U.K. will partially nationalize banks under $88B plan

LONDON -- The British government on Wednesday made up to $87.5 billion in taxpayers' money available to eight major banks to keep them solvent and to encourage lending.

The move, announced by Chancellor Alistair Darling before markets opened here, came a day after about $30 billion in value was wiped off bank shares on the London exchange.

Prime Minister Gordon Brown said the "bold" step to partially nationalize Britain's banking system was needed to put the system on a "stronger footing" in the midst of a global financial crisis that threatens to drive much of the world into recession.

"Extraordinary times call for bold and far-reaching solutions," Brown said.

Investors on London's Stock Exchange weren't immediately impressed that the effort would avert deeper economic woes. Although some bank stocks rose on the news, the FTSE 100 index of the country's biggest companies was down about 4% late in the morning.

The market drop is similar to how investors around the world, including those on Wall Street, have reacted so far to government efforts to stabilize banking systems — including the $700-billion U.S. bank rescue plan signed last week by President Bush.

Asian markets were down again earlier Wednesday on fears that banks' failures to lend is driving other business and industrial activity to a halt. Shares in Tokyo fell more than 9%, the biggest drop since the 1987 stock market crash.

Britain's rescue effort allows the country's eight biggest banks to tap taxpayers to increase their capital up to $44 billion. It makes an additional $44 billion available to the banks in return for taxpayers' shares in the banks.

In conjunction, the central Bank of England will make $350 billion available in short-term loans and another $438 billion available in loan guarantees.

The goal, Darling told the BBC, is to get banks lending to each other and to the rest of the economy, which they haven't been doing.

Brown said the British plan was a "far more comprehensive package" than the U.S. rescue. The U.S. plan lets banks unload so-called "toxic" or bad assets from their books and onto taxpayers.

Following the U.S. model and simply removing toxic assets would solve only part of the problem, Brown told reporters. The British plan provides short-term liquidity, which the U.S. plan is designed to provide, and then long-term stability, he said.

The eight big banks that can turn to the government: Abbey National PLC; Barclays PLC; HBOS PLC; HSBC Bank PLC; Lloyds TSB Bank PLC; Nationwide Building Society, Royal Bank of Scotland and Standard Chartered Bank.

The move by the British government comes just three weeks after European leaders largely rejected a call from U.S. Treasury Secretary Henry Paulson to follow America's lead and step in with taxpayers' money to stabilize the world's financial system.

Britain, Germany, Italy and France last weekend failed to coalesce behind a proposal by French President Nicolas Sarkozy to adopt a European-wide plan to keep banks solvent.

Instead, governments have acted separately to try to bolster banks in their countries, with Germany, Italy and Denmark following Ireland's lead and offering to back people's bank savings 100%.

Britain's bank rescue plan is the boldest so far outside of the United States and Russia.

Russia on Tuesday announced $36.4 billion in new credit to its banks. Earlier it had made $180 billion available to banks, companies and even to buy shares on its sinking equity markets. However, trading was halted mid-day Wednesday on Moscow exchanges after sell-offs continued precipitously. It was the second time this week trading was stopped.

In addition to coming to the rescue of its biggest banks, Britain pledged to protect deposits that British savers had in Internet accounts in Iceland's Icesave bank. The bank has frozen deposits, keeping people from taking money from their accounts.

Iceland's banking system is in the most dire straits. The Icelandic government has taken over two of its largest banks and is seeking $5.4 billion from Russia in loans to help prop them up.