Footsie surge adds £103bn to market valuations

US Treasury Secretary Hank Paulson yesterday outlined plans to put up hundreds of billions of dollars of public money to buy the toxic debt, including mortgages, which has threatened to bring the financial system to its knees and created absolute mayhem in global markets.

John Kennedy, manager of Scottish Investment Trust, said: "I think it has got a good chance of improving the situation. The expression is, Is it safe to go in the water?' Most people would say at the moment it is safer to go in the water. We are still mindful (that there will be) a very weak global economy which will still be a headache for financials in the conventional sense.

"The action stands a good chance of (tackling) the immediate stresses in the financial system such as the glued-up interbank markets and the unknowns in the investment bank balance sheets, looking at what the US authorities are proposing by way of a rescue scheme It is looking helpful."

However, he cautioned: "You have always got to be mindful of the unforeseen consequences of this. Nothing comes for free."

NewYork's Dow Jones industrial average, which had rocketed by 410 points on Thursday as it scented US government intervention, jumped a further 368.75 to 11,388.44 yesterday.

The introduction of bans on short-selling of financial stocks on both sides of the Atlantic also helped the positive tone yesterday, although the US rescue plan was viewed as much more significant than these protective restrictions in sending shares surging. Investors who "short" companies sell shares they do not own in the hope that the price will fall and they can then buy them more cheaply before they have to close out their position - so turning a quick and easy profit.

Some fund management industry experts are questioning whether short-selling has really had a massive impact on UK financial stocks, in spite of a raft of publicity about this practice as share prices have plunged.

In Scotland, First Minister Alex Salmond has attempted to blame short-selling for Bank of Scotland and Halifax parent HBOS being forced into a rescue takeover by Lloyds TSB this week.

It is understood the Treasury, which helped broker this deal, is in absolutely no doubt that it was HBOS's reliance on wholesale markets to raise funds to lend on to customers which was at the heart of the bank's troubles. Interbank lending markets seized up this week after US investment bank Lehman Brothers collapsed.

The Investment Management Association, the trade body for the UK's £3400bn asset management industry, said yesterday: "The IMA considers that short selling of bank shares is neither the sole nor the principal reason for the falls in the price of certain shares in recent weeks."

Global banking shares roared ahead yesterday amid euphoria about the US's grand plan to stabilise the global financial system.

Shares in Royal Bank of Scotland jumped 51.7p, or 32%, to 213.5p. Barclays surged 88p, or 29%, to 389p, and HSBC put on 123.5p, or 15.5%, to 919.5p.

HBOS shares rose 49.9p, or 29%, to 222.5p. The value of Lloyds TSB's offer for HBOS increased to about 237p a share yesterday, with a 48.25p, or 20%, jump in the London-based bank's stock to 285.75p.

Lloyds TSB took advantage of the surge in banking stocks to raise £767m in a share-placing yesterday. It said it had sold 284.4 million shares at 270p each - around 5% of its current issued share capital.

Eric Daniels, chief executive of Lloyds TSB, said the placing would "allow us to further strengthen our already-robust capital ratios and support the development of our business strategies".

Yesterday's jump in the FTSE-100 was the biggest one-day rise since the index's inception in 1984 in both percentage and points terms. The index touched an intra-day high of 5351.2 - a point at which it was up nearly 9.7% on its close on Thursday.

After a chaotic week, the FTSE-100's close last night was little more than 100 points below the previous Friday's finish of 5416.7.

The pan-European FTSEuro first 300 index jumped 8.2% to 1150.78 points - its biggest one-day percentage gain on record.

At a news conference yesterday at which he only took three questions, Paulson was asked the approximate dollar size of the proposed government intervention to effectively quarantine toxic debt.

"We're talking hundreds of billions," he said.

He added that the scheme, the biggest proposed government intervention in financial markets since the Great Depression of the 1930s, "needs to be big enough to make a real difference and get to the heart of the problem".

Paulson did not address specifics about the plan to buy back bad debt or say whether the government would take a direct stake in troubled banks in exchange for its help.

He said: "These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted."

Paulson said he would work through the weekend with leaders of Congress from both the Republicans and Democrats to flesh out the programme. Members of the Senate Banking Committee said they had received no details of the proposal.

John Kennedy yesterday highlighted wild swings in US bank share prices during Thursday's session, ahead of the emergence of the US plan to stabilise the financial system, with Bank of New York tumbling even though it was a mainstream "processor" and Wachovia leaping.

He said: "That sort of volatility suggests you are at some sort of tipping point."

Reflecting on the situation yesterday, Kennedy said: "The most we would think is (it is) safer to go back in the water. But out of the woods? Too early to say, but (there is) probably some merit in being diversified (in shareholdings)."

Noting the part played in yesterday's rise in banking stocks by people covering their short positions, Kennedy asked: "Would you go chasing the banks in the teeth of this short-covering today?"

He concluded: "You might get a better chance."

Kennedy described the leap in banks' shares prices yesterday morning as "quite extraordinary".

Predicting further significant acquisition activity in the banking sector, he noted the stronger institutions were "going to be looking at rivals with depressed valuations", and added: "I think there are going to be all sorts of opportunities for consolidation."

Asked about the curbs on short-selling, Kennedy noted the co-ordinated international effort on this front. He said: "I think it is the fact they are all coming out with it. The US authorities have said the same thing (as the Financial Ser-vices Authority in the UK)."

The US short-selling ban covers 799 financial stocks. The FSA's UK list started with 29 stocks, with another four added later.

Kennedy said: "The shorting (measures) situation is clearly an attempt to buy time to put the brakes on the stresses in the system. It is all to do with easing the real stress points, of which there have been many."

Declaring the measures were aimed at buying "more time for some more rational prices of securities to come through", Kennedy added: "The shorting - who knows to what extent it was responsible. If you assume there was a role in shorting, it is one more piece of plaster to stabilise the system. I don't think it is going to be permanent, but it seems to be buying time to ease the stresses. That has got to be helpful."

Commenting on the general situation, Kennedy said: "It is all unprecedented. Everything here is unprecedented. That is what is making it quite so difficult and so dangerous. We are going to stick with our investment fundamentals to own good companies with sensible business models "It is an extraordinary period. It is hard to keep tabs on quite all the developments and opportunities that there are, and risks."

Mike Lenhoff, chief strategist at stockbroker Bell Lawrie, described yesterday as "frantic" or "freaky" Friday.

He said: "Are happy days here again? The ban by the Financial Services Authority on the short-selling of financials is a welcome short-term measure. The Securities and Exchange Commission in the US is following up on this summer's temporary ban on naked short-selling of shares for the big mortgage com-panies, Fannie Mae and Freddie Mac. Now the shorts are really going to be squeezed - until the pips squeak."

Lenhoff added: "Of more fundamental significance is the plan in the US to introduce a facility to buy the bad' assets from the banks. By relieving the banks of their unmarketable mortgage-backed securities, the logjam which has effectively shut down interbank lending and driven up credit spreads quite indiscriminately right across the board, could be finally broken."