Oct. 13 (Bloomberg) -- U.K. Prime Minister Gordon Brown's government is set to buy majority stakes in Royal Bank of Scotland Group Plc and HBOS Plc to contain the worst financial crisis since the 1930s, two people familiar with the matter said.

The government will also name representatives to the boards of RBS, Britain's fourth-biggest bank, and HBOS, its largest mortgage lender, and will work closely with the management on issues including executive pay, the people said. They spoke on condition of anonymity because the information is confidential.

The crisis that began in the U.S. and toppled Lehman Brothers Holdings Inc. has spread worldwide and brought RBS, once Britain's second-biggest lender by market value, to the brink of state ownership. Brown acted to prop up the two Edinburgh-based institutions after the biggest one-day drop in the U.K 's benchmark FTSE-100 stock index since 1987.

``The most precious asset of all is confidence and it's something that's been lost in recent weeks,'' Brown told reporters in Paris yesterday. It is ``something that we will restore through coordinated intervention.''

The takeovers begin the implementation of a 50 billion- pound ($85 billion) rescue package announced by Brown last week for British banks struggling under seized-up credit markets and a plunge in home prices. In the past year, the government nationalized lenders Northern Rock Plc and Bradford & Bingley Plc and brokered the sale of HBOS to Lloyds TSB Group Plc.

`On Track'

HBOS spokesman Shane O'Riordain said yesterday that deal is still ``on track.'' He and RBS spokesman Linda Harper declined to comment on the prospect of the government controlling stakes.

Chancellor of the Exchequer Alistair Darling cut short a trip to Washington to enact the bank-recapitalization program. City Minister Paul Myners, a former chairman of Marks & Spencer Group Plc, led talks over the weekend between the government and the banks. Discussions were ongoing to put finishing touches on the package for an announcement before markets open today.

RBS, which owns the National Westminster Bank, had 2,276 branches in 2006, more than any other U.K. bank group, and 22 percent of the total, according to the British Bankers' Association. HBOS was the fifth biggest, with 1,002 branches.

In contrast, Northern Rock and Bradford & Bingley together had 261 branches in 2006, 2 percent of the total in the U.K.

Paris Meeting

Brown met European leaders in Paris yesterday to show joint resolve in stemming the global crisis. The FTSE dropped 8.9 percent on Oct. 10, the most since October 1987. The Dow Jones Stoxx 600 Index had its worst week on record. The International Monetary Fund predicted a ``major downturn'' in the global economy.

Brown said yesterday that negotiations with individual banks weren't finished yet. ``These are discussions with individual banks, not some blanket proposal,'' he said.

As part of the negotiations, ``we will discuss with them executive remuneration, dividend payments and the resumption of lending that's necessary for small businesses and of course for homeowners and we will have individual discussions with the individual banks,'' Brown said.

The U.K. Treasury will outline details of a plan today to guarantee about 250 billion pounds of interbank loans though an insurance system.

Brown yesterday stuck to the government's estimate last week of the size of the planned state capital injection.

``We estimate that the sums required are in the order of 50 billion'' pounds, Brown said. The rescue will be ``a major contribution to capitalizing the banking system so that it has the strength to deal with the problems ahead.''

RBS Sale

RBS will seek to raise 20 billion pounds, including 15 billion pounds of ordinary shares, in a deal which will bring the government's stake above 50 percent, one of the people said.

Royal Bank of Scotland Chief Executive Officer Fred Goodwin plans to step down, two people familiar with the matter said yesterday.

The total needed under the government plan for four banks seeking funds may be about 37 billion pounds, the Financial Times said on its Web site yesterday.

The Sunday Times said yesterday the scale of the bank fundraising plan may lead to a trading suspension on the London Stock Exchange. An LSE spokesman said yesterday that the market will open as usual, and decisions on whether to suspend trading in individual bank shares is a matter for the Financial Services Authority. An FSA official declined to comment.

``In extremis, you must never rule things out, but I hope that wouldn't be necessary,'' opposition Conservative Party leader David Cameron said on Sky News when asked about the possibility of market suspensions around the world. ``The problem with doing that is that people find ways round trading or find other ways to trade. It also sends a terrible signal.''

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net; Craig Stirling in London at cstirling1@bloomberg.net.

Last Updated: October 12, 2008 19:27 EDT