There is no doubt that the recession is hitting everyone and as a result there are not many businesses that have not been affected so far. This is the time for the “Survival of the Fittest” and if you want to survive the recession you need to take action.

Most businesses are stuck with the idea that the only way to increase profits is to increase prices and some think that the only other way is to increase their customer numbers. Both of these two actions will increase your business profits if they are done in the right way, however, they are by no means the only ways in which to grow your business. In fact I have listed that there are actually 7 Ways to Grow Your Business.

When I have spoken to most business owners they usually say “We can’t possibly increase our prices!” “We will lose our customers!”. So this is out of the question as a way to improve cash flow and business profitability. Also, in the present climate businesses might be finding it difficult to obtain banking finance or business loans to help with cash flow, not only because of the banks reluctance to lend, but also the rates are not that favourable right now, despite the lowest bank base rate the country has ever seen!

Some businesses are put into a ‘Catch-22′ situation whereby they feel they cannot increase their prices for fear of losing their clients and they lack the funds to pay for the advertising necessary to get more customers. In a recession though, it is even more important to continue to advertise your services and products. However, to increase your sales and your profits, advertising is not the only way to do this…more of that later. What all businesses must do and in particular in a recession, is to make sure the advertising they are doing is working.

Is your advertising working?

So what do I mean by this? What you can measure you can manage, so for example, if you take out an advert in your local news paper, you need to train your staff to ask when enquiries come in, where the enquirer got your company details from. If your new advert is not working (as confirmed from the data gathered from your incoming phone calls), this could mean one of two things; either that the advertising medium is the wrong one for your type of business; or that the advert copy needs to be changed. If however, you are not monitoring your telephone calls, how will you know whether your advertising spend is working or not?

Let me take this opportunity to tell you about three of the 7 Ways to Grow Your Business and to introduce you to Profit Increase Software. Profit Increase Software has been designed on the basis that there are seven ways to grow your business – these seven ways do include price increases and increased customers. However, what is worth noting here is that some of the 7 Ways to Grow Your Business do not have to cost the earth to do – three of these seven ways are:

1. Increase the number of customers of the type you want to have – This is quite an obvious statement and it is not rocket science. We all know that the more customers we serve the more money we make, subject to those customers being profitable customers. “Customers of the type you want to have” means that we don’t have to take on all customers, as no business wants to deal with troublesome people or people that cost more in time than in what they spend at your business.

Well let me explain to you that increasing client numbers is not always the only way to increase profitability and in a well thought out change you can actually achieve higher profits in your business with fewer clients.

2. Increase the prices charged on your products – not always a good thing to do and especially not good in the middle of a recession. We see so many companies and mostly retailers having to apply heavy discounts to their products just to stay alive. I am not therefore suggesting at this point that you should necessarily increase your prices, however, it is worth reading my article about how I tripled my prices and made my business more profitable.

3. Increase the number of times customers come back – A must for all businesses is to capitalise on your greatest asset – “Your existing customers!”. If you maintain a customer database you can use this database to your advantage, by writing to your customers on a regular basis to entice them back to buy from you. you can use this client contact to tell them about any special offers or new products or services you have. Most business owners forget about their existing customers and try to attract more and more new ones. Let me tell you it is many times more expensive to market to potential customers than it is to people that have already purchased from you and are already a customer, assuming that their experience with your business was a good one.

There are in fact, four other ways to grow your business and these can be discovered in the manual that accompanies the Profit Increase Software. This software is easy to use and it has been written using Microsoft Excel. You will therefore require Microsoft Excel to run the software, but you only need a very basic knowledge of Excel to work it.

This software has been designed so that you can quite quickly and easily discover what you can do to increase your business profits. As an example, this software was used in a meeting with a client who was adamant that he could not extract any more profits from his business, but after three hours of
pouring over figures, using this software and brain storming ideas – we added £50,000 to his bottom line! Well, the software helped us to target where the extra profit was, which led the client on to think about how to achieve that extra profit. To date this same client is still operating the idea and making the extra profit, so his pay-back is probably in the region of £350,000, as this exercise was done back in 2002!

What is even more impressive about this profit increase is that it cost the business absolutely nothing to implement the change (well it cost them my fees) and did not involve any costly advertising or marketing. The idea was sitting right under the client’s nose, it took using this software to find it and to force the thought process required to realise that there was a very simple and straight forward way to increase profits.

As another example, this system was once used for a bakery which was having cash flow problems and they had gone to the bank for a loan to alleviate the problem. However, before they went to the bank they approached their accountant – who had luckily just purchased this system. The company was asking for help in putting business plans and cash flow forecasts together. However, the accountant spent a few hours with the client pawing over figures from the business and utilising this program. Within a short space of time worked out that they could quite easily remove the cash flow problem without the aid of a bank loan.

When the accountant and their client first played with the figures on the worksheets, they were looking at additional profits of around £80,000. However, when they set to work, the actual profits in the first year were under this amount and somewhere around £50,000. But the company did not need a loan and the cash flow problem was solved and the client was more than happy with his accountant! The bank might not have been happy though!

So if you would like to buy the Profit Increase Software click this link and get to work on surviving the recession - their might well be some extra profits sitting right under your nose too. If however, you would like to purchase some of my time to help you in this process then email me at info@in-business.org. My consulting charges are not cheap, and start at £1,495, plus VAT for the day, but if you look at the results that can be achieved here, these soon pale into insignificance when those extra profits start to role in!

See also – Are there any businesses that are recession-proof?

and: What’s the price of a new customer?

and: Cash flow is king!

The credit crisis is hitting businesses around the globe and at a time when you see World Governments pledging financial support for banks then you know that there is a REAL problem.

No one knows quite how long this crisis is going to last or indeed how bad things will get, but one thing is for sure confidence is a low, property prices are falling, properties are being repossessed and people are being made redundant.

With the picture painted and that part out of the way, I want to reassure my readers that I am not trying to reap doom and gloom here although a reality check is never a bad thing. When times are tough there are certain things that businesses can do to get through and this article is dedicated to that end.

Financial squeeze, relief on the way!

Once the Government funds and guarantees have found their way through the financial system, as the world leaders assure us they will, funds will begin to flow again and the all important business life-blood of CASH will once again be available. What is good news is that interest rates are falling around the world so lending will be cheaper and so long as your figures stack up then there is no reason why banks should not lend to you. The US have dropped rates again last week to 1% and we expect the UK’s Bank of England to follow suit this week, let’s hope the drop is a significant one and not just one quarter of a per cent!

What should small businesses do?

Every business, both large and small will have to revisit business plans, cash flows and budgets, but in particular their forward cashflow projections.

Businesses that are lucky enough to be selling the necessities of life are relatively well positioned at the current time, but even these will be hit to a certain degree and competition will be fierce. So you will still need to keep an eye on budgets and forecasts and on your operating costs. If however, you are a business operating in an industry that is at the whim of discretionary spending patterns, then you will be especially vulnerable right now.

Depending upon your business sector, the effect upon your sales will vary greatly. You might be lucky enough to have a business which benefits from a recession, for example, the low value supermarkets like Lidl are more likely to do well. They will be attracting new customers who are tightening belts and wishing to spend less. However, for the large majority of businesses there will be an effect and this effect needs to be both managed and planned for.

So preparing revised cash flow forecasts and doing a number of “What if” scenarios on varying drops in sales volume is a must. So for example, you might want to see the impact on your business of a 10%, 20% and even a 30% drop might have on the “Bottom Line”. You can then make contingency plans for each of these eventualities and aside from tightening spending budgets, you may find that you will need to visit the redundancy scenario.

Alternatively, you might be able to do some re-structuring within the business and seek additional bank finance to help the business through the following months. Banks like to see businesses plan ahead and if you present to them a well prepared business plan which includes professional cash and profit forecasts, you are more likely to have the bank on your side. Banks do not like last-minute fire fighting scenarios, as this creates “Risk” and does not attract confidence in your business model.

This is a time to look at diversification and for a bit of thinking outside of the box. In other words, if your core business has taken a hit and by increasing your marketing spend does not have enough of an impact, then you should consider adding product/service lines to your range of products and services.

Billions of pounds of government money have been poured into banks worst hit in the credit crunch, in an attempt to stabilise the global financial crisis.

Sir Brian Pitman, former chief executive of Lloyds TSB Group, remembers the troubled days of the mid-1970s and tells BBC One’s Andrew Marr programme things are not as bad as they were 35 years ago.

Sir Brian Pitman worked for Lloyds TSB Group for nearly 50 years

“We’ve been in a much worse position than we are today.

“People are getting unbelievably gloomy, but I have been around long enough to remember the 70s when we had to have the IMF [International Monetary Fund bail-out], we had a three-day working week, we had candles in rooms and we couldn’t get home by train.

“We are not going to have that.”

Asked who was to blame for the current global economic crisis, Sir Brian said banks must shoulder some responsibility.

“The banks are partly to blame. There’s no doubt about that. Not wholly to blame, but partly to blame.”

But, he explained, some institutions had been “much more reckless than others”.

“What we’ve had is that some banks have been willing to lend 125% of a mortgage. If in fact you pay £100,000 for a house – if you can get one for that amount of money – and you lend them £125,000 then don’t be surprised if that leads to trouble.”

‘Walking on water’

He said he believed the main reason for any struggling business was poor management.

“I chaired a survey a few years ago about why companies fail.

“The main reason was one word; hubris – overconfidence, the belief that you can walk on water. It’s very difficult to control those sort of people.

Governments think in terms of billions, the market thinks in terms of trillions. And this has been one of the great frustrations for politicians

“At the end of the day, it is the chairman and the chief executive who control. If you choose the right chairman and chief executive you will not get into so much trouble.”

Successful staff should still be rewarded, he said, adding that it was unlikely 2007′s £17bn in bonus payouts would be repeated this year.

“Generally speaking, the bonuses are based on the corporate performance – the performance of the company as a whole, your divisional performance and your individual performance.

“Now the odds are that not many companies are going to make more profit in 2008 than 2007, but many companies made more profit in 2007 than they did in 2006.”

‘Stopping the rot’

The government’s £50bn bail-out of UK banks was the right thing to do, he said, and would help keep deposits in the country.

“When the Irish introduced this guarantee for deposits, deposits were flowing out of the UK into Ireland and other places, but I believe the action that’s been taken will stop the rot.”

Traders have been feeling the effects of the credit crunch

However, Sir Brian said the size of the bail-out was not considered large in markets terms and banks were still reluctant to lend to each other.

“Well £50bn is not very much in relation to a trillion. That’s what people have to learn. If we look at the world markets, over the past 20 years the markets have grown much faster than the national economies – much, much faster.

“So that governments think in terms of billions, the market thinks in terms of trillions. And this has been one of the great frustrations for politicians.

“They’ve found that the Bank of England has reduced the interest rate but the interest rate has not come down for lending.”

‘We will recover’

Despite the economic downturn and the widespread blaming of bankers for the current crisis, Sir Brian believed it was “totally unrealistic” to believe pay could be capped.

“If you cap pay in the UK, where are the brains going to to go? Where is the enterprise going to come from?

“We’ve got to get back to a situation where the markets drive these things again because the markets have been good for the communities in the world.

“If you have too heavy-handed regulation you will kill enterprise – kill it”

“It’s the markets which have improved global trade…it’s the global trade which has created the wealth all over the world.”

Asked how bad the current crisis would get, he said it was difficult to assess because it was global and on a much greater scale than seen before. But he added he had “very great confidence” the economy would recover.

“I don’t think it is anything like as bad as the 70s. We’re not going to go on to three-day working weeks and we haven’t got that massive inflation we had in the 70s.”

News reported by The BBC

Fraud in the workplace is likely to accelerate during the global economic downturn, says accountants KPMG.

This is because managers may falsify figures to make performance look better and debt-strapped employees are more likely to commit fraud.

Corporate fraud was £630m in the first six months of 2008, up on recent years.

Fraudsters may struggle to get false credit cards in the current climate, making them more likely to target their victim’s deposit accounts.

Rising fraud

The typical fraudster tends to be a male, middle manager, aged between 35 and 55, working in the finance department and having been with the company for many years, KPMG said.

Fraud is on the rise, with the value of fraud losses topping £1bn in cases heard in 2007, compared with £192m in 2000.

In the first half of 2008, some 128 fraud cases reached the UK courts with losses totalling £630m, according to KPMG’s Forensic Fraud Barometer.

“The signs are that we could end up seeing some substantial losses being suffered” Hitesh Patel, KPMG

This was up from £421m during the last six months of 2007 and more than half of this figure – £350m – was lost in the financial sector.

Slowdown hits

KPMG warns that fraud will increase as the full impact of the slowdown is felt.

“The fear is that we will not see the real and full fraud impact of the crunch for another six or 12 months or even more, as businesses start to take a closer look at their operations in this difficult economic climate,” said KPMG Forensic partner Hitesh Patel.

“The signs are that we could end up seeing some substantial losses being suffered.”

Another theory is that the economic downturn could push more people into crime.

One unexpected benefit of the credit crunch is that the reduction in the availability of credit means it may be more difficult for identity fraudsters to apply for cards and loans in somebody else’s name. A recent report by the all-party parliamentary group on identity fraud suggested that the squeeze on credit was pushing fraudsters to attempt to empty existing bank accounts.

Mark Bowerman, of UK payment association Apacs, said that it was unlikely that any trend would become apparent until card fraud figures for the year were published in March.

Apacs figures for the first six months of 2008 show that plastic card fraud losses were up 14% to £301m, with fraud abroad and internet fraud also on the rise.

KPMG says that companies should have an “anti-fraud culture” in the workplace, with financial matters being signed off by a number of people.

Whistle-blowing hotlines should be well-publicised and computer analysis should highlight any possible fraudulent patterns, such as invoices being submitted out of hours.

News reported by The BBC

President George W Bush has warned the US economy continues to face “serious challenges” after signing a $700bn (£394bn) financial sector rescue plan.

The controversial package is aimed at buying up the Wall Street’s bad debts in an effort to ease the credit crunch which is crippling the US economy.

The president said it would take “time and determined effort to get through this difficult period”.

The US House of Representatives passed the bill by 263 votes to 171 on Friday.

It was the second vote in a week, following the shock rejection of an earlier version of the deal on Monday.

The House adopted the new version of the Emergency Economic Stabilization Act after the Senate added about $100bn (£57bn) in new tax breaks to win Republican votes.

Job losses

The complex process of auctions to buy up the problem assets will be overseen by the US Treasury and is not expected to take place for at least a month.

Despite the adoption of the bill, share prices in New York ended Friday down, as government figures showed US job losses at a five-year high.

Mr Bush welcomed the approval of the bill, which he said was “essential to helping America’s economy weather the financial crisis”.

The president acknowledged that there were concerns about the government’s role in the deal and its cost.

“The passing of the bail-out plan is just the first stage and it will be several months before anyone can tell whether it is working” Greg Wood, BBC business correspondent

He said he believed in intervention only when it was necessary but that “in this situation, action is clearly necessary”.

“Ultimately the cost to taxpayers will be far less than the initial outlay,” he said.

Fearing a backlash from furious voters in November’s looming congressional elections, politicians were hugely divided on the unpopular bill during the House debate.

Some who had voted “No” on Monday said they were switching because of the improvements to the bill, but many of them still expressed serious reservations.

Others maintained their opposition, saying the bill was still a bail-out benefiting mainly Wall Street.

‘Outrage’

Both candidates for the US presidential election in November have welcomed the deal but neither were enthusiastic about the details.

Speaking in Arizona, Republican candidate John McCain said the deal “isn’t perfect and it’s an outrage that it is even necessary”.

NEW MEASURES IN BAIL-OUT BILL

Increased protection for saving deposits
Increased child tax credits
More aid for hurricane victims
Tax breaks for renewable energy
Higher starting limits to alternative minimum tax

But he said the US had to stop damage to its economy caused by “corrupt and incompetent practices on Wall Street and in Washington”.

Mr McCain said the deal was a temporary solution and it should not take a crisis for Congress to reach bi-partisan accord.

Democratic candidate Barack Obama said it was important that the Bush administration used the new powers granted by the deal wisely.

“We still have a health care system that’s broken, we’re still overly reliant on oil from the Middle East and so we’ve still got these structural problems,” he said, on the campaign trail in Pennsylvania.

“The fundamentals of the economy aren’t sound and we’re going to have to do a lot of work moving forward.”

BBC Washington correspondent Rachel Harvey says the focus now shifts back to the US Treasury, which is tasked with using the billions of dollars of taxpayers’ money to try to unclog the financial system.

After all the political wrangling to get this plan passed, the question now is whether it will actually work, she says.

US Treasury Secretary Henry Paulson has vowed speedy action to get the rescue package up and operating.

BBC North America business correspondent Greg Wood says it will be several months before anyone can tell whether the plan is working.

News reported by The BBC

The new chairman of the Financial Services Authority (FSA) has said it could penalise banks who pay bonuses that encourage excessive risk-taking.

Lord Adair Turner told BBC News that the FSA would not regulate how much was paid, but would ask banks to explain their bonus structures.

Banks found to encourage risky actions could be compelled to hold more capital, raising their costs.

Some believe bonuses should be based on longer-term results.

“What we are now doing is saying to banks, explain to us what your structure of bonuses are,” said Lord Turner.

“If we think they are in danger of encouraging people through that bonus structure to take risky actions which appear to look good at the time, but which create toxic assets for the future, then we have the power to say if you want to do that, you’ve got to hold a bit more capital because we think you’re a more risky institution.”

‘Back to basics’

There has been criticism that the bonus culture in the City contributed to the current financial crisis. However Lord Turner said this aspect should not be overstated.

He said other factors would be more important in ensuring there was no repeat of the credit crunch and the subsequent financial turmoil.

Lord Turner said regulators should, for example, monitor much more closely the level of liquidity in the system.

“We have to go back to basics in regulatory terms to make sure this doesn’t happen again in five or 10 years’ time,” said Lord Turner, who took over at the helm of the FSA on Saturday.

News reported by The BBC

HSBC has blamed turmoil in the financial markets after withdrawing its $6bn (£3.3bn) offer to buy a majority stake in Korea Exchange Bank (KEB).

The stake is owned by Texas-based private equity firm Lone Star.

A year after agreeing the deal, HSBC said its plans to buy the stake were no longer in the best interests of its shareholders.

There has been speculation HSBC will instead use the money to buy one of the western banks hit by the credit crunch.

It has already been linked with both Washington Mutual and Royal Bank of Scotland.

The deal to buy KEB has been complicated by legal disputes surrounding Lone Star’s investment activities in South Korea.

Without the necessary approval from South Korean regulators, HSBC said it was free to withdraw its offer.

“In the light of developments around the world, not least changes in asset values in world markets, we do not believe it would be in the best interests of shareholders to continue to pursue this acquisition on the terms negotiated last year,” said HSBC Asia chief executive Sandy Flockhart.

News reported by The BBC

Moscow’s stock markets are to remain closed until Friday, as the government tries to stem a plunge in share prices and restore confidence in the economy.

Finance Minister Alexei Kudrin said 60bn roubles (£1.3bn) would be pumped into Russia’s three largest banks to help bolster the financial markets.

President Dmitry Medvedev said supporting the financial system was the government’s “most important priority”.

The crash has brought back memories of Russia’s financial crisis of 1998.

Then the rouble was devalued, the country defaulted on its debts, and many banks failed.

While the country’s economy as a whole is now in far better shape, there is still great uncertainty over what is around the corner, leading to a collapse in confidence, says the BBC’s James Rodgers in Moscow.

Investors flee

Financial regulators halted trading on Wednesday after stocks fell to the lowest level in nearly three years.

“Obviously, the crisis on the world financial floors is more profound than the most pessimistic earlier forecasts” President Dmitry Medvedev

Russia bullish over market crisis

Russia was not alone. Markets around the world have dived this week as several big banking names have gone under due to the effects of the credit crunch.

But it has shocked a stock market which was hitting record highs as recently as May this year, helped by an economy riding high on record oil and gas prices.

While the global turmoil and a slide in the price of Russia’s abundant oil are some of the causes, analysts also point to investors fleeing Russia in the aftermath of its war with Georgia.

About £20bn has been pulled out of Russia since early August, Reuters estimates.

The executive board of Micex, one of Russia’s two main exchanges, called the situation “extraordinary”.

In a bid to support the banking sector, the finance ministry has pledged billions of dollars of loans.

Facing a liquidity squeeze, central bank officials on Thursday cut the reserves banks were allowed to hold, forcing them to release billions of roubles.

News reported by The BBC

The fourth-largest investment bank in the US, Lehman Brothers, has said it will file for bankruptcy protection, amid a growing global financial crisis.

Lehman had incurred losses of billions of dollars in the US mortgage market.

The move threatens to deal a further blow to the global financial system, as banks unwind their deals with Lehman.

Merrill Lynch, also stung by the credit crunch, has agreed to be taken over by Bank of America in a dramatic weekend of events for Wall Street.

Stock markets in Europe and Asia dropped sharply and the dollar tumbled against the euro and the yen as Lehman’s failure raised fears about the strength of the global financial system.

“The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence” Robert Peston, BBC business editor

The FTSE 100 index of leading UK shares was down 160 points, almost 3%, at 5256.50 in early exchanges.

Wall Street is also expected to open lower in what is likely to be a tense day of trading.

The Bank of England and the European Central Bank said they were monitoring money markets and stood ready to intervene if necessary.

Talks collapse

The chance that Lehman Brothers could collapse increased sharply after the strongest potential buyers pulled out at the weekend.

Barclays and Bank of America had been in talks to rescue the bank but negotiations faltered when it became clear that the US Treasury was strongly opposed to using government money to help clinch a deal.

Greg Wood, the BBC’s North America business correspondent, said that police had cordoned off the bank’s headquarters in New York and staff were leaving with cardboard boxes as onlookers gathered to watch the bank’s demise.

“I think the whole history – 150 years of effort and hard work – that’s the most saddening part for me,” said one Lehman employee as she left the building.

The bank, which employs about 25,000 staff worldwide, including 5,000 in the UK, was founded in 1850 by three brothers.

‘Extraordinary 24 hours’

Lehman Brothers said it intended to file for Chapter 11 bankruptcy protection, which allows a company time to reorganise and devise a plan to pay creditors over time.

It said that its broker-dealer division and asset management division Neuberger Berman Holdings would not be included in the filing.

The accounting firm PriceWaterhouseCoopers said the UK operations of Lehman Brothers have been placed under administration, and the business would be wound down in an orderly fashion.

Bank of America said it had agreed to buy investment bank Merrill Lynch for $50bn (£28bn), in a deal that will create the world’s largest financial services company.

Three of the top five US investment banks have now fallen victim to the credit crunch. Lehman and Merrill join Bear Stearns, which was sold to JP Morgan for a knockdown price in March.

The BBC’s business editor, Robert Peston, said that it had been Wall Street’s most extraordinary 24 hours since the late 1920s.

He said that Merrill’s sale was almost as shocking as Lehman’s demise.

“The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence,” he said.

Insurer in trouble

In addition to Lehman and Merrill Lynch, problems at AIG, once the world’s largest insurer, are also mounting.

Reeling from losses on its exposure to real estate, AIG has sought $40bn from the Federal Reserve to shore up its finances, the New York Times has reported.

To help prevent panic on financial markets, the Federal Reserve said for the first time it will accept stocks owned by banks as collateral for short-term cash loans, broadening its emergency lending programme.

Also 10 of the world’s biggest banks on Sunday agreed to establish a $70bn emergency fund, with any one of the banks able to able to tap up to a third of it should they face any liquidity problems.

News reported by The BBC

Global shares have rallied after the US government said it was taking over troubled mortgage lenders Freddie Mac and Fannie Mae.

Investors hoped the largest bail-out in US history would prop up the country’s housing market and ultimately help to end the credit crunch, analysts said.

On Wall Street, major shares added 2.58% in trading while key European and Asian indexes were up by at least 2%.

President Bush said the firms had posed “an unacceptable risk” to the economy.

Solvency bid

In a dramatic move, US Treasury Secretary Henry Paulson announced the rescue plan on Sunday, before markets opened.

FREDDIE MAC & FANNIE MAE
The two firms:
Buy mortgages from approved lenders and then sell them on to investors – rather than lending directly to borrowers
Guarantee or own about half of the $12 trillion US mortgage market
Are relied on by almost all US mortgage lenders
Are looked to for funds to meet consumer demand for mortgages
Link mortgage lenders with investors – keeping the supply of money widely available and at a lower cost
Have no direct UK equivalent

Q&A: Freddie Mac and Fannie Mae
The importance of Freddie and Fannie

Between them Freddie Mac and Fannie Mae finance or guarantee nearly half of the outstanding mortgages in the US, and have lost billions of dollars during the US housing crash.

Much of their bond debt was ultimately held by Asian banks, who had recently begun withdrawing their investment.

The most recent figures show that about 9% of US mortgage holders were behind on their payments or faced repossession.

The rescue could cost the Federal government $200bn (£100bn) as it invests fresh capital into the stricken mortgage giants to keep them solvent.

But a collapse of the two lenders would have frozen US mortgage lending for years, and would likely have lead to even steeper declines in house prices.

According to one widely-reported index, US house prices are falling at an annual rate of more than 15% in major metropolitan areas, putting many people in negative equity.

Shares rally

The rescue plan reassured investors worldwide who feared that a collapse of the government-sponsored enterprises could have a ripple effect on financial markets, with further losses by major banks leading to yet further cutbacks in credit and lending.

FROM THE TODAY PROGRAMME

More from Today programme

On Wall Street, the Dow Jones added 2.58% in afternoon trading – a welcome rally after it lost 4% last week.

Meanwhile in London, FTSE 100 index was 3.92% ahead at close after a technical glitch had brought trading to a halt for much of a day.

It had lost 7% last week – its worst showing in more than six years.

UK banking stocks had been buoyed by the news from the US, some adding as much as 15%. House builders also gained on hopes that the move could signal a turnaround in the sector.

Germany’s Dax-30 index was 2.22% ahead at close and France’s Cac-40 added 3.42%.

Meanwhile Japan’s Nikkei index closed up 3.4%, while the Hang Seng index added 4%.

US Treasury Secretary Henry Paulson on the reasons behind the government’s decision.
And key indexes in Singapore, Australia and Taiwan were also higher.

On Wall Street, where the Dow Jones index shed 4% across the previous five sessions, there have been positive signs.

The effective government takeover will lead to major changes in how the two mortgage giants are run.

As part of the changes, the management of the two companies will be replaced while the firms will be given access to extra funding to support their business going forward.

HAVE YOUR SAY I have lost both faith and trust in banks
Keith Ridgers, Cobham
Send us your commentsMr Paulson said the government was intervening in the wider interests of the financial system and of taxpayers since the financial position of the two firms was fast deteriorating.

The move is intended to keep the two companies afloat, amid fears that either could go bankrupt as borrowers default on their home loans.

Together, Freddie Mac and Fannie Mae own or guarantee about $5.3 trillion (£3 trillion) of mortgages.

But they have made a combined loss of about $14bn in the past year and officials were worried that they would no longer be able to continue functioning if such losses continued.

Banks around the world are highly exposed to the two companies and therefore, given the febrile state of markets across the world, it had become dangerous for doubts to persist about whether they were viable and would be able to keep up the payments on their massive liabilities, says the BBC’s business editor Robert Peston.

A rescue plan passed by Congress in July gave the US government the authority to offer unlimited liquidity to the two companies, and to buy their shares, in order to keep them afloat.

News reported by The BBC