Dallas Fed Urges Removal of CEOs of Bailed-Out Banks

The Federal Reserve Bank of Dallas said taxpayer aid to failing banks should come only after the voiding of all employment and bonus contracts and the removal of chief executive officers and boards of directors.

“A set of harsh, non-negotiable consequences” for requesting U.S. Treasury assistance might also include “clawbacks” to gain cash and stock bonuses paid the top management team during the prior two years, the Dallas Fed said today in a slide presentation on its website.

The proposal reflects Dallas Fed President Richard Fisher’s view that large U.S. banks need to be split apart because they operate with an implied government safety net that puts their risks of failure on taxpayers. Fed Chairman Ben S. Bernanke said at an April 25 news conference in Washington that policy makers were “making some progress” in averting bailouts by “substantially” increasing supervision and requiring higher levels of capital.

The federal safety net should be limited to federally insured bank deposits and loans made to banks that are fully collateralized, the Dallas Fed said. Creditors of financial companies should be “put on notice that there is no federal safety net covering their transactions,” the district bank said.

Other regional Fed banks have said that the Dodd-Frank act, passed in part to end bailouts, hasn’t ended bank rescues. Richmond Fed President Jeffrey Lacker in March called for Congress to eliminate the Fed’s authority to lend to institutions other than banks, strengthen “living wills” that outline how financial companies would be unwound and change U.S. bankruptcy law so it would work for the financial sector.

The “institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism,” Fisher said in an essay in the Dallas Fed’s 2011 annual report posted online.

Fisher, 63, has been president of the Dallas Fed since 2005. His district includes Texas, northern Louisiana and southern New Mexico.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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