“The Federal Reserve’s open market committee transcripts from 2008, released Friday, are a stark reminder of the damage done by the financial crisis and the terrible choices policy makers face when large, complex financial institutions fail.”

“In one critical meeting on Sept. 16 (the day after Lehman Brothers Holdings Inc.’s bankruptcy), Tom Hoenig, then the president of the Federal Reserve Bank of Kansas City, stated the problem succinctly: ‘I think we tend to react ad hoc during the crisis, and we have no choice at this point. But as you look at the situation, we ought, instead of having a decade of denying too big to fail, to acknowledge it and have a receivership and intervention program.’ Hoenig then warned: ‘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.”

“Chairman Ben S. Bernanke agreed and noted, ‘We need a strong, well-defined, ex ante, clear regime. But we have the problem now that we don’t have such a regime, and we’re dealing on a daily basis with these very severe consequences. So it is a difficult problem.’”

“The 2010 Dodd-Frank Act created such a regime. Regulators, to their credit, have responded by implementing the law’s prohibition against using taxpayer funds to keep open failed institutions and by creating a transparent, clearly defined process to manage the failures of large, systemic financial companies.”

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Read full Bloomberg View article here.