HOWZAT

In London, the FTSE surged to 5,268.6 and is on course for the second best daily performance in its history. News of the plan boosted Wall Street's Dow Jones to its biggest points gain for nearly six years last night, up 410 points or nearly 4 per cent.

Shares in HBOS, which was forced into a £12.2 billion rescue deal with Lloyds TSB this week after its shares plunged by more than half their value, rose by 57 per cent this morning.

Lloyds TSB's shares were up by 62 per cent, Royal Bank of Scotland gained over 50 per cent and Barclays soared 60 per cent. At the same time, Bradford & Bingley's shares surged by 60 per cent, while Alliance & Leicester, which is being acquired by Spain's Santander, saw its stock rise by 30 per cent.

Bank shares were boosted by a decision by the FSA, the City regulator, to ban short-selling, where traders borrow shares and sell them immediately, hoping the price will fall so they can be bought back at a lower price and they can pocket the difference.

The shares are "lent" to traders by large institutional investors who are paid a fee for lending the shares out.

Speculators are banned from actively increasing short positions until January 16. Traders with positions of more than 0.25 per cent of a company's share capital must also issue a disclosure notice from September 23.

The surprise crackdown followed a pledge by Gordon Brown, the Prime Minister, to clean up the financial system after the rescue of HBOS by Lloyds TSB.

Overnight, the US Government also announced plans to discuss solutions to the financial crisis that pushed Lehman Brothers into bankruptcy on Monday.

Mr Paulson said: “As we’ve said for some time, the root cause of the stress in the capital markets is the real estate correction”

He added: “We’re coming together to work for an expeditious solution, which is aimed right at the heart of this problem, which is illiquid assets on financial institutions in the United States on their balance sheets”.

While Mr Paulson did not provide any details and stressed the plan would require approval by American legislators, it has been reported that the meeting paved the way for what could be the biggest state bailout in American history.

The proposed plan will focus on removing bad assets from banks' balance sheets and placing them in an entity that could be worth hundreds of billions of dollars. Details are expected to emerge today, but the scheme is likely to be loosely based on the savings and loan rescue package, which established the Resolution Trust Corporation to buy the property of more than 1,000 collapsed savings and loans companies in the early 1990s.

Another proposal is to create federal insurance for credit market investors to prevent dramatic outflows of funds, similar to how insurance against savers' deposits protect against bank runs, The Wall Street Journal reported.

It also emerged last night that the Securities and Exchange Commission, the US financial regulator, is considering following the FSA's rule by clamping down on short-selling. Christopher Cox, chairman of the SEC, told congressmen that the watchdog may place a temporary ban on short-selling in all forms, according to reports.

Mr Cox declined to comment specifically on short-selling but said: "A great deal of regulatory change is in the works to address these problems."

He added: "We are likely to take additional steps in the days ahead that are more particularly addressed to this urgent situation.”

Hector Sants, the FSA’s chief executive, said that while the regulator still regarded short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets and that the FSA had taken the decision to protect the integrity and quality of markets and guard against further instability.

The Australian Government has also said that it will impose a ban on naked short-selling, when traders do not borrow shares but instead rely on a time delay to cover themselves, from September 22.

Money Central: the 10 best stock market investments ever

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