Grave business - my financial world

The Bush administration’s first two Treasury secretaries said the country’s beleaguered banking system must be cleansed of toxic assets before the economy can start to recover from the recession.

“We won’t get out of this mess and get lending returned to normal until the toxic assets are purged,” John Snow, who headed the department from 2003 to 2006, said in an interview today. Paul O’Neill, secretary from 2001 to 2003, said in a separate interview that “a significant part of the problem we have now is the suspicion the markets have that everything is poison.”

Current Treasury Secretary Timothy Geithner is set to outline tomorrow the Obama administration’s plan for rescuing financial institutions. Asked for their solutions, O’Neill and Snow offered different ways to address the illiquid securities that are keeping private investors at bay, credit in check and the economy in decline.

Snow, chairman of Cerberus Capital Management LP, said government guarantees of some of the assets might be enough to attract private investors.

“Private equity, which is pretty good at buying distressed assets, hasn’t been buying them because of this massive uncertainty as to what these things are worth,” Snow said. Guarantees “might energize the private sector to begin putting in capital.”

Snow, 69, said a public auction of soured assets — “put them on the Internet,” he suggested — would help investors study them and determine their value. He criticized the strategy of the past year under Treasury Secretary Henry Paulson and the $700 billion Troubled Asset Relief Program that focused on injecting capital into banks.

‘Making It Up’

“What the market needs is a clearly articulated set of policies to move away from the one-off, ad-hoc sorts of things that so unsettled the market last fall,” Snow said payday loan company. “The experience of the last year or so has been to generate a lot of unnecessary uncertainty in the market because policy makers seemed to be making it up as they went along.”

O’Neill, a special adviser to Blackstone Group LP, offered another approach, calling it “folly to try to value things that can’t be valued.” He said a new accounting method to quarantine bad assets might be a way out.

“I know there’s not an accounting category for ‘quarantine,’ but I think this set of issues we have is worthy of creating a new category called ‘we don’t know,’” he said. “If I were running the Treasury, I would insist that everybody lay it out there and we can all work from the same set of facts.”

Federal Guarantee

Before the TARP was enacted four months ago, O’Neill, 73, was pushing for an alternative solution that would offer guarantees for troubled assets. O’Neill today said he wouldn’t have a problem with a federal guarantee for assets that can indeed be valued.

“If assets can’t be valued, they can’t be valued,” O’Neill said “So why don’t we admit that and why don’t we figure out a way not for the taxpayers to take on the burden but in effect put them in a quarantine account?” O’Neill said. “We’re frozen in place by conventions.”

Like Snow, O’Neill said he, too, will be looking for clarity in Geithner’s speech, scheduled for 11 a.m. in Washington.

“I don’t understand what they’re doing,” he said. “It just doesn’t seem very clear at all.”

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