U.S. woos investors to buy toxic assets

By David Lawder and Glenn Somerville

WASHINGTON (Reuters) - The Obama administration on Monday offered a raft of incentives for private investors to help rid banks of up to $1 trillion in toxic assets that plunged the world economy into crisis.

U.S. stock prices shot up, led by bank shares, as Washington ended weeks of speculation about details of its attack on the heart of the credit crisis, offering generous government financing to underpin the public-private plan.

The U.S. Treasury said it will launch the program with $75 billion to $100 billion from existing financial rescue funds aimed at thawing the market for mortgage-backed securities and other hard-to-sell assets.

President Barack Obama said the plan was critical to a U.S. economic recovery, but added, "We still have a long way to go and we have a lot of work to do."

Major U.S. share indexes, which recently scraped 12-year lows, jumped about 7.0 percent on optimism over the plan. The Dow Jones industrial average closed up nearly 500 points.

Public fury over big bonus paid to executives at bailout recipient American International Group has made some investors wary of partnering with the government. But some of the world's most powerful investors said the plan could work and indicated interest in participating.

In an effort to spur participation, Treasury Secretary Timothy Geithner said private investors will not face executive pay restrictions.

Analysts cautioned that success would depend on whether banks are prepared to sell assets cheaply or want to wait in the hope of getting a better price when the economy recovers.

CRITICS SEE INVESTORS FAVORED OVER TAXPAYERS

Nobel Prize-winning economist and New York Times columnist Paul Krugman slammed Geithner's plan.

In his Monday column, Krugman said it was a rehash of a "cash-for-trash" proposal the Bush administration floated last fall, and that the incentives meant investors could profit if asset values increase but "walk away" if they fall.

Some Republican lawmakers also expressed concern over the incentives offered by the government, which could end up providing more than 90 percent of the funds to buy the assets.

"The plan seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer," said Representative Eric Cantor of Virginia, a member of the House of Representatives Republican leadership.

Geithner, who sent markets plunging on February 10 by releasing only a bare-bones sketch of the plan, said it was needed to get the private sector involved in cleaning up the banking mess.

"The great risk that we face now is that after a long period of irresponsibility and excessive risk-taking, that the system will not take enough risk now," he said.