US announces debt plan to ease financial crisis

Updated on Sep 19, 2008 10:16 AM IST

The United States said it was putting together a rescue plan to clear away the mountains of bad debt that have weighed down banks and caused the worst financial crisis in decades.

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AFP | By, Washington

The United States said on Thursday it was putting together a rescue plan to clear away the mountains of bad debt that have weighed down banks and caused the worst financial crisis in decades.

The 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 -- money lent 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.

Wall Street stalwart Lehman Brothers, which survived the 1929 market crash and Great Depression, collapsed this week -- and another one of the last major US investment banks, Morgan Stanley, has been in merger talks.

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.

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