Brown orders massive taxpayer-funded cash injection for banks

STOCK EXCHANGE TURMOIL:BRITISH PRIME minister Gordon Brown last night ordered a massive taxpayer-backed cash injection to rebuild the balance sheets of Britain's high street banks, effectively part-nationalising the sector at a cost of tens of billions of pounds.

The momentous decision came after a day of turmoil on the London stock exchange, where shares in RBS, the banking group, fell by 39 per cent to add to a 20 per cent tumble the day before. Rival HBOS more than halved over two days.

The total cost of the scheme was estimated at £35-£50 billion (€45-€64 billion) which is expected to be executed through the government acquiring preferred shares. Mr Brown is expected to insist the taxpayer receives generous dividends and profits on the deal if share prices recover. Full details may not be given until this morning, although Mr Brown's team said a statement would be given before the London markets open.

The plan may also include provisions to ensure government representation on the boards of the banks and possible caps on future remuneration for banking chiefs, and a fund to ensure they can continue to fund day-to-day operations.

Mr Brown had wanted more time to develop a fully-formed bank rescue package, but was pressured into acting immediately by the markets after reports circulated that banks were demanding an urgent injection of public money.

At £50 billion, the recapitalisation of UK banks would more than double planned public borrowing this year, pushing public sector net borrowing close to £100 billion and more than 6 per cent of national income, worse than in any year since 1994-95.

The additional borrowing, coming on top of increasingly dire independent forecasts for the public finances, will reinforce pressure on Alistair Darling, chancellor of the exchequer, to explain how the government will reconcile its new desire to borrow at whim with its existing budgetary rules, which prohibit such action.

Mr Brown and Mr Darling found their hand forced after another day of turmoil saw shares in HBOS drop 42 per cent and RBS 39 per cent amid mounting impatience for the detail of a coherent government plan to lead Britain out of the financial crisis.

RBS was forced at one point to issue a statement insisting it had not made any request for government funding. But concern about a lack of government grip was building yesterday amid a growing sense of economic as well as financial crisis - with a Chambers of Commerce survey suggesting Britain was already in a recession, while Virgin boss Richard Branson led calls for a substantial cut in interest rates when the Bank of England's monetary committee meets tomorrow.

Number 10 said last night's meeting had been in the diary for some time and should not be seen as an "emergency" session. Mr Brown's spokesman also insisted the talks were concerned with "ongoing action" and that any announcements would be made in "a calm, orderly and responsible" fashion.

But Liberal Democrat spokesman Vince Cable had earlier warned this might not be possible and that the government might have to rush forward an announcement. "We are dealing with an emergency problem here," said Mr Cable. "It is the only way that these banks are going to be able to survive this storm. There is a lot of talk about this [recapitalisation] happening and I fear that this is actually contributing to a climate of uncertainty. People are not sure what the government is going to do, so it probably will have to come forward with proposals earlier than it feels comfortable with, simply in order to deal with the uncertainty."

Mr Cable's comments followed Monday's sharp warning from former conservative chancellor Kenneth Clarke that speculation about the government's plan could itself prove damaging, and that Mr Darling needed to "come to decisions rapidly". Despite his assurance that the government stood ready to do "whatever" was necessary to maintain stability, Mr Darling spectacularly failed to reassure the markets and the London Stock Exchange suffered its biggest points fall in a single day on Monday. - (Additional reporting Financial Timesservice)