Stock markets could see more volatile trading today as they react to the US Government’s planned US$700bn (€483.5bn) banking sector bail-out.
US treasury secretary Hank Paulson is working on legislation that will allow the US government to buy up hundreds of billions of dollars worth of “toxic” bank assets that have led to the current banking crisis and threatened world economies.
It has been described as the largest operation of its kind since the Great Depression.
The plans were unveiled at the end of last week following a tumultuous week of financial turmoil, and were being finalised by officials in Washington over the weekend. The White House was hoping to get them agreed today.
Adair Turner, the new chairman of City Watchdog the Financial Services Authority (FSA), said the scheme could prove to be a turning point.
He said: “It’s a very major step which I think may turn out to be the turning point, but we don’t know that. We are now taking very exceptional measures in what has been an enormous crisis in the global financial system.”
Turner, who has taken over from Callum McCarthy, added that there would be a need for a detailed analysis of what led to the current financial crisis.
It accelerated last week with the collapse of US investment bank Lehman Brothers, the $85bn (€58.7bn) bail-out of US insurance giant AIG and the £12bn (€15.1bn) rescue of Halifax Bank of Scotland by Lloyds TSB.
The initial unveiling of the US bail-out plans by Paulson on Friday sent markets around the world soaring, reversing some of the hefty losses seen earlier in the week amid the turmoil.
London’s FTSE 100 Index posted its biggest ever one-day gain of nearly 9%, with banks like Barclays, Lloyds TSB and Royal Bank of Scotland (RBS) surging more than 20% in value. The gain also came after a temporary ban on “short-selling” - where traders effectively profit from falling share prices – were introduced both in the City and the US.
Paulson suggested non-US banks like Barclays and Royal Bank of Scotland may be able to participate in the US Treasury scheme.
But he also added that he has been talking to other governments about the need for them to offer similar relief because the current financial crisis is global.
The UK Treasury said it had no plans to carry out a similar operation, pointing instead to the government-backed Special Liquidity Scheme launched by the Bank of England earlier this year to help bolster banks’ balance sheets. It has already been tapped for more than £100bn (€126.3bn), and its deadline was extended for three months last week to January 30.
Although the finer details of the US plan have yet to be worked out, it would give Washington broad authority to purchase bad mortgage-related assets from US financial institutions for the next two years. The debts would then be held until they can be sold off in the future.
The hope is that would allow banks to get on with their normal day-to-day business of lending to consumers and get the economy moving ahead.