Giants lose £13.2bn in shares rout and at last they will act

A MASSIVE rescue plan to bolster UK banks was to be announced by the government this morning, after £13.2 billion was wiped from Scotland's leading financial institutions.

The bail-out of up to £50 billion, revealed in The Scotsman yesterday, could effectively mean the part-nationalisation of major high-street names, including the Royal Bank of Scotland and HBOS. Yesterday, the value of RBS and HBOS plunged – by 39 per cent and 41.5 per cent respectively – on a dramatic and devastating day for the Scottish giants. At one point, worst-hit RBS was haemorrhaging value by almost £2 million a second.

Its shares closed at 90p, wiping a further £9.6 billion off the group's market value. Shares in HBOS fell to 94p – a £3.6 billion loss – despite last week's assurances that the emergency takeover by Lloyds TSB would go through as planned.

The share plunges fuelled concerns that major corporate customers were planning to move their assets to safer havens.

After the markets closed, crisis talks took place at Downing Street, involving the Chancellor, Alistair Darling, the governor of the Bank of England, Mervyn King, and Financial Services Authority chairman Lord Turner.

News of the government's rescue deal was due to be revealed at 7am today, before the City reopened. Mr Darling confirmed last night he would make a statement "to put banks on a longer-term, sound footing".

He said: "The Bank of England has been putting substantial sums into the market today, and it is ready to do more when that is needed.

"We have been working closely with the governor of the Bank of England, the Financial Services Authority and financial institutions to put banks on a longer-term, sound footing.

"I intend to make a statement before the markets open tomorrow morning, and I will be making a further statement to the Commons later in the day."

It is understood all the UK's leading banks will be involved, but it was unclear last night if a curb on bank executives' pay would be part of the deal.

Nick Clegg, the Liberal Democrat leader, said today would be "a day of reckoning for the whole British economy".

However, there is growing disquiet at the time it has taken to finalise the rescue deal, under which the government will buy stakes in the banks, potentially involving the issue of some £30 billion to £50 billion of preference shares.

In the markets, the extraordinary price collapses yesterday were due to huge volumes of shares being dumped by institutional investors fearful that the recapitalisation announcement might result in ordinary share values being hugely demoted by a preference share scheme.

One banking figure close to the negotiations with the government said: "For the government to flag up the recapitalisation scheme so extensively and then leave a vacuum has been downright irresponsible."

Sandy Chen, an analyst at Panmure Gordon, said the plunge was down to shareholder fears over dilution of investments. He said there was also mounting concern at RBS and Barclays, in particular, over potentially massive exposure to defaults on complex financial instruments.

Vince Cable, the Liberal Democrats' Treasury spokesman, said: "It looks as if RBS are the latest victim of a speculative attack. The continuing uncertainty over the government's intentions is proving very damaging."

Amid the criticism, there were calls for the Bank of England's policymakers to cut interest rates by a full percentage point to ease the crisis when they meet today. Their decision will be revealed tomorrow. Downing Street also confirmed the National Economic Council would hold a meeting at 8am today in the Cobra emergency briefing room, usually used during terrorist attacks.

Effectively a "war cabinet" for the course of the financial crisis, the NEC is chaired by the Prime Minister and comprises senior ministers and officials.

Emergency discussions about the global financial crisis took place at all levels of government yesterday, with European finance ministers agreeing a pan-EU scheme to guarantee deposits of up to 50,000 (£38,000).

After the summit, Mr Darling flew back from Brussels to meet Gordon Brown, Lord Turner and Mr King.

Meanwhile, The Scotsman understands that two major corporate figures have been in touch with Alex Salmond, the First Minister, to express concern over the crisis in inter-bank lending markets.

Mr Salmond is believed to be concerned at the time it has taken to negotiate the recapitalisation plan, while confidence is haemorrhaging from Scotland's leading banks.

Last night, he said he wanted the UK government to adopt a three-point strategy to fight the worsening economic crisis: the Treasury to guarantee all deposits in British financial institutions; the Bank of England to "unfreeze the system in terms of inter-bank lending" by lending money to the banks; and for the Bank's monetary policy committee to approve a "substantial cut in interest rates".

Also, in an extraordinary move yesterday, the US Federal Reserve resorted to legislation not used since the Great Depression to provide unsecured company lending to unfreeze the bank-to-bank lending market.

This is the action that the First Minister is understood to be urging the Bank of England to take.

The International Monetary Fund also called for a comprehensive, co-ordinated international response to the global crisis, which it said had become disorderly and more damaging than it previously thought.

UK business leaders, meanwhile, piled pressure on the Bank of England to opt for a deep interest rate cut. The Federation of Small Businesses revealed a poll of 6,000 companies showed the majority had seen operating costs increase and trade reduce.

Last night, it emerged that HBOS has agreed to sell its Australian banking business for £1.2 billion in a move to boost its balance sheet. The sale, to Commonwealth Bank of Australia, is subject to approval by Australian regulators.

HOW THE DAY UNFOLDED

01:20: The Japanese Nikkei 225 share index sank more than 5 per cent, falling below 10,000 for the first time since December 2003.

05:00: The Reserve Bank of Australia cuts its key interest rate from 7 per cent to 6 per cent.

05:00: Japan's central bank announces it is keeping its key interest rate unchanged at 0.5 per cent.

07:00: Japan's Nikkei 225 recovers to finish above 10,000, but leaving it 3 per cent down on the day at 10,155.9.

07:20: Moscow's two stock exchanges suspend trading as an announcement says they will stay closed for the morning.

08:00: FTSE 100 opening share prices: RBS 150, HBOS 168.5, Lloyds TSB 270, Barclays 320.

08:10: London's FTSE 100 rises 1.5 per cent, recovering some of Monday's losses which saw the FTSE fall by 7.86 per cent.

08:43: Frankfurt's DAX 30 is up 1.47 per cent, while the Paris Cac 40 also rises 3.08 per cent.

08:57: Royal Bank of Scotland shares are down 30 per cent after reports that the chief executive, Sir Fred Goodwin, together with John Varley of Barclays and Lloyds TSB bosses met the Chancellor, Alistair Darling, and the Bank of England governor, Mervyn King, to discuss government funding.

09:00: FTSE 100 share prices: RBS 127, HBOS 146, Lloyds TSB 217.75, Barclays 290.75.

09:00: The FTSE falls to 4609.3, leaving the index just 20.1 points higher after an hour of trading.

09:00: Gordon Brown holds a Cabinet meeting.

09:21: The pound hits 2-year low against the US dollar. Sterling at $1.7322, its weakest since April 2006.

09:22: Royal Bank of Scotland shares slump 39 per cent.

09:30: The FTSE index of leading shares was down 2.3 per cent.

09:35: The Icelandic government nationalises Landsbanki, the country's second-largest bank.

09:36: The Russian regulator delays trading on Moscow exchanges until 13:00 local time (10:00 BST), 2 hours after normal opening hours.

10:25: Iceland's central bank releases a statement that Russia has agreed to loan it 4 billion (£3.1 billion), although a spokesman for Russian prime minister Vladimir Putin says he cannot confirm the statement.

10:45: The Foreign Secretary, David Miliband, emerges from 10 Downing Street after the Cabinet meeting. He said: "These are very serious times. We take them very seriously."

11:00: Russia's stock markets made early gains in the first hour of trading, after trading opened late, and was up 2.6 per cent to 889.1 points.

11:07: Royal Bank of Scotland shares recover slightly.They are now trading at 110.6 pence.

11:18: Russian president Dmitry Medvedev promises credit of up to $36 billion (£21 billion) to the country's banks to stabilise the economy.

11:32: US light crude oil rallies to just above $90 a barrel.

Bail-out story riles No 10

DOWNING Street yesterday made clear its disapproval at media reports that a £50 billion taxpayer-funded bail-out for the main banks was on the cards.

The Scotsman was the first paper to reveal that the Treasury was ready to take a stake in the stricken banks.

Announcing a crisis meeting yesterday,

a clearly irritated spokesman for the Prime Minister said: "The government is certainly not going to engage in irresponsible briefing."

Mike Gilson, the editor of The Scotsman, said the "impeccably sourced" report was of huge public interest, given the sums of taxpayers' cash that may be involved.