Stand by for Black Monday

The frightening prospect of a collapse to match the 1987 crash was raised as George Bush confirmed that he had not yet been able to persuade senior Republicans to back his $700 billion rescue plan.

In a terse statement from in front of the White House, the President said: "We've got a big problem and we've got to move quickly."

He admitted there were still disagreements about the $700 billion plan, engineered by his Treasury Secretary Hank Paulson.

But Mr Bush said he remained hopeful that an agreement can still be reached, adding: "We will get a package done, we will rise to the occasion."

American politicians now effectively have three days of frantic negotiations to save the world's financial system from a seizure that could cast the global economy into a deep recession.

Bryan Johnston, investment director at brokers Bell Lawrie, said: "If Paulson's plan fails we will see a collapse in the markets and taxpayers will effectively pick up the tab."

Mr Johnston added: "I cannot believe the posturing among US politicians but I believe after taking it to the wire the plan will be voted through because it cannot really afford to fail.

"However, nothing is certain anymore and if it did fail, we could see 1000 point falls on the FTSE on Monday and we would be out of a job while the banking system would freeze up completely."

Other senior market figures said the fall on the FTSE-100 would be at least 600 points while the Dow in New York could fall by 1000 points. There were also worrying signs in the City that wealthy investors are starting to lose faith in the entire banking system.

Brokers and fund managers say small but increasing numbers of clients are taking their deposits out of banks and putting them into "safer" investments such as short-term government bonds.

One said the cash is also being used to snap-up bargains in the London property market.

Mr Johnston continued: "It is incredible to believe we are seeing worried clients ringing up asking if RBS will go bust, which would have been inconceivable just a few weeks ago."

The price of gold - a traditional safe haven - jumped four per cent today to $911.15 an ounce. The FTSE-100 was down 96.9 points at 5100.

Mr Bush's latest update on the talks came as leading Democrat and Republican politicians engaged in a bitter "blame game" following the collapse of talks over the proposed rescue.

Each side took to the airwaves on America's agenda-setting early morning TV shows hours after the negotiations broke down in acrimony.

Details also emerged of the desperate pleading by senior government officials as the talks turned hostile.

Treasury Secretary Paulson was reported to have gone down on one knee before House Speaker Nancy Pelosi to beg for an agreement. She is said to have replied: "I didn't know you were a Catholic."

Barney Frank, the Democrat chairman of the House financial services committee, said a Republican "ideological war" was the cause of the impasse.

But Senator Richard Shelby, an Alabama Republican who appeared on the same breakfast TV show, said many Republicans disliked Mr Paulson's rescue package.

He said: "Basically, I believe the Paulson proposal is badly structured. It does nothing for the stressed mortgage payer. It does a lot for three or four or five banks."

The negotiations came to an impasse when leading Republicans refused to back the deal despite earlier apparent cross-party agreement.

The two presidential candidates, John McCain and Barack Obama, even attended an extraordinary summit with Mr Bush at the White House.

After what was described as a "shouting match" in the Cabinet Room, a crest-fallen Mr Bush is reported to have said: "If money isn't loosened up, this sucker could go down."

Democrats blamed conservative politicians, and Mr McCain in particular, for a last-minute ambush of the deal. One aide described the tense, 45-minute White House meeting as "a full-throated discussion".

Mr Obama said a deal would eventually be reached but added: "I think there's still some work that needs to be done. I think there's going to have to be some discussions between the President, Treasury Secretary, House Republicans, perhaps Senate Republicans... to figure out what exactly they want additionally to see to make this thing work."

But after the meeting Mr McCain's campaign issued a statement saying: "The plan... put forth by the administration does not enjoy the confidence of the American people as it will not protect the taxpayers and will sacrifice Main Street in favour of Wall Street."

The Republicans have proposed an alternative that would not involve the US taxpayer being saddled with such huge debts.

This would have the US government provide insurance for purchasers of "toxic" mortgage debt rather than buying them outright.

But this has been rejected as unworkable by Mr Paulson. The bad feeling is in sharp contrast to rising optimism yesterday when Democrats said they were prepared to back the plan.

They have called on President Bush to put more pressure on his own party today to get it through.

Q&A

Isn't the $700bn bail-out cut and dried?
It almost was. Competing deals and demands for tweaks to the original plan got in the way. Now the assumption is that they will work something out over the weekend to announce before stockmarkets open on Monday.

What happens if they can't agree?
If you believe US Treasury Secretary Hank Paulson, financial Armageddon, potentially. Bank shares in particular will sink across the globe as investors decide that the credit crunch is going to get much worse and last for much longer than previously thought. A new crisis seems to emerge each day - today it was the collapse of Washington Mutual - Monday could be a whole new issue.

Are more banks going under?
That seems inevitable at this point. Attempts by the Bank of England and the US Federal Reserve to pump cash into the system to get the engines working don't seem to be succeeding. The hope remains that the giant US bail-out scheme where the government buys up bad mortgage debt will be the rescue the financial system needs.

Where is safe to invest?
UK government bonds. The larger building societies. The main high street banks. The government will cover the first £35,000 of any savings in a company with a UK banking licence in any case.

What about shares?
The people who do best out of the stockmarket are those who buy when everyone else is fearful. But if you aren't an experienced investor, now is not the time to dabble in individual shares.

Will there be interest rate cuts soon to ease the situation?
Even if there are, it seems increasingly likely that banks won't pass those cuts on. Mortgages are going to get more expensive, not less. SIMON ENGLISH