The US government has announced a $700 billion rescue package that will see taxpayers' money used to buy-up 'bad debt' from the banks.
The scheme, which is currently being considered by Congress, will allow the government to buy-up the debt held by banks and reduce their exposure to these assets. However, the plan has sparked more turmoil on global stockmarkets, with share prices in Asia and Europe falling sharply.
This is because there is a still a question mark over how the rescue plan can be applied and how acquiring the bad debt could put taxpayers' money at risk.
Simon Denham, managing director of Capital Spreads, says it is unclear whether the bailout will work or not.
"If it does work we can either look forward to several years of very low growth and falling margins (possibly deflation) or, if liquidity does return to the banking sector quickly, the possibility that a $700 billion injection (from the US alone) sparks a huge money supply spike, and thus a big inflationary bubble," he warns. "Neither of these is exactly good for equities.
Meanwhile, Wall Street's Morgan Stanley and Goldman Sachs have been forced to change their status to holding banks and accept customers' deposits in a bid to maintain their independence.
The two firms, the last independent investment banks on Wall Street, have spent the last week fighting for survival following recent heavy falls in their share prices and the bankruptcy of rival Lehman Brothers.
Their trouble stems from investors being nervous about financial institutions that have exposure to risky sub-prime mortgages and pulling out their money. This has made it difficult for them to raise capital to shore up their balance sheets and have forced the banks to look elsewhere for funding.
Now that the two banks have changed their status they have access to the Federal Reserve's financial support.