Second British bank bailed out

WASHINGTON (AP) — The day before President-elect Barack Obama takes office, the escalating troubles facing major banks around the world couldn’t be clearer.

On Monday, the British government swooped in to boost its stake in troubled Royal Bank of Scotland to almost 70 percent and offered to insure banks against large-scale losses on risky assets in exchange for binding agreements to lend out more money.

It was the second major British bank bailout in three months. Shares of ailing RBS, parent of Providence, R.I.-based Citizens Financial Group., lost two-thirds of their value in Monday’s trading. Shares of other European banks plunged as investors worried that one or more banks could be nationalized after RBS said last year’s losses could reach $41.3 billion — the biggest ever for a British corporation.

Officials on both sides of the Atlantic have failed to contain the most severe credit crisis in decades, which has ravaged banks in places as diverse as Ireland, Iceland and Switzerland, along with the U.S. and Britain.

Now top officials in London, Washington and Brussels are scrambling to figure out how to stop the bleeding. They are trying to find the best way to prod banks into lending out more money, struggling for a solution 18 months after the most severe credit crisis in decades sent investors reeling.

U.S. officials are talking about establishing a new government-backed bank to remove bad loans and other toxic assets from banks’ balance sheets, Treasury Secretary Henry Paulson said last week. In theory, with those assets gone, banks would be freer to make more loans.

Still, figuring out a successful strategy for how to unclog the credit markets is a vexing challenge for Obama when he takes office today. Obama’s top economic adviser, Larry Summers, said on CBS’ “Face the Nation” Sunday that under the new administration, “the focus isn’t going to be on the needs of banks. It’s going to be on the needs of the economy for credit.”

Obama will have a “strong message for the bankers,” adviser David Axelrod said Sunday on ABC’s “This Week.” “We want to see credit flowing again. We don’t want them to sit on any money that they get from taxpayers.”

While the British government moves closer to a full takeover of that country’s banking system, Americans are more leery of such intervention, and that’s likely to continue even with Democrats in charge of the White House and Capitol Hill, analysts say.