How the nationalisation of the banks was hatched

Two officials who were spurned by Gordon Brown were among the secret architects of yesterday's unprecedented scheme to inject £37bn of taxpayers' money into three banks, which is winning the Prime Minister acclaim as a trailblazer for the world. The two men are Sir John Gieve, a deputy governor of the Bank of England who had a chequered history as a civil servant, and Tom Scholar, who lasted only seven months as Mr Brown's chief of staff after he became Prime Minister.

The Government's official line is that the three key players who put together the historic deal before it was approved by Mr Brown were the Chancellor of the Exchequer, Alistair Darling, the Governor of the Bank of England, Mervyn King, and the chairman of the Financial Services Authority, Lord (Adair) Turner.

However, senior Treasury sources say the real architects were senior officials at the Treasury, Bank and the FSA who have been working round the clock seven days a week since the financial crisis spiralled out of control after the collapse of Lehman Brothers on 15 September.

Sir John is an unlikely beneficiary of Treasury plaudits. He is quitting his five-year post at the Bank next spring, two years early, after stinging criticism from MPs that he was "asleep at the back of the shop" during the collapse of Northern Rock last year. A long-serving Treasury official, Mr Brown declined to appoint him his permanent secretary when he was Chancellor. He also lost out to Sir Gus O'Donnell in the race to become Cabinet Secretary and head of the Civil Service.

He landed the top job at the Home Office but left a poor legacy when he was dispatched to the Bank in 2006. Labour politicians described the Home Office as "dysfunctional" and "not fit for purpose" and he suffered embarrassment when the National Audit Office refused to sign off his department's accounts because of failures in "project management".

Mr Scholar was Mr Brown's principle private secretary at the Treasury and one of several close aides who transferred with him to 10 Downing Street in June last year. However, he faced criticism that he was "out of his depth" and presided over a "dysfunctional" No 10 machine. Allies insist he always intended to return to the Treasury after easing in the Blair-Brown transition. in January, he became managing director, international and finance at the Treasury, with responsibility for domestic and global financial markets and institutions.

Wearing that hat, he played a critical role in monitoring the health of British banks. The Treasury, weakened when staff moved over with Mr Brown, was caught cold by the collapse of Northern Rock last autumn. The task of making sure it could never happen again fell to Mr Scholar and Nick Macpherson, the Treasury's permanent secretary, seen as Mr Brown's "man for all seasons" when he was Chancellor.

The pair are credited by Treasury insiders as the original architects of what yesterday became the biggest nationalisation in history. For months, the two officials operated the equivalent of a life support machine plugged into Britain's banks. "They were watching the banks like hawks," said a Treasury official. This meant the Treasury was on red alert, not asleep, when Bradford & Bingley got into trouble and enabled the Government to oil the wheels of the planned merger between struggling HBOS and Lloyds TSB.

The nationalisation of Northern Rock also removed another obstacle during the crisis of recent weeks. Months before it happened, Mr Darling had become convinced there was no alternative. The stumbling block was Mr Brown, who feared that nationalisation would send a signal to voters that Old Labour was back and ordered a prolonged search for a private buyer. Even when he bowed to the inevitable, the Prime Minister could not bring himself to use the "N-word", so the policy was described as "temporary public ownership".

Mr Brown still needed some convincing last week that the unprecedented state bailout of the banks was the only option. But a precedent had been set on Northern Rock, so it was easier to swallow.

The three-pronged rescue plan, announced last Wednesday, took shape soon after the US Government sent shockwaves through the financial system by refusing to save Lehman Brothers. "We realised that we couldn't let it happen here ... [that] the contagion could spread throughout the system if one bank went under," one Treasury source said yesterday. "We didn't set out with the intention of taking a stake in the banks. But it was pretty clear early on that that would need to be part of the package."

Key players involved in the tense negotiations with the banks included John Kingman, the Treasury's second permanent secretary; Paul Myners, appointed Treasury minister responsible for the City 11 days ago in Mr Brown's reshuffle; Baroness (Shriti) Vadera, a minister at the Department for Business and the Cabinet Office, a trusted Brown ally who kept the Prime Minister informed about the talks; Jeremy Heywood, the Downing Street permanent secretary; and Hector Sants, the FSA's chief executive.

Although the deal to make £50bn available to the banks was agreed last week, the Government needed to push the banks – some of whom were reluctant to bite the bullet – over the finishing line in a second marathon session of late-night talks lasting until 10pm on Sunday.

The Treasury and Bank have had tense relations in recent months. Ministers believe the Bank dragged its feet on interest rate cuts until last week's half a percentage point reduction, while Bank officials keep their cards very close to their chest because they think the Treasury is so leaky. Yet they managed to work together well enough to stitch together the deal. "it was the public sector working at its best," a source close to Mr Darling said yesterday. Whether taxpayers agree in a few years remains to be seen.

Daring duo

*SiR JOHN GiEVE

Aged 58. Long-serving Treasury official who missed out on permanent secretary job. Landed top civil post at Home Office but came under fire because of its accounts and the failure to deport 1,000 foreign prisoners. Appointed a deputy governor of the Bank of England but faced criticism for being on holiday when the Northern Rock crisis broke, although he also attended a family funeral. Will stand down two years early. Allies say he has been in the wrong place at the wrong time – and was finally in the right place for bank rescue deal.

*TOM SCHOLAR

Aged 39. Son of Sir Michael Scholar, retired Whitehall mandarin who was permanent secretary at DTI. High-flying Treasury official who also did stint at international Monetary Fund and World Bank. Won spurs with Gordon Brown while he was Chancellor, becoming principal private secretary. Played key role in transition from Blair to Brown in 2007, becoming Downing Street chief-of-staff. Had unhappy time and took some of the flak during criticism of Brown's Number 10 machine. Returned to Treasury in January.

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