Rejects $700bn bailout plan, US Congress

Global stock markets suffered another meltdown yesterday, plummeting as much as 8 per cent, as panic about the financial crisis continued to intensify on both sides of the Atlantic. In the US, the Dow Jones Industrial Average suffered its biggest ever one-day fall, closing down 6.9 per cent at 10,365.4, after the House of Representatives threw out George Bush's proposals for a $700bn (£388bn) Wall Street bailout.


In Britain, the FTSE 100 index suffered the eighth-biggest one-day fall in its history, dropping more than 5 per cent to three-and-a-half-year lows of 4,818.77. The largest drops were seen among the banks, some of which saw almost one-fifth wiped off their share prices following the Government's announcement that it had nationalised Bradford & Bingley.

HBOS, which owns Halifax and the Bank of Scotland, was one of the hardest hit, as investors grew nervous that the proposed takeover deal by Lloyds TSB might yet fail. By the market's close, HBOS shares were down 18 per cent, well below the implied value of the Lloyds offer.

Shares in Lloyds and Royal Bank of Scotland were also both down about 13 per cent, while Barclays dropped 9 per cent. Financial regulators and government ministers had hoped the news of B&B's rescue would calm investors' fears about the banking crisis. Furthermore, central banks around the world injected billions of dollars of new cash into the money markets yesterday, led by the US Federal Reserve, which announced a $330bn expansion of its arrangements to boost US dollar liquidity. The European Central Bank (ECB) lent out more than €120bn (£96bn) to banks.

However, a torrent of negative news drove stock markets down on both sides of the Atlantic. Markets in Belgium and Holland fell by more than 8 per cent following the news that Belgo-Dutch bank Fortis was to be bailed out by the ECB, along with the Dutch, Belgian and Luxembourg governments. Citigroup came to the rescue of America's fourth-largest bank Wachovia, which had been on the verge of going bust at the weekend. Both the German and Icelandic governments were involved in smaller bank bailouts.

The Bank of England revealed that mortgage approvals fell to new lows in August – and are now down more than 70 per cent compared to the same time last year. Although house prices are already down more than 10 per cent since their peak, analysts said the low number of mortgage approvals meant they have much further to fall.

David Jones, the chief market strategist at the brokers IG Index, said government interventions were simply being seen as a sticking plaster by investors. "Recent events would seem to confirm that markets are too big to be swayed from their path by any one organisation – whether it is government or corporate," he said. "The worry is still what is unknown and yet to come out of the financial sector."

Mark Sartori, head of European sales trading at Fox-Pitt, Kelton, added: "The contagion is spreading to mainland Europe and everyone's asking, 'Who's next?'"

The Chancellor Alistair Darling confirmed that B&B would become the second UK bank to be nationalised this year, following its near collapse at the end of last week. He said the Government would take control of its £50bn mortgage book, while Banco Santander, which owns Abbey, had agreed to take on its £20bn savings book, along with its 197 branches.

Although the Treasury injected £4bn into B&B, so that the savings book could be sold on immediately, Gordon Brown was quick to point out that the rescue plan was unlikely to cost the taxpayer anything. The Treasury is now at the top of the list of the bank's creditors, and will be the first to be repaid once the mortgage book is sold on or wound down.

However, speaking at the Conservative Party conference, the shadow Chancellor George Osborne criticised the speed at which the Government had acted over B&B, accusing Gordon Brown of "dither and delay". "They had a year to sort out a private sector solution and they failed to do that," he said in a television interview. "Why on earth didn't they push that legislation through earlier?"

Vince Cable, the Liberal Democrats' Treasury spokesman, said: "It may be that, in the long-term, having acquired this for virtually nothing, the Government will be able to sell it and perhaps either cover itself or probably even make a profit."

The US bailout package is now being renegotiated, and, if passed through the House, could be put to a vote in the Senate later this week. If approved, the plan will be the biggest intervention in markets since the Great Depression.