What is being proposed by the US Government?

It is seeking approval from Congress for $700 billion to buy home and commercial mortgages that are now worth less than their face value from American banks and other financial institutions, as well as foreign banks with US operations, over the next two years.

Why is this necessary?

The dramatic falls in share prices of banks last week following the collapse of Lehman Brothers, the Wall Street investment bank, last weekend forced the Bush administration to take drastic action in a bid to restore confidence in the financial system. There was grave concern that other major banks could also collapse and that lending between financial institutions was close to freezing, threatening the US economy.

What has been the reaction so far?

Very positive. The announcement of the plan on Friday by Hank Paulson, the US Treasury Secretary, saw record rises on stock markets around the world, with the share prices of banks and financial companies rocketed.

How will the plan work?

The details are still being thrashed out on Capitol Hill, but Mr Paulson is likely to get sweeping powers over the massive war chest. John Steele Gordon, a Wall Street historian and author, said that he is effectively becoming “the dictator of the American financial system for a few months, subject to congressional oversight”. The US Treasury may hire asset managers to buy the “toxic” mortgages issued on or before September 17 and determine their actual value through auctions or other market mechanisms.

What happens next?

Legislation is expected to be presented to the House of Representatives and Senate this week and it may be signed by President Bush as early as Friday. The Democrats, who control both houses of Congress, have said that they hope to approve the bailout quickly but want more oversight, limits on executive pay and more assistance for home owners struggling to pay mortgages in return for their support.

Are other countries planning similar bailouts?

The Bush administration has encouraged governments in Japan, Germany and elsewhere to establish similar rescue plans for their own financial firms. No announcements have yet been made and it is unclear whether other governments will think it necessary to take such radical action. The UK Treasury said that it had no plans to carry out a similar operation and has pointed to the Bank of England’s Special Liquidity Scheme introduced earlier this year to help bolster banks’ finances. It had been due to end on October 21 but will now be extended to January 30.

What other steps have been taken?

The US Treasury has also announced a $50 billion fund to support the American money market mutual fund industry, which holds deposits worth $3.5 trillion. Money market fund assets fell by a record $169 billion in the week ending September 17 as investors raced to withdraw their money. The Securities and Exchange Commission imposed a 10 trading-day ban on “shorting” shares in 799 financial companies. Traders can make money by betting that the share price of a company will fall.

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