US details $1trn toxic asset plan
The United States tried to persuade private investors today to take on huge sums in banks' toxic assets, while the IMF warned of a drastic rise in unemployment that might threaten democracy in some countries or even provoke war.
Wall Street jumped on the US government's offer of financing for investors aimed at unburdening banks of up to $1 trillion in soured mortgages and other distressed assets that are blocking lending and worsening the recession.
With banks likely to be beneficiaries of the plan, shares in Citigroup and Bank of America soared. Japanese and European shares also leapt and oil rose above $53.
China helped the mood, promising to keep buying US government debt and offering to help fund International Monetary Fund bailouts for stricken countries.
But Beijing also proposed a sweeping overhaul of the monetary system, saying an IMF accounting unit could replace the dollar over time as the world's main reserve currency.
US Treasury Secretary Timothy Geithner said creating public-private partnerships to buy toxic assets from banks would help avert a longer, deeper recession and make it easier for banks to raise private capital.
But he said the government could not bear sole responsibility to get credit markets working properly.
"For these programs to work, investors have to be prepared to take some risk," he told reporters.
Geithner is under fire for his handling of the economic crisis and big bonuses paid out by financial firms that have received billions of dollars in bailouts funded by US taxpayers.
Earlier, an Obama administration official said the Treasury plans to pitch in with $75 billion to $100 billion to launch public-private partnerships.
The money, taken from a $700 billion financial rescue fund approved by Congress in October, would be put alongside private capital and then leveraged up to $500 billion, or possibly double that amount.
Two of the largest US money managers, BlackRock and PIMCO, expressed interest in joining the toxic asset scheme.
"This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically," Bill Gross, PIMCO's co-chief investment officer, told Reuters.
Last month, financial markets fell after the Obama administration offered only a bare outline of the proposed public-private partnerships.
This time the reaction was more positive. Japan's Nikkei average rose 3.4 percent to its highest close in seven weeks. The pan-European FTSEurofirst 300 was up 2.5 percent, with financial sector stocks the major gainers.
Leading US stock indices were up more than 3 percent in morning trade.
Shares in troubled bank Citigroup soared more than 18 percent while Bank of America was up 15 percent. Both are major holders of the kind of troubled assets covered by the plan.
US government bonds were mixed, while the dollar gained as investors weighed the potential impact on the debt securities often used as a safe haven in turbulent markets.
"I think there are still some lingering concerns about the details of the plan, specifically at what price the government will buy the assets. So we're seeing the dollar rise a little bit because of this," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
In the real economy, the outlook was worse than ever.
"Bluntly the situation is dire," IMF Managing Director Dominique Strauss-Kahn said.
As the crisis spreads to developing countries, millions of people will be pushed back into poverty, he told a meeting at the International Labour Organisation in Geneva.
"All this will affect dramatically unemployment and beyond unemployment for many countries it will be at the roots of social unrest, some threat to democracy, and maybe for some cases it can also end in war," he said.
The prerequisite for success was restoring a healthy financial sector, he said, adding that although bank bailouts were politically unpopular, businesses and households could not survive without a working banking system.
The enormous cost to the US government of stimulating the economy and bailing out banks has raised questions about its top-level credit rating. But China offered a little relief, saying it would continue to invest part of its huge foreign currency reserves in US Treasury bonds.
"Investing in American Treasuries, as an important part of our foreign exchange reserve management, will continue," Hu Xiaolian, a vice governor of the People's Bank of China, told a news conference on China's preparations for summit of Group of 20 major developed and developing nations in early April.
PBOC chief Zhou Xiaochuan outlined how the dollar could eventually be replaced as the world's main reserve currency by the IMF's Special Drawing Right, now an accounting unit.
"The desirable goal ... is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies," he said.
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