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Shares surge on US bail-out plan Shares surge on US bail-out plan
(about 1 hour later)
The London stock market ended a week of turmoil with its biggest one-day gain after the US government unveiled a plan to bail out the financial system.The London stock market ended a week of turmoil with its biggest one-day gain after the US government unveiled a plan to bail out the financial system.
The FTSE 100 closed 8.8% up at 5311.3. Wall Street rebounded and the French and German markets also rose.The FTSE 100 closed 8.8% up at 5311.3. Wall Street rebounded and the French and German markets also rose.
The surge came as the US government said it planned to spend billions of dollars to mop up bad debts fuelling the global financial crisis.The surge came as the US government said it planned to spend billions of dollars to mop up bad debts fuelling the global financial crisis.
Washington will set out further details of the rescue plan next week.Washington will set out further details of the rescue plan next week.
US Treasury Secretary Henry Paulson said the bad debts were "clogging up" the financial system.US Treasury Secretary Henry Paulson said the bad debts were "clogging up" the financial system.
"To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem," Mr Paulson said."To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem," Mr Paulson said.
Financial stocks have gained the most from the rise in confidence on the markets. In London, the Royal Bank of Scotland and HBOS rose as much as 50%.Financial stocks have gained the most from the rise in confidence on the markets. In London, the Royal Bank of Scotland and HBOS rose as much as 50%.
Moves to restrict short-selling in the US and UK also helped to boost financial shares.Moves to restrict short-selling in the US and UK also helped to boost financial shares.
Short-selling occurs when a trader borrows shares from another to sell them with the hope of buying them back at a lower price, thereby profiting from the difference. It has been blamed for the recent sharp falls in some banking shares. Short-selling occurs when a trader borrows shares from another to sell them with the hope of buying them back at a lower price, thereby profiting from the difference. It has been blamed for the recent sharp falls in some banking shares. name="story">
See graph of the FTSE 100 this weekSee graph of the FTSE 100 this week
Crisis of confidenceCrisis of confidence
The proposed US government rescue plan comes at the end of a week of almost unprecedented turmoil on world financial markets:
  • Central banks around the world have pumped billions of dollars of extra funding into money markets on Thursday and Friday to ease the liquidity crisis
  • The US Treasury also said it would guarantee US money market funds - mutual funds that typically invest in low-risk credit such as government bonds and are often used by pension funds - up to a value $50bn to further restore confidence
  • Stock markets in Russia were temporarily suspended again on Friday at the end of a week of wild swings and stop-go trading
  • There are rumours that Morgan Stanley is looking for a partner. Reports have cited talks with US bank Wachovia and the possibility that China Investment Corp - China's sovereign wealth fund - could buy a major stake
The proposed US government rescue plan comes at the end of a week of almost unprecedented turmoil on world financial markets:
  • Central banks around the world have pumped billions of dollars of extra funding into money markets on Thursday and Friday to ease the liquidity crisis
  • The US Treasury also said it would guarantee US money market funds - mutual funds that typically invest in low-risk credit such as government bonds and are often used by pension funds - up to a value $50bn to further restore confidence
  • Stock markets in Russia were temporarily suspended again on Friday at the end of a week of wild swings and stop-go trading
  • There are rumours that Morgan Stanley is looking for a partner. Reports have cited talks with US bank Wachovia and the possibility that China Investment Corp - China's sovereign wealth fund - could buy a major stake
Dramatic measuresDramatic measures
News of a US bail-out emerged after a meeting with Congress members late on Thursday, when Mr Paulson announced plans to introduce new laws to buy hundreds of billions of dollars of bad debt from banks.News of a US bail-out emerged after a meeting with Congress members late on Thursday, when Mr Paulson announced plans to introduce new laws to buy hundreds of billions of dollars of bad debt from banks.
There will be serious long-term damage to the ability of the US to export its way of doing business to the rest of the world. Robert Peston,BBC Business Editor Read Peston's thoughts in fullUS public fears 'troubling times'Credit crunch jargon explainedSend us your commentsThere will be serious long-term damage to the ability of the US to export its way of doing business to the rest of the world. Robert Peston,BBC Business Editor Read Peston's thoughts in fullUS public fears 'troubling times'Credit crunch jargon explainedSend us your comments
This, he said, was at the heart of the almost unprecedented malfunction of the banking system, which has caused havoc in world stock markets this week.This, he said, was at the heart of the almost unprecedented malfunction of the banking system, which has caused havoc in world stock markets this week.
"We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions' balance sheets," he said."We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions' balance sheets," he said.
Mr Paulson and Federal Reserve Chairman Ben Bernanke are expected to thrash out the details of the plan over the weekend.Mr Paulson and Federal Reserve Chairman Ben Bernanke are expected to thrash out the details of the plan over the weekend.
It is thought options under consideration include establishing a government agency that would buy bad loans to allow troubled Wall Street banks to clear their balance sheets.It is thought options under consideration include establishing a government agency that would buy bad loans to allow troubled Wall Street banks to clear their balance sheets.
Reports said Mr Paulson was looking into setting up something akin to the Resolution Trust Corp (RTC), which was formed after savings and loans banks collapsed in the 1980s.Reports said Mr Paulson was looking into setting up something akin to the Resolution Trust Corp (RTC), which was formed after savings and loans banks collapsed in the 1980s.
The RTC took over most of the smaller banks in the US at a cost of $400bn - about $1 trillion (£550bn) in today's money - and then tried to sell off their assets.The RTC took over most of the smaller banks in the US at a cost of $400bn - about $1 trillion (£550bn) in today's money - and then tried to sell off their assets.
The cost of such a bailout would probably be higher this time, with bad mortgage debt believed to be around $2 trillion.The cost of such a bailout would probably be higher this time, with bad mortgage debt believed to be around $2 trillion.
Mixed reactionMixed reaction
New York trader: 'The crisis has been painful to watch'New York trader: 'The crisis has been painful to watch'
Some analysts welcomed the news.Some analysts welcomed the news.
"It's a relief, it allows for an orderly workout for the impaired assets and it will help the banking sector get back to business," said Hans Kunnen of Colonial First State Fund Managers in Australia."It's a relief, it allows for an orderly workout for the impaired assets and it will help the banking sector get back to business," said Hans Kunnen of Colonial First State Fund Managers in Australia.
Howard Wheeldon, senior strategist at London-based BGC Partners, also welcomed the market rally after a "torrid week".Howard Wheeldon, senior strategist at London-based BGC Partners, also welcomed the market rally after a "torrid week".
But he added: "We still face many problems not least the threat of recession because of the fallout of the banking crisis.But he added: "We still face many problems not least the threat of recession because of the fallout of the banking crisis.
And he cautioned against central banks flooding the financial system with too much liquidity.And he cautioned against central banks flooding the financial system with too much liquidity.
"In a way we are now paying the price for the liquidity-boosting measures taken after the September 11 atrocities. We can't afford to have a short-term fix and then in three or four years have an even bigger bubble explode," he warned."In a way we are now paying the price for the liquidity-boosting measures taken after the September 11 atrocities. We can't afford to have a short-term fix and then in three or four years have an even bigger bubble explode," he warned.
BBC Business Editor Robert Peston said that the taxpayer funded bail-out "represents a massive humiliation for Wall Street" and will severely dent the ability of the US to export its way of doing business to the rest of the world.BBC Business Editor Robert Peston said that the taxpayer funded bail-out "represents a massive humiliation for Wall Street" and will severely dent the ability of the US to export its way of doing business to the rest of the world.
But an even bigger risk could be a loss of confidence in the American government's balance sheet, he said.But an even bigger risk could be a loss of confidence in the American government's balance sheet, he said.
"This could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities," our correspondent explained."This could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities," our correspondent explained.
Market movesMarket moves
The UK's FTSE 100 index of largest shares added 8.6% with banking stocks among the biggest gainers.The UK's FTSE 100 index of largest shares added 8.6% with banking stocks among the biggest gainers.
Halifax owner HBOS, which was forced into the arms of rival Lloyds TSB after its shares slumped this week, traded up 30.5%.Halifax owner HBOS, which was forced into the arms of rival Lloyds TSB after its shares slumped this week, traded up 30.5%.
France's Cac 40 and Germany's Dax indexes joined in the rally, up 7.5% and 5.1% in afternoon trade.France's Cac 40 and Germany's Dax indexes joined in the rally, up 7.5% and 5.1% in afternoon trade.
Earlier, Japan's Nikkei jumped 3.8%, while the Shanghai Composite recovered from 22-month lows to close up 9.5% and Hong Kong's Hang Seng soared almost 10%.Earlier, Japan's Nikkei jumped 3.8%, while the Shanghai Composite recovered from 22-month lows to close up 9.5% and Hong Kong's Hang Seng soared almost 10%.
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