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Shares surge on US bail-out plan Shares surge on US bail-out plan
(10 minutes later)
European shares have rebounded sharply after a proposed US government plan to buy billions of dollars of US banks' bad mortgage-related loans.European shares have rebounded sharply after a proposed US government plan to buy billions of dollars of US banks' bad mortgage-related loans.
The UK's FTSE 100 index up more than 8% and in Paris the Cac was 7.5% higher.The UK's FTSE 100 index up more than 8% and in Paris the Cac was 7.5% higher.
Financial stocks gained the most, with Royal Bank of Scotland and HBOS up more than 50% at one point.Financial stocks gained the most, with Royal Bank of Scotland and HBOS up more than 50% at one point.
Moves to restrict short-selling in the US and UK also helped to reverse steep losses from earlier in the week, with stock markets worldwide bouncing back.Moves to restrict short-selling in the US and UK also helped to reverse steep losses from earlier in the week, with stock markets worldwide bouncing back.
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.
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:
  • Stock markets in Russia have been suspended for the second time on Friday at the end of a week of wild swings and stop-go trading
  • The US financial regulator the Securities and Exchange Commission banned short-selling in the stock of 799 financial companies until 2 October
  • The move followed similar moves by the UK's City watchdog on Thursday
  • Nervous traders turned on the last independent US Wall Street giants Morgan Stanley and Goldman Sachs on Thursday sending their shares lower
  • 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
  • Central banks around the world have pumped billions of dollars of extra funding into money markets on Thursday to ease the liquidity crisis
The proposed US government rescue plan comes at the end of a week of almost unprecedented turmoil on world financial markets:
  • Stock markets in Russia have been suspended for the second time on Friday at the end of a week of wild swings and stop-go trading
  • The US financial regulator the Securities and Exchange Commission banned short-selling in the stock of 799 financial companies until 2 October
  • The move followed similar moves by the UK's City watchdog on Thursday
  • Nervous traders turned on the last independent US Wall Street giants Morgan Stanley and Goldman Sachs on Thursday sending their shares lower
  • 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
  • Central banks around the world have pumped billions of dollars of extra funding into money markets on Thursday to ease the liquidity crisis
Dramatic measuresDramatic measures
News of a US bail-out emerged after a meeting with Congress members late on Thursday, when US Treasury Secretary Henry 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 US Treasury Secretary Henry 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.
In addition, a separate pool of money could be made available to insure investors in US money-market funds, which have seen significant withdrawals in recent days.In addition, a separate pool of money could be made available to insure investors in US money-market funds, which have seen significant withdrawals in recent days.
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
FROM THE TODAY PROGRAMME More from Today programmeFROM THE TODAY PROGRAMME More from Today programme
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.
But 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 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 more than 8% with banking stocks among the biggest gainers.The UK's FTSE 100 index of largest shares added more than 8% 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 63 pence at 240p.Halifax owner HBOS, which was forced into the arms of rival Lloyds TSB after its shares slumped this week, traded up 63 pence at 240p.
France's Cac 40 and Germany's Dax indexes joined in the rally, up 6.5% and 4% before midday.France's Cac 40 and Germany's Dax indexes joined in the rally, up 6.5% and 4% before midday.
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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