The US plan addressed concerns expressed by the International Monetary Fund, which said the world was in a dire economic crisis and that no recovery was possible until the financial sector was cleaned up. The US Treasury said it would start with $75 billion to $100 billion to create public-private investment funds that could be leveraged up to $500 billion or even $1 trillion to buy distressed debt.
By bringing in private investors, the government hopes finally to establish prices for the assets that have languished on banks books and constricted the flow of credit. Officials also are trying not to scare off investors by avoiding the executive pay restrictions that have been attached to other bailout measures.
Two of the largest US money managers - BlackRock and PIMCO - expressed interest in joining the toxic asset scheme. "From PIMCOs perspective, we are intrigued by the potential double-digit returns as well as the opportunity to share them with not only clients but the American taxpayer," Bill Gross, manager of the worlds largest bond fund, told Reuters.
BlackRock CEO Larry Fink told CNBC television his firm might create mutual funds so that individual investors could take a bet on some of those toxic assets. Investors embraced the details after sending markets plunging on February 10 when Treasury Secretary Timothy Geithner released a minimal outline of the public-private plan, which departs from previous bailouts by extending the risk beyond the US taxpayer.
"For these programs to work, investors have to be prepared to take some risk," said Geithner, who has come under fire for his handling of the crisis and for big bonuses paid out by financial firms that have received billions of public dollars. US stocks climbed more than 5 percent, led by banking shares as Citigroup rose 17 percent and Bank of America was up 19 percent.
HOME SALES CLIMB Sales of previously owned US homes beat market expectations for a fall and rose 5.1 percent in February, the fastest pace in nearly six years. That provided a rare sign of optimism during a 15-month-long recession that was fuelled by a deteriorating housing market. Still, there were reminders that recession was enduring and that the US financial system was fragile.
"Bluntly, the situation is dire," IMF Managing Director Dominique Strauss-Kahn told a labour meeting in Geneva, warning that as the crisis spreads to developing countries, millions of people will be pushed back into poverty. "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," Strauss-Kohn said.
The enormous cost to the US government of stimulating the economy and bailing out banks has raised questions about its top-level credit rating, and China proposed a sweeping overhaul of the monetary system, saying an IMF accounting unit could replace the dollar over time as the worlds main reserve currency.
For now, though, China will continue to buy US government debt, viewing the credit risk as low overall. "Investing in American Treasuries, as an important part of our foreign exchange reserve management, will continue," said Hu Xiaolian, a vice governor of the Peoples Bank of China.