WASHINGTON (MNI) – The following is the third and final
section of the text of the remarks of Kansas City Federal Reserve Bank President
Thomas Hoenig prepared for the William Taylor Memorial Lecture Sunday:

As a Swiss central banker once insisted to me many years ago, ”
[I]t is the central bank’s job to focus on the long run so that the
short run can take care of itself.”

For me, one certain lesson from this most recent crisis is that
both the industry and supervisory authorities lost sight of the long
run.

The industry over a series of years systematically pushed to
increase its flexibility around underwriting greater levels of risk,
pursuing greater leverage for the sake of short-term returns. Risk
management systems were weakened or abandoned outright. Executives whose
job it was to sound the alarm were ignored or in some cases dismissed.

The CEO and boards of directors of many companies didn’t have any
reasonable understanding of the risks they were taking and didn’t care
so long as profits flowed quarter to quarter. They failed in their
fiduciary duties.

The regulators also came up short. They too often allowed leverage
to increase to unprecedented levels without raising alarms. They backed
down to congressional and industry pressure. The fallout of such
failures is now all too obvious.

Any regulatory reform will fail unless the industry and the
regulatory authorities are resolute in their commitment. We should not
have needed legislation to tell us the necessity of maintaining strong
capital and underwriting standards. It should not have taken legislation
for us to recognize the importance of controlling conflicts of interest
and addressing early on the issues around moral hazard that have
undermined the integrity of our financial system. It also is not a
matter of too many regulators because recent experience dismisses that
as the core issue.

The Bill Taylor Rule

No, the core issue is leadership. We need leadership that reflects
the highest level of integrity, is trusted at the outset as fair and has
the resolve to implement a regulatory program that looks past special
interest and focuses on the system. Why don’t we just call it the Bill
Taylor Rule.

Bill recognized that the failure of a bank, regardless of its size,
had an important impact on the community it served, its business
customers and consumers. He understood that the job of a bank supervisor
was not to close banks, but to enforce rules and exercise regulatory
judgment that minimized bank failures. He encouraged strong capital
standards, insisted on tough examinations and outlined careful actions
with a focus toward mitigating problems and strengthening the system
before it became subject to unmanageable crises.

There is one additional characteristic of Bill Taylor that enabled
him to be a great leader in bank supervision: He was a commissioned
examiner. He knew what the examiners were facing. He knew the tricks of
the frauds and the arguments of desperate bankers. Bill insisted that
his briefings come from the field examiner of a problem bank, not the
officer in charge.

With Bill, you didn’t worry about his past, current or future
conflicts. Nothing prevented him from telling the hard facts. He was not
concerned with re-election, reappointment or fundraising. He had no paid
speeches or consulting contracts. He wasn’t “giving back” or building
his resume. Bill understood the unique role a financial regulator should
play outside of politics and profit.

Bill Taylor was the cop on the beat and Bill Taylor is the model on which to write the job description for those who will lead financial supervision.

Conclusion

I will close with an excerpt from a speech Bill gave in 1987 in
which he anticipated with amazing accuracy today’s events. He said:

“The banking structure of the country will change. It’s now a
matter of playing it out … to a nationwide banking arrangement. …
Although I have some hope for moderation, the increased competition
brought about by all these changes in combination with the fascination
of this country for debt and leverage will continue to create stress
that will require very close attention. … Now, one never knows. It’s
not over ’til it’s over. … (This) old examiner has these suspicions
lurking in his heart. Suspicions that say the answer to world hunger is
not eating someone else’s lunch.”

Bill called it as he saw it. And once again, Bill was right.

(3 of 3)

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]