Brilliant Bailout Advice from Paul O’Neill: Let’s take it.

Former treasury secretary Paul O’Neill served from 2001-2002 when he resigned from the Bush Administration. O’Neill’s business acumen is almost legendary as he was the executive that led multinational Alcoa in a case study still used at Harvard Business School as an example of inspired corporate leadership.

O’Neill’s concerned about the economy though he’s correctly suggesting that the current issues pale when compared to the massive – some 43 trillion – in unfunded liabilities congress and the president have smilingly absorbed over the last few decades. O’Neill suggests that if we don’t get our financial house in order soon we are in for trouble that makes today’s problems look like a walk in the park.

O’Neill has offered what seems to me the most elegant solution by far to the current crisis. He suggests that the Government take two simple steps, the first of which is the same under the current bailout plan which is to value the toxic paper assets. His second step is to have the government guarantee the asset values rather than buy the assets themselves. This brilliancy *immediately* solves the two key problems in this crisis: first, it means the Government does NOT need to borrow 700,000,000,000 from … you and me. Second, it creates a market for the distressed assets because the Government value guarantee means that investment capital will flow to buy these formerly toxic assets because they have a floor value along with possible extra upside. In this scenario you’d see investors band together to buy books of real estate which the Govt would guarantee but the investors would have incentive to improve and resell at a profit. In that scenario, replayed throughout the economy, we’d see Government intervention and more importantly Government *obligation* limited, allowing the free market to work, money to flow, etc.

Why is O’Neill seeing what Paulson can’t see? Probably because Paulson, Bernanke, and congress are both mired in the type of thinking that got us into all this in the first place. Namely that the massive global economy can sustain dramatic levels of financial derivative manipulations and Government manipulation without a huge raft of unintended consequences.

34 thoughts on “Brilliant Bailout Advice from Paul O’Neill: Let’s take it.

  1. I agree…that is why some of us from day one have been saying insure the bad paper and eliminate mark to market.

    That is exactly what this does.

    We can do it for pennies on the dollar and solve the immediate issue.

    Then we can spend 100’s of billions on prosecuting all these dirtbags. 🙂

    But what do I know about economics…

  2. Glenn I’m surprised that neither McCain or Obama has taken this up as “the most viable approach” but I think there is a kind of Washington / Govt thinking brainwash that makes it hard to come up with elegant solutions. Some of the pork you mentioned may be part of the problem – I’m sure many saw this as an opportunity to stuff pet projects into a spending bill so massive the amounts of money involved are really not comprehensible.

  3. Gingrich saw this immediately…

    The problem is…Obama wouldn’t touch this because one way or another he wants piles of monies.

    I fault McCain because he is still stupid enough to trust anything that comes out of the Whitehouse.

    The day Paulson said you need to give me $700billion with no oversight, etc…I was just shocked. Really, really dumb.

    Then I wasn’t surprised at the partisan games Pelosi and crew continued to play. When I first saw how directly connected Freddie and Fannie are, etc…I knew this would never be a good bill.

    McCain totally blew it. He should have stood up nationally and exposed the hypocrisy and waste. He should have put forward this type of plan immediately and promised to deliver accountability across the board – Wall-Street, Main-Street, Penn Ave and E. Capitol Street. He could have achieved a national referendum on it just through the media – just like we did to shut down the first bad bill.

    The bill that is going to pass is going to be a nightmare and we are going to pay for this for years to come.

  4. I remain staggered at the situation that has culminated in the USA as a result of a decade (+) of unbridled, massive extensions of credit to millions of borrowers who could never repay their debt when the going got tough. Living in Australia where obtaining a loan for a home has never been all that easy, I appreciate why our banks are not draining down the gurgler like their USA counterparts. However we are about to have some suffering as a result of the USA irresponsiblity!

  5. And Reid should be removed from office – first IndyMac and now this:

    “We don’t have a lot of leeway on time,” Reid told reporters in the Capitol. “One of the individuals in the caucus today talked about a major insurance company — a major insurance company — one with a name that everyone knows that’s on the verge of going bankrupt. That’s what this is all about.”

    He did not identify the insurance company, and later in the day Reid spokesman Jim Manley said the senator was speaking broadly and not referring to anything specific.

    “Senator Reid is not personally aware of any particular company being on the verge of bankruptcy,” Manley wrote in an e-mail to “Rather, his comments were meant to refer to the conditions in the financial sector generally. He regrets any confusion his comments may have caused.”

    Once again Reid is incredibly irresponsible. We uses his pulpit to get American soldiers killed, banks run on and now the insurance industry will take a major hit in the markets today.

    Between Biden and Reid we could talk ourselves into destruction.

  6. Ross you are absolutely right and you should be really ticked off. Our congress and greedy Wall-Street manipulators have let America down and the world down.

  7. Watch Syria now…they are amassing troops on the border of Lebanon.

    Because of the incompetence and pandering of our politicians and the corrupt politicians holding key positions we are losing any position in the world.

    Iran is going to ratchet everything up now.

    Russia is going to move quickly if their markets hold and will be pushing the issue with Georgia.

    You should all spend some time on and really look at the differences on the analysis for foreign policy of our candidates.

    Serious differences with serious consequences for us.

  8. Russian invades Georgia unilaterally, without provocation. The world looks at that and says – how different is that, really, from what the U.S. did with Iraq? True, Hussein was a vile despot, but the fact is there were no WMDs, no ties to Osama bin Laden, no justification for an invasion.

    That doesn’t make what Russia did right, it’s not….but the world looks at the U.S. and sees hypocrisy where it used to see leadership. We’ve lost our credibility on the world stage such that, when real crises do occur, our motivations, honesty and character are second-guessed in a way they never used to be.

  9. Paul…lol comparing the US and Iraq to Russia and Georgia is ridiculous. There is a huge trail of events that led up to the invasion of Iraq with the UN, etc.

    Russia just decided to do it, no UN trail of events, etc. They just wanted to take control of the oil pipeline.

    One of the biggest issues Obama has with his foreign policy plan is he expects Europe to deliver with him on holding the scoundrels of the world accountable.

    #1 Europe doesn’t have the forces or the equipment to do hat
    #2 They don’t have the will
    #3 Europe failed miserably in the response to Georgia

  10. People love to conveniently forget that under President Clinton we bolstered up the support for resistance in Iraq and then when they needed us Clinton, et al abandoned them and then SoDamn Insane gassed them to death 80,000 people. And he used a WMD to get it done.

    Paul do you believe Iran is developing nuclear weapons? Do you believe they will use them on Israel?

    Because if you don’t – you really need to think about that.

    Here are some facts.

    When Israel attacks Iran which they will and soon Iran will move to strike the oil production capability in Saudi Arabia and Iran currently has the ability to do that within 15 minutes. Once 18-30 millions of oil a day is taken out of the equation – The good ole US of A is toast. Our country will come to a grinding halt like you can’t even imagine. Iran will launch massive attacks on Iraq and Afghanistan to rally Muslims to fight us.

    Syria, Russia, etc will jump on these opportunities like we have never seen before.

    This isn’t wild speculation this is the prospect of events within the next 12 months.

  11. Do I think Iran is working on Nukes? – not sure, seems probable given who is in charge.

    Will they use them on Israel? – hard to say, crazy people say crazy things but often never do them. It could be politcal posturing on Ahmadinejad’s part (he says it because it sells well in the Middle East, makes him look big and bad, but he has no intentions of doing it because the inevitable retribution would put him out of power and annihilate his country).

    The issue is our credibility from a global perspective remains very suspect in the eyes of the world because of the invasion of Iraq. Our troops are over-extended, our hard work in Afghanistan has largely unravelled, Obama remains at large, and we are ham-strung to intervene where and when we truly need to because we’re so over-extended from fighting a war we never needed to fight against the wrong enemy.

  12. Paul – Hitler was saying the same things…and the Chamberlain view of the world was to say they are just words.

    You are right Obama remains at large… 🙂

    But we don’t have to mention that Clinton had Osama in his sites, confirmation of exact location and because of the Monica BS he didn’t have the political clout to pull the trigger…oh my how things would be different…but remember character has nothing to do with the position of President.

  13. I think anyone who professes to know how events are going to unfold in the Middle East has a far better crystal ball than I because if there is one thing that corner of the world has proven it is to expect the unexpected.

  14. The irony is that this is really more about oil and that is the wildcard that will draw in more moderate muslims and other countries around the world.

    The faster the US gets off foreign oil the better however it will accelerate our enemies that want to keep getting funding from us to do something.

    Probably the biggest crime against the citizens of this country is that our government for decades and decades has not addressed this issue. Pure insanity.

  15. CAFE limits were left unchanged for far, far too long. American’s quickly migrated back to the biggest of the big SUVs. It took a wicked price spike to change behavior.

    Kind of reminds me of the housing bubble…despite having recently lived through the tech stock bubble, everyone bought into the assumption that home prices could dramatically outstrip income growth and it would never be a problem. It wasn’t just CRA homes, it was regular & luxury home buyers, builders, developers and speculators. There were voices of warning but they were drowned out by the lemming like scurrying of buyers who were certain that real estate was a “no-lose proposition”.

    You would think, having heard that just a few years prior in regards to the tech run-up, folks would be more prudent and realize they had recently heard something similar about a different asset class, but memories are short and greed is a powerful motivator.

    Irrespective of Republican efforts to blame Democrats, and Democratic efforts to blame Republicans, a healthy dollop of blame can be laid at the feet of the American public who, once again, bought in hook-line-and sinker as they inflated yet another bubble and watched it pop.

  16. I would view the primary issue to an environmental issue. The major problem isn’t SUV’s, etc. It is the lobbyist protecting the combustion engine. The Fuel Cell was invented in the 1800’s and other forms of power generation (including nuclear) have been sidelined to project the combustion engine.

  17. America better wake up to the emerging factors that are now coming into play.

    The geo-political ramifications of this Freddie and Fannie economic meltdown are starting to come home. Coupled with the inability of our elected officials to even come up with something that is workable this does spell disaster for the American way.

    We are impacting global markets now and wars have been started over much less.

    Keep a close eye on Russia the wheels are in motion and they are trying force our collapse.

  18. This is a creepy thought, so I voice it with some misgivings but – putting aside for a moment the political debate on the current crisis – it has crossed my mind more than once that if I were a creep like Bin Laden trying to bring down America, now would be the perfect time to attack. People are scared, the system is fragile, the problems real and deep-seated.
    We know he is an opportunist. We know he goes long intervals between actions to lull his targets into a state of complacency. The U.S. is mightily and understandably distracted from his threat right now.

    All we can hope is that the folks in Washington who are in charge of terrorist monitoring and prevention have thought of this too and are being extra-vigilant. It would be the worst thing that could happen at any time, but especially now.

  19. Paul you concern is warranted and very real. What would really shock you is the amount of threats they have thwarted that have never been reported…hundreds and hundreds of them.

    We are at a very fragile point right now and the next 6 months are critical.

  20. Paul and Glenn I’m also concerned about that especially because campaigners are out and about a lot more than usual.

    However I actually believe that we’ll rise to almost any occasion if necessary, as Americans did after the 9/11 attacks and potential economic turmoil.

    I also think part of the big solution is to maintain the tradition of spirited but friendly debate that Palin / Biden showed us last night.

  21. Glenn the Apple rumor story is remarkable – I think it’s clearly a market manipulation play where even if they find the person who wrote that it is unlikely they will be able to track down the beneficiaries unless they got really greedy and the trades stand out.

    I think we’ll see a few of these and then people will realize that citizen news is not reliable enough for big decisions, and the market impact of stories like this will not be so dramatic.

  22. The Media Research Center’s Director of Communications and Contributing Editor Seton Motley appeared this morning on the Fox News Channel’s Fox & Friends to discuss the media’s ongoing silence about the Association of Community Organizations for Reform Now, better known by it’s acronym, ACORN.

    Seton asserts that the media has remained steadfastly silent about ACORN due to the group’s extensive and extended connections with Sen. Obama, and have done so so as not to damage Sen. Obama’s chances in this year’s Presidential election.

    Seton discusses how ACORN has been in the past convicted of voter registration fraud in six states and is currently under investigation for either registration fraud or misuse of funds in fourteen. He points out that they have routinely registered to vote dead and underage people, and fictitious personages with names like “Jive Turkey”, “Mary Poppins” and “Dick Tracey”. He mentions that in 2006 in Washington state, ACORN turned in 1,800 registrations, of which six were valid.


  23. WASHINGTON — The U.S. recession will be “significantly deeper” than they previously thought, Goldman Sachs economists predicted Friday in a research note. The economy will probably show no growth at all between the middle of 2008 and the middle of 2009, with gross domestic product falling 2% this quarter and 1% next, they said. Two other quarters will show 0% GDP growth. The unemployment rate will likely rise to 8% by the end of next year from 6.1% currently. “We now also see at least another 100 basis points of monetary easing from the Federal Reserve, aggressive measures to stabilize the money markets, and a possible further easing of fiscal policy under a new administration,” wrote Jan Hatzius and his team of economists.

    Copyright © 2008 MarketWatch, Inc. – MarketWatch Pulse

  24. Now experts are saying home prices need to stop falling for this bailout to really work. The fact of the matter with amount of foreclosed property and the number of properties up for sale I think it will be a very long time before the housing market stabilizes and home values begin to appreciate.

    Some areas will recover faster than other but the serious boom areas where the speculators were rampant will take a long time to recover. I think we will see many vacant and run down McMansions.

  25. So here we are a couple of weeks into this mess and we today a NY State Supreme Justice temporarily blocks the sale of troubled Wachovia to Well Fargo.

    We know Citigroup is in NY so you have to wonder what is going on here.

    Citigroup on Sunday night agreed to a deal valued at around $2 billion for Wachovia’s assets and NONE of the bad paper. It is also known that Citigroup could not absorb the bad paper and that Citigroup itself might be in some serious trouble anyway.

    Along comes Wells Fargo and offers almost $15 billion to buy our Wachovia – EVERYTHING including the bad paper. Wells Fargo balance sheet is excellent and probably one of the best run financial institutions in this country.

    So why would anyone want to block this sale?

    Citigroup’s offer puts the entire burden of the bad paper directly on the back of the Government – which btw is estimated to be several hundred billion dollars as opposed to an offer that is worth 7X as much and tries to deal with the bad paper within Wells Fargo – to be fair I am sure some of the bail-out would go to help Wells Fargo but it seems to me that Wells Fargo would be a better choice from several standpoints:

    Wells Fargo is primarily a Western US bank. Wachovia is mostly East Coast. Citigroup is mostly an Eastern US bank.

    Wells Fargo is a better run institution and given the physical footprints of the banks it would seem that more of the employees would be able to keep their jobs, shareholders would get at $7 a share as opposed to almost nothing and given Wells Fargo track record we would have a much stronger institution because of it.

    I don’t see really any downside to the Wells Fargo deal unless of course you think NY losing the deal is that important.

    You have to wonder what people are thinking when we have such turmoil and problems in the market.

    I wonder how Ramos became a justice.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s