The results of the Federal Reserve's "stress tests" on 19 of the country's largest banks were among Washington's worst-kept secrets, with abundant leaks about the multibillion-dollar capital shortages at Bank of America and other giants. So it came as little surprise Thursday afternoon when the Fed's Board of Governors announced that only nine of the banks had come through the tests with no need for additional money.
The other 10 will be required to raise nearly $75 billion from either private investors or the federal government. That amount was less than some observers had feared, and Treasury Secretary Timothy F. Geithner called the results "reassuring.” But our reaction is just the opposite. We're dismayed by the prospect of the government taking an even bigger stake in the banking industry. And we're still waiting for some market-based mechanisms to deter banks from becoming so systemically important that the government is compellIt's probably misleading to describe the Fed's assessment as a test -- there was no chance of failure. In fact, the whole point was to tell financial markets two ostensibly encouraging things: that each of the 19 banks could survive a worse downturn than most economists expect (although some would need more capital to do so) and that the government stood ready to provide this capital if private investors would not. In other words, the underlying purpose of the exercise was to show that the government would not let any of the companies be scuttled by the recession, tight credit markets or their own bad bets.
That has been the Obama administration's consistent mantra, and it mirrors the approach taken by the Bush administration after the government failed to halt Lehman Bros.' precipitous demise. Lending all but ceased when Lehman defaulted, and there's no telling how much the recession would be prolonged if another major bankruptcy froze lending again. But such "too big to fail" treatment distorts the markets in a number of important and noxious ways. Companies whose solvency is implicitly guaranteed by the government don't have to pay as much for the money they borrow to fund their operations, giving them a competitive advantage, and they're more cavalier about risk. So they have a strong incentive to become so complex and interconnected that the government will be compelled to bail them out if they stumble again.
Geithner has announced plans to develop new rules for companies that threaten the entire financial system, and they're warranted. But it's just as important to thin the ranks of such companies. There are a number of promising ways to do so, such as imposing larger and more costly capital requirements on the financial industry giants, mandating that extra reserves be available during tough times, discouraging mergers that would create systemic risk and requiring that some of a bank's debt be convertible to stock in the event it gets into financial trouble. The system also needs more transparency so investors and regulators can see just how intertwined these companies are, and with whom. Such steps would not only reduce the potential for another collapse but would take taxpayers out of the role of the big banks' guardian angels.
Friday, May 8, 2009
2 Banks Cited in Stress Tests Find Ready Investors
Finally, it was a moment for thA day after the bank stress tests were released, two major institutions, Wells Fargo and Morgan Stanley, handily raised billions of dollars in the capital markets on Friday to satisfy new federal demands for more capital. A third, Bank of America, hastily laid out plans to sell billions of dollars in new stock.
The speed and ease with which the banks swung into action, combined with a surge in financial shares, was hailed as a sign that confidence was returning to the financial industry. The sales seemed to put to rest questions about whether big banks would be able to lure private investors, rather than have to turn to the government again.
While the results of the tests on 19 major banks, released by the administration on Thursday, were far more positive than many had expected, they nevertheless created an immediate urgency for 10 banks to raise new capital. Federal regulators ordered them to raise a combined $75 billion to buffer their potential losses.
With some off to such a rapid start — Goldman Sachs raised $5 billion before the stress test results were announced — the race is now on among the most robust to repay the government money they received last fall and so escape from government control.
But while the mood was generally buoyant among these leaders, others still have to spell out how exactly they will raise money — or accept further federal aid.
GMAC, the onetime finance arm of General Motors, was deemed by the regulators to need an extra $11.5 billion in capital. On Friday, Treasury Secretary Timothy F. Geithner indicated that this was likely to have to come from the government and that the administration would stand behind GMAC.
The stress tests estimated how much each bank would lose if the economic downturn proved even deeper than currently expected: under the worst-case assumptions, with an unemployment rate of 10.3 percent, the losses by the 19 banks could total $600 billion.
On Friday, economic data showed the American economy lost a further 539,000 jobs in April and the unemployment rate leapt to 8.9 percent — a sign that the United States might already be heading toward the worst case, although the job losses were less than Wall Street expected.
Despite the sobering outlook, the mood on Wall Street was generally upbeat after the rosier-than-expected assessment of the biggest banks. The stock market climbed, with the Standard & Poor’s 500-stock index gaining 2.4 percent on Friday.
“If there were holes in this, the market would have seen it,” said Stuart Plesser, an analyst at Standard & Poor’s.
In the capital-raising exercises, Wells Fargo sold $7.5 billion of common stock; regulators ruled it needed to fill a capital hole of $13.7 billion.
Morgan Stanley raised $8 billion by selling $4 billion in common stock and $4 billion in bonds. It increased the total amount it raised compared with its initial plans by $3 billion because of strong investor demand, it said. Regulators had declared that the investment bank needed to raise money to fill a $1.8 billion hole.
In an important signal of its future intentions, Morgan Stanley raised its debt without the guarantee of the Federal Deposit Insurance Corporation — a show of strength that is one of the government’s requirements for paying back money from the Troubled Asset Relief Program. JPMorgan Chase and Goldman Sachs, which are also eager to repay TARP funds, have recently gone through similar debt-raising exercises.
Bank of America, judged one of the weaker institutions, registered its intention to sell 1.25 billion common shares over the coming weeks. At Friday’s closing stock price, that amount of stock would be valued at nearly $18 billion, which means the bank might not have to turn to another possible means of raising money like converting preferred shares into common equity.
Citigroup, which for many has come to stand for the problems plaguing the financial industry, was told by regulators that it must raise $5.5 billion, in addition to its recent efforts to raise capital by selling businesses and converting to common stock just over half of the $45 billion of its preferred stock held by the government.
On Friday, Vikram S. Pandit, Citi’s chief executive, held a town hall meeting at Citigroup’s investment banking offices in New York, where he told staff members the test results had validated his strategy of righting the company.
But Meredith A. Whitney, a prominent banking analyst, said the results underscored the difficulties banks faced. Many are likely to experience several more quarters of poor financial results.
“The revenue environment is very different,” Ms. Whitney said. Given the recession, banks are not going to make much money from credit cards or originating mortgages, she said. And even if all the banks secured more capital, they still might not lend, holding back the economy.
Some analysts are now saying that some of the assumptions even in the worst-case situation may turn out to be too optimistic.
Given this, attention is now turning to the thousands of smaller banks elsewhere in the country and whether they will be able to survive any deterioration in economic conditions. Mr. Plesser said that these banks would face extra capital needs and that there might be consolidation among them.
“It’s not the same urgency as the big 19, but I think we are going to see needs for additional capital, and one way to get that is to be swallowed up,” he said.
e banks to de-stress
The speed and ease with which the banks swung into action, combined with a surge in financial shares, was hailed as a sign that confidence was returning to the financial industry. The sales seemed to put to rest questions about whether big banks would be able to lure private investors, rather than have to turn to the government again.
While the results of the tests on 19 major banks, released by the administration on Thursday, were far more positive than many had expected, they nevertheless created an immediate urgency for 10 banks to raise new capital. Federal regulators ordered them to raise a combined $75 billion to buffer their potential losses.
With some off to such a rapid start — Goldman Sachs raised $5 billion before the stress test results were announced — the race is now on among the most robust to repay the government money they received last fall and so escape from government control.
But while the mood was generally buoyant among these leaders, others still have to spell out how exactly they will raise money — or accept further federal aid.
GMAC, the onetime finance arm of General Motors, was deemed by the regulators to need an extra $11.5 billion in capital. On Friday, Treasury Secretary Timothy F. Geithner indicated that this was likely to have to come from the government and that the administration would stand behind GMAC.
The stress tests estimated how much each bank would lose if the economic downturn proved even deeper than currently expected: under the worst-case assumptions, with an unemployment rate of 10.3 percent, the losses by the 19 banks could total $600 billion.
On Friday, economic data showed the American economy lost a further 539,000 jobs in April and the unemployment rate leapt to 8.9 percent — a sign that the United States might already be heading toward the worst case, although the job losses were less than Wall Street expected.
Despite the sobering outlook, the mood on Wall Street was generally upbeat after the rosier-than-expected assessment of the biggest banks. The stock market climbed, with the Standard & Poor’s 500-stock index gaining 2.4 percent on Friday.
“If there were holes in this, the market would have seen it,” said Stuart Plesser, an analyst at Standard & Poor’s.
In the capital-raising exercises, Wells Fargo sold $7.5 billion of common stock; regulators ruled it needed to fill a capital hole of $13.7 billion.
Morgan Stanley raised $8 billion by selling $4 billion in common stock and $4 billion in bonds. It increased the total amount it raised compared with its initial plans by $3 billion because of strong investor demand, it said. Regulators had declared that the investment bank needed to raise money to fill a $1.8 billion hole.
In an important signal of its future intentions, Morgan Stanley raised its debt without the guarantee of the Federal Deposit Insurance Corporation — a show of strength that is one of the government’s requirements for paying back money from the Troubled Asset Relief Program. JPMorgan Chase and Goldman Sachs, which are also eager to repay TARP funds, have recently gone through similar debt-raising exercises.
Bank of America, judged one of the weaker institutions, registered its intention to sell 1.25 billion common shares over the coming weeks. At Friday’s closing stock price, that amount of stock would be valued at nearly $18 billion, which means the bank might not have to turn to another possible means of raising money like converting preferred shares into common equity.
Citigroup, which for many has come to stand for the problems plaguing the financial industry, was told by regulators that it must raise $5.5 billion, in addition to its recent efforts to raise capital by selling businesses and converting to common stock just over half of the $45 billion of its preferred stock held by the government.
On Friday, Vikram S. Pandit, Citi’s chief executive, held a town hall meeting at Citigroup’s investment banking offices in New York, where he told staff members the test results had validated his strategy of righting the company.
But Meredith A. Whitney, a prominent banking analyst, said the results underscored the difficulties banks faced. Many are likely to experience several more quarters of poor financial results.
“The revenue environment is very different,” Ms. Whitney said. Given the recession, banks are not going to make much money from credit cards or originating mortgages, she said. And even if all the banks secured more capital, they still might not lend, holding back the economy.
Some analysts are now saying that some of the assumptions even in the worst-case situation may turn out to be too optimistic.
Given this, attention is now turning to the thousands of smaller banks elsewhere in the country and whether they will be able to survive any deterioration in economic conditions. Mr. Plesser said that these banks would face extra capital needs and that there might be consolidation among them.
“It’s not the same urgency as the big 19, but I think we are going to see needs for additional capital, and one way to get that is to be swallowed up,” he said.
e banks to de-stress
Fine Line for Obama on How to Convey Hope on Economy
The formula for restoring national confidence — part good policy, part good politics, part good luck — can be hard to find. It eluded Herbert Hoover after the Crash of ’29, Lyndon B. Johnson after the Tet offensive, Jimmy Carter after the energy shock and George W. Bush after Iraq turned from quick victory to bloody insurgency.
But President Obama has to try to do just that in a time of crisis. As the government announced this week that the nation’s largest banks had steered away from the precipice and that job losses were beginning to slow, Mr. Obama has carefully begun trying to mine any national leader’s most precious commodity in a crisis: optimism.
His past references to “glimmers of hope” were modestly upgraded at the White House on Friday, with his declaration — which he stumbled over, taking some of the assertiveness out of the line — that “the gears of our economic engine do appear to be slowly turning once again.”
His aides have been reaching tentatively for similar metaphors, then adding, as Mr. Obama quickly did, that real recovery is months, if not years, ahead.
Fear and aversion to risk have been part of the economy’s problems since the downturn began, and Mr. Obama’s aides have been highly attuned to the risks of a downward spiral of pessimism. In recent weeks, his economic team has begun flagging signs that the worst could be over, even as it carefully released the results of its bank examinations in a way that suggested a desire to reassure the financial markets and consumers. They got a bit of backing this week from the Federal Reserve chairman, Ben S. Bernanke, who forecast that the economy was likely to begin growing again by the end of the year.
“Remember this central paradox of financial crisis,” Lawrence H. Summers, Mr. Obama’s top economic adviser in the White House, said in mid-March, when every arrow was pointing down, “that while the problem was caused by excessive complacency and excessive optimism, what we need today is more optimism and more confidence.”
Mr. Obama’s own words on Friday signaled that he was worried about the perils of getting out ahead of the numbers. He spent more time talking about the letters he received from the desperate and out-of-work than he did dwelling on the decline in the pace at which Americans are losing their jobs. After all, 539,000 job losses in a single month is not exactly cause for celebration, even if it represents an improvement over the previous month.
“There’s a kind of artistry to this, isn’t there?” said Robert Dallek, the presidential historian best known for chronicling how Lyndon Johnson, the consummate politician, never led the public out of its view that everything was falling apart. “You don’t want to come out and say the recession is over. You want to do a version of Churchill’s line about how this isn’t the end, or the beginning of the end, but rather the end of the beginning.”
In Mr. Obama’s case, polls showed that a significant chunk of the public was predisposed to look for the bright side. The proportion of Americans who said the country was moving in the right direction rose to 41 percent in a New York Times/CBS News poll last month, from 15 percent in January just before his inauguration, even though by nearly every measure the economy was getting worse during that period. But there are plenty of skeptics out there, from economic historians who know that history is littered with false recoveries, to those who argue that Mr. Obama has engineered a turnaround at the cost of phenomenal deficits and a huge new role for the government in the private sector.
Robert Reich, President Bill Clinton’s secretary of labor and one of Mr. Obama’s critics on the left, was on television Friday arguing that to create this sense of optimism Mr. Obama’s team essentially put its finger on the scale when weighing the ability of the banks to survive a deeper downturn.
Given the depth of the concerns about the stability of the financial system and the debates about whether Mr. Obama was being tough enough on the banks, administration officials recognized that they could not afford the kind of mistake they made in early February, when Timothy F. Geithner, new to his job as Treasury secretary, provided vague assurances that the banks would be saved but said he was not prepared to give details. He was hammered in the markets and derided as inexperienced.
So when it came to releasing the results of the bank stress tests, much was done differently. When the tests were first announced in late February, administration officials said that bank-by-bank results would not be announced. It quickly became clear that would court disaster: Banks that were given a clean bill of health would scream that news to the markets, leaving the rest of the 19 appearing to be in far direr straits.
Inside the administration, according to two officials, Mr. Geithner argued that the results had to be announced in considerable detail. And this week Mr. Geithner defended the soundness of the administration’s approach.
“A huge part of the dynamic of a crisis is confidence,” Mr. Geithner said in a telephone interview on Friday. He was influenced in part by his days as a young Treasury official in the American Embassy in Japan, where he saw what happened when the Japanese government talked up the economy but failed to act.
He said Mr. Obama was opting for “directness and candor and openness about the scope of the problem,” but steering clear of “talking up the numbers” in ways that predict what the future will bring.
But administration officials said they recognized that the numbers that resound most with Americans were the unemployment statistics, and those were usually the last to recover. They are also subject to surprise downturns, which explains Mr. Obama’s hesitance to describe the job-loss figures on Friday as the beginning of an improving trend.
“The hardest part of this is balancing optimism with credibility,” said Mr. Dallek. “Hoover’s ‘Happy days are here again’ wasn’t credible. Bush’s ‘Mission accomplished’ became a running joke. No one wants to make that mistake again.”
But President Obama has to try to do just that in a time of crisis. As the government announced this week that the nation’s largest banks had steered away from the precipice and that job losses were beginning to slow, Mr. Obama has carefully begun trying to mine any national leader’s most precious commodity in a crisis: optimism.
His past references to “glimmers of hope” were modestly upgraded at the White House on Friday, with his declaration — which he stumbled over, taking some of the assertiveness out of the line — that “the gears of our economic engine do appear to be slowly turning once again.”
His aides have been reaching tentatively for similar metaphors, then adding, as Mr. Obama quickly did, that real recovery is months, if not years, ahead.
Fear and aversion to risk have been part of the economy’s problems since the downturn began, and Mr. Obama’s aides have been highly attuned to the risks of a downward spiral of pessimism. In recent weeks, his economic team has begun flagging signs that the worst could be over, even as it carefully released the results of its bank examinations in a way that suggested a desire to reassure the financial markets and consumers. They got a bit of backing this week from the Federal Reserve chairman, Ben S. Bernanke, who forecast that the economy was likely to begin growing again by the end of the year.
“Remember this central paradox of financial crisis,” Lawrence H. Summers, Mr. Obama’s top economic adviser in the White House, said in mid-March, when every arrow was pointing down, “that while the problem was caused by excessive complacency and excessive optimism, what we need today is more optimism and more confidence.”
Mr. Obama’s own words on Friday signaled that he was worried about the perils of getting out ahead of the numbers. He spent more time talking about the letters he received from the desperate and out-of-work than he did dwelling on the decline in the pace at which Americans are losing their jobs. After all, 539,000 job losses in a single month is not exactly cause for celebration, even if it represents an improvement over the previous month.
“There’s a kind of artistry to this, isn’t there?” said Robert Dallek, the presidential historian best known for chronicling how Lyndon Johnson, the consummate politician, never led the public out of its view that everything was falling apart. “You don’t want to come out and say the recession is over. You want to do a version of Churchill’s line about how this isn’t the end, or the beginning of the end, but rather the end of the beginning.”
In Mr. Obama’s case, polls showed that a significant chunk of the public was predisposed to look for the bright side. The proportion of Americans who said the country was moving in the right direction rose to 41 percent in a New York Times/CBS News poll last month, from 15 percent in January just before his inauguration, even though by nearly every measure the economy was getting worse during that period. But there are plenty of skeptics out there, from economic historians who know that history is littered with false recoveries, to those who argue that Mr. Obama has engineered a turnaround at the cost of phenomenal deficits and a huge new role for the government in the private sector.
Robert Reich, President Bill Clinton’s secretary of labor and one of Mr. Obama’s critics on the left, was on television Friday arguing that to create this sense of optimism Mr. Obama’s team essentially put its finger on the scale when weighing the ability of the banks to survive a deeper downturn.
Given the depth of the concerns about the stability of the financial system and the debates about whether Mr. Obama was being tough enough on the banks, administration officials recognized that they could not afford the kind of mistake they made in early February, when Timothy F. Geithner, new to his job as Treasury secretary, provided vague assurances that the banks would be saved but said he was not prepared to give details. He was hammered in the markets and derided as inexperienced.
So when it came to releasing the results of the bank stress tests, much was done differently. When the tests were first announced in late February, administration officials said that bank-by-bank results would not be announced. It quickly became clear that would court disaster: Banks that were given a clean bill of health would scream that news to the markets, leaving the rest of the 19 appearing to be in far direr straits.
Inside the administration, according to two officials, Mr. Geithner argued that the results had to be announced in considerable detail. And this week Mr. Geithner defended the soundness of the administration’s approach.
“A huge part of the dynamic of a crisis is confidence,” Mr. Geithner said in a telephone interview on Friday. He was influenced in part by his days as a young Treasury official in the American Embassy in Japan, where he saw what happened when the Japanese government talked up the economy but failed to act.
He said Mr. Obama was opting for “directness and candor and openness about the scope of the problem,” but steering clear of “talking up the numbers” in ways that predict what the future will bring.
But administration officials said they recognized that the numbers that resound most with Americans were the unemployment statistics, and those were usually the last to recover. They are also subject to surprise downturns, which explains Mr. Obama’s hesitance to describe the job-loss figures on Friday as the beginning of an improving trend.
“The hardest part of this is balancing optimism with credibility,” said Mr. Dallek. “Hoover’s ‘Happy days are here again’ wasn’t credible. Bush’s ‘Mission accomplished’ became a running joke. No one wants to make that mistake again.”
Bank of England braced for third wave of financial crisis
The Bank of England is concerned that the UK's banking system is heading for a third wave of crisis that could snuff out fragile signs of recovery in the economy.
On Thursday the Bank surprised the City by announcing that it would pump an extra £50bn of new money into the economy despite recent stockmarket rallies.
Now the Guardian has learned that this increase in quantitative easing was driven by fears in Threadneedle Street that the credit crunch is still sucking the life out of the British economy and the banking sector remains in deep trouble.
The new mood of caution chimes with comments from business leaders yesterday, who warned that apparent green shoots in the economy had shallow roots.
Richard Lambert, director general of the CBI, said: "The fact is that for all the injections of taxpayers' money, the credit markets are still not working properly."
Bank of England officials are concerned that big banks now supported by the taxpayer, such as Royal Bank of Scotland and Lloyds Banking Group, are struggling to increase lending volumes, as they had promised in return for help from the government.
The governor, Mervyn King, and several other members of the Bank of England's monetary policy committee are said to be unconvinced by talk of green shoots that has helped propel the FTSE 100 share index up by more than 20% over the last month.
Fears of a false dawn echo the mood at the beginning of the year, when apparent recovery in financial markets was wiped out by a second wave of crisis led by RBS and Lloyds.
This week both banks again warned of sharp increases in bad loans to British business customers. RBS said yesterday it was seeing little sign of green shoots.
Continued weakness at these banks may prevent the increase in lending that ministers are desperate to see, and dash hopes of a pre-election recovery for Labour.
The Bank of England is also worried that continued stresses in the global financial system will suck money out of the UK as cash-starved international banks bring money back home. Foreign banks are thought to be withdrawing funds from Britain once loans expire, rather than roll them over.
In return for support from the government, both RBS and Lloyds had pledged to increase lending to homeowners and businesses to compensate for declining foreign lending. Instead Stephen Hester, chief executive of RBS, said yesterday that demands for loans had contracted as customers "quite properly" try to reduce their borrowings as the recession bites.
King presents the MPC's latest quarterly inflation report next Wednesday and speculation was rife in the Square Mile last night that the report would contain gloomy forecasts for economic growth and inflation, which will probably be projected as being below its 2% target in two years' time, even though it is currently at 2.9%.
Last year King was criticised by some experts for failing to cut interest rates fast enough as the economy slid into recession. But from September, when US investment bank Lehman Brothers collapsed, he led the MPC in slashing rates to an all-time low of just 0.5% and embarked on the unconventional quantitative easing in March, a policy the European Central Bank said on Thursday said it would follow.
Poor lending decisions by HBOS, now part of Lloyds, and RBS, along with the rapid deterioration in the economy, mean that the two banks in which the government has major stakes could alone account for £25bn of bad debts by the end of the year.
Both banks believe these losses will count towards the "first loss" they must bear before their insurance – through the government's asset protection scheme – kicks in.
The extent of the rise in bad debts has surprised some commentators who now believe the taxpayer could be on the hook for losses under the asset protection scheme faster than first expected.
There has been some evidence of a small increase in mortgage lending in Britain, but it is not nearly strong enough to prevent house prices, which are down nearly a quarter from their 2007 peak, falling further. And unemployment is expected to continue rising well into next year, something that is likely to restrain consumer spending.
Many economists have been encouraged by some better figures on consumer confidence and forward-looking surveys into thinking that the 1.9% contraction in the economy in the first quarter of the year – the worst for three decades – will not be as severe in the second quarter. But they say that this only marks a slower pace of contraction, not a rapid return to growth.
Few share the chancellor's belief that the economy will recover strongly in 2009, and nor does the Bank of England.
On Thursday the Bank surprised the City by announcing that it would pump an extra £50bn of new money into the economy despite recent stockmarket rallies.
Now the Guardian has learned that this increase in quantitative easing was driven by fears in Threadneedle Street that the credit crunch is still sucking the life out of the British economy and the banking sector remains in deep trouble.
The new mood of caution chimes with comments from business leaders yesterday, who warned that apparent green shoots in the economy had shallow roots.
Richard Lambert, director general of the CBI, said: "The fact is that for all the injections of taxpayers' money, the credit markets are still not working properly."
Bank of England officials are concerned that big banks now supported by the taxpayer, such as Royal Bank of Scotland and Lloyds Banking Group, are struggling to increase lending volumes, as they had promised in return for help from the government.
The governor, Mervyn King, and several other members of the Bank of England's monetary policy committee are said to be unconvinced by talk of green shoots that has helped propel the FTSE 100 share index up by more than 20% over the last month.
Fears of a false dawn echo the mood at the beginning of the year, when apparent recovery in financial markets was wiped out by a second wave of crisis led by RBS and Lloyds.
This week both banks again warned of sharp increases in bad loans to British business customers. RBS said yesterday it was seeing little sign of green shoots.
Continued weakness at these banks may prevent the increase in lending that ministers are desperate to see, and dash hopes of a pre-election recovery for Labour.
The Bank of England is also worried that continued stresses in the global financial system will suck money out of the UK as cash-starved international banks bring money back home. Foreign banks are thought to be withdrawing funds from Britain once loans expire, rather than roll them over.
In return for support from the government, both RBS and Lloyds had pledged to increase lending to homeowners and businesses to compensate for declining foreign lending. Instead Stephen Hester, chief executive of RBS, said yesterday that demands for loans had contracted as customers "quite properly" try to reduce their borrowings as the recession bites.
King presents the MPC's latest quarterly inflation report next Wednesday and speculation was rife in the Square Mile last night that the report would contain gloomy forecasts for economic growth and inflation, which will probably be projected as being below its 2% target in two years' time, even though it is currently at 2.9%.
Last year King was criticised by some experts for failing to cut interest rates fast enough as the economy slid into recession. But from September, when US investment bank Lehman Brothers collapsed, he led the MPC in slashing rates to an all-time low of just 0.5% and embarked on the unconventional quantitative easing in March, a policy the European Central Bank said on Thursday said it would follow.
Poor lending decisions by HBOS, now part of Lloyds, and RBS, along with the rapid deterioration in the economy, mean that the two banks in which the government has major stakes could alone account for £25bn of bad debts by the end of the year.
Both banks believe these losses will count towards the "first loss" they must bear before their insurance – through the government's asset protection scheme – kicks in.
The extent of the rise in bad debts has surprised some commentators who now believe the taxpayer could be on the hook for losses under the asset protection scheme faster than first expected.
There has been some evidence of a small increase in mortgage lending in Britain, but it is not nearly strong enough to prevent house prices, which are down nearly a quarter from their 2007 peak, falling further. And unemployment is expected to continue rising well into next year, something that is likely to restrain consumer spending.
Many economists have been encouraged by some better figures on consumer confidence and forward-looking surveys into thinking that the 1.9% contraction in the economy in the first quarter of the year – the worst for three decades – will not be as severe in the second quarter. But they say that this only marks a slower pace of contraction, not a rapid return to growth.
Few share the chancellor's belief that the economy will recover strongly in 2009, and nor does the Bank of England.
Police called in as fresh expenses leaks embarrass MPs
The parliamentary authorities reacted to damaging revelations of cabinet and junior ministers cynically exploiting Commons expenses rules by calling in the police to investigate how the details were leaked and by whom.
The involvement of the police, and the prospect of a full-scale criminal inquiry, came as fresh disclosures emerged of expenses claims made by middle-ranking ministers for items as trivial as a razor and a kettle.
One MP implicated in the latest allegations told the Guardian that he believed a mole was still active operating inside parliament and feeding material to the Daily Telegraph. Others said the paper was guilty of trading in stolen property, and could be subject of a swingeing court fine running into millions.
Sir Stuart Bell, a member of the Commons estimates committee, claimed that there had been a breach of the Data Protection Act.
Downing Street believes the police investigation may backfire because of the huge public anger at what is seen as greed and fraud by MPs.
Tonight it emerged that the employment minister, Tony McNulty, could face a police investigation after a complaint was made about expenses he had been claiming under the second homes allowance. In March, it emerged that McNulty had claimed about £60,000 from Commons allowances since 2002, towards maintaining a house where his parents lived.
The Daily Telegraph is expected to continue revealing fresh detailstomorrow, this time focusing on a clutch of middle-ranking ministers, including the Home Office minister Phil Woolas, and the health ministers Phil Hope and Ben Bradshaw.
Hope said he had made a mistake in wrongly claiming for a razor. "In order to represent my constituents effectively I have somewhere to live - in my family home - near Corby and I have somewhere to live in London to carry out my duties in parliament, for which these costs have been incurred."
He added: "In all my claims for the costs of the accommodation in London I have acted with the full approval of the fees office and the claims are entirely in line with the rules of parliament. Any new fittings were brought to replace dilapidated or broken fittings in my flat in London, any household items were bought to make the flat usable, I've got a communal garden for recreational use around my flat. I made one claim for a razor. I didn't realise it was inadmissible. It was pointed out and I withdrew it."
Woolas said that the Telegraph had made a mistake in the allegations it had put to him. He said that the paper wrongly assumed that receipts submitted by him were his expenses claim. In fact he regularly submitted full receipts - until asked not to do to by the fees office - and then claimed for far less.
The paper put to Woolas that he had claimed for clothes on behalf of his wife, plus children's nappies and comics. They were on receipts submitted, but not claimed on, by the minister. "I am a victim of too much honesty in putting in the full receipts," he said. Woolas did claim for a kettle in 2006.
Labour MPs believe that a mole may be feeding sensitive personal information to the Daily Telegraph. One MP raised his concerns with the Commons authorities, which helps explain why the police were called in to investigate.
The MP acted after his office raised a series of questions with the fees office about expense claims dating back to 2004. Within an hour of this conversation, the MP's staff were contacted by the Daily Telegraph which then asked questions covering exactly the same area. The MP told the Guardian: "It was uncanny. There is something horrible going on. I have never been so frightened. What is happening is disgusting."
Lord Mandelson, the business secretary, accused the Telegraph of running a dishonest political campaign by focusing on the government and delaying the publication of shadow cabinet expenses claims until Monday.
The Commons members estimates committee will meet on Monday to decide how to respond to the leak and the serious damage being done to the reputation of parliament. It is certain to bring forward publication of the past five years of claims from the planned date in July.
A series of ministers took to the airwaves earlier today to defend their conduct. Gordon Brown, aware of the damage being inflicted on his battered government, insisted he had been trying to reform the expenses rules and admitted that "the system doesn't work."
The allegations against the cabinet ranged from the bizarre to what looked like a systematic attempt to bend the rules for personal gain. They included:
• Gordon Brown, who paid his brother, Andrew, £6,577 over 26 months between 2004 and 2006 for cleaning services at his London flat.
• Jack Straw, the justice secretary, who claimed for the full rate of council tax on his home in his Blackburn constituency, despite receiving a 50% discount from his local authority. Straw discovered the mistake and paid back the money.
• A series of ministers - Hazel Blears, Geoff Hoon and Alistair Darling - changed the status of their London and constituency homes, prompting claims that they were attempting to maximise their claims under the additional costs allowance which is used to subsidise second homes. Blears made claims on three properties in the space of one year.
David Cameron, bracing himself for revelations about his own party, said every MP would have to explain themselves to their constituents. He said: "I completely understand how angry the public are about this and we desperately need change.
"We've got to radically reduce the number of things that MPs can claim for such as barbeques and patio heaters.
The Liberal Democrat leader Nick Clegg said the issue "affects all politicians of all parties and no one comes out of this smelling of roses".
The Speaker, Michael Martin, will make a Commons statement on Monday. It is thought that only 120 MPs have so far examined their "raw" receipts and could go ahead with publication straight away.
The MPs who have still not examined their expenses fully may be given another week before pressing ahead with publication.
The fees office set up a weekend hotline to advise panic-stricken MPs who are worried about how their claims covering the five years back to 2004 will look to their constituents.
The involvement of the police, and the prospect of a full-scale criminal inquiry, came as fresh disclosures emerged of expenses claims made by middle-ranking ministers for items as trivial as a razor and a kettle.
One MP implicated in the latest allegations told the Guardian that he believed a mole was still active operating inside parliament and feeding material to the Daily Telegraph. Others said the paper was guilty of trading in stolen property, and could be subject of a swingeing court fine running into millions.
Sir Stuart Bell, a member of the Commons estimates committee, claimed that there had been a breach of the Data Protection Act.
Downing Street believes the police investigation may backfire because of the huge public anger at what is seen as greed and fraud by MPs.
Tonight it emerged that the employment minister, Tony McNulty, could face a police investigation after a complaint was made about expenses he had been claiming under the second homes allowance. In March, it emerged that McNulty had claimed about £60,000 from Commons allowances since 2002, towards maintaining a house where his parents lived.
The Daily Telegraph is expected to continue revealing fresh detailstomorrow, this time focusing on a clutch of middle-ranking ministers, including the Home Office minister Phil Woolas, and the health ministers Phil Hope and Ben Bradshaw.
Hope said he had made a mistake in wrongly claiming for a razor. "In order to represent my constituents effectively I have somewhere to live - in my family home - near Corby and I have somewhere to live in London to carry out my duties in parliament, for which these costs have been incurred."
He added: "In all my claims for the costs of the accommodation in London I have acted with the full approval of the fees office and the claims are entirely in line with the rules of parliament. Any new fittings were brought to replace dilapidated or broken fittings in my flat in London, any household items were bought to make the flat usable, I've got a communal garden for recreational use around my flat. I made one claim for a razor. I didn't realise it was inadmissible. It was pointed out and I withdrew it."
Woolas said that the Telegraph had made a mistake in the allegations it had put to him. He said that the paper wrongly assumed that receipts submitted by him were his expenses claim. In fact he regularly submitted full receipts - until asked not to do to by the fees office - and then claimed for far less.
The paper put to Woolas that he had claimed for clothes on behalf of his wife, plus children's nappies and comics. They were on receipts submitted, but not claimed on, by the minister. "I am a victim of too much honesty in putting in the full receipts," he said. Woolas did claim for a kettle in 2006.
Labour MPs believe that a mole may be feeding sensitive personal information to the Daily Telegraph. One MP raised his concerns with the Commons authorities, which helps explain why the police were called in to investigate.
The MP acted after his office raised a series of questions with the fees office about expense claims dating back to 2004. Within an hour of this conversation, the MP's staff were contacted by the Daily Telegraph which then asked questions covering exactly the same area. The MP told the Guardian: "It was uncanny. There is something horrible going on. I have never been so frightened. What is happening is disgusting."
Lord Mandelson, the business secretary, accused the Telegraph of running a dishonest political campaign by focusing on the government and delaying the publication of shadow cabinet expenses claims until Monday.
The Commons members estimates committee will meet on Monday to decide how to respond to the leak and the serious damage being done to the reputation of parliament. It is certain to bring forward publication of the past five years of claims from the planned date in July.
A series of ministers took to the airwaves earlier today to defend their conduct. Gordon Brown, aware of the damage being inflicted on his battered government, insisted he had been trying to reform the expenses rules and admitted that "the system doesn't work."
The allegations against the cabinet ranged from the bizarre to what looked like a systematic attempt to bend the rules for personal gain. They included:
• Gordon Brown, who paid his brother, Andrew, £6,577 over 26 months between 2004 and 2006 for cleaning services at his London flat.
• Jack Straw, the justice secretary, who claimed for the full rate of council tax on his home in his Blackburn constituency, despite receiving a 50% discount from his local authority. Straw discovered the mistake and paid back the money.
• A series of ministers - Hazel Blears, Geoff Hoon and Alistair Darling - changed the status of their London and constituency homes, prompting claims that they were attempting to maximise their claims under the additional costs allowance which is used to subsidise second homes. Blears made claims on three properties in the space of one year.
David Cameron, bracing himself for revelations about his own party, said every MP would have to explain themselves to their constituents. He said: "I completely understand how angry the public are about this and we desperately need change.
"We've got to radically reduce the number of things that MPs can claim for such as barbeques and patio heaters.
The Liberal Democrat leader Nick Clegg said the issue "affects all politicians of all parties and no one comes out of this smelling of roses".
The Speaker, Michael Martin, will make a Commons statement on Monday. It is thought that only 120 MPs have so far examined their "raw" receipts and could go ahead with publication straight away.
The MPs who have still not examined their expenses fully may be given another week before pressing ahead with publication.
The fees office set up a weekend hotline to advise panic-stricken MPs who are worried about how their claims covering the five years back to 2004 will look to their constituents.
Nurses lack decontamination areas
Some nurses are having to decontaminate vital equipment in hospital bathrooms because they have no access to a dedicated cleaning room, a survey says.
A Royal College of Nursing (RCN) survey of 2,000 nurses found 37% had no access to a room for cleaning equipment.
Of those, a third have had to use a bathroom as an alternative.
The RCN described the results as "shocking", but the Department of Health said it was for individual trusts to make proper arrangements.
Dr Peter Carter, RCN chief executive and general secretary, said: "Having the time and space to clean and then store essential everyday hospital equipment such as IV stands, commodes and patient cushions is crucial in keeping patients safe from dangerous infections.
"It's shocking that some nurses have no choice but to store equipment in hospital bathrooms.
"People need to recognise that fighting infection is about much more than just hand washing."
The RCN survey also found that more than one third (34%) of nurses who have responsibility for decontaminating patient equipment have never received any formal training in how to do it.
Four out of 10 nurses said their organisation did not provide cleaning services 24 hours a day.
Training budgets
Dr Carter added: "Every trust should protect training budgets for nurses and make sure that every nurse in the country is given the opportunity to update their infection prevention training.
"Every nurse should have access to round-the-clock cleaning services.
"Overall, infection rates have been going down over the past couple of years, but that's from a very high point indeed."
Shadow health minister Anne Milton said: "This is yet more evidence that nurses aren't getting the support they need.
"Given that three times as many people now die from hospital infections each year than die on Britain's roads it is simply unacceptable to find basic standards of hygiene are not being met because the resources aren't available.
"Nurses are being put in an impossible position. It's unfair on them and unfair on patients."
A Department of Health spokesperson said: "We have made substantial investment - an additional £270m a year by 2010/2011 - for the NHS to tackle healthcare associated infections.
"Trusts must make adequate arrangements for decontamination, out-of-hours cleaning and staff training in infection prevention and control."
A Royal College of Nursing (RCN) survey of 2,000 nurses found 37% had no access to a room for cleaning equipment.
Of those, a third have had to use a bathroom as an alternative.
The RCN described the results as "shocking", but the Department of Health said it was for individual trusts to make proper arrangements.
Dr Peter Carter, RCN chief executive and general secretary, said: "Having the time and space to clean and then store essential everyday hospital equipment such as IV stands, commodes and patient cushions is crucial in keeping patients safe from dangerous infections.
"It's shocking that some nurses have no choice but to store equipment in hospital bathrooms.
"People need to recognise that fighting infection is about much more than just hand washing."
The RCN survey also found that more than one third (34%) of nurses who have responsibility for decontaminating patient equipment have never received any formal training in how to do it.
Four out of 10 nurses said their organisation did not provide cleaning services 24 hours a day.
Training budgets
Dr Carter added: "Every trust should protect training budgets for nurses and make sure that every nurse in the country is given the opportunity to update their infection prevention training.
"Every nurse should have access to round-the-clock cleaning services.
"Overall, infection rates have been going down over the past couple of years, but that's from a very high point indeed."
Shadow health minister Anne Milton said: "This is yet more evidence that nurses aren't getting the support they need.
"Given that three times as many people now die from hospital infections each year than die on Britain's roads it is simply unacceptable to find basic standards of hygiene are not being met because the resources aren't available.
"Nurses are being put in an impossible position. It's unfair on them and unfair on patients."
A Department of Health spokesperson said: "We have made substantial investment - an additional £270m a year by 2010/2011 - for the NHS to tackle healthcare associated infections.
"Trusts must make adequate arrangements for decontamination, out-of-hours cleaning and staff training in infection prevention and control."
Minister in £25k security claim
Tourism minister Barbara Follett claimed more than £25,000 for security patrols at her London home, the Daily Telegraph claims.
It is the latest in a string of expense claims leaks which MPs said were made with Commons approval.
The wife of author Ken Follett and one of Parliament's richest MPs, Mrs Follett said her claims for security had been made within the rules.
Police have been asked to probe how the details were leaked to the paper.
'Disgusting reporting'
In a further disclosure, the Telegraph says immigration minister Phil Woolas claimed for nappies and women's clothing on his expenses, an allegation he vehemently denies.
He says they were listed on a receipt for food which he submitted, but he did not receive any money for them.
Mr Woolas called the Telegraph's reporting "absolutely disgusting" and said they were handling stolen property and making false allegations against ministers.
He said he believed the newspaper's claims might be "actionable" and he was seeking legal advice.
The paper reported that care services minister Phil Hope had spent more than £37,000 over about four years on refurbishing and furnishing a two-bedroom south London flat.
Mr Hope said: "I claimed the cost of running and furnishing a flat in London, in full accordance with the rules that apply to members of Parliament.
"The purchases I made were no more than was necessary to live in a habitable residence and replacements only occurred when furniture and fittings were worn out. These items were then disposed of.
"I have not personally benefited from this process, nor did I make purchases that were inappropriate for the property concerned."
Claims cleared
Mrs Follett's total bill for security patrols between 2004 and 2008 was £25,411.64, the paper said.
She told the BBC: "I claimed it, it's within the rules and I have no comment to make".
She also claimed £528.75 for a Chinese needlepoint rug to be repaired and cleaned, but was only paid back £300 after it was deemed excessive, the Telegraph said.
She told the newspaper: "As all of [my claims], bar one, have been accepted and cleared by the House of Commons Fees Office under the rules laid out in the Green Book, I have no further comment to make on them.
"The item not accepted by the Fees Office was claimed in error and is, to the best of my knowledge, one of the only two occasions in the last 12 years when my expenses claims have been queried by them."
Full details of all MPs' expenses dating back four years, running to 2.4 million receipts, were due to be published in the middle of July after the Commons authorities lost a Freedom of Information battle.
But instead, the Telegraph is revealing the information early and over several days.
BBC political correspondent Ben Wright said: "Clearly at the moment it is very much the government that is suffering because of this, because it is cabinet ministers who are having the spotlight shone on their expenses and junior ministers, as we discovered today.
"But MPs from other parties are going to be drawn into this, backbenchers too. There is a feeling that that is where, perhaps, some of the real, shocking horror stories of claims may then come to light, on the back benches."
Resignations predicted
The former independent MP, Martin Bell, said he believed a few MPs would now have to resign, and others would have to accept major changes to their expenses.
"I think the more we know about this, the worse it gets. I think Barbara Follet is in an almost impossible situation now.
"It's not a matter of her wealth, it's a matter of how can you possibly claim this amount of money for protection when we have a police service."
Other expense claims revealed earlier include a £6,500 claim by Gordon Brown to pay his brother for a cleaner. Downing Street has said there was "nothing wrong" with the claim.
And Lord Mandelson, who claimed £2,850 for his home, before quitting as an MP and selling it for a large profit, said the claims were for essential repairs.
It is the latest in a string of expense claims leaks which MPs said were made with Commons approval.
The wife of author Ken Follett and one of Parliament's richest MPs, Mrs Follett said her claims for security had been made within the rules.
Police have been asked to probe how the details were leaked to the paper.
'Disgusting reporting'
In a further disclosure, the Telegraph says immigration minister Phil Woolas claimed for nappies and women's clothing on his expenses, an allegation he vehemently denies.
He says they were listed on a receipt for food which he submitted, but he did not receive any money for them.
Mr Woolas called the Telegraph's reporting "absolutely disgusting" and said they were handling stolen property and making false allegations against ministers.
He said he believed the newspaper's claims might be "actionable" and he was seeking legal advice.
The paper reported that care services minister Phil Hope had spent more than £37,000 over about four years on refurbishing and furnishing a two-bedroom south London flat.
Mr Hope said: "I claimed the cost of running and furnishing a flat in London, in full accordance with the rules that apply to members of Parliament.
"The purchases I made were no more than was necessary to live in a habitable residence and replacements only occurred when furniture and fittings were worn out. These items were then disposed of.
"I have not personally benefited from this process, nor did I make purchases that were inappropriate for the property concerned."
Claims cleared
Mrs Follett's total bill for security patrols between 2004 and 2008 was £25,411.64, the paper said.
She told the BBC: "I claimed it, it's within the rules and I have no comment to make".
She also claimed £528.75 for a Chinese needlepoint rug to be repaired and cleaned, but was only paid back £300 after it was deemed excessive, the Telegraph said.
She told the newspaper: "As all of [my claims], bar one, have been accepted and cleared by the House of Commons Fees Office under the rules laid out in the Green Book, I have no further comment to make on them.
"The item not accepted by the Fees Office was claimed in error and is, to the best of my knowledge, one of the only two occasions in the last 12 years when my expenses claims have been queried by them."
Full details of all MPs' expenses dating back four years, running to 2.4 million receipts, were due to be published in the middle of July after the Commons authorities lost a Freedom of Information battle.
But instead, the Telegraph is revealing the information early and over several days.
BBC political correspondent Ben Wright said: "Clearly at the moment it is very much the government that is suffering because of this, because it is cabinet ministers who are having the spotlight shone on their expenses and junior ministers, as we discovered today.
"But MPs from other parties are going to be drawn into this, backbenchers too. There is a feeling that that is where, perhaps, some of the real, shocking horror stories of claims may then come to light, on the back benches."
Resignations predicted
The former independent MP, Martin Bell, said he believed a few MPs would now have to resign, and others would have to accept major changes to their expenses.
"I think the more we know about this, the worse it gets. I think Barbara Follet is in an almost impossible situation now.
"It's not a matter of her wealth, it's a matter of how can you possibly claim this amount of money for protection when we have a police service."
Other expense claims revealed earlier include a £6,500 claim by Gordon Brown to pay his brother for a cleaner. Downing Street has said there was "nothing wrong" with the claim.
And Lord Mandelson, who claimed £2,850 for his home, before quitting as an MP and selling it for a large profit, said the claims were for essential repairs.
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