"This is a pivotal moment for America's economy,'' President George W Bush said , as US officials began acting on a series of government steps.
Mr Bush said that the US government "should interfere in the marketplace only when necessary'' but that "given the precarious state of today's financial markets, and their vital importance to the daily lives of the American people, government intervention is not only warranted, it is essential.''
Full details of the plan were not released by Mr Bush, but he said it would allow "the federal government's purchase of illiquid assets such as troubled mortgages from banks and other financial institutions.''
Treasury Secretary Henry Paulson said the rescue plan being drafted with the Federal Reserve and Congressional leaders to help purge bad assets from the banking sector will cost "hundreds of billions'' of dollars.
"This needs to be big enough to make a real difference and get at the heart of the problem,'' Mr Paulson told reporters on the massive rescue effort, first unveiled late Thursday.
Amid a scramble to put in place legislation, US authorities also offered new guarantees to stem a run on money market deposits and issued emergency rules to curb short sales, seen as a factor in driving financial firms into ruin.
The massive rescue being drafted evoked the Resolution Trust Corp. established to clean up US savings and loans after huge losses for those depository institutions in the 1980s, but the form of the new entity was not immediately clear.
In full crisis mode yesterday morning, the US Treasury said it would guarantee US money market funds to stem a run on deposits that could further destabilise the battered financial sector.
Global stock markets saw a powerful relief rally on the news. On Wall Street the Dow Jones Industrial Average jumped 3.35 per cent to close at 11,388.44, recouping nearly all its losses in a turbulent week.
In London, the FTSE 100 index of leading shares vaulted 8.84 per cent, Paris added 7.54 per cent and Frankfurt put on 5.56 per cent.
British bank HBOS, which was rescued by peer Lloyds TSB in a multibillion-dollar takeover Thursday, saw its share price spike 39 per cent -- a gain mirrored by its peers throughout Europe overnight.
The latest efforts come after an intensifying financial crisis that has sent global markets on a stomach-churning ride and put in jeopardy more banks and financial firms even after massive US government bailouts of insurance giant AIG and a takeover of mortgage finance firms Fannie Mae and Freddie Mac.
The financial firms are reeling from a meltdown in US home prices after a frenzied boom that induced a wave of investments before a collapse.
Reaction to the plan was initially positive, although some questioned whether it would get to the heart of the problem.
"While many details have yet to emerge, the Treasury and the Fed have finally realized the depth and systemic nature of the crisis,'' said John Ryding, economist at RDQ Economics.
`We believe that these actions will constitute the wider firebreak that will contain the crisis.''
Sherry Cooper, chief economist at BMO Capital Markets in Toronto, said, "These moves were welcomed by stock markets all over the world, but it remains uncertain if they will be a long-term solution to the complex and opaque problems confronting the global financial system.''
Ian Shepherdson, chief US economist at High Frequency Economics, said the effort appears to mark "the beginning of the end'' of the crisis.
"This is a gigantic step forward, the only way to fix the crisis,'' he said. "The economy is still a mess, but systemic risk is way down.''
Analyst Mary Ann Hurley at DA Davidson & Co called the plan the "mother of all bailouts'' and said it seemed to "establish a toxic debt dumpster to purge the banks of bad debt.''
"The trillion-dollar question (is) how will the government priced the toxic debt?'' she added.
Brian Bethune, economist at Global Insight, said that "what is lurking in the balance sheets of commercial and investment banks and insurance companies, no matter how we try to reshuffle the deck, is about $US1.25 trillion ($1.51 trillion) of illiquid mortgage assets.''
"The initial cost will be in the hundreds of billions of dollars, to be funded by the US Treasury,'' he said.
"However, the ultimate cost to the taxpayer should be much lower, presuming that the economy and the housing market recover perhaps in the second half of 2009 and 2010.''
The latest vicious chapter of the 14-month-old US subprime crisis began at the weekend with the collapse of Lehman Brothers.
That was followed by the $US85 billion government loan to save insurance titan AIG, a wave of other distress signals and the rescue of British bank HBOS Thursday.
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