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US recovery plan could remove toxic debt

The US Treasury and the Federal Reserve will spend the weekend developing a plan to clean up the toxic debt that is at the heart of the credit crisis.

The news has seen markets rise worldwide with banking stock showing a strong recovery and shares in Barclays, HBOS and Lloyds TSB rising substantially.

The US Government is seeking to cure the lack of confidence in the markets that is freezing credit and a plan could involve a body similar to the Resolution Trust Corp (RTC), which was set up in the late 1980s, when more than 1,000 savings and loan institutions in the US failed.

The RTC managed and liquidated the assets of the failed loan and savings providers until 1995, after which its responsibilities passed to the Federal Deposit Insurance Corporation.

A similar government-backed enterprise today could buy the mortgage-backed assets that are shunned by the money markets and restore much needed confidence in the financial sector, encouraging banks to lend to one another again.

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