Jeremy Warner's Outlook: Banks made to pay a heavy price for taxpayers' largesse

Back from the abyss? For the moment at least, the UK Government's decision to attack the banking crisis with hundreds of billions of taxpayers' money is not only winning plaudits but it seems to be actually working. To succeed, it was always crucial that Europe and the US followed suit with their own recapitalisations and guarantees.

This they seem to be doing. Amazingly, Gordon Brown and his Chancellor, Alistair Darling – until a week ago widely condemned for dithering ineptitude – find themselves portrayed as financial wizards whose bold and creative response to the crisis has become the model for all others. As if in applause, stock markets around the world are again surging.

Mr Brown should enjoy his moment in the sun while he can. Whether the recapitalisations announced yesterday succeed in restoring stability to the banking system or not, they certainly won't prevent a painful recession. The Prime Minister will eventually be judged at the ballot box for his ability to get the economy going again, not his boldness in bailing out bankers.

Nonetheless, it is hard not to feel a degree of admiration for the sheer can-do determination with which the Government, regulators and supervisors have moved to stem the crisis. Even deal-hardened bankers confess to being awed by the speed and effectiveness with which the Treasury has gripped the situation. Normally, they would regard anything to do with the Government as irrelevant and ineffective. Now they seem almost lost in admiration.

The Government's ability to act stems from its access to the capital markets. These are closed to the banking system, but still open to taxpayers, who are in essence merely replacing the bank funding that used to be provided by wholesale markets.

Yet it is the decision to use this access to funding as a way of forcing the banks into dramatic recapitalisation which is the really impressive bit. The Government has chosen to adopt a violently aggressive approach to restoring stability, forcing a degree of recapitalisation which bankers think way beyond that necessary for prudential purposes.

By acting in this way, the Government hopes to make UK banks bullet-proof against all that can be thrown at them, and certainly capable of surviving the rise in bad-debt experience among businesses and householders that would accompany a bad recession. From this extreme approach on capital has stemmed a number of momentous consequences.

RBS has been forced to agree a potential dilution by the Government of its shareholders down to just 40 per cent of the company. The equivalent number for HBOS is even worse at 25 per cent. This in turn has forced HBOS to renegotiate its all-share merger with Lloyds TSB on less favourable terms.

Counting the already nationalised Northern Rock, the Government thereby ends up effectively in control of three of Britain's largest lenders. Each one, ministers insist, will be run independently on a commercial basis so as to maximise shareholder value to the Government.

Even so, the competition issues posed by hegemony on such a scale, already bad enough as a result of the Lloyds TSB/HBOS merger, are extreme. It's as if the Government was suddenly in control of Britain's big four supermarket groups. You can imagine what the imperative of maximising returns across all four would do to prices at the tills.

As for the idea that these are only "temporary" share stakes which the Government will be able to sell back to markets within a couple of years, pigs might fly.

Banks are engaged in a vicious process of "de-risking" and "deleveraging" which will not be greatly mitigated by the agreed recapitalisations. Until that process is complete, and it is fully understood what sort of returns banks are capable of, or will be allowed, there's little chance of offloading these shareholdings. These adjustments may take many years.

As for Barclays, for the time being it has managed to escape the back-door nationalisation faced by others. The size of recapitalisation demanded of it by the Financial Services Authority is less extreme than RBS and HBOS, to reflect the fact that it is better funded. Barclays has also managed to convince regulators it should be all-owed to raise the new capital privately.

This is either brave or stupid. It is indicative of the enormity of the crisis that even policy action as momentous as that announced yesterday may not be sufficient. Hats off to John Varley, the Barclays chief executive, and his chairman, Marcus Agius, if they have gambled correctly. The step change in approach we saw in Europe and the US yesterday suggests they might have done. For now at least, Bob Diamond's £20m bonus, which would have been toast if they had asked the Government for money, is safe. Yet if they have read it wrongly, then the terms for bailing them out at a later stage are going to be penal in the extreme. We'll see.

Ignominious end for the man called 'Fred the shred'

Veritas vanitatum, omnis vanitas. All is vanity. There can be few more striking examples of hubris being overtaken by nemesis than the rise and fall of Sir Fred Goodwin, the soon to be ex-chief executive of Royal Bank of Scotland (RBS).

The grammar school boy from Paisley who lists restoring vintage cars among his hobbies is not about to be reduced to penury or imprisonment – for starters, there's a £580,000-a-year pension to scrape by on. Yet to be bundled out the door without a pay-off or gold watch after being forced into a massively dilutive Government bailout is a profoundly humbling end and therefore bitter pill for an executive once routinely described as the most talented banker of his generation.

Sir Fred was relatively collected and resigned to his fate during his conference call yesterday, but once the dust has settled and the enormity of his fall from grace begins to sink in, a grimly dispiriting down awaits. A star-studded career has ended in abject failure. There's unlikely to be much solace in the period of "rest and reflection" he looks forward to.

This was a man who enjoyed all the trappings of banking power – from private jet to the grandeur of his spanking new head office complex outside Edinburgh, aspects of whose design he personally oversaw. Pomp has been replaced by humiliation, and the companionship of bankers, business tycoons and heads of state with the oily innards of the cars he likes to dismantle and put back together again.

There was not a word of contrition from Sir Fred as he made his exit – only "sadness" that he'll be leaving so many friends behind, and understanding that the capital raising required a new leader to articulate and execute a new strategy for the bank going forward. Rather, Sir Fred depicted himself as some kind of hapless victim of forces beyond his control. Up to a point, this is perfectly correct. A year ago, nobody dreamt the banking crisis would end in the near nationalisation of three of Britain's leading banks. Both capital and funding had been judged by regulators to be adequate, and though Sir Fred had been roundly criticised in the City for "empire building", he was also considered to be a man who delivered the goods.

Yet the scale of the dilution RBS is being obliged to accept is indicative of a bank which is in much worse shape than its direct peers. For some reason, prudence, that greatest of banking virtues, managed to escape Sir Fred. Instead, he pursued a high-risk strategy of growth that gave him a funding profile which became demonstrably less safe than others. By the end, RBS's need for short-term liquidity was so great that it was in no position to resist the Financial Services Authority's demands for a massive recapitalisation. Sir Fred had backed himself into a corner.

Both in leveraged deals and structured products, RBS had drifted a long way from its roots in bog standard commercial and retail banking, and then, to cap it all, in a display of corporate virility, Sir Fred relentlessly pursued the ABN Amro deal, even though everyone knew it was a top-of-the-market transaction. Sir Fred refuses to accept ABN had much to do with the position RBS now finds itself in, but how the positions might now be reversed if he had left ABN to Barclays. Sir Fred's hubris was John Varley's lucky escape.

I feel sorrier for Andy Hornby, the HBOS chief executive, who is also falling on his sword. He's a decent bloke who largely inherited the situation HBOS found itself in from Sir James Crosby, his predecessor and the man who ironically is heading up the Government's review of the mortgage market. Virtually all Mr Hornby's personal wealth has been wiped out by the meltdown in the HBOS share price. Still, at the age of 43, he's got plenty of time to redeem himself. Sir Fred may find it a good deal tougher. Plainly he should have accepted all those job offers that rained in from international banks when he was at his zenith.

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