Banker blames all of us for credit crunch

Archie Kane, one of the key architects of the HBOS rescue deal with Lloyds TSB, said consumers were as much at fault as the so-called "spivs and speculators" for bringing about the global meltdown.

His sobering message came as the US struggled last night to close a $700 billion deal to bail out banks, and the markets were hit with yet more uncertainty.

Mr Kane, the chief executive of Scottish Widows and a main board member of Lloyds TSB, believes bankers and consumers are equally guilty of creating the conditions for the liquidity crunch threatening the western economic system with an over-reliance on debt.

In an exclusive interview with The Scotsman, he said "we are all guilty" of contributing to what he called the "error of cheap finance".

"Everybody is responsible, from consumers all the way to investment bankers. Everybody has been involved in what has happened and everybody has fuelled it," he said.

Mr Kane said a tipping point had been reached where consumers and bankers alike could expect the economy to function on far less debt than in the past ten to 15 years, which would also result in cheaper "depressed" assets such as homes.

"The capitalisation of banks in the western world will be different. And what does it mean for all of us? The best way of describing it is the error of cheap money is gone and it isn't coming back."

Mr Kane – whose earnings are believed to top 1.25 million a year, including a performance bonus of 715,000 – is the longest standing member of the main board of Lloyds TSB, the parent company of Scottish Widows.

Having engineered the takeover of TSB by Lloyds, Mr Kane will now play a key role in shaping the merged Lloyds-HBOS. He was appointed chief executive of Scottish Widows five years ago, in place of Mike Ross.

Douglas Stewart, chairman of the Scottish Consumer Council, dismissed Mr Kane's comments as "seeking to rewrite history".

"Consumers have simply reacted to the products that have been offered by the banks," he said.

"The financial institutions were happy to allow their customers to believe that they were highly regulated, honest and trustworthy.

"People who had stuck with the same bank for years did not question that the extra credit offer they took was unwise or that the advice to take up a particular mortgage deal was dangerous. Some sympathy for the people who are now paying such a high price for simply trusting their banks would not go amiss."

Fiona Moriarty, director of the Scottish Retail Consortium, said this was "not the time to be pointing the finger at anyone outside the banking arena".

"We should be focusing on the problems within the banking and finance industries," she said.

"Retailers have undoubtedly had a difficult couple of months and as we enter the crucial run-up to Christmas, people will be shopping around more than ever before, and the retailers who do best will be the ones who are able to provide the right product at the right price."

Bryan Johnston, of the stockbroker Bell Lawrie, said: "There is a lot of truth in what Archie Kane is saying. We have bought into the whole culture of having tomorrow today and of treating loans like a gift. As a society, we seem to have forgotten the old adage that unless you can afford it, you don't buy it."

Mr Kane also hit out at the 'Save the Bank' consortium being convened by SNP MSP Alex Neil as an "opt out strategy" and that people who disagree that the deal needs to take place "deny reality".

He said: "I do find it strange that people can envisage they could somehow alter the global financial environment and deny reality. I don't understand how anyone who is in the know would come to a conclusion like that. Most serious people don't ascribe to opt out strategies."

More banks around world show strain

THE US Senate was still frantically trying to thrash out a 700 billion economic rescue plan last night as cracks began to appear in major banks across the globe.

In Europe, the Belgian-Dutch bank Fortis was forced to deny it faced a liquidity crisis and said it would sell more assets as its shares fell to a 14-year low.

In the US, after the collapse of Washington Mutual Bank on Thursday, concerns were being raised about the country's last two investment banks – Morgan Stanley and Goldman Sachs.

International concern about a global meltdown was also highlighted by one of the world's fasting growing economies – Brazil. National Development Bank president Luciano Coutinho warned that such a catastrophe was possible because the world's economies are so tightly linked.

Meanwhile, Gordon Brown, the Prime Minister, backed the rescue package during a visit to the US. He called for "an end to the age of irresponsibility".

The spotlight in the US yesterday was on Morgan Stanley in particular as it struggled to secure an equity investment of as much as $8.5 billion from Japan's Mitsubishi UFJ Financial Group. Last week, its stock price halved.

Goldman Sachs had yesterday seen off some of the concerns by raising 10 billion of capital.

In the UK, shares in Bradford & Bingley, already the subject of speculation after 370 redundancies on Thursday, fell 20 per cent to 17p at one point before recovering slightly.

Added to that, HSBC signalled it might be in trouble by shedding 1,100 jobs.

Leading central banks tried to buy breathing space. The European Central Bank, the US Federal Reserve, the banks of England and Japan, and the Swiss National Bank announced new short-term banking sector loans worth tens of billions of dollars.

The continued uncertainty pushed the FTSE down 108.55. There was more optimism in the US as the Senate debate dragged on. Early trading saw the Dow Jones drop 33.55 points but it later rallied to 26.69 above its opening level.

An optimistic President Bush insisted that, after the failure on Thursday to get a rescue package through Congress, a deal could be struck last night.

"There is no disagreement that something substantial must be done," he said.

The Senate majority leader Harry Reid made it clear that the sitting would not end until something could be worked out. He said: "We're going to get this done and stay in session as long as it takes to get it done."

But there was a disappointing early sign when a $56.2 billion economic stimulus package – that would have extended unemployment benefits, increased food aid and funded new construction projects to create jobs – was blocked by the Senate. It had been seen as a possible sweetener for the $700 billion package.

Despite the deepening crisis, both presidential candidates – John McCain and Barack Obama – took up the cudgels again in the race for the White House after Mr McCain had suspended his campaign. They both flew to Mississippi for their first debate, which had at one point looked like being cancelled.

Angus Howarth

Paulson on his knees to beg for $700 billion dollar bail-out

OVER the past 48 hours, Washington has witnessed a series of incredible scenes, including the Treasury Secretary going down on bended knee to beg the Speaker of the House of Representatives to pass the multi-billion-dollar bail-out.

The world could only look on with bated breath last night as American politicians continued to tussle over a historic $700 billion (367 billion) deal that, if rejected, could trigger an unprecedented global financial collapse.

Two days after President Bush appeared ashen-faced before the nation to insist that if Congress did not act immediately, America would "slip into financial panic", he was yesterday forced to make a brief statement, prior to the opening bell on Wall Street, in which he said that while Congress can express doubts, they should "rise to the occasion" and approve a plan to stave off economic calamity.

Last night, the world was waiting with a deepening awareness that when the US sneezes, the rest of the planet can catch a cold.

In Washington, a disturbing endgame is being played out, between an exhausted, unpopular president whose term in office could not have contained more disastrous events, and two candidates for the Oval Office.

The road to the impasse began two days ago in Washington, in the broad, white hearing rooms of Congress, when Treasury Secretary Hank Paulson's attempts to persuade legislators on both sides to push through the plan stuck in the mud.

Over the past few days, the former CEO of Goldman Sachs, whose personal fortune is estimated at 200 million, had been called a socialist and told to do his "remedial homework" by his fellow Republicans.

He was not the only one forced to go cap in hand. Dick Cheney, the most powerful vice-president in American history, was reduced to stoically enduring round after round of verbal attacks from Republican senators who, in the words of one lobbyist, saw him "ripped into shreds".

It was often standing room only as Democrats and Republicans argued for hours, fuelled only by bottles of still mineral water and cups of coffee in bone-china saucers and their BlackBerrys on mute. The mood was broken only by the arrival of a persistent protester who managed to break in and brandish a placard decrying corporate "welfare" before security guards bundled him to the ground.

Yet after spending Thursday morning behind closed doors, senior politicians from both parties emerged shortly before 1pm into the corridors on the first floor of the Capitol building to herald their agreement on the broad outlines of a deal.

They said the legislation, which would authorise unprecedented government intervention to buy distressed debt from private firms, would include limits on pay packages for executives of some firms that seek assistance and a mechanism for the government to take an equity stake in some of the companies, so taxpayers have a chance to profit if the bail-out plan works.

Robert Bennett, a Republican member of the banking committee, stated: "I now expect we will indeed have a plan that can pass the House, pass the Senate, be signed by the president ."

But a few blocks away, a senior House Republican was at a lunch with reporters, at which he said the party would never go along with the deal. The Republican, who was not named, said Representative Eric Cantor of Virginia, the chief deputy whip, was circulating an alternative course that would rely on government-backed insurance, not taxpayer-financed purchase of mortgage assets.

He said the recalcitrant Republicans were calculating that the Democratic Speaker of the house Mrs Pelosi, who had the power to push the bill through using Democratic support alone, would not want to leave her party politically exposed during the election campaign by passing a bail-out bill without rank-and-file Republican support. "You can have all the meetings you want," said the Republican, referring to the White House session with Bush, the presidential candidates and congressional leaders, then scheduled to take place in a few hours time. "It comes to the floor and the votes aren't there. It won't pass."

The problem was the Republicans had spent days expressing their unease about a huge government intervention, which they regard as a step down the path to socialism.

When congressional leaders and Mr McCain and Mr Obama trooped to the White House on Thursday afternoon, most signs pointed toward a bipartisan agreement on a grand compromise that could be signed into law by the weekend.

It was intended to pump billions of dollars into the financial system, restoring liquidity and keeping credit flowing to businesses and consumers.

Shortly before 4pm, President Bush told reporters gathered in the Cabinet Room, where the meeting would take place: "We're in a serious economic crisis. My hope is we can reach an agreement very shortly."

But once the doors closed, it quickly became apparent that "very shortly" was going to take some time.

Mr McCain was seated at one end of the walnut table, while his opponent Mr Obama took a seat at the opposite end.

The president and senior congressional leaders sat between them. The meeting began with Mr Paulson giving an update on the market's condition and warning of his concern that the credit market would further tighten overnight. While Mr Obama peppered the Treasury Secretary with questions, Mr McCain kept his counsel.

Then John Boehner, the Republican leader of the House, surprised many in the room by declaring that his party could not support the plan as it currently stood.

He pressed an alternative that involved a smaller role for the government, and Mr McCain, whose support of the deal is critical if fellow Republicans are to sign on, and who had listened to their concerns earlier, declined to take a stand. The stalemate that was crippling the world remained in place.

As Senator Richard Shelby, the senior Republican on the banking committee, said after leaving the meeting: "The agreement is obviously no agreement."

After the session, in an attempt to salvage a deal, Mr Paulson went to an extraordinary length.

In the Roosevelt Room, he bent down on one knee to plead with Nancy Pelosi and urge her not to "blow it up" by withdrawing her party's support for the package over what the Speaker derided as a Republican betrayal.

"I didn't know you were Catholic," Ms Pelosi responded to Mr Paulson, who is actually a Christian Scientist.

She then added: "It's not me blowing this up, it's the Republicans."

Mr Paulson then reportedly sighed and agreed: "I know. I know."

Meanwhile, President Bush, angered by the meeting's failure, said: "If money isn't loosened up, this sucker could go down."

Things were already going down. On Thursday evening, federal regulators seized the Washington Mutual bank as the giant lender that had come to symbolise the excesses of the mortgage boom became the largest bank failure in American history.

Regulators simultaneously brokered an emergency sale of virtually all of the nation's largest savings and loan bank, to JPMorgan Chase for $1.9 billion, averting another potentially huge taxpayer bill for the rescue of a failing institution.

At 8pm, US time, on Thursday Barney Frank, the lead Democratic negotiator, headed back to the Rules Committee room on the second floor of the Senate side of the Capitol, for another meeting with Mr Paulson and other congressional leaders in an attempt to restart negotiations and so fend off more volatility in the markets yesterday morning. At 10:30 pm, the meeting was adjourned.

Laws, said the 19th century German chancellor, Otto von Bismarck, are like sausages. "It is better not to see them being made."

The ugly scenes of the previous night were referred to by President Bush in a brief statement yesterday morning timed to coincide with the opening of the New York financial markets, when he said: "The legislative process is sometimes not very pretty".

He continued: "But we are going to get a package passed.

"We will rise to the occasion. Republicans and Democrats will come together and pass a substantial rescue plan."

In order to assist this coming together, Mr Cheney had cancelled a trip to New Mexico and Wyoming, and returned to Washington for meetings.

In various rooms, the politicians began reviewing a 102-page proposal based on a consensus outline hammered out by members of the House and Senate the previous day.

But last night, as efforts to strike a deal in Congress continued, a poll said that only 30 per cent of Americans support the package which will cost the equivalent of 1,270 for each man, women and child in the country.

Stephen McGinty