FTSE 100 edges higher but banks still under cosh
'The consequences get worse every day if we do not act,' Bush said
The London stockmarket staged a remarkable rally today amid optimism that the rescue plan for the US banking sector could be revived following last night's shock rejection by Congress.
Having plunged 147 points in early trading, the FTSE 100 index surged back into positive territory and was up 24.6 points by 1.30pm at 4843.3.
Britain's battered banks bucked the trend, though, with HBOS down more than 16% at one stage — putting its takeover by Lloyds TSB in doubt. As fears continue to stalk the financial sector, Bank of England governor Mervyn King met Gordon Brown this morning to discuss the crisis.
Shares had been expected to plunge sharply today, on the back of the massive losses on Wall Street last night, where the Dow Jones industrial average shed 777.7 points. It is now tipped to come roaring back when trading begins at 2.30pm BST.
In a sombre address this afternoon, the US president, George Bush, said Congress must reach agreement on the bail-out.
"The consequences get worse every day if we do not act."
Analysts said there were hopes that the deadlock over the US government's proposed $700bn (£380bn) bailout of Wall Street could be resolved.
"I think that a huge amount of pressure is going to be put on leaders. I think that they will eventually come to their senses," said Mike Lenhoff, chief strategist at Brewin Dolphin.
City commentator David Buik agreed. "The reason for the turnaround is that we headless chickens are facing across the pond and we note that the Dow futures have rallied... which ventures to suggest that the self-indulgent hillbilly behaviour of Congress will eventually see an agreement to the Hank Paulson plan on Thursday or Friday," he said.
Another factor behind the turnaround was speculation over possible interest rate cuts in the US and Europe.
Politicians worldwide reacted with disappointment to the rejection of treasury secretary Hank Paulson's plan, in a gripping vote in the House of Representatives. Brown said he had lobbied Bush to urge him to find an agreement fast.
"We've obviously sent a message to the White House about the importance that we attach to taking decisive action in America," Brown said today.
Today's breakfast meeting between Brown, King and chancellor Alistair Darling came a day after the nationalisation of Bradford & Bingley.
Treasury minister Yvette Cooper said the government was keeping close contacts with the Bank of England as the financial crisis developed.
"We obviously need to monitor events very closely. We're disappointed really with the events in the US, the fact that they didn't get a deal," Cooper told Sky News.
David Cameron today announced that he will drop his objections to the government's proposed reforms to the banking sector, and urged Brown to introduce the legislation in parliament next week.
"Our focus must be on protecting the financial system," Cameron told the Conservative party conference, adding that it was vital to not repeat the political wrangling seen in America.
Other stock markets around the world tumbled earlier today, with Japan's Nikkei index closing at its lowest level for more than three year. Trading in Russia was suspended amid fears of panic selling.
Bailout misery
The bailout plan was voted down by 228 votes to 205 last night in the House of Representatives, where Republicans refused to support the rescue scheme.
Following the drama, which prompted groans on the trading floor on Wall Street, US shares plunged as uncertainty sent investors fleeing for safety. The Dow Jones industrial average suffered its worst one-day decline since the 1987 crash.
Congress's refusal to support the bailout is expected to force more banks to fail, both in the US and Europe.
Belgium-France firm Dexia was an early victim, with the Belgium government leading a rescue bid today. And the Irish government has guaranteed all banks deposits at the country's six main banks for the next two years — just days after the country became the first member of the eurozone to fall into recession.
"The government's objective in taking this decisive action is to maintain financial stability for the benefit of depositors and businesses and is in the best interests of the Irish economy," said a spokesman.
US crude oil fell again to around $95 a barrel today, having plunged by $10 to $96 a barrel last night as traders bet on a slump reducing the need for fuel. Gold also surged yesterday to $915 an ounce, but fell back slightly to $895 an ounce.
US politicians have blamed each other for the rejection of Paulson's plan to buy toxic assets from America's banks. Democrats rejected claims that speaker Nancy Pelosi had alienated Republicans by blaming the recklessness of the Bush administration.
"The speaker had to give a partisan voice that poisoned our conference," said Republican leader John Boehner. This drew ridicule from Democrats. Barney Frank, chairman of the House financial services committee, said: "Somebody hurt my feelings so I'll punish the country? That's hardly plausible."
Most Democrats in the House supported the plan, while two-thirds of Republicans opposed it.
Critics of the bailout said they were not prepared to write a blank cheque to the highly paid bankers who had caused the credit crunch. The plan was unpopular with the US voters, and it appears that those politicians whose seats are most at risk in November's elections had generally voted against the plan.
It is now unclear what steps the US government will take. Paulson has said he will continue negotiating to find a plan that can be passed.
"This is much too important to simply let fail," he said.
Peter Morici, professor of business at the University of Maryland, said: "Things are going to get so bad something will have to be done in the next few weeks. Banks will sink, credit markets will seize, the economy will go into something much worse than a recession."
In a Gallup poll for USA Today, 33% of Americans said they believed the country was in a depression.
The Mortgage Bankers' Association reacted by warning of job losses as banks curtail credit to small businesses. Larry Fink, chairman of a leading US investment management firm BlackRock, said critics had been wrong to characterise the plan as a bailout of Wall Street. "This is a bailout of Main Street," he said. "Banks have no ability to lend at the moment because their balance sheets are so gummed up."
source: http://www.guardian.co.uk/business/2008/sep/30/marketturmoil.globaleconomy/print
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