US pledges financial rescue plan
US Treasury Secretary Henry Paulson
US officials are working on a plan to help rid US banks of their bad debts in order to tackle the devastating global financial crisis.
After a meeting with Congress members late on Thursday, US Treasury Secretary Henry Paulson said new laws were needed to deal with the "root" of the problem.
It comes after a series of seismic shocks in the world's financial system.
The news boosted European and Asian shares. On Thursday, US shares added 3.9% after the plan was leaked.
In London, an announcement by the UK's City watchdog the Financial Services Authority to temporarily ban short-selling in certain financial companies added to the dramatic change in sentiment.
Short-selling occurs when a trader borrows shares from another to sell them, then buy them back at a lower price thereby profiting from the difference.
Market moves
The UK's FTSE 100 index of largest shares added more than 6% with banking stocks among the biggest gainers. Halifax owner HBOS, which was forced into the arms of rival Lloyds TSB after a run on its shares this week, surged more than 30%.
France's Cac 40 and Germany's Dax indexes joined in the rally, up 5.6% and 3.7% in morning trade.
Japan's Nikkei jumped 3.8%, while the Shanghai Composite recovered from 22-month lows to close up 9.5% and Hong Kong's Hang Seng soared 7.3%.
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US stocks had surged on Thursday because of reports of the rescue plan, with the Dow Jones Industrial Average ending 3.9% up at 11,019.69.
Crisis in confidence
The proposed US government rescue plan comes at the end of a week of almost unprecedented turmoil on world financial markets amid a crisis of confidence in banks:
US Wall Street giants Morgan Stanley and Goldman Sachs are the latest to have their shares punished by nervous investors amid concerns for their financial health
Central banks around the world have pumped billions of dollars of extra funding into money markets to ease the liquidity crisis
The UK's City watchdog announced a crackdown on short-selling - thought to be a big contributor to the share price falls in UK banks in recent days.
The US financial regulator the Securities and Exchange Commission followed suit on Friday, banning short-selling in the stock of 799 financial companies until 2 October
Stock markets in Russia re-opened on Friday after wild swings in share prices forced trading in its main exchanges to be suspended and resumed several times in the week.
'Best of the US'
Mr Paulson and Federal Reserve Chairman Ben Bernanke are expected to spend the weekend hammering out a plan to free the banks of their mortgage-backed assets.
With property prices continuing to plummet and borrowers defaulting on their loans , these investments are seen by the Treasury Secretary as being at the heart of the global financial crisis.
There will be serious long-term damage to the ability of the US to export its way of doing business to the rest of the world.
Robert Peston,
BBC Business Editor
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"We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions' balance sheets," he said.
In an upbeat press conference, the congressional leaders and financial regulators were keen to stress they had agreed to work together for the good of the country.
"I think we saw the best of the United States of America in the Speaker's office tonight," Mr Paulson said.
"This country is able to come together and do things quickly when it needs to be done for the good of the American people."
Mixed reaction
Some analysts welcomed the news.
"It's a relief, it allows for an orderly workout for the impaired assets and it will help the banking sector get back to business," said Hans Kunnen of Colonial First State Fund Managers in Australia.
But BBC Business Editor Robert Peston said that the taxpayer funded bail-out "represents a massive humiliation for Wall Street" and will severely dent the ability of the US to export its way of doing business to the rest of the world.
But an even bigger risk could be a loss of confidence in the American government's balance sheet, he said.
"This could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities," our correspondent explained.
Central bank action
There is speculation that one plan being discussed involves legislation that would force lenders to renegotiate mortgages that homeowners are having difficulty paying.
Markets have been jittery amid huge upheavals in the banking sector
Another possibility is establishing a government agency that would take on the debt.
Reports said Mr Paulson was looking into setting up something akin to the Resolution Trust Corp (RTC), which was formed after savings and loans banks collapsed in the 1980s.
The RTC took over most of the smaller banks in the US at a cost of $400bn - about $1 trillion (£550bn) in today's money - and then tried to sell off their assets.
The cost of such a bailout would probably be higher this time, with bad mortgage debt believed to be around $2 trillion.
But Congressman Barney Frank, chairman of the House Financial Services Committee, said the plan would probably not involve creating a new government agency.
"There is this concern that if you had to wait to set up an entity, it could take too long."
Six of the world's top central banks took steps to calm worried stock markets on Thursday, releasing $180bn to lift the amount of credit available.
On Friday, the Bank of Japan said it had injected a further three trillion yen ($28bn; £15.5bn) into money markets, to add to the eight trillion yen it had already made available this week.
