LONDON — Britain's announcement of an $87-billion bailout of its flailing banking system boosted confidence in the nation's financial sector Wednesday but didn't immediately alleviate the panic gripping investors.
The unveiling of the rescue package sent shares soaring for beleaguered financial institutions such as the Royal Bank of Scotland and HBOS, whose stocks had taken major hits in the preceding days.
But the surge among bank stocks, along with a sooner-than-expected interest rate cut by the Bank of England, was not enough to prevent the London stock exchange from dropping 5%. Since Monday, the FTSE 100 index has shed 12% in value, hitting a low not seen in four years.
Although officials worked feverishly through the night to finalize the package in time to unveil it before the start of trading Wednesday, the British government insisted that the strength of the bailout plan would not be measured by the stock market's performance.
Prime Minister Gordon Brown characterized the package as a groundbreaking effort to help banks stabilize their balance sheets. Several times during a news conference, Brown and his top economic minister, Alistair Darling, took pains to point out that the plan differed significantly from the $700-billion U.S. bailout approved by Washington last week.
Whereas the U.S. government is buying securities tied to troubled home loans, the British government will give banks a transfusion of as much as $87 billion in exchange for special shares that, if the banks recover, would give taxpayers first dibs on profits. (U.S. officials say American taxpayers, too, could earn a return if the government can later sell the securities it buys.)
British officials also established a separate liquidity fund of at least $348 billion that would offer short-term loans to financial institutions to help them cover their day-to-day operations.
"This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," Brown, a former British treasury chief, told reporters. "This is not the American plan. We are buying shares in the banks themselves. . . . That is capital that we are putting in, but we expect a return on that."
Later, the Bank of England cut its benchmark interest rate by half a percentage point to 4.5%, a day earlier than expected. The reduction was part of a concerted lowering of rates by central banks worldwide, including the U.S. Federal Reserve.
