US bank rescue deal 'will cost hundreds of billions'

The US today outlined a rescue plan costing hundreds of billions of dollars to sort out the toxic bank debts that plunged the world’s economy into chaos.

Treasury Secretary Henry Paulson said the scheme to confront the worst US financial crisis in decades “needs to be big enough to make a real difference and get to the heart of the problem”.

He gave few details but said he would work through the weekend with leaders of Congress to flesh out the programme, the biggest proposed government intervention in financial markets since the Great Depression of the 1930s.

President Bush said that federal intervention was not only warranted but “is essential”.

He said the plan was not without risk. “Significant amounts of taxpayer dollars are on the line,” he said. Even so, he added, “We expect this money will eventually be paid back.”

The move was welcomed by financial markets. As Mr Paulson spoke, the Dow Jones industrials were up over 300 points and at one point had soared by 450 points.

Before the markets opened, the government announced plans to temporarily insure money-market deposits and to block short-selling in financial securities. Short selling is a trading method that bets the stocks will go down.

Mr Paulson said that the new troubled-asset relief program that he wants Congress to enact must be large enough to have the necessary impact while protecting taxpayers as much as possible.

“I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion,” he said.

“The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing.”

Mr Paulson said mortgage giants Fannie Mae and Freddie Mac will step up their purchases of mortgage-backed securities to help provide support to the crippled housing market.

He also said that the Treasury Department will expand a programme, announced earlier this month, to buy mortgage-backed securities, which have been badly hurt by the housing and credit crisis.

“As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford,” Mr Paulson said.

At a news conference in which he only took three questions, he was asked the approximate size of the government intervention. “We’re talking hundreds of billions,” he said.

He did not address specifics about the plan to buy back bad debt or whether the government would take a direct stake in troubled banks in exchange for its help.

“These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans’ personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted,” he said.

He said that the administration would present Congress with a proposed package of laws to set up the deal and then work with them “to flesh out the details through the weekend. And we’re going to be asking them to take action on legislation next week.”

“This is what we need to do. Because for some time we’ve been saying that the root cause of the problems in our economy and our financial system is housing, and until we get stability in the housing market we are not going to get stability in our financial markets,” he said.

The Securities and Exchange Commission earlier imposed a temporary emergency ban on short-selling of financial company stocks. As the financial crisis widened, pleas had come from all quarters to stem a swarm of short-selling contributing to the collapse of stock values in investment and commercial banks.