Bush launches $700bn rescue plan and confesses he didn't realise how severe problems were

Details began to emerge yesterday of the US's unprecedented plans to deal with the underlying causes of the present credit and financial crises. The Bush administration is asking Congress to let the government use $700bn to buy the bad debt of any American financial institutions for the next two years. The largest bailout in decades, it would raise the statutory limit on the US national debt from $10.6 trillion to $11.3 trillion.

The news, together with the continuing ban on either side of the Atlantic on short-selling financial shares, is expected to further settle the world's volatile financial markets. But, after Friday's heady rises in the US Dow Jones (up 3.4 per cent) and UK FTSE (up 8.8 per cent), President George Bush had some sobering words. He acted so boldly, he said yesterday, only after realising just "how severe the problems were".

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The President said his first instinct was to let the free markets work. But then he heard from experts who said the problem was so significant and so deep that massive federal help was needed. "America's economy is facing unprecedented challenges, and we are responding with unprecedented action," Mr Bush told reporters in the White House rose garden.

The Treasury Secretary, Henry Paulson, and Federal Reserve Chairman Ben Bernanke used even stronger words. They met congressional leaders on Thursday night, after which Senator Charles Schumer of New York said: "When I heard his description of what might happen to our economy if we failed to act, I gulped." And a congressional aide on a telephone conference call between the Federal Reserve, Treasury and lawmakers said that Mr Bernanke issued a stark warning: "If Congress doesn't act soon, there will be an economic meltdown."

A draft of the proposal obtained yesterday by the Associated Press does not specify what the government would get in return from financial companies for the federal help. But some elements are clear. Hedge funds and non-US financial institutions would not be allowed to offload troubled assets. And the government would not face a deadline for disposing of the assets it acquires, according to one source. The source said any assets being offloaded would have had to have been on the books of any participating financial firm as of 15 September.

Banking industry sources said "reverse auctions" – where those holding an asset, however flawed, indicate the lowest price they would accept – would be held to purchase $50bn tranches of debt, which could include residential and commercial mortgages and mortgage-backed securities. One source said the purchases would then be made in further increments of $10bn and that five outside asset managers would help to run the auctions.

President Bush defended the government's financial rescue plan on Saturday, saying the cost to taxpayers of shoring up shaky markets was better than the alternatives. In his weekly radio address, he said: "Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars and college tuitions."

Mr Bush said he initially thought the government could deal with the trouble on Wall Street "one issue at time." But the financial "house of cards ... started to stretch beyond just Wall Street in the sense of the effects of failure. So when one card started to go, we were worried about the whole deck coming down."

The move ended a week in which financial markets faced their most serious confluence of crises since the 1930s Great Depression and threatened national economies and the worldwide banking system. US investment bank Lehman Brothers and the UK's Halifax Bank of Scotland went under as independent concerns, and there was a considerable risk that US insurance giant AIG could follow.

In Britain, there was no formal response to the Bush plan by the Brown government, but the Conservative former chancellor Ken Clarke, speaking to the BBC, said he believed the financial markets would learn the lessons of the present crisis. Asked if there was a risk that bailouts could encourage recklessness, he told Radio 4's Today programme: "That's a serious danger: 'The bonus is now saved, let's go back to making some money in the way we did before'." But, he went on, "fortunately I do think that in the financial markets there are endless sensible people who will know that we can never return to what occurred. We do need more regulation."

He said it was "absurd" to pin the blame on short-selling. "To suddenly find scapegoats and say short-selling, which is, done properly, a perfectly reasonable market operation, is absurd. If you are going to find scapegoats find the right ones: the people in the banks who gave up traditional banking and listened to young rocket scientists who took the debt off the balance sheet and engaged in creating investment vehicles that nobody understood. Some have lost their jobs and their money, but some are still sitting there."

Meanwhile, a New York judge has approved a plan by Lehman Brothers to sell its investment banking and trading businesses to Barclays Bank. The deal was said to be worth US$1.75bn (£970m) earlier in the week, but the value was in flux after lawyers announced changes to the terms. It may now be worth closer to US$1.35bn (£750m), which includes the £533m price tag on Lehman's Manhattan office tower. Lehman filed the biggest bankruptcy in US history on Monday, after Barclays declined to buy the bank in its entirety.

How to Beat the crunch

Advice from the financial experts at the IoS:

* Arrange new mortgages before the fallout from last week's events pushes up interest rates.

* See a broker to find the best mortgage rates for your circumstances. Rates can be secured for up to six months before the mortgage is needed.

* Anyone on the Halifax's standard variable rate mortgage is unlikely to be affected by the takeover, but they should try to remortgage at a cheaper rate.

* Stock market investors should leave their money where it is, as they stand to lose if they mis-time selling their shares, only to go back in later.

t New investors should build a balanced portfolio with a range of sectors and asset classes.

* Anyone near retirement, should keep their money in cash.

* Cash investors should have no more than £35,000 saved with any one institution – the sum that the Government will guarantee if a bank collapses.

* Basic-rate taxpayers should look for current and savings accounts that pay more than 6 per cent interest, so that their deposits earn enough to keep pace with inflation.

My week of living dangerously

Jerry Daykin, Marketing manager, City Gateway charity

"Lehman was due to start sending volunteers to allow us to run a course for workless and under-skilled women in Tower Hamlets. Without their support the course will have to be delayed and possibly cancelled. We have had the rug pulled out from under our feet. There will be a lot of very disappointed women, many of whom would find it hard to have the courage even to go into an office. My job is to get support from companies and it's difficult enough at the best of times. This week has been awful."

'Lisa', Equities and research, Lehman Brothers

"I'm having to bring my son into work with me because I'm worried about childcare costs. We're all going in every day just to show ourselves, to find out bits of news, and what's happening with pay and pensions. I doubt we'll get our money, but if we don't go in, it is likely that we won't get paid, which would make a good excuse for the liquidators not to pay us. I'm still really angry about it. I've been in the industry for 15 years, but now I'm thinking of other jobs because it's not wise to go back into banking at all."

Martin Atkinson, managing director, PIMS workspace

"Lehman Brothers represented a substantial part of our business as we organised all their office space, so this is going to hurt. There's still a lot of money outstanding that Lehman owes us; tens of thousands, which is a lot for a small company. I feel responsible for the guys that work there for us and their mortgages. I went in on Monday to reassure them and took them out for a drink. All the pubs nearby were packed. I don't think they'd seen such trade in years."

Jess Wilkinson, PR executive, Lost out on a romantic break with XL

"I was booked to go on a one-week holiday to Egypt with my boyfriend to celebrate my 24th birthday on 14 September. It was supposed to be our first holiday together. We'd been looking forward to it for absolutely ages and spent months deciding where to go. We just couldn't believe it when it happened... even now I am still upset about it and it has been really difficult being at work. Although we've been able to get something else in a couple of weeks, we've had to pay hundreds of pounds more."

Gary Howley, Cabin crew, XL

"We're not getting paid at all and I'm owed £900. To this day we've heard nothing from the actual management; no "thank you", no letters, nothing. I moved from Glasgow for the job, so now I'm living in Gatwick with no job. Everyone is obviously applying for jobs, so it's going to be very hard to get anything. All my friends have had to go to the job centre and sign on. I've got £200 left in my bank account and I'm basically living on nothing; I don't know how I'm going to pay my bills."

'Joe', floor trader, Merrill Lynch

"This week has been incredible, like living in an episode of '24' or something. You don't sleep; nothing stops and the minute you think you're all right, the market takes a dive again. One minute my boss had his head in his hands and we'd think everything was over, and the next he'd be jumping up and high-fiving everyone. The sense of urgency and emotion has been really high. I woke up with palpitations this morning, and I've been having cigarettes for breakfast. There's a massive sense of dread – we know there will be job cuts in January (if not before) and that up to 30 per cent of us will go."

'Liam', Financial adviser Merrill Lynch

"It's been a pretty interesting week and it's certainly been very stressful. But in the end I think we've sort of dodged a bullet with this deal. Given the situation, I think it worked out all right. For most of us it's been as if it's business as usual because we've been working on the transition. There have been no job cuts as yet, but that's no guarantee because we've really not been told too much about it."

Derek Simpson, Unite joint general secretary, speaking on HBOS' and Lloyds' jobs

"Staff working in branches, call centres and back offices across Britain are shell-shocked. For a third day in a row the staff at both banks are in the dark, trying to provide the best possible service to customers. HBOS and LTSB must end the speculation about jobs. It must be unbearable for the staff who have to turn up to work each day, not knowing what this takeover means for them."

'Colin', Banking adviser, London Strand branch of Halifax

"When the takeover started, we got an email from head office saying it was all rumours. All our customers came in and asked if it was happening and we had to tell them it wasn't. We were just used to tell people a lie. It was terrible. The branch I work for has a Lloyds TSB right next door, and I just know that it's one that will have to disappear. Middle management says we should be motivated, but what about the people that are going to be losing their jobs?"

Alistair Singleton, Managing director, 7FiftyTwo Solutions recruitment agency

"Any event like this creates a degree of opportunity. We went to the Wharf when the news broke and were handing out cards. It was easy to circulate the bars because we knew where they go. It's been good for us because the quality is extremely high. We've got hundreds of CVs on our books as a result of the last few days; we've tried to spread our nets."

Emily Dugan, Jonathan Owen, Sam Walker and Michael Wooldridge