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Shares recover as £37bn rescue plan revealed

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by Kay Mitchell

Shares on the FTSE 100 index have risen this morning on the news that the UK Government is to pump £37 billion into three of the country’s largest banks.

Under the terms of the deal, banks have agreed to scrap executive bonuses for the current year and future bonuses will be paid in the form of shares. In addition, banks will not pay out a dividend until the Government’s investment in preference shares have been fully repaid.

The announcement forms part of the £500 billion bailout plan unveiled by the Government last week.

The Government is to inject £20 billion into Royal Bank of Scotland (RBS) while a further £17 billion will be pumped into Lloyds TSB and HBOS.

HBOS will raise £11.5 billion from taxpayers, made up of £8.5 billion in ordinary shares and £3 billion in preference shares, while Lloyds TSB will receive £5.5 billion. However, the terms are dependent on the merger of the two banks going ahead.

As a result, taxpayers will own approximately 60% of RBS and 40% of the merged Lloyds TSB and HBOS.

RBS chief executive, Sir Fred Goodwin, is to part ways with the bank after it had no option but to turn to the Government for help. Chairman, Sir Tom McKillop, will also step down.

Furthermore, Andy Hornby, chief executive of HBOS, and Dennis Stevenson, chairman, will also depart.

Meanwhile, Barclays plans to raise £6.5 billion via private investors, not from the Government.

Robert Peston, the BBC’s business editor, said today is ‘perhaps the most extraordinary day in British banking history‘.

According to Prime Minister Gordon Brown, the bail-out was ‘unprecedented but essential for all of us‘.

Following the announcement, shares in London rose by 230.2 points to 4,162.34. Barclays led the way gaining 13.8%, while Lloyds TSB rose 10.7%.

The FTSE 100 crashed below the 4,000 mark last Friday and suffered its worst week since the 1987 crash.

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News posted: October 13, 2008

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