Financial Crisis: US calls on world to save banking system

By Yvette Essen
Last Updated: 12:04am BST 22/09/2008

The US government last night urged other countries to follow its model of bailing out stricken banks after Treasury secretary Hank Paulson unveiled an unprecedented $700bn (£380bn) rescue plan to prevent a collapse of the financial system.
    
The US government has urged other countries to follow its model of bailing out stricken banks
President Bush with US Treasury secretary Hank Paulson, who has announced plans to buy up 'toxic' debts

The proposal would allow the Treasury to buy up "toxic" mortgage-related debts from financial institutions, including US arms of foreign banks, to try to stem the worst financial crisis since the Great Depression.

With Congress set to vote this week on the emergency legislation, Mr Paulson took to the airwaves, warning that the massive bailout was the only way to avoid catastrophe and that other countries must take similar measure.

"We have a global financial system and we are talking very aggressively with other countries around the world and encouraging them to do similar things and I believe a number of them will," Mr Paulson said.
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However, Prime Minister Gordon Brown looks unlikely to follow suit, with a Treasury spokesman saying: "We're not working toward implementing a US-style resolution regime. But the Prime Minister and the Chancellor [Alistair Darling] have made clear that we will take whatever action is necessary in the interest of financial stability."

Mr Paulson and Fed chairman Ben Bernanke have taken the drastic measures in an attempt to stem dramatic losses caused on Wall Street by the collapse of investment bank Lehman Brothers and demise of AIG, once the world's largest insurer.
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Under the US Treasury's bailout proposals, the US government's debt limit would rise to $11.315 trillion from $10.615 trillion. This would fund the acquisition of up to $700bn home and commercial mortgages and related assets from US-based banks and other institutions over the next two years.

A factsheet released by the US Treasury department said in consultation with the Fed, it will have the authority to purchase other assets, "as deemed necessary to effectively stabilise financial markets".

It added the price of these purchases will be set "through market mechanisms where possible, such as reverse auctions". However, market analysts predict it will be able to buy these assets at a "significant discount" to provide US taxpayers who are expected to fund the scheme with the chance of getting a return on the assets in the longer term. A vote on the legislation to enact the scheme could be held as early as today.

Tim hαɾɾιs, senior portfolio manager at JP Morgan Asset Management, said the bailout cannot afford to fail. "I think it will work - I cannot contemplate what will happen if it does not work," he said. However, Mr hαɾɾιs added the sudden "flood of liquidity" increases the chances of "a thumping great recession" as the financial system is no longer paralysed.

"The risks move from the financial sector to the retail and service sectors," he explained. "If anything, last week has increased recession risk. Policymakers and politicians have thrown the book to saving the financial system and damn the consequences."

Jeremy Batstone-Carr, equity strategist at Charles Stanley, cautiously welcomed the US Treasury's intervention. "Whilst wholehearted applauding the package, we need to look at the fine print of the publicly-funded lifeboat," he said. "We could see more volatility as the details emerge."

In France, finance minister Christine Lagarde warned: "We have a whole series of obstacles to overcome and difficulties to face." Traders predicted the dollar would come under pressure as Washington raises borrowings. David Woo, London-based global head of foreign exchange strategy at Barclays, said: "The downdraft on the dollar from the hit to the balance sheet of the US government will dwarf the short-term gains from solving the banking crisis."

Liberal Democrat's Treasury spokesman Vince Cable said the Government would be right not to follow the US. "This was a desperate throw by the US authorities to stop what was virtually the meltdown of western capitalism."