Andrew Grice: Fear, loathing and leaks at the top

Tense relations between No 10, No 11 and the Bank of England ensured yesterday's crisis was a drama, too
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The Independent Online

When Alistair Darling opened a meeting with the bosses of eight British banks at 6pm on Monday, he said it was "irritating" that the option of the Government taking a stake in ailing banks had already become public knowledge. He urged the 16 people sitting around the table in his Treasury office to keep their talks private.

Perhaps the Chancellor should not have tempted fate. Yesterday his irritation turned to anger as news of the highly sensitive meeting leaked out, and shares in banks plummeted amid speculation of a government injection of up to £50bn. HBOS dropped 42 per cent, Royal Bank of Scotland 39 per cent and Lloyds TSB 13 per cent, while Barclays was down 9 per cent.

Ministers suspect an operation by the banks to bounce the Government into an early announcement. "It seems some bankers were falling over themselves to get to the media first," said one Westminster insider. "The result was mayhem in the markets. Whoever did it shot themselves in both feet."

The dismay in the Treasury and Downing Street is all the more acute because Mr Darling was going to announce a rescue package by the end of this week. The seeming delay was because he just wanted to get it right, ministers insist – and there was no need for the banks to force his hand.

After a rollercoaster ride yesterday the banks will get their way today, when a recapitalisation plan is expected to be announced before the markets open. The details were being finalised last night at an emergency meeting at 10 Downing Street involving Gordon Brown, Mr Darling and Mervyn King, Governor of the Bank of England. Although the three men handling the economic crisis will put on a united front, there is growing tension between them.

Some ministers suspect that Mr King, who supports a recapitalisation scheme, has also tried to bounce the Government into action. Mr King met David Cameron, the Tory leader, and George Osborne, the shadow Chancellor, at the Bank last Friday. On Sunday, Mr Osborne announced the Tories' conversion to a recapitalisation plan for struggling banks in a discreet U-turn when he appeared on the BBC's Andrew Marr Show. On Monday, Mr Cameron called for "drastic capital measures" to help the banks.

The bank bailout being drawn up in great secrecy at the Treasury was not mentioned when Mr Osborne was briefed by Mr Darling and Treasury officials last week. But the Tories deny Labour claims that they were tipped off by Mr King and sought to get the credit by calling for recapitalisation before the Government announced it. They insist they would never leak details of a private meeting with the Governor, and that they have been discussing the banks' capital for a few weeks.

In January the Governor was reappointed for a second five-year term, starting from June. But there are other signs of tension between him and the Government. Ministers are frustrated that interest rates remain at 5 per cent and believe the Bank has been slow to act to stave off recession.

In recent days, Mr Darling has been putting discreet pressure on the Monetary Policy Committee to cut rates at its monthly meeting tomorrow. The Chancellor insisted that the Bank was also required "to look at the Government's wider economic objective". But Mr Darling has rebuffed a call by Vince Cable, the Liberal Democrats' respected Treasury spokesman, for the Bank's remit to be rewritten to include growth as well as inflation.

Treasury sources insist Mr Darling and Mr King, who are now meeting about once every two days, are getting along fine. "They might have robust discussions but the idea that they are at loggerheads is ridiculous," said one insider. However, another source of friction between the three men in the eye of the economic storm is Mr Brown's determination for the state to underwrite mortgages to kickstart the housing market. Mr King has made clear he is vehemently opposed to the idea and Mr Darling is in danger of being caught in the crossfire.

To complicate matters, there have been tensions between Mr Brown and Mr Darling, a long-standing ally. The Prime Minister's autumn fightback was derailed by the Chancellor's off-message comment in a newspaper interview that Britain faced arguably its worse economic crisis for 60 years. Some advisers urged Mr Brown to sack Mr Darling, warning that the Prime Minister would not regain the public's trust on the economy unless he installed a new Chancellor. But Mr Darling survived in last Friday's reshuffle – partly because it was not the time to unsettle the markets by moving him. Relations between the Prime Minister and Chancellor are said to have since improved. Mr Darling is said to be relaxed about the decision to set up a National Economic Council or "war cabinet", dismissing the idea that it dilutes the Treasury's power.

Mr Darling's hour-long meeting with the bankers over tea and biscuits on Monday evening was amicable enough. One insider said the recapitalisation plan was "the elephant in the room" and was not discussed in any detail, even though the cast list also included Mr King, Adair Turner, chairman of the Financial Services Authority, and two senior Treasury officials, Nick Macpherson and Tom Scholar, who have been burning the midnight oil for months to try to head off a banking crisis and avoid a repeat of the Northern Rock disaster.

Mr Darling told the meeting that it was more important to get his proposals right – and ensure they were properly "road tested first"– rather than to rush them out prematurely. He believes that early disclosure of the $700bn bailout in the United States contributed to the crisis on Wall Street.

It is believed that the injection of further liquidity into the markets was discussed. But yesterday the Treasury and banks both denied that the eight bankers went cap in hand for a government bailout. Government sources claimed a garbled version of the not-so-secret meeting reached the BBC's business editor Robert Peston, who has led the field on landmark stories such as the collapse of Northern Rock and Bradford & Bingley. On his blog at 7am yesterday, Peston reported that the chief executives of Lloyds TSB, Royal Bank of Scotland and Barclays – Eric Daniels, Sir Fred Goodwin and John Varley – had urged the Chancellor to announce his rescue plan sooner rather than later as they were being weakened significantly by investors' perception that they were short of capital.

Peston quoted one banker as saying that this "Gang of Three" told Mr Darling to "pull his finger out and finalise whatever it is he's eventually prepared to offer on taxpayers' behalf".

Last night, the plot thickened. While the Government accused the banks of loose talk about the meeting, there were counter-claims that Treasury officials briefed newspapers about a rescue plan after a conference call involving Mr Darling, Mr King, Lord Turner and other bank bosses at 7.30pm on Monday. Treasury officials dismissed that as "a lie", saying that no such conference call or briefings took place, and accusing banks who allegedly spoke to Peston of covering their tracks by playing a "blame game".

The Government's determination to "get it right" led to renewed charges of dithering, just when Mr Brown and Mr Darling were hoping to appear the complete opposite. But the banks' shareholders may have paid a heavy price for the frustration and impatience of their bosses.

Feeling the crunch: The view from Birmingham

Jill Sharpe

She was made redundant from Taylor Wimpey, a house building company, in August after five years. Being aged 53 has made it more difficult to find work, she says, but she has now found part-time employment.

"I lost a decent salary and only just found part-time work last week at Solihull College at only £7.50 an hour," she said. "But I would rather be earning than claiming Job Seekers Allowance."

A large mortgage and increasing council tax, utility bills and food bills means she now has to shop differently. "Now my husband and I cut back on the amount of meat we buy because it has got more expensive and we shop later at night when the supermarkets have more deals."

The couple have put on hold plans to invest in property abroad.

Rob Simpson

Sales at Rob Simpson's financial advice company have plummeted by 90 per cent in the past 12 months. The slowdown has forced him to make a mortgage adviser redundant and reduce advertising but he has retained his salary of £80,000.

"Since the credit crunch, we have received a growing number of inquiries from people worried about their financial future. This increase is probably people doing the rounds to get a range of financial advice," Mr Simpson said yesterday.

Clients are being forced to make cuts in travel, food and petrol, he says.

"Clients who have invested in cash ISAs and opted for price over value have been affected badly by the credit crunch. Some of our clients have put a block on withdrawals from online accounts."

David Kuczora

The PR executive was forced to leave his rented accommodation in the Jewellery Quarter of Birmingham because quarterly electricity bills reached as high as £1,000 in a two-bedroom flat. The 23-year-old, who lives in central Birmingham, had planned to buy property as soon as possible but the credit crunch means he has had to rethink his plans.

"My priority used to be to get on the property ladder, but I've had to put that on hold for the next few years – that would be a sound investment but for a first-time buyer it's impossible."

Mr Kuczora, who earns £20,000 a year, has also cut back on going out. "I would also have taken a holiday this year but haven't been able to. I used to go out once or twice a week but now it's closer to once or twice a month."

Peter Maskell

As the provider of private health plans for 400,000 people, Peter Maskell fears that, as the credit crunch bites, customers will drop their policies, which cost up to £30 a month. But he has a more pressing problem: his company's investments of £20m have slumped.

Mr Maskell is head of BHSF, a not-for-profit company that helps workers afford medical care. The fund covers top-up care not freely or readily provided by the NHS, such as fees for opticians, dentists, and consultants.

"We are not affected directly by the credit crunch because we are not a borrower," Mr Maskell said.

"But [it] will, we feel, in due course impact on policy holders because they are middle-income working people... and if the squeeze hits hard they will review discretionary spending, of which medical care is one."

David Moorhouse

Drinkers at The Wellington near the centre of Birmingham have not cut their consumption of real ale. Indeed, trade has picked up over the past year, David Moorhouse, the manager, says. The pub is running against the trend of the pub industry nationally, which is experiencing record closures.

"We are doing very well. We specialise in real ales and a good atmosphere. Businesses that are doing quality food and drink are doing well," he said. "The pubs that are struggling sell just lager."

The credit crunch, though, is a hot topic among regulars, who include office workers at lunchtime and a more varied crowd in the evening. "People are getting a bit worried about the price of beer and the price of petrol."

Jill Hitchman

Despite a slowdown in spending at some attractions, there has been no fall-off yet in visitors to Dudley Zoo in the West Midlands. "The figures are up, they are better than we thought they would be," said Jill Hitchman, a spokeswoman for the attraction, which has 167 endangered species, including Asiatic lions, Bornean orang-utans and west African dwarf crocodiles.

"We think it's basically because people are not going away so much for holidays or weekend breaks but they are still coming out for day trips," she added. "There are some pretty awful stories about the credit crunch in the local papers, but we are doing OK for now."

The zoo has 125,000 visitors a year.