President Obama is preparing to unveil a rescue plan for Wall Street next week which will dig the world’s biggest banking industry out of a $2 trillion hole.

His plan, which has yet to be finalised and signed off, is expected to include the creation of a “bad bank” that will buy some of lenders’ distressed debt and underwrite the remaining billions of dollars worth of troubled assets. It is also believed to include caps on executive pay for banks benefiting from federal help.

It is believed that President Obama has estimated that total losses among America’s lenders could cost the US up to $2 trillion.

As President Obama and his economic team raced towards a self-imposed deadline of next week, new evidence of the severity of the American recession emerged.

Yesterday, the US Commerce Department revealed that the world’s biggest economy had contracted at an annual rate of 3.8 per cent between October and December, marking the fastest decline for 26 years. The US economy, which has been in a recession since December 2007, contracted faster than at any time since 1982 as American families, fearful of losing their jobs and anxious about the falling value of their homes, stopped spending on all but essential items such as food and petrol.

Commenting on the growth numbers, President Obama said that the flailing US economy had turned Americans’ lives upside down and was “like the American dream in reverse”.

Mr Obama said: “This isn’t just an economic concept – this is a continuing disaster for America’s working families. The recession is deepening, and the urgency of our economic crisis is growing.”

He pledged to place poor, working families at the “front and centre” of his economic policy to create middle-class jobs that help Americans aspire to a higher standard of living, and the chance to save. Unveiling his Middle Class Working Families Task Force, to be headed by Joe Biden, the Vice-President, Mr Obama said: “We’re not forgetting the poor. They are going to be front and centre, because they, too, share our American dream. And we’re going to make sure that they can get a piece of that American dream if they’re willing to work for it.”

Mr Obama’s remarks represent part of his vision of economic populism, echoed this week when he criticised the $18.4 billion in bonuses paid to Wall Street bankers in 2008, as the lenders were bailed out by US taxpayers. Senator Claire McCaskill of Missouri, a Democrat, yesterday said she would introduce legislation that capped pay at $400,000 a year for any worker employed by a company that had received government bailout funds.

Alongside trying to stem the sharp rise in unemployment – about 7.2 per cent of the US workforce is out of a job – Mr Obama is also under pressure to make public next week his plans to rescue America’s financial system. It is understood that the White House now believes losses on Wall Street might cost Americans as much as $2 trillion (£1.38 trillion).

On Wednesday, Mr Obama, Tim Geithner, the Treasury Secretary, Ben Bernanke, the Federal Reserve chairman, and Sheila Bair, the head of the Federal Deposit Insurance Corp, met in Washington to discuss a new bailout for Wall Street. It is believed that want to unveil a plan next week.

One of the main threads of the proposal is to create a so-called “bad bank”, run by the FDIC, which would buy troubled mortgage-backed securities which are stagnating on the books of Wall Street’s big lenders. These troubled assets would be those that have already been heavily discounted, so the purchase by the bad bank would not trigger a large writedown by the lender.

A similar plan for a German national bad bank was rejected yesterday when Angela Merkel, the German Chancellor, proposed that each lender split itself into a good and bad bank.

In America, the US Treasury would also guarantee lenders’ remaining distressed debt which has, as yet, been unvalued. The dual measures would allow the lenders to either dump or underwrite their troubled debt, without crystallising a new loss. It is hoped that such a bailout, whose cost would be met by the American taxpayer, would encourage banks to lend again.

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