Senate urged to back crisis bill

Shares remain volatile ahead of Wednesday’s key vote

Democratic and Republican Senate leaders have appealed for a new version of a $700bn (£380bn) Wall Street bail-out to be approved in a key vote.

Republican Mitch McConnell said it would shield Americans from “shockwaves of a problem they didn’t create”.

The plan needs support in the Senate and House of Representatives, which rejected a similar bill on Monday.

Senate Democrat Harry Reid said he hoped a strong show of bipartisanship would “spark the House to do the same”.

President George W Bush has been speaking to senators ahead of the vote. The White House said it hoped to see “strong support for the bill”.

“It’s critically important that we approve legislation this week and limit further damage to our economy,” said spokesman Tony Fratto.

US presidential hopefuls John McCain and Barack Obama are returning from the campaign trail for the vote, which is due to begin late on Wednesday.

Revised proposal

Global shares were mixed in Wednesday trading ahead of the vote.

By early afternoon on Wall Street the Dow Jones was down 0.2% or 30 points.

CHANGES TO BILL Raises government’s guarantee on savings from $100,000 to $250,000 Tax breaks to help small businesses and promote renewable energy Expansion of child tax credit and help for victims of recent hurricanes

But hopes that enough changes had been made to get the bill through saw shares close up strongly in Asia on Wednesday.

In Europe, the UK’s FTSE 100 finished 1.1% higher at 4,959.6 points, France’s key index added 0.6% while German shares fell.

Changes to the rescue plan involve lifting the US government’s guarantee on savings from $100,000 to $250,000 and a package of targeted tax breaks.

They are designed to answer critics who felt the original plan was weighted too much in favour of Wall Street while not enough was being done to help struggling American families.

To get through the Senate, the bill will require backing by 60 of the 100 senators. It would then return to the House of Representatives for a vote on Thursday or Friday.

Some members of Congress continue to press for more fundamental changes to the bill.

President Bush has warned of “painful and lasting” consequences for the US should Congress fail to agree a rescue plan.

The House’s rejection of the earlier version of the plan on Monday led to sharp falls on world stock markets.

In other developments:

• The European Union outlines its own proposals for reforming banking regulation which, if approved, could see dramatic changes to the way in which banks operate
• Russian Prime Minister Vladimir Putin says the “irresponsibility” of the US financial system is to blame for the crisis
• Ireland’s government discusses a move to guarantee all bank deposits with the EU Competition Commissioner

‘Painful recession’

In election campaigning on the eve of the vote, Mr McCain and Mr Obama urged politicians of both parties to work together to pass the emergency legislation.

Speaking in Reno, Nevada, Mr Obama warned that without action by Congress “millions of jobs could be lost, a long and painful recession could follow”.

John McCain said inaction by Congress was putting the US at risk

He added: “There will be a time to punish those who set this fire, but now is the moment for us to come together and put the fire out.”

Mr McCain, who campaigned in Des Moines, Iowa, said inaction by Congress had “put every American and the entire economy at the gravest risk” and that Washington urgently needed to show leadership.

“I am disappointed at the lack of resolve and bipartisan goodwill among members of both parties to fix this problem,” he said.

The vote comes a day before a TV debate between vice-presidential candidates Joe Biden and Sarah Palin.

Mr Biden, Mr Obama’s running mate, is also expected to take part in the Senate vote.

Meanwhile, ex-President Bill Clinton is to hold his first rally for Mr Obama.

Mr Clinton, whose wife Hillary lost to Mr Obama in a fierce primary contest for the Democratic nomination, is due to appear in Florida, where he will encourage people to register as voters before a deadline on Monday.

Shares surge on US bail-out plan

Wall Street shares have rebounded sharply after a proposed US government plan to buy billions of dollars of US banks’ bad mortgage-related loans.

The Dow Jones index jumped 3.8% in early trading, while London’s FTSE 100 index was up 8.6%. In Paris, the Cac 40 was 7.6% higher.

US Treasury Secretary Henry Paulson said the bad debts were “clogging up” the financial system.

He said more details of the rescue package would be announced next week.

“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%.

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.

Crisis 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 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

Dramatic 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.

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

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.

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.

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 cost of such a bailout would probably be higher this time, with bad mortgage debt believed to be around $2 trillion.

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.

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.

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.

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.

“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 moves

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%.

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%.

Investors edgy as US stocks fall

Investors are concerned that financial markets will remain volatile.

US stock markets sank in early trade on fears the bailout of insurance giant AIG would not be enough to dispel the gloom engulfing the financial world.

AIG’s rescue and a potential takeover of UK lender HBOS had earlier boosted confidence in Asia and Europe.

But markets were volatile as nervous investors tried to make sense of the dramatic events that have unfolded in recent days.

The widely watched Dow Jones industrial average was down 1.9% at 10,849.

Top UK mortgage lender HBOS, which has faced heavy selling this week, fell as much as 50% before recovering after it emerged that it was in advanced talks to be taken over by Lloyds TSB.

HBOS shares were down 13% at 160 pence in London, the biggest faller in the FTSE 100, after being the top gainer at one point.

It has been a tumultuous week on financial markets, with significant changes in the financial landscape.

Key events on Wednesday included:

• Beleaguered HBOS in merger talks with Lloyds TSB after a steep fall in its share price
• US insurance giant AIG being bailed out by the US government
• Volatile stock markets as global investors remain nervous
• Trading on the Russian stock exchange being suspended
• Barclays snapping up key assets from Lehman Brothers after its bankruptcy

I don’t think anyone has got any or much confidence in market direction for more than a few days Darren Winder, Cazenove

The FTSE 100 index of top UK shares was down 0.48% at 5,001.4, reversing earlier gains, with some banking shares hard hit.

Shares in Barclays were up 9.8%, Lloyds TSB climbed 7.9% while Royal Bank of Scotland was down 2.6%.

Topsy-turvy trade

Trade is likely to remain rocky amid concern that financial system instability will continue after the dramatic events of the past few days.

“I don’t think anyone has got any or much confidence in market direction for more than a few days,” said Darren Winder, a strategist at Cazenove.

AIG’s bail-out follows the collapse of US investment bank Lehman Brothers, which caused share prices to plummet across the world’s financial markets.

Another investment bank, Merrill Lynch, has been sold off to Bank of America.

France’s Cac 40 share index was down 0.24%, while Germany’s Dax index was 0.64% lower, reversing earlier gains as Wall Street opened.

Russia’s stock exchange suspended trade following steep falls in shares.

Asian shares had a mixed session. Stocks in Tokyo, Taipei, and Seoul all rose, although prices in Hong Kong, Shanghai and Australia lost ground.

Japan’s Nikkei 225 index ended up 1.2% at 11,749.79, having risen by as much as 2.3% earlier in the day. The index had hit a three-year low on Tuesday.

Hong Kong’s Hang Seng index ended down 3.6% at 17,637.19 points.

Global economy woes shake markets

Japanese shares felt the force of the economic uncertainty

Fears about a global economic slowdown, heightened by worsening US job figures, have continued to undermine stock markets around the world.

London’s FTSE 100 index lost 2.3% – taking its weekly decline to 7% – its biggest since July 2002.

Markets in Paris and Frankfurt fell by 2.5% as economy concerns spread.

On Wall Street the Dow Jones index clawed back early losses to edge higher despite figures showing the US economy shed 84,000 jobs last month.

But the benchmark US index still had its worst week since May.

Earlier, Japan’s main share index fell nearly 3% while markets in Hong Kong, China, Australia and India all slid 2%.

‘Ugly’ data

The US labor market figures – which showed the unemployment rate rising to 6.1% – were a further jolt to investors who have had to swallow a slew of poor economic data in recent days.

Economists had been expecting 75,000 jobs to be lost while the government also revised upwards.

“This was an ugly number that pretty much confirms that our economy continues to trend downward,” said Jack Ablin, chief investment officer of Harris Private Bank.

“This just knocks the legs out of any hope of seeing much economic improvement right now.”

‘Uncertainty’

Amid the uncertainty, few investors are willing to buy Masayuki Otani, Securities Japan

The FTSE 100 closed down 2.3% at 5,240.70 points. The last time it lost so much value in a week was more than six years ago in the wake of financial scandals such as Enron and WorldCom.

Markets in Paris and Frankfurt continued their recent downward trend, both the Cac-40 index and the Dax-30 dropping about 2.5%.

The Dow Jones index, which lost 3% on Thursday, rose 32.73 points, or 0.3% to 11,220.96, but still ended down 2.8% on the week.

“Given the fact we were down so much yesterday we’re seeing a bit of a reflex rally with investors wanting to take advantages of some of the bargains,” said Bucky Hellwig, senior vice president at Morgan Asset Management.

The Nasdaq index slipped 3.16 points, or 0.1% to 2,255.88, ending the week 4.7% lower.

Earlier Japan’s benchmark Nikkei index fell 361.54 points to 12,196.12 amid a widespread sell-off of shares in Asia.

The Hang Seng index fell more than 3% in Hong Kong while markets also fell sharply in China, Australia and India.

“Amid the uncertainty, few investors are willing to buy,” said Masayuki, Otani, chief market analyst at Securities Japan.

“Several bad things happened at once,” he added, explaining the fall.

Gloom

Worries about inflation have prevented central banks in Europe from cutting interest rates to help forestall a slowdown.

But analysts believe this could change soon with economic forecasts across Europe looking increasingly gloomy.

The European Central Bank cut its 2009 growth forecast from 1.5% to 1.2% on Thursday while the UK economy stalled in the second quarter.

In a separate development, the Russian rouble fell against the dollar a day after Russia’s central bank intervened to support the currency amid concerns about a flight of foreign capital after the conflict with Georgia.

The central bank sold up to $4bn in reserves, the Financial Times reported, after the rouble slipped to its lowest level since February 2007.