The United States said it is putting together a rescue plan to
clear away the mountains of bad debt that have weighed down banks
and set off the worst financial crisis in decades.
The Thursday announcement came as leading central banks moved to
flood markets with cash while British and US regulators put the
brakes on short-selling shares, as nations banded together to try
to end the turmoil on global markets.
US stocks staged a dramatic rally on rumours about the new plan,
with the Dow Jones average recovering 3.86 percent Thursday. Asian
markets followed Wall Street's lead, gaining broadly after days of
turmoil and brutal sell-offs.
US Treasury Secretary Henry Paulson and Federal Reserve chairman
Ben Bernanke met with Congressional leaders late Thursday night,
vowing to move swiftly amid fears that more banks could go under as
the crisis deepens.
Paulson did not give details, stressing any plan would
need Congressional approval, but US media reports said he was
considering a bailout by taxpayers like that used in the savings
and loan crisis of the 1980s and 90s.
"As we've said for some time, the root cause of the stress in
the capital markets is the real estate correction," Paulson told
reporters in a brief appearance with Bernanke after the
meeting.
"We're coming together to work for an expeditious solution which
is aimed right at the heart of this problem, which is illiquid
assets on financial institutions in the United States on their
balance sheets," he said.
Like Paulson, US lawmakers stressed that the plan would be put
together quickly.
"We're anxious to see their proposal, which we hope to receive
in a matter of hours, not days," Senate majority leader Harry Reid
said.
The crisis, which began a year ago but intensified in recent
weeks, was set off by so-called subprime mortgages from US banks --
loans to home-buyers with spotty credit that in many cases ended up
in default.
The defaults drove down US house prices, reduced available cash
and credit, and left financial institutions around the world, which
bought many of the loans as part of complex investment instruments,
exposed to the bad debts.
The crisis has led to the mergers or collapse of some of Wall
Street's biggest names -- including Bear Stearns, Merrill Lynch and
Lehman Brothers -- and now perhaps even Morgan Stanley.
The Financial Times said Morgan Stanley, along with Goldman
Sachs the only major independent Wall Street investment bank still
standing, was in talks to sell a stake of up to 49 percent to
China's sovereign wealth fund CIC.
Paulson has faced criticism over the Fed's 85 billion dollar
rescue of insurance giant AIG by the Fed, and putting taxpaying
voters on the hook for billions more weeks before the presidential
election could prove unpopular.
To help the country get out from the savings and loan crisis
almost three decades ago, the US government created the Resolution
Trust Corp -- which bought up assets from failed banks and
eventually re-sold them.
The complicated mortgage-related investments connected to the
current crisis could prove harder to sell, and Paulson indicated
that Congress would need to approve any such measure -- effectively
a massive taxpayer bailout.
"What we are working on now is an approach to deal with the
systemic risk and the stresses in our capital markets," he said
after the meeting with lawmakers including House speaker Nancy
Pelosi.
"We talked about a comprehensive approach that will require
legislation to deal with illiquid assets," he said.
Countries around the world have recognised the need to rein in
the deepening global crisis. Major central banks announced a joint
move Thursday to flood world markets with dollars to try to calm
the turmoil.
Meanwhile Britain and the United States took steps to curb
short-selling -- a practice by which investors bet that a given
stock will decline in value. Short speculation has helped drive
share prices down throughout the crisis.
Britain banned short-selling in financial stocks while the
United States tightened the rules on shorting stocks, looking to
bring some stability to the roller-coaster ride in equities in
recent months.
"While we still regard short-selling as a legitimate investment
technique in normal market conditions, the current extreme
circumstances have given rise to disorderly markets," said the
chief executive of Britain's Financial Services Authority, Hector
Sants.
