By Simon Kennedy
March 16 (Bloomberg) -- Finance chiefs from the Group of 20 vowed to work together to clean up the toxic assets that helped trigger the financial crisis and led banks to rack up more than $1 trillion in losses.
Officials meeting near London this weekend outlined guidelines on how governments should rid banks of distressed securities that have devastated companies from Citigroup Inc. to Royal Bank of Scotland Group Plc. With the G-20 calling the fight its “key priority,” Treasury Secretary Timothy Geithner vowed in an interview to “move quickly.”
The commitment, made three weeks before G-20 leaders gather in London, comes as investors demand faster action in the face of turmoil that’s showing few signs of abating. The Standard & Poor’s 500 Financials Index has dropped 35 percent this year and a lack of lending is pushing the global economy deeper into its worst recession in six decades.
“Markets are looking to policy makers around the world to move from the recognition and design stages to implementation, and to do so in a coordinated, or at least correlated, fashion,” Mohamed El-Erian, the co-chief executive officer of Pacific Investment Management Co. in Newport, California, said in an interview. “Tackling toxic assets is a necessary condition for sustainable progress.”
New Powers
Separately, the Obama administration may give the Federal Reserve new powers to impose tougher capital requirements for large banks, the Wall Street Journal said today, citing people familiar with the matter.
Governments have struggled to tackle toxic assets head on, allowing concern to seep through markets that banks still haven’t revealed all their exposure.
The Bush administration’s $700 billion Troubled Asset Relief Program was redirected away from buying the tainted securities and Geithner has disappointed investors by not giving details of a promised $1 trillion plan.
Germany has had several false starts and Barclays Plc is so hesitant about the terms of Prime Minister Gordon Brown’s asset guarantee program that it still hasn’t signed up.
“There have been too many promises already and investors now want to see concrete actions getting rapidly underway,” said Marco Annunziata, chief economist at UniCredit MIB in London. Citigroup, Commerzbank AG and Lloyds Banking Group have lost more than half their value this year
Substantial Recovery
Speaking after their talks, officials conceded that until banks are cleansed and can start lending again, attempts to revive growth by cutting interest rates and taxes would pack little punch.
“We aren’t going to have a substantial recovery in the real economy until we solve the bank issue,” Canadian Finance Minister Jim Flaherty said. Fed Chairman Ben S. Bernanke said in an interview with CBS Corp. that aired yesterday the biggest risk to an economic recovery is a shortage of “political will.”
Action may be imminent. Chancellor Angela Merkel is considering taking over Germany’s non-performing assets until they mature, according to three people familiar with the proposal. Geithner will this week roll out enough information on his public-private partnership plan for investors to gauge their interest in it.
“We have and expect to see a lot of support for this program” among potential buyers of the assets, he said in an interview after the Horsham talks.
Global Reach
To govern such programs, the G-20 proposed a dozen principles for authorities to follow with the hope that a united front would avoid distorting capital flows or sparking protectionism. The parameters are meant to guide a “cooperative and consistent approach by national authorities.”
“Financial institutions are global in their reach so it’s important governments adopt a common approach,” said Daniel Price, President George W. Bush’s G-20 negotiator and now senior partner for global issues at Sidley Austin LLP in Washington.
Among the guidelines: shareholders should be exposed by the “maximum possible” to losses or risks prior to a government intervening. There should also be flexibility when judging which assets can be aided and it should be clear how they are valued. Credit rating companies, hedge funds, and credit derivatives markets will be subjected to greater oversight.
Help
The parameters were drawn up to guide a “cooperative and consistent approach by national authorities,” the G-20 statement said.
Companies that receive help should be run according to business principles and agree to impose conditions on executive compensation. Governments should provide only temporary assistance and spell out exit strategies.
“The key question is whether this framework is detailed and concrete enough to reassure markets that the normalization of banking systems is at hand,” said Annunziata.
As Obama embarks on a revamp of U.S. financial rules, Geithner also wants the Fed to have authority to look broadly at markets to spot signs of systemic risk, such as huge bets made by investment banks on mortgage debt, the Wall Street Journal said.
The G-20 also pledged a “sustained effort” to end the worldwide recession, setting aside transatlantic differences over whether that should include more fiscal stimulus as the U.S. wants.
Data will this week show U.S. factories and home builders scaled back even more last month and European industrial production dropped the most on record in January, according to surveys of economists by Bloomberg News.
Necessary Action
“We are prepared to take whatever action is necessary to ensure growth is restored and we are committed to do that for however long it takes,” said U.K. Chancellor of the Exchequer Alistair Darling.
The International Monetary Fund will monitor budget policies and judge if more is needed to be done after euro- region finance ministers said they had spent enough and wanted to preserve fiscal discipline.
“I was worried we wouldn’t arrive at an agreement, but we all agreed that the re-launch has to go ahead on four wheels,” said France’s Christine Lagarde.
The IMF was told it will have its resources at least doubled to $500 billion after being inundated with loan requests from Pakistan to Hungary.
Influence at IMF
Smaller countries will be granted more say in how it is run within two years and its next boss will be selected by an “open” process and not automatically a European, the G-20 said.
In a bid to prevent future crises, the officials said they would strengthen ties between their individual banking supervisors. The financial system will also have more curbs introduced to ensure regulations “dampen rather than amplify economic cycles.” Options include buffers that limit leverage and encourage banks to save capital in good times.
“All in all, the Horsham statement should be regarded as a positive sign of progress,” said Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London. It “gives hope that the G-20 leaders will be able to present a common stance in responding to the extraordinary challenges.”
To contact the reporter on this story: Simon Kennedy in Horsham at Skennedy4@bloomberg.net
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