Bailed-Out Firms Have Tax Havens, GAO Finds

y Carol D. Leonnig

Washington Post Staff Writer
Saturday, January 17, 2009; Page D01

Most of America's largest publicly traded corporations -- including several that are receiving billions of dollars from U.S. taxpayers to finance their recovery -- have set up offshore operations that could help them avoid paying U.S. taxes on their profits, a government study released yesterday found.

• GAO Report: Internal Taxation

American International Group, Bank of America, Citigroup and Morgan Stanley are among the companies that are getting bailed out by U.S. taxpayers while having subsidiaries in locations where they can avoid paying U.S. taxes, according to the Government Accountability Office.

Of the 100 largest public companies, 83 do business in tax-haven hotspots like the Cayman Islands, Bermuda and the British Virgin Islands, where they can move their income into tax-free accounts.

It is all legal, but it could come to an end, given the dire condition of the U.S. economy and President-elect Barack Obama's campaign pledge to close this popular business tax loophole. The Treasury estimates that it loses $100 billion a year in tax revenue as a result of companies shipping their income off shore, and congressional leaders are vowing to introduce legislation forcing big companies to pay full freight.

The GAO did not independently review company transactions to see if the companies purposely created tax-haven businesses to avoid U.S. taxes. But it said that historically, offshore subsidiaries are used for reducing tax costs and shielding transactions from public view.

Several of the companies are household names, including Pepsi, Exxon, Dell and Dow Chemical. In the list of 100 companies that GAO studied were 63 with major federal contracts, including Caterpillar, BearingPoint, Boeing, Merck & Co. and Kraft Foods.

Legislators gave particular attention to the 14 companies on the list that received bailout money from the Treasury in the recent financial meltdown. Sens. Byron L. Dorgan (D-N.D.) and Carl M. Levin (D.-Mich.) requested the GAO study as a launching pad for their effort to curtail what they call "tax-dodgers."

The bailout recipients on the list include Bank of America, which received $45 billion; Citigroup, $45 billion; American Express, $3.4 billion; and Goldman Sachs, $10 billion, according to the Taxpayers for Common Sense watchdog group.

"This is kind of like economic patriotism," Dorgan said. "Americans were told you have to pony up some money to help these companies. And it's rather infuriating for them to find out now that those companies, when they were profitable, didn't want to pay taxes and found clever ways to hide their money overseas."

Several companies said they are engaged in legitimate business operations around the world, and rejected the premise that they are trying to avoid paying their share of U.S. taxes.

Representatives from two companies reported in interviews that they couldn't say whether their foreign operations ultimately reduced their total tax bill.

"We do business around the globe," AIG spokesman Nick Ashooh said. "It's absurd that we're being accused of using these as tax havens. Now what the net tax impact is, that's extremely complicated."

The GAO found 17 companies with no business in tax-haven locales, including Fannie Mae, Freddie Mac, United Parcel Service, Verizon, Lockheed Martin and Northrup Grumman.

Obama pledged during his campaign to shut down the ability of U.S. corporations to avoid paying taxes by shipping their income to offshore havens. As a senator in 2007, he joined Levin in proposing similar legislation to curb abuse of offshore tax operations and force companies to be more transparent about their overseas operations in those jurisdictions.

Some critics of the loophole argue that the secrecy in tax-haven countries may hide shady accounting at some businesses. Members of Congress say that investigators at the Internal Revenue Service are outgunned in trying to track down who is crossing the line and who is not.

"This is a basic issue of fairness and integrity," Obama said in introducing the 2007 bill. "We need to crack down on individuals and businesses that abuse our tax laws so that those who work hard and play by the rules aren't disadvantaged."

Tax experts said that such legislation has been a perennial in years past, but is "very likely" to gain steam this time around because of growing unpopularity of tax havens.

"The number one thing, however, is we need revenue," said Jack Blum, a tax-haven expert and Washington lawyer who has testified before Congress about shutting down the loophole. "This business of letting people get away with bloody murder by taking their money offshore is inconsistent with trying to fund our government. That is going to put terrific pressure to close down obvious and ridiculous loopholes."

Levin noted that not all companies use such havens and some use far fewer than others. The report found that Citigroup has set up 427 subsidiaries in tax-haven countries, including 91 in Luxembourg, 90 in the Cayman Islands and 35 in the British Virgin Islands.

Levin said other havens where Citigroup has subsidiaries include Switzerland, Hong Kong, Panama and Mauritius. Morgan Stanley has 273 subsidiaries in tax-haven countries, 158 of them in the Caymans, according to the GAO.

"Pepsi has 70 tax-haven subsidiaries, while Coca Cola has eight," Levin said. "Morgan Stanley has 273, while Fannie Mae has zero, and Caterpillar has 49, while Deere has three.''

Morgan Stanley declined to comment on the report.

Citigroup said in a statement: "Citi has more than 4,000 subsidiaries throughout the world which enables us to serve hundreds of millions of individuals and institutions in more than 100 countries."

World trade hit by collapsing demand

The global downturn is tightening its grip. Over the past few months there has been a "dramatic" slump in trade, said Ambrose Evans-Pritchard in The Daily Telegraph. All major economies are affected, with US trade activity (imports and exports) down 7% year-on-year in November, and 18% since July.

Japanese exports posted a record decline in November and its overall trade was down by an annual 20%. Chinese trade slipped 9% – it looks set for a hard landing, the World Economic Forum warned this week – and Germany's was down 7%; the four biggest EU economies' exports tumbled by 10% in November alone. Asia is also suffering, with Korean exports down an annual 30% in January.

Trade between Asia and Europe is "an unmitigated disaster", said Charles de Trenck, with some shipping brokers now effectively waiving fees to transport containers. Asian trade to Europe and the US will fall by up to 12% and 7% this year, said de Trenck. Outbound traffic from America's top two ports, Los Angeles and Long Beach, is down 18% year-on-year. "This is no regular cycle slowdown but a complete collapse in foreign demand," said ING's Lindsay Coburn. A dearth of credit to back up trade deals has also hampered global exports. The World Bank now thinks trade could fall by 2.1% this year, the first fall since 1982.

Heading for the 1930s?

We should keep a close eye on trade figures over the next few months, said Martin Hutchinson on Breakingviews. The 66% decline in trade amid mounting protectionism is "what made the Great Depression Great". Averting a "1930s-style death spiral" in trade may soon become "the world's top priority".

Economist: Citi Insiders Refer to Bank as "Too big too fail, too shit to buy"

And the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell: and great was the fall of it

Illustration by S. Kambayashi

“TOO big to fail, too shit to buy” is the way some Citigroup insiders describe their employer. Not for much longer. On January 13th Citigroup announced that it had reached a deal to spin out Smith Barney, its broking arm, into a joint venture with Morgan Stanley’s broker. The agreement presages even more dramatic changes. The bank has brought forward its fourth-quarter results to January 16th and expectations are high that Vikram Pandit, Citi’s chief executive, will unveil plans to slim the bank further and faster.

The Smith Barney deal is already a watershed. As recently as November, Mr Pandit heaped praise on the broker and said he did not want to sell it. No wonder. Citi’s wealth-management business, of which Smith Barney is a big part, was the only one of its main divisions to post a profit in the third quarter. And it sat snugly with Citi’s universal-bank model, endorsed by Mr Pandit just weeks ago, of offering a full array of services to customers.

Citi will still receive its share of revenue from the joint venture, which overtakes the troubled Bank of America-Merrill Lynch combination as the world’s largest broker by number of advisers, but there is no question who will be in charge. Morgan Stanley is paying Citi $2.7 billion to take a 51% stake in the venture, which will be called Morgan Stanley Smith Barney, and has an option to take further stakes. James Gorman, now seen as favourite eventually to succeed John Mack as Morgan Stanley’s boss, will be the venture’s chairman.

Mr Pandit’s about-face reflects Citi’s continuing need for capital. Those quarterly results are expected to be the fifth in a row where Citi bosses own up to a loss. Although the bank has received two shots of government money and has a decent level of capital by some measures, its first line of defence, common equity, is thin. Mounting problems in its consumer and corporate loans, as well as some old wounds in its portfolio of mortgage-backed securities, threaten to erode it further. Selling Smith Barney, which creates tangible common equity of approximately $6.5 billion, is the quickest way of plugging the gap.

Gap-plugging alone does not constitute a strategy. Initial word of the deal sent Citi’s share price skidding on January 12th, as investors reasoned that the bank must be desperate if it was choosing to sell one of its best assets. Hence reports that more radical surgery is coming, with up to one-third of the bank’s assets being hived off to leave a slimmer Citi, focused on global corporate and retail banking.

Precisely what Mr Pandit has in mind is not clear, but it may be too late for an elegant retreat. Many of the businesses he would like to unload, such as Primerica, a seller of insurance, have been on the chopping-block for a while. Appetite will probably be keenest for the things that Citi would most like to keep—its retail-banking operations in Mexico and South Korea, say, or its suddenly sexy transaction-processing business. There is talk of setting up a separate entity to house the assets earmarked for sale, which could then be divested later. But that would still leave Citi with the problem of how to fill today’s holes in its capital.

Citi’s burst of activity signals two big, and necessary, shifts in thinking. The first is the final abandonment of the idea that has animated Citigroup since Sandy Weill engineered the merger of his company, Travelers, with Citicorp in 1998—that of the financial supermarket. The news on January 9th that Robert Rubin, a powerful voice in favour of the universal model, is to quit the board affirms the change. (The position of Sir Win Bischoff, the bank’s chairman, is also reportedly under discussion; Mr Pandit looks more secure, if only because no one wants his job.)

Not super at all

Universal banking need not fail. But smaller, focused organisations are easier to run than large, sprawling ones—Citigroup has more employees than the American navy and, apparently, greater destructive power. Mr Weill’s creation, backed by a host of executives, directors and investors ever since, has proved horribly flawed. Unlike HSBC, another giant, Citi has been built through deal making and it shows. Acquisitions were poorly integrated. Cultures overlapped rather than melded (the resilience of the Smith Barney name is one telling indicator). Risk management was dismal. The big balance-sheet was deployed recklessly. It may be inevitable that some banks are too big to fail; but the lesson of Citi is that they can also be too big to manage.

The second shift in thinking signalled by Citi’s manoeuvres concerns policy. November’s dramatic government intervention may have quelled fears that the bank would go under. But it has not stopped the bleeding at Citi, which remains focused on survival rather than on ramping up credit. Red ink laps around a host of other banks too. Full-year earnings at American banks are likely to be awful. Many eyes are on Bank of America, whose levels of tangible equity are also thin and, with Merrill Lynch and Countrywide to digest, is seeking billions of dollars in additional capital from the government. In Europe Deutsche Bank revealed a fourth-quarter loss of €4.8 billion ($6.3 billion) on January 14th, thanks in part to misplaced trading bets.

Recognition is growing that bad assets must somehow be purged from banks’ balance-sheets before they will freely make new loans. Citi has already had more than $300 billion of toxic assets ringfenced and guaranteed by the government; its apparent intention to create a separate entity for its unwanted assets is a more straightforward echo of the “good bank/bad bank” approach used in Sweden’s much-vaunted bail-out of the 1990s. In a speech on January 13th Ben Bernanke, chairman of the Federal Reserve, pointedly highlighted the continuing need for the financial system to shed its toxic assets.

That was the original purpose of the $700 billion Troubled Asset Relief Programme (TARP), approved in October, an effort that largely foundered on the difficulties of setting a purchase price for bad assets. The valuation problem has not gone away. Given the further deterioration in markets since the autumn, few believe that the $350 billion still left to spend from the TARP, if Congress agrees to release it, is anywhere near enough to absorb all the poison in the system. Even so, Citi’s shift in direction may signal that policymakers are looking again at the idea of bad banks. After all, one U-turn deserves another.

Willem Buiter warns of massive dollar collapse

Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.

By Edmund Conway, Economics Editor
Last Updated: 3:05PM GMT 06 Jan 2009

MPC founder member Willem Buiter. Photo: CHRISTOPHER COX

The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.

Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.

Celente Trends Alert - ME conflict may precipitate WWIII

I subscribe to Celente. Just received the following trends alert. Stock up on supplies now, hide your teenage boys and batten down the hatches - the mother of all shitstorms may just be coming.

Trend Alert®: Israel War to Ignite Terror, Threaten Global Economy and possibly Spark World War III, Trends Institute Warns



CAIRO, 14 January 2009 – Israel’s invasion of Gaza sets up the United States and any other nation supporting Israel as terror targets, predicts Gerald Celente. The Trends Research Institute Director also warns that should Israel continue the invasion, or take the war beyond Gaza, the world risks both a 1973-style oil shock and global conflict.



“Regardless of whose side you take, what you believe in, who did what to whom and when … this is just the latest chapter of ‘Crusades 2000’,” said Celente, who coined the term in 1993 and has written about it extensively. Yet, unlike preceding Crusades confined to the Holy Land, the trend seer says the current violence will spread globally. (See “Crusades 2000,” Trends Journal, Fall 1993; Trends 2000 Warner Books 1997; “Crusades 2000,” Trends Journal, Spring 2006.)



Armed and Dangerous



World news sources report a Middle East up-in-arms and seething at the lopsided Israeli massacre that has left over 1,000 Palestinians dead, thousands wounded, and Gaza in ruins. In comparison, three Israeli civilians and less than a dozen Jewish soldiers have been killed; scant damage has been inflicted on Israel.



The incessant US media and government message focuses on Israel's “right to defend itself” while minimizing or ignoring the long sequence of Israeli provocations leading up to its invasion while also failing to cite the real tally from the preceding mutual hostilities. In the months prior to Israel’s December 27th attack, homemade Hamas projectiles fired into Israel killed no one. (Over the past several years prior to the invasion, 13 Israelis were killed by rocket fire. Between 2005 and 2007 alone, the Israeli Defense Force killed 1,290 Palestinians in Gaza, including 222 children.)

Also largely absent from United States war coverage are the contributing factors Palestinians claim precipitated their primitive Qassam rocket launches into Israel. Chief among them, Israel’s 18-month starvation blockade of 1.5 million impoverished Palestinians squeezed into densely populated Gaza (described by the Vatican as “a big concentration camp”) and Israel’s pre-invasion assassination of six Palestinian officials.



According to the Geneva Conventions, the United Nations, the Red Cross, Human Rights Watch and other government and NGOs, Israel’s response has been both disproportionate and illegal. Among the condemnations, Israel's military has been accused of firing white phosphorus artillery packed shells on civilians. The UN special envoy for human rights accused the Israeli army of “… committing a shocking series of atrocities by using modern weaponry against a defenseless population - attacking a population that has been enduring a severe blockade for many months."



For its part, since the onset of hostilities, the United States had prevented approval of a UN Security Council statement calling for an immediate cease-fire. And when the United Nations Security Council voted for a “durable and fully respected” cease-fire in the Gaza Strip, “leading to the full withdrawal” of Israel’s forces from the Palestinian territory, the US abstained from voting. (The New York Times reported that Israeli Prime Minister Ehud Olmert “placed a phone call to President Bush” and that “Secretary of State Condoleeza Rice had been forced to abstain” from the UN resolution.)



“Major trends are brewing that if not quickly corrected or stanched, will lead to disaster,” Celente forecasts, citing fears among Israel’s neighbors that they could be the next victims.



“Throughout 2008, reports had been circulating that Israel was planning a military strike against Iran’s major nuclear complex at Natanz, and The New York Times all but confirmed it on January 11th,” Celente said. “While President Bush has made scores of disastrous foreign policy decisions during his reign, he should be congratulated for turning down Israel’s request for specialized bunker-busting bombs needed to take out the nuclear facility.”



An attack on Iran by either Israel or the US will spark the onset of World War III, predicts Celente.



“If oil producers sympathetic to the Palestinian cause cut the flow of oil, or if they cut supply in fear of being the next Israeli target, the world will go from a terrible recession into a deep Depression,” Celente said. (OPEC used the oil weapon in the 1973 Arab-Israeli War, embargoing the US and other countries who sided with Israel.)



Beyond escalating economic dangers, Washington has placed itself in terror’s bulls-eye Celente said, pointing to last weeks US Senate and House passage offering "unwavering commitment" for Israel. "Today, we reaffirm that Israel, like any nation, has a right to self-defense when under attack," said House speaker Nancy Pelosi. "The rocket and mortar attacks from Gaza, which were increasing in frequency and range, constituted an unacceptable security threat to which Israel had a responsibility to respond.”



Should Washington continue its "unwavering commitment" to Israel while taking direct measures to destroy Palestinians, Americans should also be aware that those left standing will seek revenge, Celente said. “News reports of US supplied ships bringing munitions to Israel to be used against Palestinians, and Israel’s claims that the UN school they shelled killing some 50 civilians was the fault of a US-supplied weapon malfunction will not be forgotten by those seeking revenge,” said Celente.



Trendpost: Stay abreast of ongoing Middle East developments. Assess them by weighing the facts and gleaning the truth lurking behind the propaganda smokescreen. Should an oil embargo ensue, product scarcities will cause frenzy buying of food and fuel. Gold prices will spike, the dollar will crash and global panic will most likely break out.



Reporting from Cairo, Egypt: John Anthony West, Executive Editor, the Trends Journal.

Bank of America Gets $138 Billion Lifeline for Merrill Losses

By Scott Lanman and Craig Torres

Jan. 16 (Bloomberg) -- Bank of America Corp., the largest U.S. bank by assets, received a $138 billion emergency lifeline from the government to support its acquisition of Merrill Lynch & Co. and prevent the global financial crisis from deepening.

The U.S. government agreed to invest $20 billion more in Bank of America and guarantee $118 billion of assets “as part of its commitment to support financial-market stability,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said in a joint statement shortly after midnight in Washington.

The bailout may increase pressure on Chief Executive Officer Kenneth D. Lewis, who reports fourth-quarter results today, to defend his decision to buy the ailing Merrill. Lewis overreached by rescuing two money-losing firms in six months, including New York-based Merrill and Calabasas, California-based Countrywide Financial Corp., said analysts including Paul Miller of Friedman Billings Ramsey Group Inc.

“This thing is unraveling so fast that he may know his job is lost,” Miller said.

Bank of America spokesman Robert Stickler said the firm doesn’t comment on “uninformed gossip.”

Shares of Bank of America plunged 18 percent yesterday, sliding $1.88 to $8.32 in New York Stock Exchange composite trading after hitting $7.35, its lowest level since February 1991. The bank moved up its fourth-quarter report to today at 7 a.m. New York time.

‘Fire-Fighting Tactics’

“The motivation is to try and basically get information to the market sooner rather than later because of all the anxiety that’s out there,” said Bert Ely, chief executive officer of Ely & Co., a bank consulting firm in Alexandria, Virginia. It’s a “very tense situation now,” he said.

Today’s emergency action shows officials so far have failed to quell concerns about the viability of some of the biggest banks, even after deploying $350 billion of a financial-rescue fund and a doubling of the Fed’s balance sheet. Citigroup Inc.’s shares also tumbled amid concern of rising credit losses.

“This is more short-term fire-fighting tactics,” said Ed Rogers, chief executive officer at Tokyo-based hedge-fund adviser Rogers Investment Advisors Y.K. “Once again, the U.S. government does not seem to be thinking in terms of final solutions to the problem.”

Citigroup Model

The U.S. had already injected $15 billion into Bank of America, the country’s biggest lender, and another $10 billion to Merrill to bolster the combined company against the credit crunch.

The plan mirrors the government’s emergency actions with Citigroup in November, which explicitly insured the bank against losses on toxic assets with taxpayers footing the bill. The U.S. backed up a $306 billion portfolio of Citigroup real-estate loans and securities, sharing losses beyond $29 billion on what were likely to be some of the bank’s worst holdings.

With today’s Bank of America deal, the government will protect a $118 billion pool of assets that a U.S. official said includes residential and commercial real-estate holdings and credit-default swaps. The official spoke to reporters on a conference call on condition of anonymity.

The $20 billion purchase of preferred shares, which carry an 8 percent dividend, will be made today. The funds come from the first half of the Treasury’s Troubled Asset Relief Program. Yesterday, the U.S. Senate voted to allow the release of the next $350 billion of the program.

Acquisition Spree

Lewis, 61, has spent $129 billion on acquisitions, including regional lenders FleetBoston Financial Corp. and LaSalle Bank, credit-card issuer MBNA and investment manager U.S. Trust Co.

Bank of America on Sept. 15 agreed to buy Merrill Lynch, the world’s largest securities firm, after a weekend of negotiations between Lewis and Merrill CEO John Thain. The $19.4 billion transaction came as Lehman Brothers Holdings Inc. sank into bankruptcy, crippled by the frozen credit markets.

“Bank of America has all kinds of problems with its acquisitions,” said Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Maryland. “They’ve been so acquisitive, they find themselves with very little in tangible equity.”

Talks between the government and Bank of America have been held for the past couple of weeks, an official said. The Charlotte, North Carolina-based bank told regulators in December it might abandon the takeover because of Merrill’s worse-than- expected results, three people familiar with the matter said before the announcement.

Future Losses

The government insisted the Merrill deal proceed because its collapse would renew turmoil in financial system, according to the people, who declined to be identified as talks were private.

Bank of America will absorb the first $10 billion of losses in the pool of assets, of which the “large majority” were assumed with the Merrill purchase, the statement said. The company will absorb 10 percent of any additional losses, with the government on the hook for the remainder.

The Fed will backstop assets with a loan, after the government’s first $10 billion in losses, shared by the Treasury and the FDIC.

The asset pool includes cash assets with a current book value of as much as $37 billion and derivatives with maximum potential future losses of as much as $81 billion, according to the term sheet provided by the government.

Separately, the FDIC said today it plans to propose changing its bond-guarantee program for banks to cover debt as long as 10 years, from the current three-year maturity. The FDIC will soon propose rule changes to the Temporary Liquidity Guarantee Program, today’s statement said.

“The U.S. government will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks,” the joint statement said.

Federal Reserve Chairman Ben S. Bernanke earlier this week said troubled assets remain a “continuing barrier to private investment” in financial institutions and recommended that they be extracted with government help. He urged a “comprehensive plan,” with one possibility being to erect a so-called bad bank to purchase and administer the troubled loans and securities.

Treasury plans 'bad bank' to buy toxic assets

A state owned "bad bank" to buy up tens of billions of pounds of toxic assets from high-street banks with taxpayers' money could be set up, under plans being drawn up by the Treasury.

By Robert Winnett and Andrew Porter
Last Updated: 7:45AM GMT 16 Jan 2009

Alastair Darling: Treasury plans 'bad bank' to buy toxic assets

Gordon Brown is preparing a new multi-billion pound rescue package for the banks which is expected to be announced next week.

In his strongest hint yet that a "bad bank" is a serious option, the Prime Minister said that "action" on toxic debts, which are blamed for the failure of high-street banks to resume normal lending, is now essential.

Ministers will spend this weekend locked in talks with senior bank executives, who are thought to be resistant to the "bad bank" proposal.

However, Mr Brown has been warned by City experts that the scheme may have to be quickly introduced to prevent the economic and financial crisis worsening.

Amid scenes not seen since before the last banking bailout in the autumn Bank shares fell sharply yesterday amid growing fears over the levels of bad debts.

The controversial "bad bank" scheme, which would involve taxpayers having to take on billions of pounds in risky assets, is increasingly seen as critical if banks are to begin lending again.

Banks may receive billions of pounds in taxpayers' money and the Government may take further stakes - or the right to purchase shares - as part of the package.

The Bank of England is also expected to offer tens of billions in credit to banks to fund new loans for homeowners and businesses.

The plans could be introduced internationally in co-ordination with the new American administration and European governments.

On Thursday, bank shares around the world dropped sharply. Barclays fell in value by 8 per cent, Lloyds was down 11 per cent and RBS by 4 per cent following reductions earlier in the week.

In America, shares in Citigroup, the world's largest bank, and Bank of America fell by more than 20 per cent at one point as speculation mounted that they would be seeking further Government assistance.

Speaking in Berlin after meeting Angela Merkel, the German Chancellor, Mr Brown indicated for the first time that the Government was planning to act over toxic bank debts.

"We must secure the widest possible transparency and the necessary renewal of trust in the banking system," he said. "That is an essential element of rebuilding the global financial system."

"It will also require us to take action on impaired assets in the banking system. It will mean that we will have to have new standards of surveillance and supervision for global financial institutions."

A Government source added: "Ministers are astounded by the scale of the losses that the banks have to write off. It isn't yet clear to the public quite how irresponsible some of the decisions made by bankers have been. The details are still sketchy."

The toxic bank scheme is set to be the latest audacious attempt by the Government to tackle the global credit crisis.

Two banks have already been nationalised, and a further three banks have sold stakes to the Government worth £37 billion. The Bank of England has also offered high-street banks tens of billions of pounds in Government loans.

However, although the previous bailouts may have prevented high-street banks from collapsing they have failed to pave the way for banks to begin lending normally again. Homebuyers and businesses have complained they are unable to obtain credit.

Banks argue that because of the extensive bad debts on their balance sheets they are effectively unable to take on more debts and resume normal lending.

Therefore, until their balance sheets have been "cleaned" and the toxic assets removed the credit crisis is likely to continue.

The issue is thought to have become urgent over the past few weeks as banks are currently preparing to announce their financial results for 2008. The scale of bad debts at some banks may be so high that it is difficult for the financial result statements to be signed off by accountants.

Specialist auditors are understood to be currently analysing the balance sheets of RBS, HBOS and Barclays to calculate the value of their toxic assets. The assets are mostly complicated financial instruments which are linked to sub-prime mortgages and commercial debts.

However, they are notoriously complicated and opaque - and are therefore difficult to value. Banks are likely to receive a small fraction of the assets' original value from the Government.

A senior Government source said: "We are looking at the unprecedented nature of the losses on the balance sheet. In short we do not know what they are worth.

"All the assets on the balance sheet have got to be valued to the best of our ability. Auditors have been brought in to work this out."

The scheme could cost the Government tens of billions of pounds - which could be financed by the issuing of new bonds or gilts. However, much of the money may be retrieved if the assets can eventually be sold on or the debts are repaid.

The Government may also take further stakes in the banks and therefore profit if bank share prices rise.

It is hoped the "bad bank" will expose the taxpayer to less of a risk than full-scale nationalisation of other banks which it was feared may also become necessary if the current financial turmoil continues.

Treasury officials are understood to have been studying a "bad bank" scheme introduced in Sweden in the early 1990s which may provide a blueprint.

The Swedish Government set up a series of state-owned financial vehicles that bought bad banking debts.

The equivalent of about four percent of the country's entire economy was spent on buying up the toxic bank debts. Specialists were employed by the Government to run the new bad banks and sell-off or run down the bad debts.

After many of the loans were successfully restructured, renegotiated and then sold on again, the Swedish Government lost about half of its original investment, about eight billion dollars.

Paul Volcker, the former head of the Federal Reserve appointed by Barack Obama to help advise on the financial crisis, said yesterday that the banking system was still a "mess".