Even £500 billion may not be enough, admits Darling

Despite putting up eye-watering sums of taxpayers' money, the Chancellor said he was prepared to do more if it failed. "I believe it will go a long way," he said. "As I have said on many, many occasions, I'm not ruling anything out."

Today's complex package was far more wide-ranging than expected, and exposed more taxpayers' money to potential risk than had been imagined.

Some £50 billion is offered to the big banks as fresh capital in return for the Government taking a stake in the form of preferential shares — effectively the semi-nationalisation of banks that call on the money.

Eight were said to be signed up – Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland, Standard Chartered – but more will be eligible.

Abbey, HSBC and Standard Chartered later denied they would use the facility. Half of the cash is available now, with the remaining £25 billion in reserve until needed.

The Government insisted it would attach strings to the money, including curbs on the bonus culture and help for small firms finding their credit lines cut off. There were also vague promises of help for mortgage-payers, with details to be agreed.

The Government will also underwrite inter-bank lending to the tune of some £250 billion. Providing no bank goes bust, the fortune will not be called on — but the entire sum is theoretically at risk in a collapse of the system.

In the third element, £200 billion will be pumped into the banks in short-term loans under the Special Liquidity Scheme set up to keep the financial system working on a day-to-day basis.

The Chancellor said there was no alternative, given the risk of a disastrous collapse of the system. "If we didn't do anything there would be a very significant cost to all of us," he said.
He said taxpayers should get every penny back — and claimed the public purse could even show a profit. "Unlike America where the bad assets have been taken on by the taxpayer, we are putting money into the system and we will get it back," he said.

At 1.45 the FTSE was down 95.84 at 4509.38.
Details of the scheme were thrashed out during all-night talks at the Treasury leading to a 5am agreement. Mr Darling went to bed at 1.45am for three hours, but his key officials had no sleep.

At a press conference, the Prime Minister said: "Extraordinary times call for bold and far-reaching solutions. This is not a time for conventional thinking but for fresh and innovative intervention that gets to the heart of the problem.

"These decisions on stability and restructuring are the necessary building blocks to allow banks to return to their basic function of providing cash and investment for families and businesses."

Despite the rhetoric, it was clear that many details had been left until later. The opposition parties promised constructive support and welcomed the simultaneous cut in interest rates, from five to 4.5 per cent.

At Prime Minister's Questions in the Commons, David Cameron called for a ban on big bonuses for the executives of the banks who are to receive money in the recapitalisation scheme.

"Taxpayers are making an enormous investment and have potentially a huge liability," he said. "They want to see their interests protected."

For the Liberal Democrats, Nick Clegg said: "When a ship is sinking you send out the lifeboats. You don't argue about who steered it into an iceberg."

Mr Brown said bonuses would indeed be curbed, and the banks would also have to promise not to cut off credit or raise interest rates to small firms.
The scale of the package was breath-taking, involving more public money than the £324 billion annual spending total by Whitehall departments. The £500 billion exposed is equivalent to some £20,000 per taxpayer.

Miles Templeman, director general of the Institute of Directors, urged further cuts in interest rates next month, adding "Inflation was yesterday's story, recession is today's story and deflation is tomorrow's risk. Interest rates are heading in one direction — down."

John Cridland, of the CBI, aid: "British business is facing a freezing of bank finance. Many companies need this action to keep investment and working capital flowing."

Julian Jessop, chief international economist at Capital Economics, said the rate cut would "provide at least a temporary boost to confidence".

Steve Radley, chief economist for the manufacturers' group the EEF, said: "Coupled with the plan to shore up the financial system today's co-ordinated moves should help arrest the potential slide into depression."

In a shock move, the Treasury revealed it had frozen the UK assets of Iceland's Landsbanki to protect Icesave depositors. A source said: "This is a signal that when the chips are down, the Chancellor will act to protect savers."