Here’s what the Fed thought of too big to fail at the height of 2008 panic
During the height of the financial panic of 2008 members of the board of the Federal Reserve were voicing their concerns about the health of some of the world's largest financial institutions.
Board member Thomas Hoenig brought the issue of too big to fail front and centre:
Mr. Chairman, I have thought about this considerably because I think we have come to a time in our history when we have institutions that clearly ought to be and may in fact be too big to fail.
We are in a world of too big to fail, and as things have become more concentrated in this episode, it will become even more so.
Fed chairman Ben Bernanke responded:
I certainly agree—and the Treasury Secretary and I have said publicly—that we need a strong, well-defined, ex ante, clear regime.
The board debated whether they had taken the correct decision when it came to Lehman Brothers, with Hoenig commenting:
I think what we did with Lehman was the right thing because we did have a market beginning to play the Treasury and us, and that has some pretty negative consequences as well, which we are now coming to grips with.
Minutes during the Federal Open Market Committee emergency meeting showed board member Randall Kroszner voicing his concerns about the health of UBS:
No one has mentioned UBS yet, but that’s another institution about which there’s a lot of concern, and if you look at CDS quotes there, they are skyrocketing also.
Randall was especially concerned about the flow of information during the crisis:
Much as Governor Warsh said, I think that people are worried about what the next shoe to drop will be and whom we have to challenge. Whom do we have to get more information about to make us feel comfortable? If that suddenly becomes everyone, then of course the markets don’t function