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Ex-Treasury secretary O'Neill says bailout plan 'crazy,' 'lunacy'

By Brendan Murray, Bloomberg News

Published October 2, 2008 at 12:05 a.m.

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Former U.S. Treasury Secretary Paul O'Neill said the $700 billion bank-rescue proposal under negotiation in Washington is "crazy," with potentially "awful" consequences for the world's largest economy.

"Doesn't this seem like lunacy to you?" said O'Neill, who was President George W. Bush's first Treasury chief, from 2001 to 2002, in a telephone interview Wednesday. "The consequences of it are unbelievably bad in terms of public intrusion into the private sector."

O'Neill's objections mirror those of Republicans in the House of Representatives who rejected the plan in a Sept. 29 vote. The former Treasury chief said he lobbied for an alternative solution that would offer guarantees for troubled assets, stopping short of purchasing the debt.

"Is anybody thinking there?" asked O'Neill, who also served as deputy budget director in the Ford administration. "It's too late, it's not going to make any difference and it's aggravating as hell when there's a better idea and you can't even get it in play," he said.

O'Neill, 72, was fired after an almost two-year tenure marked by strains with White House officials and comments that roiled markets.

His plan would start with a "discounted cash-flow analysis" of distressed instruments that are clogging the financial system. The government would guarantee the assets, paring back the support as principal and interest payments were made, he said.

He likened his solution to the Treasury's decision Sept. 19 to guarantee domestic money-market funds for a year to try to stop a run on what traditionally have been among the safest of investments.

To replenish capital in banks, the government should make 20-year loans to institutions and charge 2 percentage points above the government's borrowing rate, he said.

O'Neill said he tried to shop his ideas to congressional leaders, but said no one returned his phone calls.

"I honestly don't think they really understand it and they're so much in a bubble that it's impossible to penetrate it."