US Following European Lead in Bank Bail-outs

The US government summoned banking bosses to Washington yesterday to put the finishing touches to a plan to pump billions of dollars into the financial industry, sparking frenzied anticipation of a rescue that sent shares on Wall Street flying.

Anxious to avoid lagging behind Europe in supporting troubled institutions, the US treasury said it was moving "quickly but methodically" towards an initiative that is likely to include guaranteeing inter-bank lending and taking equity stakes in leading banks.

Encouraged by the prospect of bail-outs on both sides of the Atlantic, buyers returned to the US stockmarket. During the morning session in New York, the Dow Jones industrial average surged by as much as 578 points to 9,029 - the biggest intra-day rise on record - in the first sustained sign of a bounce in the blue-chip index after eight days of decline.

After initially planning simply to clean up banks' balance sheet by buying distressed assets, the US treasury secretary, Henry Paulson, has accepted that far more radical aid is necessary, in spite of the Bush administration's deep aversion to government intervention in private enterprise.

Top Wall Street names including the chief executives of Goldman Sachs, Bank of America, Morgan Stanley and JP Morgan were invited to discuss details of rescue proposals at a mid-afternoon meeting with Paulson. A treasury spokeswoman said the get-together was to "finalize details on a financial market stabilization initiative".

The US treasury official in charge of restoring financial stability, Neel Kashkari, said in a speech that officials were working "around the clock" to establish a framework for action. The department has set up seven policy teams to deal with different aspects of a bail-out, including equity purchases, loan purchases, keeping homeowners in their properties and adjusting Wall Street pay packages.

"We are moving quickly but methodically, and I am confident we are building the foundation for a strong, decisive and effective program," said Kashkari.

He revealed that 70 firms had applied for a role as "master custodian" in managing the US government's banking investments. The list has been whittled down to three, with the winner to be announced within 24 hours.

On Wall Street, the mood was cheered by confirmation of a $9bn (£5.2bn) investment by Japan's Mitsubishi USJ into the troubled bank Morgan Stanley and by news of merger talks to combine forces among Detroit's struggling "big three" car makers: General Motors, Ford and Chrysler.

"Everybody knew that we were going to have an up day eventually," said Dave Rovelli, managing director of US equity trading at Canaccord Adams. Prior to yesterday, the Dow Jones index was yet to finish a day in positive territory since the beginning of October.

Many leading high-street banks in the United States remain in a sickly condition. One of the strugglers, the Philadelphia-based Sovereign Bancorp, which has 750 branches nationwide and 12,000 staff, revealed it was in talks about a possible takeover by Spain's Banco Santander, which already owns a 25% stake.

The prospect of government investment has been welcomed by US banks as it could help to restore trust and confidence, reigniting lending between institutions.

The treasury has stressed that any program of equity investments will be voluntary and that "healthy" firms will be eligible, in an attempt to avert any stigma attached to government aid that could drive down the stocks of participating banks even further.

At the White House, President Bush made a joint appearance with the Italian prime minister, Silvio Berlusconi, to offer reassurance on efforts to combat the financial crisis.

"These are tough times for our economies," said Bush. "Yet we can be confident that we can work our way through these challenges. And America will continue to work closely with the other [G7] nations to coordinate our response to this global financial crisis."