Shares rise in banks buy-out

The FTSE-100 Index leapt 167.82 points to 4099.88, a four per cent rise that added £40 billion to the value of leading companies.

Traders said they hoped the Treasury's decision to pump £37 billion into the Royal Bank of Scotland, HBOS and Lloyds TSB would finally end the panic that has threatened to destroy Britain's financial system.

On Wall Street the new mood of optimism sent the Dow Jones Index soaring 352.76 points to 8803.95.

Leading City shareholders said bonuses paid to the banks' bosses should be refunded.

One said: "It has to be wrong in principle that they got bonuses for sowing the seeds of their banks' destruction."

In return for bailing them out, the Prime Minister and Chancellor Alistair Darling said cash bonuses would not be paid to directors this year and no dividends would be paid out.

Three government directors will take seats on the board of RBS, while two directors will go on Lloyds TSB's board.

Mr Brown said the bail-out was "unprecedented but essential for all of us".

Mr Darling pledged to defend "taxpayers' interests" ruthlessly as he unveiled the plan to nationalise the three banks.

In a statement to the Commons, Mr Darling said that the £37 billion being pumped into the Royal Bank of Scotland, HBOS and LloydsTSB had "strings attached" to help small firms and mortgage holders.

"We are making it clear that there will need to be a strong focus, at these re-capitalised banks, on making available lending for small business and homebuyers," he told MPs.

However, shadow chancellor George Osborne attacked Labour for presiding over 10 years of spiralling debt, and Financial Services Authority chief Lord Turner warned that there were "lessons to be learned" from the past decade of "boom".

The Chancellor confirmed that the Government was setting up a Bank Reconstruction Fund to buy shares from the top banks.

He announced that the taxpayer would have 63 per cent of the shares in RBS and 44 per cent of a merged HBOS/LloydsTSB superbank.

"These are very turbulent times in financial markets. But I believe these measures are an essential to stabilise the financial system and help the UK economy," he said. "We are committed to do whatever it takes to stabilise the banking system, protect savers and the taxpayers and support the wider economy."

In a get-tough message to the City, Mr Darling confirmed that no cash bonuses will be paid to any board member of RBS or HBOS and LloydsTSB this year.

Three government directors will take seats on the board of RBS, and two directors will go on Lloyds TSB's.

Barclays said it would not need government funds and instead asked private investors to stump up £6.5 billion for new shares.

The Prime Minister earlier said the bail-out was "unprecedented but essential for all of us" and made plain he expected a new approach from the City, with "excessive risk" replaced by more long-term strategy.

However, Lord Turner suggested Gordon Brown shared some responsibility for the crisis: "There are many lessons to be learned about what has happened over the last 10 years. At a macro-economic level we allowed the boom to go on for too long," he told the BBC.

Analysts described today's bail-out as a "humiliation" for the banks. Four of the country's most senior bankers are being ousted, with RBS chief Sir Fred Goodwin forced to forgo a £1.2 million pay-off. Sir Fred and RBS chairman Sir Tom McKillop are to quit. HBOS chief Andy Hornby and chairman Lord Stevenson will also resign once Lloyds TSB completes its takeover.

Fresh evidence of the extent of City profligacy emerged when figures showed financial firms awarded staff £16.8 billion in bonuses in 2007/8.

Cross-party co-operation over the rescue came under strain as the Conservatives accused Mr Brown of milking it as a personal "triumph".

David Cameron said the plan was necessary but expensive: "In many ways, it's paying the bills for the last 10 years of excessive debt."