$70 million bail-out rejected

[OpenMind]

The following was extracted from a Daily Telegraph article in today's copy.



Amid extraordinary scenes, Wall Street’s Dow Jones index plunged by 700 points - more than six per cent - within minutes of the American Congress voting against the plans.

Although share prices partially recovered, British investors are braced for further sharp falls following a day of turmoil in which the London stock exchange suffered one of its biggest ever daily drops.

Frantic negotiations are underway in Washington to try and rescue the bailout package. American politicians said they were determined to negotiate a deal but the ongoing uncertainty is likely to have profound effects on financial markets this week.

George W Bush, the American President, previously warned that without the scheme the impact on the US economy would be devastating. He also said that Americans would struggle to get mortgages, credit cards or loans.

Ben Bernanke, the chairman of the Federal Reserve, had warned of "grave threats" tothe financial system if Congress rejected the plan.

Mr Bush, who staked his political reputation on securing the deal, that he was “very disappointed. Gordon Brown, the Prime Minister, was said to be monitoring the situation “very closely.

Under the terms of the $700 billion bail-out the US Government was to take on bad banking debts. It was hoped that this would rescue beleaguered banks that would then be free to begin lending again.

However, American politicians were growing increasingly wary that voters would regard the scheme as using taxpayers’ money to save wealthy Wall Street banks who should be allowed to fail.

The rejection of the package - blamed on the Republicans - was branded as potentially one of the most significant financial events in a generation.

The meltdown in America came after financial markets in Britain, Europe and Asia had already suffered one of the worst days on record amid growing doubts over the rescue package.

The London stock market fell by more than five per cent on Monday - the biggest one-day fall in the current crisis and the eighth worst ever.

The pound also recorded its biggest one day fall in more than 15 years amid growing fears over the state of the British economy.

The financial turmoil came in the wake of Alistair Darling’s announcement that Bradford & Bingley (B&B), Britain’s eighth biggest mortgage lender, is to be nationalised.

In Europe and America, governments have been forced to step in to help a further four banks including Belgian giant Fortis - Britain’s third largest motor insurer - and the US’s fourth largest bank Wachovia.

Authorities also intervened to save an Icelandic investment company with links to a number of British high-street chains including Debenhams.

There are now growing fears that despite the emergency interventions, Government action is failing to quell the growing panic and distrust which is plaguing the financial markets. Experts warned that the effects on the economy and on household finances will be severe.

The former Prime Minister Tony Blair said: “What has happened has left everybody surprised, shocked, bewildered. Not even the experts were able to predict the full scale of this. In these circumstances there is no guide book, no rules on what to do.

On another day of turbulence:

• Shares in Royal Bank of Scotland (RBS) dropped by more than 20 per cent amid concerns over its exposure to the ongoing credit crisis. Shares in the bank closed down 13 per cent as the B&B nationalisation failed to end the turbulence facing Britain’s banks.

• The FTSE-100 index of Britain’s biggest companies fell by 270 points to close at 4,818. A global index of stock markets fell by the largest amount in more than a decade. The Dow Jones index suffered its biggest daily points fall - down 777.7 points (6.98 per cent) at 10365.4.

• Mortgage lending ground to a halt during August. It fell 95 per cent to just £143 million - the lowest since records began in 1993 - as banks rationed credit. The figures prompted warnings that further house price falls are now imminent.

• Homeowners were warned that mortgage rates will rise. Northern Rock, Nationwide and HBOS are among those increasing home loan costs.

Financial regulators said that although they were confident that other banks were secure, the turmoil had not yet ended.

Lord Turner, the new head of the Financial Services Authority (FSA), said: “We are not necessarily right at the end of this process, he said.

Regulators and central banks are particularly concerned that despite pouring billions of pounds into the financial markets, banks are still reluctant to lend money. The latest mortgage figures are causing particular alarm.

George Osborne, the shadow Chancellor, said the situation had to be stabilised, and then politicians must reflect on what caused the economic “wreckage. He offered to hold talks with Labour to work out a rescue solution in this country.

He said: “The task at hand on a day like this is to work out what we can do to stabilise the situation, what the American government can do now they have lost the vote in Congress."