Exclusive: Former Treasury Secretary Paul O'Neill on Dodd Reform Bill

Former Secretary of the U.S. Treasury Paul O’Neill, in New York for a busy week of meetings, sat down with Wealth Manager Editor in Chief Kate McBride at the Waldorf Astoria for an exclusive interview on Tuesday, May 18. O’Neill spoke about the economy, global issues and pending financial reform legislation. The following comments are an excerpt from a longer interview that Wealth Manager will publish next week.

A cloture vote on the Senate version of financial reform failed Wednesday, May 19, as Democrats did not garner enough votes to finish debate on Senator Christopher Dodd’s (D-Connecticut) reform bill. The cloture vote will be taken up on Thursday, and if it is approved, further debate on current amendments will be limited to 30 hours and a halt would be placed on the introduction of new amendments.

What does O’Neill think about the pending Senate reform bill? He told Wealth Manager that, “There are pieces that are not in the bill that jump out at me as more important than anything that’s in the bill–and I’ve said this to some of the leading members of the Senate committees. I think we should pass a law that says it’s illegal in the United States for anyone to give or receive a home mortgage without a 20% equity downpayment, and the 20% equity downpayment should be forever stapled to the instrument, so that, even if the instrument gets traded, the financial system always has a 20% equity component vis-?-vis outstanding mortgages,” so you can’t strip the equity away from the payments in the securitization of those mortgages.

Too much leverage in the system

“And I would have a parallel reserve equity requirement for all kinds of financial transactions, so effectively, de-leverage the system from whatever it is now, to five-to-one [leverage to equity] so that the system is always protected. [It] doesn’t mean that individual things will [not] go wrong or individual companies will [not] go wrong, but I believe we should be very interested in systems integrity–in the integrity of the financial system. I believe the only way to get that is to have really large reserve requirements so that when an individual mortgage or a region of the country with downward economic conditions begin to unfold, if you have a 20% equity provision, after somebody fails to make three or four payments, you still have, arguably, 18% of their equity to deal with them, rather than dealing with the principal because there isn’t any equity component.”