Βι¶ΉΤΌΕΔ

For banks that emerged in reasonable shape from the 2008 financial earthquake, 2010 looks set to be a return to a time of blissful profit.

Pre-tax profits for Barclays in the first three months of the year almost doubled on an underlying basis - and at Β£1.8bn may well be a record performance.

Believe it or not, Barclays says it can't be sure whether this is the best or second-best performance ever, because it hasn't been reporting on a quarterly all that long.

It's possible that in the boom or bubble year of 2007, it did a bit better - which some may say is a slightly ill augury, though I'm sure Barclays would insist that it isn't taking the kind of silly risks that all banks were taking in 2007.

There are two striking trends: like Lloyds, the rate at which loans and investments are going bad has been falling sharply. The charge for loans and investments going bad is down by almost a third to Β£1.5bn.

And the profits of its investment bank, Barcap, stand out, surging 47% to Β£1.5bn.

Later today, Barclays chairman Marcus Agius will tell the banks' annual meeting that Barclays is proof of the strength of the so-called universal banking model.

He'll in effect be saying that both David Cameron and Nick Clegg were wrong last night when in the prime-ministerial debate they called for banks that look after retail savings to be banned from engaging in so-called casino investment banking.

And by the way, Agius will also give succour to Gordon Brown - who defended big banks - in a second way, by saying that he fears the unilateral imposition of a new tax on banks would be damaging for the City and for the UK: the Lib Dems and the Tories, unlike Labour, would impose such a tax, irrespective of what other countries do.

Mr Brown hasn't had the best press in the past couple of days, and will doubtless embrace support from more-or-less any quarter. That said, and charming though Mr Agius is, "Big Banker backs Brown" is probably not a headline that would win many votes for Labour.

Which, in a way, is the nub of the matter.

Banks have been repairing their balance sheets and their profitability; but repairing their battered reputations is very much work in progress.

Central to that will be how Barclays and others manage the contentious element of bankers' pay and bonuses.

Big Barcap profits means big banker remuneration: on average, Barcap's 22,000 employees probably earned just under Β£70,000 for the past three months toil, which doesn't look too shabby (that's on the basis that Barcap again pays out 38% of its income in remuneration, including bonuses).

I would be staggered if Mr Agius doesn't again say that Barclays is committed to showing restraint in the way it rewards staff: he'll know of course that bankers' idea of restraint is not the same as everyone else's.

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Birmingham: What have I learned tonight about the parties' policies on sanitising the banking system and rebalancing the economy so that it is less dependent on the City?

Not a great deal - and, believe me, I was listening intently.

In respect of mood rather than substance, David Cameron was clearer than I had ever heard him on the need to separate retail banking from investment banking - though he did not say whether he would break up the banks in the absence of international agreement.

He was also crystal clear about the imperative of levying a tax on the banks, even if other countries don't.

On these two issues, and you wouldn't believe it from their mutually hostile body language, David Cameron and Nick Clegg aren't that far apart: although the Lib Dems would levy a new 10% tax on banks' profits, whereas the Tories would tax their wholesale borrowings.

Out on something of a limb was Gordon Brown - who defended big banks and also argued that it would be wrong to impose a new tax on banks in the absence of international agreement.

David Cameron also made an intriguing statement about wanting to give the Bank of England the power "to call time on debt in the economy" - which was presumably a nod to so-called macro-prudential policy, or the provision of a new power to the central bank to ration credit in boom years.

There was, however, an outbreak of consensus on the need to promote manufacturing, especially "green" and hi-tech businesses - though I struggled to glean any convincing detail from any of them about how they would achieve this in a meaningful way.

That said, there is a serious division between Brown and Cameron about the taxation of business - on top of their spat about Labour's plan to raise national insurance next year.

Cameron favours cutting the headline rate of corporation tax for all companies, financed by the reduction of assorted tax allowances for them.

Brown characterised that approach as a cut in taxes paid by banks - which Cameron only half disputed.

The prime minister's implicit point is that the removal of corporate tax allowances would hit investing manufacturers disproportionately more.

I suppose on these narrow but important issues I rated the debate as a slightly dull no-score draw - the sort of thing we may experience in the looming Bayern/Inter Champions League Final.

Where's Lionel Messi when we need him?

Update 2355: The coffee has all gone cold. And the Blackberries (except mine) have been put away.

So what's the overall verdict on tonight's performances in the round (and not just on the stuff that relates to my eccentric interests)?

Well, what I would point out is that Gordon Brown's crew was pretty glum as Spin Alley was dismantled until the next election. Team Brown felt that Brown had been too negative.

By contrast, the Tories were cheerful. And the Lib Dems seemed a bit nonplussed.

As for the rampaging press pack, it scored Cameron first, Clegg second and then - a bit in the rear - Brown. The hacks echoed the post-debate polls.

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Birmingham: Blimey. Talk about a trip down Memory Lane - or should that be Memory Alley? I've beamed into frenetic Spin Alley, the anteroom for tonight's prime-ministerial debate, which is filled with hyper hacks, pols and spinners from my previous life as an inky-fingered political editor.

First observation: the Lib Dems are everywhere. Front-benchers, advisers, funders. They outnumber the two "bigger" parties by a factor of three.

And that self-deprecating quality that was their hallmark when I knew them well some 10 years ago has been replaced by something more redolent of confidence.

Snippet number one: G. Brown is thinking of making a joke about his "bigoted woman" moment, to show that he isn't scared of his lapsus.

Frisson number one: G. Osborne unexpectedly pulls out of tonight's , supposedly to spend more time briefing the media in Spin Alley. Does that mean he expects Mr Cameron to say something tonight that will need to be elucidated by Mr Osborne? (See update below.)

All very intriguing.

Anyway, I'm here in the perhaps naive hope that we'll see an enlightening elucidation of the respective parties' positions on financial reform and fiscal consolidation.

Or, to translate: it's an economic debate, so maybe we'll learn something more about their policies on cutting the deficit and making the banks behave. Or maybe not.

Update 2010: For what it's worth, the Conservatives and the Βι¶ΉΤΌΕΔ disagree about when George Osborne pulled out of Question Time.

The Tories tell me it was a week ago; Βι¶ΉΤΌΕΔ people tell me it was tonight, though they concede they were haggling with the Tories over his appearance for some days.

All a bit odd.

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Is there any more powerful and feared institution in Europe (or the world) than Standard & Poors?

This firm - whose ostensibly blameless activity is to assess the quality of credit that's traded on financial markets - has induced high anxiety in European Union governments and citizens by giving lower grades to the public sector debt of Greece, Portugal and Spain.

Loans to the Greek government have been categorised by S&P as junk, or carrying a high risk of default - whereas those who lend to Portugal and Spain have been told that their money is a little less secure than it was, with Spain having a significant quality edge over Portugal.

S&P's assessment of the growth prospects of these three nations, and their respective prospects for closing the ominous gaps between what their respective governments spend and what they raise in taxes, has induced gyrations in markets: the euro and share prices have fallen; the price of each of the three nation's government bonds has dropped, with those of Greece plunging, such that the implied cost of lending to Greece is now higher than that of much poorer, less democratic countries.

And there has been a frenzy of panicky meetings involving the International Monetary Fund, the German government, senior European Union officials and so on, to stitch up some kind of rescue deal for Greece, which may eventually involve eurozone states and the IMF extending more than Β£80bn of emergency credit to Greece.

Crikey. That S&P certainly knows how to make a noise.

Now, of course, S&P isn't responsible for the widening deficits of Greece, Portugal and Spain that represent the fundamental reason why confidence in those nations' creditworthiness - and in the value of the euro - has eroded.

S&P would claim to be an articulate messenger, an impartial analyst of the woes they face, not in any sense the creator of all this mayhem.

But it is nonetheless extraordinary that some relatively simple economic research by a private-sector organisation can have quite such an impact.

All the facts underlying that research are well-known and easy to obtain. All that S&P has done is to say that Greek debt is junk; but surely Greek debt can't in reality be junkier today than it was last week just because S&P says so?

You may wonder what on earth is going on. If S&P doesn't create economic reality - which it doesn't - how can its assessment of that economic reality wreak such havoc?

The answer is that S&P - and the two other leading credit-rating agencies, Moody's and Fitch - have been endowed with enormous authority by governments, central banks and regulators.

They are the gods of the credit markets, and made so by fiat of the Bank of England, the European Central Bank, the US Securities and Exchange Commission and so on.

The rating agencies' assessment of the quality of bonds or tradeable debt issued by public sector and private sector is, officially, the last word on the subject - and has been since the early 1970s, when the SEC in the US started using their ratings to assess the strength of securities firms' balance sheets.

So, for example, the Bank of England typically provides credit to commercial banks if those banks provide bonds as collateral to it that are classified as AAA by rating agencies. The ECB operates a lower quality threshold for the provision of funds or liquidity to banks, but still uses the rating agencies as arbiters of the relevant security or collateral quality.

Which in turn conditions the investment decisions of banks, insurance companies and pension funds: if a bond loses its AAA status, the potential size of the market for that bond shrinks, at a stroke.

By now I would hazard that a few of you will be shouting at the screen that these are surely the same rating agencies which gave AAA ratings to many tens of billions of dollars of tranches of collateralised debt obligations and issues of residential mortgage backed securities that turned out to be a very bad joke.

These AAA CDOs weren't the solid gold that the AAA badge implied: they were manure (although arguably lacking the functional benefits of good manure).

Many would say that S&P and the others played an important dishonourable role in fomenting the worst banking crisis since the 1930s. So how is it that S&P's word on the quality of Greek debt, Portuguese debt and Spanish debt carries any credibility at all?

It's curious, isn't it?

What is extraordinary is that almost nothing has been done by governments, or central banks or regulators to break the de facto monopoly of S&P, Moodys and Fitch in the business of rating bonds.

There has been a good deal of talk about reforming the way they are remunerated, to end the apparent conflict of interest arising from the convention that they are paid by borrowers (who obviously want the highest possible rating for their credit).

But isn't the real issue that the ratings troika doesn't face any proper competition, thanks to the official endorsement the firms receive from central banks and regulators?

Wouldn't it make sense for the Bank of England, the European Central Bank, the FSA, the SEC and so on to find other ways to judge the quality of the bonds that underpin their evaluations of banks' financial robustness.

Perhaps I am being over-squeamish, but it doesn't feel democratic or sustainable that the fiscal fate of nations and currency zones - and indeed the perceived strength of the financial system - rests on the analytical verdict of three private-sector research firms, the financial record of which has in recent years not been unblemished.

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The 10-hour torture session of Goldman Sachs executives by US senators yesterday disclosed a very basic disagreement between the world's most powerful investment bank and the world's most powerful legislature.

Goldman Sachs tried to explain, time and again, that market making - in its view - operates outside of any ethical or moral universe: the role of Goldman's market makers is to provide a product to grown-up investors, not to endorse that product in any way.

In that sense Goldman views its market makers as amoral (though, of course, not immoral). They are not the equivalent of the shop staff at Marks & Spencer or Wal-Mart, who - in a sense - are guaranteeing the quality of what they are selling on behalf of their company.

So although Goldman's executives squirmed when the senatorial inquisitors pointed out that its market makers were selling investments - collateralised debt obligations - that Goldman executives had described in internal e-mails as various forms of excrement, their view is that the financial institutions which bought the excrement from Goldman knew what they were doing.

Many of their answers can be paraphrased as follows: "there's a price for excrement; our clients are quite capable of working out what the right price might be".

And, the Goldman bosses added, it's not relevant that Goldman - for its own book - moved from being a net buyer of this horrid stuff to placing bets that it would become even stinkier and less valuable.

How so?

Well again it believes its clients are grown up enough to know that Goldman has its own balance sheet, which it has to manage for the benefit of the firm and its owners, and a separate "client facilitation" activity called market making.

Goldman's evasive action in 2007 to prevent itself being poisoned by all that housing-market ordure, the cleansing of its own financial corpus, was what any sensible bank should have done, or so Goldman executives would say. And it wasn't the role of Goldman's market makers to tell their clients to do the same.

All of which was received with a mixture of contempt and incredulity by the senators.

Their view - and it would be the popular view too, I would hazard - is that a bank with Goldman's history and reputation should not be conducting itself as though it was a street trader selling fake Rolexes which it has pretty good reason to believe will stop ticking within a few days.

If Goldman was desperate to empty its own warehouses of those dodgy investments - which Goldman concedes that it was - it should not have been selling them in the first place.

Now to be clear about all this, the argument here is about business ethics, about morality.

What some may find remarkable is that the senators were unable - at least as far as I could tell - to demonstrate that Goldman broke the law. And I am not sure that anything emerged that reinforced the strength of the Securities and Exchange Commission's fraud action against the investment bank.

That appeared to be the verdict of markets, in that Goldman's share price rose yesterday.

But that does not mean there will be no consequences for Goldman, and for other banks.

To be clear, it is not realistic to ban market makers like Goldman from taking positions for their own account in securities and assorted tradeable investments: no one, I think, would say that banks which trade foreign currencies or government bonds for clients should be prohibited from going long or short of those bonds for their own account.

But it is wholly realistic to put limits - as President Obama wishes to do - on the scale of own-account trading by banks like Goldman.

And in products as murky and difficult-to-analyse as collateralised debt obligations, the presumption that the purchasers of those products are grown-ups able to make rational informed judgements turns out to be naive (to put it mildly).

Which suggests that regulators will have to be much more intrusive in vetting the design and purpose of new financial products, even those aimed at banks and professional fund managers.

Because, as we've learned at some cost, when banks and other investors purchase excrement from the likes of Goldman, its taxpayers - all of us - who pay to clean the mess up.

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Big banks find it immensely difficult to buck the general economic trends.

So many will see it as firm evidence of better times that Lloyds says it was in profit during the first three months of the year - and expects to be in profit for the remainder of 2010 too.

This represents a remarkable turnaround - from losses of more than Β£6bn in 2008 and in 2009 for the two banks, Lloyds TSB and HBOS, which came together in a controversial marriage to form the Lloyds Banking Group we know today.

And it's a better performance than Lloyds expected even a month ago, when it predicted that for the whole of the current year it would return to the black.

There have been two significant contributors to the recovery - a sharp fall in the losses on loans going bad, and a pronounced widening in the gap between what Lloyds charges for loans and what it pays depositors. Which may stoke complaints that banks are paying too little to savers and charging too much to borrowers.

There is also growing evidence that taxpayers will emerge with a profit, perhaps a significant one, on the emergency investment the state pumped into Lloyds and Royal Bank of Scotland, to prevent them collapsing.

At their current share prices, taxpayers are a few billion pounds up on the Β£66bn we paid in aggregate for our stakes in those two banks (on this morning's share price, Lloyds remains a smidgeon below the 73.6p we paid for our 41% stake, and RBS shares are well clear of taxpayers' 50.2p average purchase price).

That's not to say that everything in Lloyds' garden is spring-like and rosy.

The bank still faces a formidable challenge to reduce its dependence on loans and guarantees provided by British and overseas taxpayers, that totalled some Β£157bn last year.

And some will fear that Lloyds and other banks are not yet providing the credit to viable borrowers that a growing economy requires - as indicated by Lloyds remarks that its lending balances remain flat.

But back to that question of whether and when we might pocket a real, cash profit on our holdings in Lloyds and Royal Bank of Scotland. Here are a couple of points to consider.

First, that the initial mechanism for liquidating the stakes will probably involve selling a portion in the form of convertible government bonds (or government bonds convertible at a future date into shares of RBS or Lloyds at a pre-determined price).

This would allow the government - in theory - to borrow a few tens of billions of pounds relatively cheaply, at a time (no secret here) when it has quite a large borrowing appetite.

Second, even if we do emerge with a profit on the rescues of Lloyds and Royal Bank of Scotland, no one - I assume - would believe that represents adequate compensation for the role played by banks in causing the worst recession since the 1930s (which in turn is causing the worst crisis of confidence in sovereign borrowers for several decades too).

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I am hearing that the Pru's largest shareholder, Capital Research & Management, is underwhelmed by the British insurer's record-breaking planned takeover of AIA, the Asian arm of the giant, troubled US insurer, AIG.

In fact word reaches my ears that Capital would prefer to see a pre-emptive break-up bid for the Pru than vote through the $35.5bn takeover of AIA.

An authoritative source tells me that a Capital executive recently held talks with a British financial firm, to probe whether that firm would participate in an initiative to dismantle the Pru.

Capital is one of the biggest fund managers in the world. And it is far and away the most substantial investor in the Pru, with a 12% stake.

It can't block the AIA deal single handed. But if it's determined to vote against the takeover, well the Pru would face a big obstacle to completing the deal.

As you'd expect, I put all this to Capital. This was the response of a spokesman:

"I can neither confirm nor deny whether a conversation between ourselves and another British company took place regarding the proposed Prudential-AIA deal, and/or potential alternatives to the proposed deal structure. In general, conversations that we have with others within the industry are confidential, and therefore we wouldn't be able to comment about such matters in any event."

As for the Pru, it says that it has had constructive conversations with Capital and that there are some weeks to go before Capital has to formally make up its mind whether to approve or vote against the AIA takeover.

There are those close to the Pru who believe that if it came to the crunch, the US Treasury - which controls AIG having bailed it out in the autumn of 2008 - would lean on Capital to "do the right thing".

Really? In the home of the brave investor and the land of free-market capitalism, the US government would strong-arm a giant investment firm to put the putative interests of US taxpayers ahead of its clients?

I suppose the US Treasury might try, but there's no guarantee it would succeed.

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The gulf of mistrust and misunderstanding between the US legislature and Goldman Sachs is something to behold.

The events of the past few days have been a propaganda battle between two enemies that would not have looked anomalous during the Cold War.

The Senate's permanent sub-committee on investigations has released Goldman e-mails that support its conviction that the world's leading investment bank made big profits from betting against the housing market and put the bank's profits before the interests of clients or the wider economy.

Goldman's response has been to release a barrage of other internal e-mails and management reports, which back up its contention that it did not generate enormous profits in this way.

Who is right?

Well, a bit like the Cold War, perception of the truth is conditioned by ideology.

Goldman would not disagree that it bet on the fall of residential mortgage-backed securities (RMBS) and collateralised debts obligations (CDOs) manufactured out of subprime housing loans in 2007 - that it went short of them.

But it would see the adjustment of its own trading and investment positions as a defensive measure, a sensible precaution to avoid lethal losses, rather than an aggressive punt to make enormous profits.

And what it regards as conclusive proof of its innocent intent is that in the circumstances of a collapsing market for RMBS and CDOs, it didn't actually generate colossal winnings: its net revenues from residential mortgage-related products business in 2007 was $500m, not trivial but only 1% or so of its total net revenues that year; and in 2008 Goldman says it made a loss of $1.7bn from these activities.

To be clear, these net revenue figures probably understate the scale of its bet against subprime: what caught Goldman out in 2008 was the weakening in the better-quality home-loans market.

That said, Goldman's speculative position against subprime wasn't remotely as substantial as its big hedge-fund client, Paulson, or as the few other hedge funds that made a killing (many billions of dollars) out of shorting subprime.

The picture that emerges from Goldman's internal e-mails and management documents is certainly of its partners seeking to protect the firm's financial interests; but their first priority appears to be to limit the risk of a lethal loss rather than to maximise the potential for an enormous profit.

Now, most dispassionate observers would probably say it's a shame that more banks weren't a bit more like Goldman in respect of their risk controls: the banks that really let down taxpayers and citizens were those like Merrill Lynch, Lehman, Citigroup, UBS and Royal Bank of Scotland that made stupendous and insane bets that the bull market in debt would go on forever.

So it should not be dismissed as trivial that taxpayers' financial help for Goldman was considerably less than for most of its domestic and international competitors - which is not to ignore that when markets melted down in the autumn of 2008, Goldman too had to be bailed out.

But the big and important point is not about the quantum of Goldman's subprime bet or the quality of its risk management. It is about the essence of Goldman's business model, whether it remains appropriate for Goldman to have the twin priorities of maximising trading and investment profit for its own account, albeit subject to strict limits on the risks it runs, while also seeking to maximising returns for clients.

Those Goldman e-mails written in 2007, when the RMBS and CDO markets were entering the final gasping phase of their bubbled life before collapsing in August 2007, show that Goldman's partners were agonising about how far the price of housing-related investments would fall, whether - for example - prices were overshooting and would bounce.

It's an intelligent and fascinating debate between colleagues with palpable respect for each other. But did they show the same respect for their clients? Did they expose their concerns about the potential for a subprime debacle with those to whom they were selling RMBS and CDOs?

What's so potentially damaging for Goldman about Securities and Exchange Commission's recent fraud charges against it (see my posts on its role in creating and selling the Abacus 2007-ACI CDO) is the allegation that it didn't share relevant information about the risks of investing in a CDO with one important group of clients.

Goldman denies the charges and the broader critique.

But it is surely aware that the SEC case is simply an extreme version of a criticism routinely made by its investment and corporate clients: I have lost count of the number of times chief executives of big companies have said to me that they hire Goldman because the bank is so powerful and talented that they don't want it working for a rival, but they're not confident that every bit of Goldman is promoting their respective interests, rather than those of other clients or the bank's book.

Again, I should say, that at every instance of conflict of interest, Goldman is brilliant at showing that it plays by the rules.

And whatever the reservations of clients, those qualms haven't prevented Goldman becoming - arguably - the most influential and important investment bank since the heyday of the Rothschilds some 200 years ago.

Perhaps therefore the best way of seeing the assault on Goldman by Senate and SEC is as part of the wider debate about how to sanitize the banking system - about whether the risks of boom and bust in banking would be reduced if there were a clearer demarcation between banks that advise clients and institutions that deploy their own capital to generate trading and investment returns.

A couple of e-mails released by Goldman may come to characterise this debate.

They were written towards the end of January 2007, a good six months before Armageddon for the asset-backed securities market, by Fabrice "Fab" Tourre, the middle-ranking Goldman executive charged by the SEC.

Here are the resonant quotes, from flirtatious notes to Tourre's female pals:

"More and more leverage in the system. There is a risk that the entire edifice will collapse at any moment...Sole potential survivor, the fabulous Fab...,standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all the implications of those monstruosities (sic)!!! Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job; amazing how good I am in convincing myself!!!"

"When I think that it is to an extent myself who has participated in the creation of this product (which, I should say in passing, is a pure product of intellectual masturbation, the kind of thing one invents while saying: 'well what if one invents something that has absolutely no purpose, is utterly conceptual, totally theoretical and no one knows how to price'), that makes me sick to see it implode in flight...It's like Frankenstein turning against its inventor".

It turns out that Tourre was a prophet; he saw the tsunami building on the horizon.

Many may well think it's a shame that Tourre's searing insights seem to have been reserved for his women chums.

But the big questions for his bosses - which will doubtless be put tomorrow by US Senators when they grill Lloyd Blankfein, Goldman's chairman - is whether they agreed that CDOs are a "pure product of intellectual masturbation" and whether the way they switched to shorting subprime showed that they too feared the collapse of "the entire edifice".

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was perhaps less striking for what he said, and all the more for how he said it, where he said it, and to whom he said it.

The shape of his programme to make safe America's banking system has been known for some months.

He would:

(a) set up an autonomous consumer-protection agency;

(b) give more power to shareholders to determine who runs the banks and what they're paid;

(c) put in place resolution procedures to protect taxpayers when the biggest financial institutions run into difficulties;

(d) introduce greater transparency into the trading of derivatives by directing trades through centralised clearing houses, and

(e) limit the size of banks and place limits on the ability to speculate for their own account of those that take retail deposits.

Obama was giving a push to the central elements in his programme as the progress of legislation in the Senate reaches a crucial stage.

Within a very short walk of Wall Street, and in a room which contained Lloyd Blankfein, chairman of Goldman Sachs, Bob Diamond, president of Barclays, and senior representatives of Morgan Stanley and JP Morgan, among others, he urged the big banks to surrender their arms, to temper their ferocious lobbying against the proposed changes.

This is what he said:

"To those of you who are in the financial sector, let me say this: we will not always see eye-to-eye. We will not always agree. But that doesn't mean that we've got to choose between two extremes. We do not have to choose between markets that are unfettered by even modest protections against crisis, or markets that are stymied by onerous rules that suppress enterprise and innovation. That is a false choice. And we need no more proof than the crisis that we've just been through."

Now although the rhetoric of Gordon Brown, George Osborne and Vince Cable has become increasingly critical of some banks and bankers, I don't recall any of the leaders of the main parties venturing into the City to deliver a public sermon to the grandees about the duties that must accompany their rights.

Also, some will say that there's a boldness to what Obama is proposing that we haven't yet seen in UK legislation - which to date has focussed on the palpable flaws exposed by the collapse of Northern Rock, such as the unsuitability of traditional insolvency legislation for dealing with banks that run into difficulties, and the fuzzy relationship between the Financial Services Authority, the Bank of England and the Treasury.

That said, the FSA already has a consumer-protection arm (which the Tories would like to hive off, as part of its plan to crunch the main supervisory part of the FSA into the Bank of England). Also, shareholders in British companies have greater rights than owners of American businesses to influence executive remuneration.

But what about breaking up banks and limiting their size? Well, the government is set against that.

In last night's prime-ministerial debate, I thought one of the more riveting exchanges was between a PM who defended that status quo and a Liberal Democrat leader who would like to shrink and dismember them.

Gordon Brown's factually true statement was that Northern Rock did quite a lot of damage when it collapsed, and it was not a super-conglomerate bank of the size and sort that Obama and Clegg would like to cut down to size.

That said, most would argue that it wasn't Northern Rock's difficulties which put a bomb under the British economy. The direct fiscal costs of nationalising it were relatively small, a few billion pounds (although taxpayer loans to the bank were around Β£30bn at the peak).

It was the much bigger and more diversified banks, Royal Bank of Scotland and HBOS, that wreaked havoc when they went to the brink of collapse. And saving them required tens of billions of pounds of direct investment by taxpayers and hundreds of billions of pounds of state guarantees and loans (mostly to them, but also to other giant mega banks, such as Barclays).

The pertinent issue is how to prevent the likes of Royal Bank of Scotland and HBOS holding taxpayers and the economy to ransom.

Right now, in the UK, the battle lines on this aren't perhaps what you'd expect.

There is an intriguing alliance between the Lib Dems and the Bank of England, which believe there's a strong case for physically separating investment banking from retailing banking. Ranged against them is the Labour government and the Financial Services Authority, which argue that investment banking can be made safe, even when owned by a conglomerate engaged in retail banking, by massively increasing the capital the banks have to hold against their trading books as a buffer against losses.

By the way, both sides are fans of so-called living wills, or explicit, legally binding arrangements for protecting and hiving off retail deposits in the bigger banks when they face ruin.

Where do the Tories stand on this? Well, their public position is that they're in favour of some dismantling of banks so long as that's what happens in important competitor nations.

But in practice they are probably closer to Clegg and Cable than they would care to admit.

How so? Well Osborne and Cameron are - as I've said - committed to giving much more power to the Bank of England over the supervision and regulation of banks. And they would transfer these powers while knowing that the Governor of the Bank of England, Mervyn King, believes that there may be no credible alternative to breaking up the banks.

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Why are banks so vulnerable to going bust?

What does it mean when the Bank of England creates new money?

Why are some people paid so much more than others?

These are some of the things we all need to know for a grasp of what caused the 2007-8 financial crisis that in turn precipitated the Great Recession - and also to assess the competing claims of the political parties that they have the remedies.

Can complete answers be given in three minutes?

Not on your nelly.

Can comprehension be aided by a a trio of pop-video-length films?

I hope so, because - for me - the most important work I've done this year has been to make three films which you can watch here.

They were commissioned by Βι¶ΉΤΌΕΔ3, and shortly after the election they will be the centrepiece of a televised discussion with young people about the Crunch and after.

In the meantime, please have a look at them and tell me what you think.

PS: If you think they're any good, please forward the link to anyone who might find them informative.

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If the UK implemented the duo of taxes proposed by the International Monetary Fund, the proceeds could be very substantial indeed.

My estimate, based on the parameters set out by the IMF, is that the take from financial firms from the two would be between Β£5bn and Β£10bn per annum.

That's based on what the IMF says should be a possible rate for any new tax on the profits and pay of financial institutions, and also what it indicates should be the yield from the separate liabilities tax for countries like the UK with relatively large financial sectors.

Such a sum would make a useful dent in the ballooning British deficit - although the IMF is (naturally enough) explicit that it doesn't think such taxes should be dedicated to filling a fiscal hole, but should be a provision to meet the costs of future financial crises.

What's striking is that proceeds of such magnitude massively exceeds what any of the main political parties currently say they want to raise from new bank taxes.

The Tories have said that their planned bank tax - which looks very similar to the IMF's Financial Stability Contribution, as a levy on what banks borrow - would raise around Β£1bn.

And the Lib Dem's tax on banks' profits - arguable a "lite" version of the IMF proposed Financial Activities Tax - is budgeted by Vince Cable to generate Β£2bn a year, rising to Β£3bn in 2014/15.

As for Labour, it has kept its powder dry, preferring to wait for what the IMF had to say (see last night's note for more on this).

That said, the government has already raised Β£2bn from its one-off tax on bonuses. And Alistair Darling has already in the past few hours made it clear that he believes that the IMF proposals give him licence to do a lot more.

Among those who'll be very disappointed with the IMF proposals are Adair Turner, chairman of the Financial Services Authority, and campaigners for a tax on financial transactions, or a Tobin Tax.

The IMF is explicit in rejecting Lord Turner's argument that a Tobin Tax could make a useful contribution in reducing the bloated size of financial markets or their volatility.

It does look, in spite of the passion of its proponents, as though the Tobin Tax is dead.

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I have in my possession a copy of the IMF's eagerly awaited paper for governments on how the banks should be made to pay for the costs of future financial and economic rescue packages.

And I have to say that the proposals - which have been sent to IMF members in the past few hours - are more radical than I anticipated.

In the paper called PDF (which rather gives the game away), the IMF argues the case for two new levies to be applied in as many countries as possible:

1) A "financial stability contribution" to pay for "the fiscal cost of any future government support to the sector". The levy would be paid by all financial institutions, not just banks, initially at a flat rate but eventually refined so that riskier institutions paid more.

2) A "financial activities tax", which would be levied on the sum of financial institutions' profits and the remuneration they pay.

The proposals are likely to horrify banks, especially the proposed tax on pay.

They will also be politically explosive both domestically and internationally.

Labour is bound to claim that the IMF is implicitly criticising the Tories' plan to impose a new tax on banks irrespective of what other countries do - because the IMF paper says that "international co-operation would be beneficial" and that "unilateral actions by governments risk being undermined by tax and regulatory arbitrage" (the danger that banks will relocate to countries where the tax doesn't apply).

I would also start to question my sanity if Gordon Brown doesn't claim credit for putting pressure on the IMF to launch its review of possible bank taxes.

All that said, the Tories will say their tax resembles the Financial Stability Contribution.

And the LibDems are bound to claim that their proposed tax on banks' profits isn't a million miles from the IMF's profits-plus-pay levy.

Internationally, there will be dissenters. Canada is opposed to any new bank taxes.

And although the Americans have adopted a tax to pay for past bailout costs, it is by no means certain they would want the second financial activities tax.

That said, the IMF paper represents a big step along the way to a new levy or levies on banks everywhere.

I would make three other points.

The IMF would mildly prefer the so-called financial stability contribution to go into a discreet bailout fund rather than into general government revenues.

By contrast, Labour, the Conservatives and the LibDems all want the proceeds of any new bank tax to be available for general government use.

Also, the IMF favours a bold associated reform, which would be to limit the tax deductability of interest, to make debt more expensive and discourage banks, financial institutions and other companies from taking on excessive debts.

George Osborne, the shadow chancellor, has talked about such a reform, but is not committed to it.

Finally, insurers, hedge funds and other financial institutions less implicated in the recent financial and economic crisis would be disheartened that they would have to pay the new taxes.

But the IMF argues that if they were excluded, lots of activities currently carried out by banks would reinvent themselves as insurance or hedge-fund services, for example, to escape the levies.

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First things first: the Financial Services Authority's (FSA) decision to investigate Goldman over the way it sold the collateralised debt obligation Abacus 2007-ACI to investors is another embarrassment for the world's most successful hedge fund.

But all it really shows is that the FSA takes the Securities and Exchange Commission's (SEC) civil fraud charge against Goldman seriously - which shouldn't be much of a surprise.

The relevant point is that the middle ranking Goldman executive also accused by the SEC of fraud in this case, Fabrice "Fab" Tourre, is currently authorised by the FSA to work as a banker in London, having been employed on Wall Street at the time of the alleged offence.

So the FSA has a legal duty to investigate whether its proper that Mr Tourre should continue to be licenced to ply his trade here.

In other words, there is no reason to assume that the FSA has discovered some kind of British angle to the alleged fraud (other than what I pointed out on Friday, to wit that by dint of a chain of deals, some $841m of the Abacus loss ended up with Royal Bank of Scotland).

Still, it's not the prelude to the unveiling of Goldman's first-quarter results that it would have chosen.

I'll update you on those in just a few minutes, when they're available.

Update 12:16: Well Goldman has done it again: another spectacular set of figures from the world's number one investment bank.

Net revenues at $12.8bn were up by a third compared with the last quarter of 2009 and by more than a third in relation to the first three months of last year.

As for net earnings, these were a handsome $3.5bn, 94% higher than a year earlier.

However handsomest of all was the provision for what to pay employees: this was a mouthwatering $5.5bn, or $166,000 on average for each of Goldman's 33,100 permanent and temporary staff.

In pounds sterling, that around Β£109,000 per head for three months work (although, of course, no-one at Goldman is paid that average - some are paid less and the lucky ones received spectacularly more).

Goldman would wish me to point out that remuneration could have $830m more - $25,000 per head higher - if it hadn't shown restraint and decided to pay out a lower proportion of revenues as compensation than has been its norm.

What's the Β£109,000 question? Whether the SEC's civil fraud charges - which Goldman contests in no uncertain terms - marks a high-water mark for the firm and therefore for the riches accruing to its clever bankers?

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Goldman Sachs's results today will be a further opportunity for the world's most successful investment bank to respond to .

Goldman is accused of creating an investment, a so-called collateralised debt obligation or CDO called Abacus 2007-ACI, so that a giant hedge fund, Paulson, could bet that the CDO would collapse in value, without telling those who bought into the CDO that they were the suckers on the end of this bet.

Goldman denies it has done anything wrong. And points out that those banks which lost money were sophisticated financial institutions which should have known what they were doing.

But apart from the potentially serious ramifications for Goldman, the case also shines a light on the behaviour of hedge funds during the euphoric years of 2006 and 2007 when the bubble in markets reached its peak.

Now it is important to point out that Paulson has not been charged with breaking any rules or laws.

But its behaviour in this deal - and the actions of other hedge funds in similar deals - may increase the determination of politicians, especially in Europe, to curb hedge funds' activities.

Because what Paulson and other hedge funds did in these boom years was not simply to bet on a slide in the value of investments that already existed and were being traded.

These hedge funds encouraged investment banks to create brand new collateralised debt obligations to be sold to other banks and investors - so that they, the hedge funds, could then speculate that the price of these CDOs would shrivel.

Both Goldman and the SEC agree this is what happened in the Abacus 2007-ACI case.

Why does this matter?

Well it means that the hedge funds were - for example - spurring the investment banks to manufacture these CDOs, which bundle together other securities made out of low quality or sub-prime loans to home buyers. And the effect may have been to increase the supply of cheap finance to homebuyers.

In other words, the hedge funds can be seen as having pumped up America's unsustainable housing bubble with the intent of maximising their winnings as and when that housing bubble burst.

In some cases, hedge funds - though not Paulson in the Goldman case - are said to have provided risky equity, the essential ingredient to allow the collateralised debt obligations to be created, and then took out insurance against the risk of default on the very same CDOs.

The allegation is that they put up money knowing that it could be lost, so that they could then make even more money from the insurance claim when the investment went belly up.

A number of hedge funds made billions of dollars in 2007 and 2008 having astutely placed bets that investments made out of US sub-prime housing loans would collapse in value.

Now, if this was their reward for pointing out that - in an investment sense - the emperor had no clothes, who could quibble with that?

And if - prior to that - they encouraged investment bankers to sell CDOs to gullible professional investors, thus perpetuating the myth for a convenient period that the emperor was magnificently attired, weren't they just being entrepreneurial?

On that view, today's moans about how some hedge funds profited at the expense of these gullible investors is surely just the sour grapes of the foolish against the smart.

Except that it wasn't just deep-pocketed professional investors - banks and insurers - who were on the other side of the hedge funds' bets. When the hedge funds picked up their winnings, it turned out that some of these banks and insurers didn't have the moolah. And the bill landed on taxpayers' doorstep.

To put it another way, the painful flip side of hedge funds' huge profits from betting on the collapse of sub-prime was billions of dollars of losses for banks and insurers. These losses were a major contributor to the meltdown of the banking system in 2007 and 2008 - which in turn led to a global recession and the biggest taxpayer bailout of banks that the world has ever seen.

Some will argue therefore that what a few hedge funds did was not an example of markets doing what they do best, which is to allocate resources to where they can be used most efficiently.

Instead hedge fund critics will see it as a justification for imposing significant new constraints on how hedge funds operate, on the basis that the billions of dollars in profits they made were not blameless profits.

Or to put it another way, the determined manner by which some hedge funds maximised their riches may have contributed to the impoverishment of the rest of us.

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• - What's this?

of at between Β£15m and Β£20m per day.

And it has confirmed that European airlines have asked the EU and national governments for financial compensation for the prohibition on flying.

Later today I also expect BA to say that it believes - on the basis of the tests it conducted yesterday - that it is safe to resume at least some flying.

The airlines believe they have a moral case for compensation from taxpayers, in that they have been deprived of the ability to make their own judgements about whether it is safe to fly.

In effect, the European Commission - or rather the air-safety arm of it - has prohibited flights.

The airlines tell me that this is a break from the norm: they would typically assess, in consultation with regulators such as the Civil Aviation Authority, whether it's safe to fly.

This is what happened in the US, I am told, after the Montserrat eruption.

BA would like to be given back some responsibility for determining whether it is right to fly.

As for the prickly issue of compensation, the airlines believe there is a precedent: nine years ago, after 9/11, airlines were compensated for the four-day prohibition on transatlantic flights. BA received Β£22m from the British government under this scheme.

If compensation is paid this time, it would probably have to have an EU dimension, given that the flying ban is an EU decision.

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is beginning to bite in many ways.

TUI Travel, the leading holiday travel group which owns Thomson and First Choice, has become the first company to estimate the losses it is incurring from the grounding of flights. Up to yesterday, it says the costs have been Β£20m - and that the daily expense is between Β£5m and Β£6m.

You'll find it increasingly difficult to buy roses, since most of them this time of year are flown from Kenya.

And you may find, like the family Peston, that your kids are being given the day off school, because substantial numbers of teachers can't get home from their holidays.

But it is time that someone defended the battered reputation of the erupting Icelandic volcano.

Because all reports to the contrary, it isn't the volcano that has grounded our aircraft; it's the weather that has done the damage.

Or at least that's the view of the airline bosses to whom I've been speaking.

They point out that there are other live volcanoes in the world. But when they belch out ash, they don't bring air transport to a standstill.

The airlines tell me they are quite habituated to flying round ash clouds.

So why is this cloud apparently so much bigger and more dangerous?

Well it's because of the unusual weather conditions that are causing it to spread over some of the busiest flying lanes in the world.

Also, and here's what may tickle a few of you, the official view of the extent and location of the cloud, its geography, is a computer simulation by the Met Office.

Airline executives can't resist telling me that this is the same Met Office which last year told us to prepare for that blistering BBQ summer which turned out to be something rather cold and damp.

Now the accuracy of the Met's ash map is being improved by hard data gathered by observation planes.

But it seems highly unlikely that it can ever be 100% accurate.

Which is why the airlines are desperate to find some other fundamental solution that would give them - and their passengers - confidence that the closure of airspace is a one-off event.

Whether that's fitting special filters to engines or developing a contingency for low-level flying, what they say they need is some system that will reassure customers that any reopening of airspace won't be temporary.

As I've repeatedly mentioned, most airlines are only just recovering from the worst recession in their history.

They're therefore deeply alarmed at the very real possibility that many people will simply choose not to fly either for business or leisure, if there's a risk that they could find themselves trapped abroad by a renewed grounding of aircraft.

Any significant dent to the recovery in passenger numbers could undermine the confidence of some airlines' creditors and precipitate a new spate of bankruptcies.

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British Airways is conducting its own tests of the impact of the ash cloud on aeroplane engines.

A BA Boeing 747 is flying over the Atlantic for up to four hours on Sunday.

BA's chief executive, Willie Walsh, who is a trained pilot, is on board, as is the airline's chief pilot.

The airline's engineers will work through the night to examine the impact of the flight on the 747's four engines. Results are unlikely till tomorrow.

Right now, BA and other airlines are planning on the assumption that they won't be allowed to fly till Thursday at the earliest.

As I pointed out on Saturday, the financial cost to the industry of the cessation of flights is immensely painful, at around Β£25m a day for BA and - according to the industry group IATA - at least Β£130m ($200m) a day for airlines collectively.

I would not be surprised if IATA on Monday were to call on European governments to provide financial support to airlines, which face a stiffer financial challenge than even after the collapse in passenger numbers after the 9/11 atrocity.

I would also expect BA and other airlines to urge the government to "stress test" the science that has led to the flying ban.

BA would want to highlight that in the US the authorities operate less constraining safety precautions after volcano eruptions.

"There are six active volcanoes in the world" said an airline executive. "We need to understand why the Icelandic eruption is seen by the authorities to be so much more dangerous than others".

Update 19:11: Airline executives and engineers want to know why they can't be given permission to fly at 20,000ft, below the ash cloud, till the cloud clears.

Also, they're worried that even if they are given permission to fly again in a few days, many people may decide to avoid air travel for an extended period on the fear that the plume and cloud will return.

"We need a permanent solution that reassures people in a proper way" said one airline boss. "Otherwise the damage to our businesses will be even more severe."

As I said earlier, there are deep concerns that some European airlines will be bankrupted by the disruption, unless they're given support by taxpayers.

In the UK, Easyjet is more robust than most.

Its losses are running at between Β£3m and Β£5m a day. But it has always operated with a massive liquidity buffer, so that it can withstand being grounded for up to six months.

As for food retailers, the big chains tell me that about one or two per cent of their produce is flown in.

"We're beginning to see a shortage of certain flowers, because Kenya supplies about half our stock at this time of year" said a supermarket boss. "And you'll begin to see less exotic fruit and out-of-season veg".

As for clothing retailers, the impact on them so far has been limited: some so-called "fast" fashion, based on what's in the latest shows, goes by air.

Right now, the biggest impact for business is the sheer number of executives who are stuck abroad, unable to come home.

"The real danger for them is that we'll discover we don't really need them," one business leader joked.

Update 21:38: The BA 747 has now landed at Cardiff after a two hour 46 minute flight, covering 550 miles to the west, over the Atlantic.

The plane took off from Heathrow, and flew through the no-fly zone.

It encountered no problems, no loss of engine performance, no damage to windows.

Engineers in Cardiff will now make a more detailed assessment of the Jumbo's engine over night.

Update 21:50: Earlier today a Met Office plane went through the cloud and encountered dangerous levels of ash.

Which shows that the issue isn't whether the cloud is real and dangerous - but whether its extent can be accurately mapped.

One possible solution is to put observation planes in the sky, to give a more detailed picture of the location of ash concentrations.

The government is therefore trying to obtain more observation planes, from the military in particular.

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The closure of Britain's major airports, and the almost unprecedented disruption of Transatlantic and pan-European travel, is beginning to look like a major business and economic disaster.

If it goes on many days longer, a number of European airlines will run into financial difficulties and may need bailing out by governments - or so I am told by senior airline figures.

As it happens, British Airways is probably able to weather this particular storm longer than most: in February it said it had Β£4bn of cash and committed borrowing facilities, which would allow it to absorb the losses of being grounded for a time.

But the daily losses for BA of not flying are probably around Β£25m a day (although one airline source estimated the daily loss at Β£45m), which is painful (to put it mildly).

BA has no insurance against the impact of this natural disaster. So it won't be able to absorb these losses indefinitely (to state the obvious).

What worries BA and other airlines is that they have absolutely no idea when they will be able to start flying again.

However they are beginning to question whether the Met Office's computer model of the ash cloud is exaggerating its size. They claim that satellite pictures do not corroborate the Met's computerised simulation of the cloud.

"It is possible that the Met Office is being too cautious", an airline executive said to me.

There's also a growing concern among airline executives that the government is not engaged enough on what they see as a catastrophe which - if airports don't reopen soon - will spread from financially stretched airlines to any business dependent on aircraft for shipping goods.

"This has the potential to wreak huge damage to Europe's economy" is how one airline director put it to me.

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Goldman Sach's response to the SEC's fraud charge shows that probably the best way to see the SEC's action is as an attack on one important aspect of the leading investment bank's business model - which, of course, probably makes the charge more significant than the narrower allegation that it committed a single billion-dollar crime.

The world's number one investment bank concedes that it constructed Abacus 2007-ACI after the mega hedge fund Paulson "indicated its interest in positioning itself for a decline in housing prices" (see yesterday's note, "Goldman may owe British taxpayers $841m"). And it says that Paulson provided "input regarding the composition of the underlying securities" and stood to benefit "from a decline in the value of the underlying securities".

Also, Goldman doesn't attempt to deny that those who invested in Abacus may not have know that Paulson would be betting against them, or taking a short position that would impoverish them to Paulson's considerable benefit.

But Goldman has a defence that deserves to be taken seriously - which is that the firm stuck to the conventions for how such deals should be managed.

Goldman says that those who invested in Abacus, notably IKB and ACA, were experienced professionals who were "among the most sophisticated mortgage investors in the world".

And it says that the normal practice of a market maker - and part of Goldman's role in this deal was as market maker - is not to "disclose the identities of a buyer to a seller and vice versa".

Goldman is also completely adamant that it did not ever represent to ACA that Paulson would be a long investor in Abacus - although ACA, according to the SEC, believed that was the case.

A bit of explanation is required here: ACA Capital Management was a leading manager of CDOs; it gave final approval for the 90 mortgage-backed bonds on which Abacus was constructed, having received input from Paulson and IKB; and it was the largest investor, in the sense that it provided insurance against default for Abacus, with a $951m exposure (which through a complicated chain ended up generating huge $841m losses for Royal Bank of Scotland).

So, more specificially, Goldman says that ACA and IKB, a German bank, were given all the necessary information on the securities underlying Abacus to have allowed them to assess the risk of investing in Abacus; and that they knew that a deal of this sort was always going to have someone on the "short" side, profiting from the claim on the credit insurance if the deal went bad.

Here's what Goldman thinks is the clincher, in that it's the first line in its defence: Goldman itself lost money on Abacus; although it took a fee of $15m on the transaction, it too was an investor in Abacus - alongside IKB and ACA - and ended up losing more than $90m.

So Goldman can't understand why anyone could think that it constructed Abacus as a surefire lossmaker, to the detriment of ACA and IKB, because if that had been its intention it - like Paulson - would surely have bet on Abacus's collapse, rather than putting its own money into the deal.

All I would say about this apparently simple and compelling point is that CDO structures are highly complicated. And it's simply not possible to know, on the basis of the available financial material, what degree of poor performance by Abacus would have generated net losses for Goldman.

It is conceivable that Goldman invested on the basis that some degree of poor performance by Abacus was highly likely - just not the total meltdown that transpired.

Doubtless all this will become clearer as the SEC's case against Goldman is pursued.

But what may be of some concern to Goldman's owners, its shareholders, is that in denying that Abacus was a rogue deal, Goldman has in a way raised the stakes for the firm.

If Goldman were to lose the case, there could be collateral and expensive damage to the way that it constructs and sells other deals, and thus to the inner workings of one of the most formidable moneymaking machines the world has ever seen.

UPDATE 17:35 Following my blog of yesterday ('Goldman may owe British taxpayers $841m'), Royal Bank of Scotland says that its board has not yet made a decision on whether to sue Goldman.

Royal Bank will let the SEC's case against Goldman run for a bit and will then make a decision. The board will have discussions with lawyers in the coming weeks and "think carefully" about suing Goldman, I am told.

As chance would have it, the previous Royal Bank board, under the then chief executive Sir Fred Goodwin, had a row with Goldman in the spring of 2008 when Goldman was an advisor on Royal Bank's Β£12bn rights issue.

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British taxpayers have a direct material interest in the outcome of the by the US financial watchdog, the .

Because the bulk of the loss on the transaction at the heart of the charge against Goldman ended up with Royal Bank of Scotland, the bank where British taxpayers have an 84% stake.

How the loss ended up with Royal Bank is quite a long story, which I'll summarise below.

But the material fact to dwell on for now is that on 7 August 2008, just before Royal Bank was semi-nationalised, it paid out $841m to Goldman Sachs to settle a claim on credit insurance provided by ABN, the Dutch bank which Royal Bank had acquired (or to be more precise, it had bought a big bad chunk of ABN in the autumn of 2007).

Goldman then passed this $841m to the ultimate beneficiary of the insurance contract, the giant US hedge fund, Paulson & Co.

Now the SEC claims that the insurance contract would never have been written, and therefore the loss would never have fallen on RBS, if Goldman had told the truth about certain financially important elements of the investment product that was being insured.

So although most interest in the SEC's case will focus on the big point that the world's most successful investment bank, Goldman Sachs, has been charged with fraud - and doubtless there will be lots of new jokes leveraged on the resonant statement last year by Lloyd Blankfein, Goldman's chair and chief executive, that the bank does "God's work" - there is a fascinating sub-plot about whether Royal Bank (and by implication British taxpayers) will be able to recover a short billion dollars from Goldman.

Financial thriller

The narrative of what transpired, as set out by the SEC, is quite the financial thriller. It's all about the circumstances in which a collateralised debt obligation called Abacus 2007-ACI was created and sold to investors, notably a German commercial bank called IKB.

Collateralised Debt Obligations, or CDOs, are bonds that are created out of lots of other mortgage-backed bonds.

And this one was created by Goldman Sachs, according to the SEC, to service a demand from the hedge fund, Paulson & Co.

Freefall housing market

But here's the thing: Paulson didn't want to invest in the CDO in a conventional sense, it didn't want to go long of it (to use the jargon); the hedge fund wanted to bet on the price of the CDO falling, it wanted to go short of the CDO.

The background is that Paulson had rightly identified that the US housing market was in freefall and that this would lead to massive price falls of CDOs, bonds and investments created out of homeloans, especially subprime homeloans.

Paulson was looking for ways to profit from falls in these CDOs and bonds. So it gave a list of bonds to Goldman that it wanted to be included in the Abacus CDO.

It selected these bonds on the basis of its belief that these bonds would be downgraded by rating agencies and their price would collapse.

The allegation

Now although lots of people are uneasy about investors that take short positions, there is nothing illegal or unethical about anything I've just described.

But what the SEC alleges is that Goldman failed to disclose to the main adviser on the constituents of the CDO, a firm called ACA that has since collapsed, that Paulson wanted to bet on Abacus falling.

In fact, says the SEC, ACA was led to believe that Paulson would be taking a long position in the equity of the CDO, or doing precisely the opposite of what Paulson actually did.

The SEC says that Goldman also failed to disclose to those who invested in the CDO that it had been created with advice from Paulson and that Paulson wanted to bet on the bond falling in value.

The $1bn bet

It believes that investors in the CDO, like IKB, and those that insured the CDO against default - which ultimately turned out to be Royal Bank - wouldn't have done so, if they had known that it had been constructed to enable Paulson to take a giant bet at their potential expense.

Paulson certainly won that bet (and this firm, founded by John Paulson, has won many such big bets over the past three years, making its founder a billionaire several times over).

The Abacus deal closed on 29 April 2007. By 29 Jan 2008, a staggering 99% of its constituent bonds had been downgraded.

Which meant that investors lost $1bn. And Paulson had made a handsome $1bn profit.

As for Goldman, it expected to make a fee of between $15m and $20m on the deal.

For the record, I should point out that the SEC has not accused Paulson of wrongdoing.

Along with the SEC's fraud charge against Goldman, SEC is also charging a Goldman middle-ranking executive, Fabrice Tourre - who currently works in London, but was based in New York when working on the Abacus deal.

I should also point out that Goldman has tonight rejected the charges. The bank said: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."

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How much has the 2007-8 banking crisis cost us?

Well, if you believe that the big cost is the economic growth that's been permanently lost in the worst recession since the 1930s, the number that emerges is so huge as to defy comprehension.

According to the Bank of England - or more precisely its executive director for financial stability, Andy Haldane - the cost of the financial meltdown on this kind of analysis is anywhere between one and five times the value of GDP, between one and five times the annual value of everything we produce (see his recent speech, ).

So for the world, that would be a loss of up to $200 trillion and for the UK it would be a loss of up to Β£7.4 trillion.

If you want to humanise the British number, that would be a maximum loss of Β£148,000 for every one of Britain's 50m adults.

Since most of us don't have Β£148,000 to lose, you might wonder if Mr Haldane is overstating it a bit.

But what you have to remember is that this is the income that all of us would have earned over many years to come, if there hadn't been a permanent ratcheting down of the UK's output caused by the credit crunch.

Think of it as a diminution of your lifetime earnings that has resulted from the damage to the UK's productive potential.

Now if you accept this analysis (and not everyone agrees that the banks are the main culprits for the Great Recession and its consequential economic harm) then a number of things follow.

First is that the direct costs to taxpayers of bailing out the banks are trivial by comparison.

It is more than a theoretical possibility that as and when the state guarantees and loans to the banks are unwound, and after taxpayers' stakes in Royal Bank of Scotland, Lloyds and Northern Rock are sold, the public sector's account for all this will be in the black - taxpayers will have made a profit.

Which, of course, would be a jolly good thing.

But it doesn't remotely imply that the banks have been unfairly castigated and that there's no need for serious reform of the banking and financial system (although you won't be surprised to know that bankers have told me that the recovery in their share prices shows that all this "hysteria" about how they have to change their ways has been massively overdone).

There is something very badly wrong with a banking system that creates the financial instability that leads to the kind of sharp swings in economic activity that we've recently experienced.

So how to fix it?

Well there is the most extraordinary divergence of opinion between those who run the banks, those who run governments, and increasingly those in charge of regulation - which some bankers would characterise as the "nutters in the tent".

Most bankers believe that if they're forced to hold a bit more capital as a buffer against future losses, if they stock up their holdings of liquid assets as an insurance pot against runs, and if they shed some of their instinctive irrational exuberance, well then everything will be alright again.

Although predictably, they're throwing all their fearsome lobbying might behind a campaign to water down even this kind of conventional remedy: German and American banks in particular are putting enormous pressure, via politicians and regulators, on the Basel Committee on Banking Supervision to back off certain elements of the proposed capital and liquidity changes that could erode their profitability more than they feel is comfortable.

What about politicians?

Well there has been a bit of argy bargy about bank reform in Britain's general election.

But, apart from the fairly sketchy but radical plans of the Liberal Democrats, it's mostly second order, relatively tame stuff: modest proposals for hiving off some of banks more speculative activities if other countries do the same (the Tory position); a tax on banks to raise precious revenue (which all three parties would love, though Labour - unlike the Tories and Lib Dems - would not impose one in the absence of international agreement).

For revolutionary ideas, you have to go to an unlikely source, those who run Britain's Financial Services Authority and the Bank of England.

Haldane, for example, is doubtful that the banks can be made safe unless the size of banks is limited very significantly, and unless their structures and activities are made much less complex.

On his view - and, as I understand it, his view is shared by the Governor of the Bank of England, Mervyn King - the likes of Barclays, HSBC, Royal Bank of Scotland, Citigroup, Deutsche Bank, BNP Paribas and so on simply should not be allowed to exist in their current huge, sprawling, conglomerate form.

Now you may think that's big stuff.

But the ideas of the chairman of Financial Services Authority, Adair Turner, pose just as great a challenge to the status quo.

In a speech he gave last weekend to the inaugural conference of George Soros's , Turner outlined a vision of taxes and capital requirements being used to massively shrink the size of liquid debt markets - and of regulators (like him) intervening in a much more hands-on way to prohibit banks from lending too much to specific sectors as and when those sectors seem to be overheating.

Here's what's striking.

First that Turner and King/Haldane are some way apart (King has been very sceptical about the notion of taxing transactions to shrink markets).

But arguably more important is that the Bank of England and the Financial Services Authority are very much the outriders in terms of global thinking about all of this: they are massively more radical than their peers in other financial centres.

And they're also much more radical than the elected leaders of any rich developed economy.

What you might deduce is that King, Haldane and Turner have somehow acquired immunity from a dangerous prevailing liberal-market ideology that is actively promoted by the banks and bankers who profit from it (this characterisation is not that of some Marxist extremist by the way, but is the FSA chairman's), but that politicians are yet to acquire that immunity (which some would say is to do with the traffic in jobs between banking and politics, especially in the US).

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• - What's this?

Vince Cable has been the great scourge of how banks hid the risks they've been taking by keeping much of their financial activity off their published balance sheet.

So I had to slightly chuckle at the 's presentation of a Lib Dem government's de facto profit-and-loss account.

Because Cable's plan to levy a tax on banks' profits is classified as a "savings proposal" rather than as a "tax proposal".

Now in fairness to him, the Lib Dems' proposals for the public finances are set out in a more helpful tabular form than is to be found in either the Labour or Tory manifestos.

Unlike Labour and the Tories, the Lib Dems make it incredibly easy to see that (just like Labour and the Tories) they would only make a start in reducing the public-sector deficit - and have promised expenditure cuts only in the generality rather than the detail.

But I think Mr Orwell would have something to say about the classification of a tax as a saving, even when the targets of the tax are institutions as unpopular as the banks.

Also, there is no detail about how any bank's liability to the proposed tax would be calculated. All we're told is that the levy would raise just over Β£2bn in the current financial year, rising to almost Β£3bn in 2014-15.

Which sounds like a lot of money, but is actually quite small beer compared with the Β£5.5bn a year that the Lib Dems would raise by restricting relief on pension contributions to the basic rate of tax.

The Lib Dems would be taking to a logical conclusion the reduction of tax reliefs for those on higher earnings already announced by the government.

On the Lib Dem's plan, anyone earning more than Β£44,000 a year, and paying into a pension, would see a tax rise - although those paying 40% tax who earn less than Β£100,000 a year and make fairly modest pension contributions would probably be net beneficiaries from the Lib Dem's flagship tax idea, which is to increase the tax free personal allowance to Β£10,000 (at a whopping cost of Β£16.8bn).

As Stephanie has pointed out, like Labour the Lib Dem's would phase out the personal allowance for those earning more than Β£100,000.

That said, and using terminology that some might regard as archaic, the Lib Dem's manifesto does seem the most "left wing" of the main three parties' - and by quite a margin.

It is more explicitly redistributive than Labour's - and Labour's is the most redistributive of any of its manifestos since 1992.

Also the Lib Dem manifesto is explicit about its distaste for those on higher earnings. Not only is it bashing bankers' bonuses (see my note of yesterday), but it would force all public companies to "declare in full all remunerations of Β£200,000 per year or more".

Crikey. Some would say that the Lib Dems have journeyed quite a long way from that liberal strand of their origin.

All that said, there are elements of the Lib Dem programme that will be seen as friendlier to business and investors: there are the routine pledges to reduce red tape; and the manifesto echoes the Tory distaste for Labour's planned National Insurance rise, which it too describes as a tax on jobs (although unlike the Tories, the Lib Dems won't commit to any timetable for reversing the rise).

Even so, the thrust of this manifesto would be seen as toxic by many Tories and delicious by traditional Labour supporters. Which raises the question whether it's remotely realistic to think that the Tories and Lib Dem could cohabit in government, in the event that the Conservatives emerged as the largest party but without an overall majority.

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The business and economy section of is its ideological and intellectual heart. It says that "we can't go on with the old model of an economy built on debt" and that "saving and business investment must replace reckless borrowing as the foundation of growth".

Most focus will doubtless be on the credibility of the party's plans to cut public-sector borrowing - and also on whether the Tories are right to put a greater emphasis on public-spending reductions, and a lesser weight on tax rises, than Labour.

The Tories estimate that, for them, tax rises would contribute one fifth of the planned reduction in the so-called structural deficit, compared with one third for Labour.

Over to Stephanie in due course for the half-time assessment on the public-spending death match between the parties. I would simply note that the Tories are committed to a far more significant shrinkage in the relative size of the public sector, or a bigger proportionate boost for the private sector, than Labour.

And the important argument is whether that proportionate boost for the private sector would enhance or diminish the prospects for growth for the economy as a whole - because only a few ideological zealots would think that what matters most is the comparative size of one or other sector, rather than the implications for future prosperity of their respective weightings.

So I suspect that the really important skirmishes in the coming campaign will be over where that boundary between private and public sectors should be drawn.

But beyond the Tories' focus on the size and efficiency of the public sector, what would they actually do to reinforce the underpinnings of the economy, to reduce the dangerous dependence of all sectors - public, corporate, household and financial - on borrowing?

Well, on the face of it, nothing that could be described as transformative.

Just over a year ago, the Tories did have a policy to promote saving by providing limited tax relief on savings income. That's gone - there's no trace of it in the manifesto.

And arguably - just like the government - the Tories would actually do everything in their power to deter any great escalation in the repayment of debts by households and businesses, or any sharp increase in saving, for fear that the consequential collapse in spending would tip the UK back into recession.

In fact, the main justification of their plans to cut public spending is to "enable the independent Bank of England to keep interest rates as low as possible for as long as possible". Which, of course, is music to the ears of most businesses and borrowers - but means that income for those who save and invest their pennies would remain derisorily low.

The task for the Tories of reconstructing the economy on equity rather than debt is very much a long-term one. And, at this stage, the main tools are consumer advice, consumer protection and constraints on the behaviour of banks and assorted credit providers.

Were George Osborne to become chancellor, he would give pensioners more flexibility over what they can do with their pension pots. And he would aspire to give back to pension funds the cash they lost when Gordon Brown abolished their tax break on dividends in 1997.

But some would question whether that's an adequate response to what the manifesto calls the "unsustainable consumer borrowing on the back of a housing boom" which it describes as a feature of "an age of irresponsibility".

Where George Osborne will be seen as more radical is in his proposals to simplify corporate taxation.

As a first priority, probably in the proposed emergency Budget which would take place within 50 days of a Tory victory, Osborne would cut the headline rate of corporation tax by three percentage points to 25% and the small companies' rate by one percentage point to 20%.

This would be financed by reducing assorted reliefs and allowances - in particular, the allowance for capital investment would be reduced.

Now the implication is that the reductions in headline rates would be self-financing, or that the overall take from companies would stay the same. It's the method of extracting the tax that would change.

What that means, of course, is that in the short term there would be quite a lot of losers from the reform, notably those companies that invest significantly.

So the reform won't be universally popular in the business community: pain will be felt by some businesses, especially manufacturers - which are widely regarded as important to the UK's ability to generate wealth.

That said, many companies would welcome a simplification of the tax system. And the Tories insist that their aim over five years would be to "create the most competitive tax system in the G20".

Even so, companies should not assume that a Tory chancellor would be a soft touch.

The manifesto talks about "consulting on moving towards a territorial tax system that only taxes profits generated in the UK".

Now you might think that would lead to multinationals paying less tax in Britain. But you would probably be wrong.

A Tory source tells me that the implication of such a territorial system is that HM Revenue and Customs would take a dim view of any multinational that loaded up its UK balance sheet with debt to reduce its taxable profits in the UK.

HMRC would look at how a multinational distributes its indebtedness worldwide. And if it felt that debt or leverage had been increased in the UK to suppress the tax liability here, it would disallow much of the interest on that debt for tax purposes. I am told that the Treasury has already tried to do something similar, but I am unclear whether it has succeeded.

Which may mean that many of our biggest international companies could find themselves paying rather more tax under the Tories' simplified, lower-rate, territorial tax system.

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• - What's this?

Nick Clegg's latest policy, , is vintage Vince Cable. It's a vice to the vitals of investment bankers and those running our biggest banks.

These are the highlights:

1) All bonuses over Β£2,500 would be payable in shares, which couldn't be redeemed, or pledged as security for loans or turned into anything spendable for at least five years.

2) No one on the board of a bank, not even the chief executive, would be eligible for a penny of bonus.

3) Loss-making banks would be banned from paying bonuses.

4) Every employee of a bank earning more than the prime minister - which Mr Clegg defines as circa Β£200,000 - would be publicly named.

5) Bank directors would be fined if their banks were to break the remuneration code.

What to say about this? Chances are that, were the C&C pay code implemented, it would be a pretty fast route to a smaller British-based banking sector, a smaller City - as bankers and banks would doubtless make a panicky run to a more benign tax climate.

C&C would probably say "good riddance to bad risks".

And they would say that the bonus jihad is just a stepping stone to a structural reform of the banking system: the break-up of banks and the stimulation of competition to eliminate what they see as the excess profits that generate the bonuses.

C&C talk about this with total moral and economic certainty. Unlike Labour and the Tories, they have reached a settled position that the tax revenues and employment generated by a bulging City are inadequate reward for the risks to the stability of the economy and to social cohesion from a vast financial industry built on debt, speculation and substantial bonuses.

Anyway, to state the obvious, it'll be an unusual investment banker who votes Lib Dem in the coming election.

More generally in the City, the C&C pay policy will be dismissed as the extremist grandstanding of a party with no chance of winning power.

But that would be a bit naive. Vince Cable's voice has been louder than any other British politician's since the Crunch became full-scale banking crisis. Where he leads, Labour and the Tories do not slavishly follow. But nor do they ignore him.

At the very least, if C&C have opted for a hairshirt, fundamentalist bonus prohibition, no banker should expect that the general political and popular attitude to their wonga will become markedly more benign any time soon.

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• - What's this?

represents a significant shift away from the party's belief in a market-based economy and a shift towards much more government intervention.

In that sense, it may well be seen as the death of at least one incarnation of New Labour, or that great mid-1990s political creation of the troika of Blair, Brown and Mandelson.

That can be seen in its formal statement that "continuing modernisation and investment will be needed by the Royal Mail in the public sector" (my italics) - which is an important formal commitment that it would not privatise Royal Mail for at least the lifetime of the next Parliament.

It is also manifested in the pressure it is applying to the Takeover Panel to raise the voting threshold for all takeovers - and not just hostile bids - to two-thirds of shareholders (see my note of yesterday, "Not a Cadbury law").

The market for buying and selling big companies would probably shrink considerably if this new stipulation were introduced.

Also, the manifesto is littered with warm words and half-policies about encouraging the spread of mutuals and employee-owned businesses, and colder words about subjecting bankers' pay to tighter shareholder controls and empowering the FSA to "quash executive remuneration where it is a source of risk and instability".

But perhaps the killer manifesto phrase is this one:

"An activist industrial strategy is needed - learning the lessons from those nations that have succeeded in developing advanced manufacturing and leading-edge service industries. In those countries, the role of the government is not to stand aside, but to nurture private-sector dynamism, properly supporting infrastructure and the sectors of the future."

Some would say this is a pretty extraordinary statement from a party that has been in power for the past 13 years. It rather implies that Labour hasn't been nurturing private-sector dynamism.

So what is this new "activist industrial strategy"?

Well it's a variety of state-sponsored funds for investing in growing businesses, green businesses and infrastructure projects. And it's a series of tax breaks, especially for small companies, to encourage them to invest in capital, research and intellectual property.

As I've been banging on about for many weeks now, this area of industrial strategy and business policy represents - for the first time in some years - a clear ideological and policy split between Labour and the Tories.

The divide isn't yet as sharp as between the free-market Conservatives of the 1980s and the interventionist Labour of yore; but some would see striking parallels.

Update 1350: Peter Mandelson has told the World at One that part-privatisation of Royal Mail isn't ruled out.

So what does that phrase in the manifesto about Royal Mail needing investment "in the public sector" actually mean?

I'll admit to being bemused.

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It looks to me, from the manifesto, as if Labour has completely dropped its commitment to privatise Royal Mail in whole or part.

Royal Mail would stay in the public sector under Labour. The CWU union, big donors to Labour, have won that battle.

Update 1220: Labour's policy on the privatisation of Northern Rock will be seen by many as facing in two contradictory directions.

On the one hand, Labour would encourage "as one option" a so-called "mutual solution", or turning the reconstructed Rock back into a building society owned by members.

One the other hand, it wants the deal to generate "maximum value-for-money for the taxpayer".

These two ambitions are - on the face of it - completely incompatible.

Mutualising the Rock would involve giving it to the banks' current savers and borrowers.

Even if some way could be found for the Rock's customers to pay something for the Rock, it stretches credulity to breaking point that this would raise as much as a sale to another bank or even a stock-market flotation.

Many will say that Labour can't have it both ways - that it must choose between maximising the return for tax-payers or mutualising the Rock.

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• - What's this?

Labour's manifesto will not propose that ministers have any new powers that would have enabled them to block the controversial takeover of Cadbury by Kraft - although there has been widespread media speculation that it would be planning a so-called "Cadbury law".

The manifesto will instead call for the business secretary to have a new quasi-judicial power to block takeovers, but only takeovers of utility companies and infrastructure businesses. Cadbury is by no stretch of the imagination a utility or infrastructure company.

That said, the manifesto will also say there is a strong case for making it harder for all bidders to buy any company, by raising the threshold for a successful takeover to 66% of votes, up from the current simple majority.

This would apply to all takeovers, and not just the takeovers of companies somehow deemed to be strategically important.

However, Labour is leaving the decision on whether to raise the takeover threshold to the independent Panel on Takeovers and Mergers, which is conducting a review.

As for utilities and infrastructure companies, the manifesto will say that a new "public interest test" should be applied when there is an attempted takeover of a water business, an energy business, a telecoms/broadband business and so on.

The relevant regulator would advise the secretary of state whether the takeover of said utility or infrastructure company would be in the public interest. And the secretary of state would then decide whether or not to take the advice of the regulator, likely to be Ofgem for energy, and Ofcom, for communications.

The final decision would be for the business secretary.

This new power to block utility takeovers and mergers will be seen as a U-turn by Labour, since it took great pride more than a decade ago in legislating to abolish ministers' ability to block takeovers in all but a tiny number of cases involving the media, defence and national security.

More recently, the government extended the ministerial power of intervention to the takeovers of banks, so that the Treasury could push through the takeover of HBOS by Lloyds, against the wishes of the Office of Fair Trading.

It is not wholly clear why ministers have belatedly decided that they need explicit powers to prohibit certain takeovers of utility and infrastructure companies.

I am told by those involved in drafting the manifesto pledge that this is not because of any great anxiety about foreign takeovers of these businesses.

"This is not about foreign takeovers" said a senior Labour figure.

Apparently it is more about the likely financial implications of any deal financed by debt on businesses that are typically local or national monopolies and can normally be seen as providing an essential service.

Ministers have latterly become concerned about burdening utilities with vast amounts of borrowing taken on in a takeover, which could undermine their ability to invest in renewing and modernising networks and plant.

The proposed new law may be seen as a belated response to the widespread anxiety in government that followed Ferrovial's use of debt to acquire the airports group BAA - because there was a period of about a year when there was a risk of bankruptcy for the owner of Heathrow.

In respect of the wholly separate decision on whether to raise the voting threshold for all takeovers, that decision is for the independent Takeover Panel; it is not a government matter.

That said, Labour frontbenchers are likely to hint that they could legislate to force an increase in the threshold, if the Takeover Panel did not do so.

Any increase in the takeover threshold would be highly controversial. Some would see it as anti-democratic, since companies would be able to remain independent against the wishes of over half of their owners.

Update 17:00: Although what Labour is proposing is in no sense a Cadbury law, the confusion is perhaps understandable - because its support for a raised takeover threshold is redolent of the musings of the former Cadbury chairman, Roger Carr.

This is what Carr said in a speech on 9 February:

"In the life of a company there can be nothing more important than a change of control where only 50.1% now applies. In these circumstances a threshold adjustment to say 60% of the total register could be contemplated thereby reducing the odds of deal-driven investors unduly influencing the outcome - but by making only a modest increase, ensuring that poor managements are not provided with unreasonable protection.

As I mentioned in my note on that speech, Carr also said there was a case for disenfranchsing short-term speculators during a takeover battle, such that they would be unable to influence the outcome.

I understand that Labour will agree with him that there should be a review of whether hedge funds, arbs and other such supposed agent provocateur should lose the right to vote on whether a company should be taken over, if they've bought their shares in the course of the takeover contest.

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• - What's this?

Since we seem to be talking about democracy and voting, it's as well to remind ourselves of one of the great democratic deficits - which is the yawning gap between the owners of public companies and their managers.

As I've bored on about for some years, each of the millions of us saving for a pension own tiny slivers of almost every big stock-market company on the planet.

Yet we're the worst kind of absentee landlord: for most of us, it barely enters our consciousness that we have a financial interest in the performance of these businesses, and that we have a right - albeit of a slightly indirect kind - to boss them, especially when they're letting us down or taking dangerous risks.

The rarity of our interventions is understandable: if our pension funds own shares in BP or Marks & Spencer, for example, the shares are registered in the name of the funds; they're held in trust for our benefit.

So there's no right for each pension-fund member to vote those BP or M&S shares. But fund members do have the ability to put pressure on pension-fund trustees to instruct pension-fund managers to vote those shares according to their wishes.

If you belong to a pension fund, have you ever thought about the lever you possess to influence how big companies behave? Have you ever used that lever?

Probably not.

Because as I've described it, the process of transmitting your voice into the boardroom of a BP or an M&S seems rather long and convoluted.

But here's the thing. The internet is transforming these theoretical democratic rights to put pressure on boardrooms into something more real and practical: online social networking allows support for a campaign to build rapidly; web petitions are a powerful tool for communicating views to decision-makers.

Now it's no accident that I've been talking about BP, because that oil giant has been on the receiving end of a pensioner campaign that comes to a head on Thursday at its annual meeting.

Organised by Fair Pensions, the lobbying group for "responsible investment", the campaign raises concerns about the environmental risks of extracting oil from tar sands, which are a massive potential source of crude oil, much of it located in Canada and Venezuela.

Fair Pensions' attention has been directed in particular at the activities of BP and Shell in Alberta, Canada, where tar sands cover an area greater than the size of England and Wales.

For BP and Shell, the important point is that the proven reserves in Canada's tar sands are the world's second largest source of future oil after Saudi Arabia's more conventional reserves - which they feel that they can't ignore at a time when demand for energy shows no sign of easing.

For Fair Pensions, the more significant issues are that the greenhouse gas emissions that result from tar-sands extraction are higher than for normal oil production, that there is the potential for significant damage to forests and wildlife, and that there is a threat to the livelihoods of Alberta's indigenous First Nations communities.

What Fair Pensions wants is a report by BP's audit committee or a risk committee into the first tar sands project being developed by BP, a joint venture called Sunrise.

This report would set out the "the assumptions made by the company in deciding to proceed with the Sunrise Project regarding future carbon prices, oil price volatility, demand for oil, anticipated regulation of greenhouse gas emissions and legal and reputational risks arising from local environmental damage and impairment of traditional livelihoods".

Under Section 338 of the Companies Act, Fair Pensions succeeded in forcing BP to include a special resolution to that effect for this week's annual general meeting.

And it then used the internet to rally support to its cause from individual members of pension funds: on a special tar sands web page, it's easy for individuals to send a message to their respective pension funds, urging those funds to back the special resolution.

According to Fair Pensions, in the last six weeks over 5000 people have emailed pension providers, mostly UK providers. Legal and General, which is the largest investor of pension assets in the UK and the largest single shareholder in both BP and Shell, is said to have received 3000 of the emails.

Other pension funds and investors that have been sent the protesting emails are the University Superannuation Scheme, Friends Provident, the West Yorkshire Pension Fund, Prudential, Standard Life and Aviva.

It would be wrong to overstate the significance of this popular pressure: those 5,000 emailers are a tiny minority of the millions of pension-fund members.

And the chances are that the resolution will be lost, by a very wide margin.

BP is urging its investors to reject it, on the basis that it would be inappropriate for it to commission a special board report on a single project; British pension funds have a habit (which some would describe as lazy and unfortunate) of voting the way that the boards of their companies would wish.

That said, some of the biggest US pension funds, led by the enormous and influential CALPERS of California, are backing the resolution.

Also, BP has - in apparent response to the protesters' demands - provided quite a lot more relevant information about the Sunrise scheme, including the greenhouse gas emissions it expects, the steps being taken to engage with local communities, the cost of carbon it incorporates into its assessment of the viability of such projects, and its expectations for future oil prices.

In that sense, BP hasn't simply ignored "the little people" - although, arguably, BP's non-executive directors are taking something of a personal risk in not acceding to the protestors' demand for a more rigorous evaluation of what by any standards is a significant change in the company's energy strategy that is fraught with potential financial and reputational dangers.

Anyway, for those who want to learn more, you can click for Fair Pensions campaign page, and for BP's response to the oil sands resolution.

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• - What's this?

The banks can no longer be in any doubt: if the Tories were to win the general election, they will introduce a new tax on them - because David Cameron has today spent around half of the proceeds of that proposed new tax with his promise to introduce a new transferrable tax allowance for married couples.

They've also drawn back the veil a bit further on what kind of tax it would be.

The preferred model of the shadow chancellor, George Osborne, is a tax on banks introduced in Sweden last year.

This is a tax on banks' so-called wholesale liabilities, or what they borrow from other financial institutions, big companies and those with the deepest pockets.

The Swedish tax is levied at a rate of 0.018 per cent, and is rising to 0.036 per cent - and it applies to the total value of taxable wholesale liabilities. That rate of 0.036 per cent is just under a quarter of the proposed rate for a similar tax which President Obama wishes to introduce in the US.

The effect of it is to slightly increase the cost for banks of borrowing to finance their lending and investing.

Mr Osborne wants to raise more than Β£1bn a year from the new tax - which he doesn't think would be such a huge burden on banks as to persuade them to relocate in countries that won't levy such a tax.

He doesn't believe there is evidence of Sweden's banks being damaged by the decision of their government to go it alone and hit them with a new tax. But it is worth noting that the Swedish economy is rather less dependent on banking and financial services than Britain's.

The shadow chancellor is also optimistic that most other developed countries will implement such a tax. Were that to happen, he could then endeavour to raise even more from British banks by increasing the tax rate on banks' liabilities.

As for the timetable, he would not introduce such a tax or the family tax break in the emergency budget he would hold within weeks of a general election.

His hope would be to announce both reforms in his first "proper" budget, in the spring of 2011.

As for Labour, its position on a bank tax is that it would only introduce such a tax if there were an international consensus to do so.

The Libdems would impose a tax on banks' profits rather than their liabilities.

There is one important difference between the Swedish tax and what both Labour and the Tories would do. The aim of the Swedish tax is to generate funds to pay for any future bailout of the banking system, not to provide general revenues to finance other tax breaks or pay down the national debt.

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There's no great secret that public companies, especially banks, use cosmetic devices to make their published accounts look as attractive as possible.

It's called window dressing - and in the case of banks its aim is normally to persuade investors and creditors that they are not taking excessive risks.

As you'll recall, Lehman - the US investment bank whose demise triggered arguably the worst global banking crisis the world has seen - used a highly questionable accounting device called "Repo 105" to reduce its published assets and debts by a significant $50bn (see my note, "Lehman: how it disguised its frailty").

Now you'd think that in the wake of that banking crisis, banks would abandon their window-dressing habits and share with investors and creditors the true risks they run.

That, it seems, would have been a naive assumption to make.

Data supplied to the Federal Reserve Bank of New York shows that 18 big international banks systematically understated in their published quarterly accounts what they had borrowed to finance securities trading from the repo market (which is where securities can be swapped for short-term loans).

So says this morning's Wall Street Journal.

, the 18 banks that understated their debt levels included all the important ones, such as Goldman Sachs, Morgan Stanley, JP Morgan Chase, Bank of America and Citigroup - although it doesn't say which were the worst culprits.

The scale of this prettying up of their balance sheets is striking.

The Fed data shows that during the past 15 months, and at the end of each of the five quarterly reporting periods, the published debt used to fund securities speculation of the 18 banks was 42% lower on average than the actual peak levels of their debt in the preceding few weeks.

Or to put it another way, these banks were telling their investors and creditors that they were taking on much less debt (42% less) and much less risk than was actually the case.

That will disturb anyone who believes that the best way to keep banks on the prudent straight-and-narrow is for those who lend and invest in them to have the facts about what they're doing - so that they can instruct banks' management to do the right thing.

The important point is that market discipline on banks is wholly ineffective if the market doesn't have the relevant information.

Many would argue that it shows that the banks have learned almost nothing from the financial cataclysm of 2008.

All the banks would argue that wealth creation is maximised when official regulation is light and markets are liberated to do what markets do best.

But if they are not giving the market the facts that the market needs to sort the banking wheat from the chaff, then there is no alternative to very intrusive and costly regulation by the likes of the New York Fed and Britain's Financial Services Authority.

Arguably, the New York Fed's data shows that when the banks were herded into the last chance saloon at the end of 2008, they were not converted to a life of transparent temperance, but chose instead to drink the bar dry and shoot the place up.

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"Why hasn't the press made more of a fuss about Bart Becht's Β£92m?", a well-known businessman asked me today.

Good question.

It is an almost incomprehensibly large sum for anyone to take home in a single year, a record for the boss of a FTSE100 company.

Some - like the Lib Dem Treasury spokesman Vince Cable - says it's far too much, that those who work as employees rather than entrepreneurial owners should never be paid that much - and that it is another manifestation of a widening gap between rich and poor that damages the cohesion of our society.

That said, the chief executive of Reckitt Benckiser is widely seen as the most able boss of his peer group.

The owners of that consumer products company, its shareholders, think he's worth the wonga.

Over a decade, the publicity-hating Mr Becht has turned Reckitt - which makes Cillitt Bang and Vanish stain remover - into a world leader.

Its shares have increased in value vastly more than those of its close rivals.

Unlike many bankers, Becht seems to have been rewarded for taking the right kind of risks.

And by the way, Becht has provided a valuable service for other well paid business leaders.

Take Sir Stuart Rose, soon to depart Marks and Spencer.

After a couple of torrid years, Marks' performance has revived sharply in the last three months of its financial year - just in time to generate bonuses of Β£80m for its staff, including just shy of Β£3m for Rose himself.

But will anyone complain, when Rose is being paid the equivalent of the interest on Becht's one-year wedge?

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BA and Iberia have taken another important step to creating one of the world's largest airline companies, through signing an agreement to merge - and announcing the name of the new business.

The merged BA and Iberia will be called International Consolidated Airlines, which hardly trips off the tongue and has a 1930s, Biggles feel to it.

But the airlines want to be known as International Airlines for short. And the name may not matter much anyway, because they'll continue to fly - for now at least - as BA and Iberia.

Existing BA shareholders will receive one new International Airlines share for every BA share they hold. Iberia investors will receive just over one new share for each of their existing shares.

In these straitened times for airlines, much of the motive for the deal is cutting costs - and the airlines think so-called synergies, largely cost savings, will be Β£350m within five years.

It is striking that International Airlines has been constructed in a way that would make it easier to pursue further mergers: BA has for some time wanted to merge with American Airlines.

All that said, this is not yet a done deal - it's exchange rather than completion.

And Iberia retains the right to walk away if the Pensions Regulator forces bigger costs on BA in sorting its pensions black hole than Iberia thinks is affordable.

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If greed-fuelled, unsustainable lending by the banks was largely to blame for the financial and economic mess from which we appear (at last) to be emerging, to what extent has that tarnished the entire private sector - and does the endorsement of business people for a political party help or hinder that party?

You don't need telling that no party has been endeavouring to woo the bankers' vote, in any explicit way.

In fact, Peter Mandelson, George Osborne and Vince Cable have all been predicating their campaigns on the notion that there are more votes in beating up Bob Diamond, Barclays' president and the best-paid board director in history of what used to be called a British clearing bank, than in rallying City folk to their respective causes.

Perhaps Barclays can take pride that within its ranks is someone who has forged this rare entente between the three parties.

Although perhaps the Tories don't need to do explicit City lobbying, in that - according to an analysis by the Financial Times - 48 of 206 new Conservative candidates in winnable seats have worked in the Square Mile or financial services.

But it is also striking that the endorsement of the Tories by several hatfuls of prominent business leaders a week ago has put wind in the sales of Cameron and Osborne - and the wind up Gordon Brown and Mandelson.

Is that simply because the business leaders were attacking Labour's planned rise in national insurance - and were therefore reminding all of us that the government had announced plans to increase the tax paid by everyone in work, and not just those on highest incomes?

Or to put it another way, was it what the likes of M&S's Rose and Sainsbury's King actually said that resonated rather than who it was that was speaking (or, to be pedantic, writing a letter)?

That's tricky to assess.

Certainly in 1997, Labour was in absolutely no doubt that the endorsement of business leaders played a vital role in persuading the non-committed that it was ready for power and would govern in the national interest.

And it is bound to be a matter of considerable pain to those architects of New Labour, Mandelson and Brown, that they are finding it almost impossible to rally a serious number of credible business leaders to their cause this time round - although they might point out that there are two highly successful former bosses of substantial private-sector operations within the bosom of government, in the shape of the Lords Davies and Myners.

Will Labour publish an explicit "business manifesto" this time, as it has in previous elections? Well it might not wish to risk the ridicule of the newspapers' business pages if it were to launch such a manifesto to a room of party hacks rather than proper entrepreneurs.

All that said, along with the anti-Diamond alliance, there is also a cross-party consensus that the revenue-generating capacity of the private sector needs to be expanded if Britain is to return to a sustainable path of rising prosperity.

Each party leader will express it slightly differently, but none resiles from the idea that the state's share of the economy - at around 50%, a proportion we haven't seen since the 1970s and early 1980s - needs to be reduced.

Which is another way of saying that improvements in the public services we cherish need to be seen as the fruits of our ability to generate tax revenues from making stuff and selling stuff (although stuff - of course - can be intangible services, including the services provided by banks).

All that said, Labour would argue that the UK's recession would have been even deeper if it hadn't allowed the state to expand over the past couple of years, to compensate for the collapse of activity in the private sector - which plays into today's fraught argument between Labour and the Conservatives about whether the economy is strong enough to withstand immediate cuts in public spending.

As if you need reminding, perhaps the most passionate dispute between the Labour/LibDems on the one hand and the Conservative on the other is whether the British economy is strong enough to withstand the few billion pounds of cuts that the Tories would impose in the current financial year (over to Stephanie for ball-by-ball commentary on this death match).

But, as I wrote before the Budget, what some see as the only serious ideological dispute between Labour and the Tories is over how best to stimulate the growth of the private sector.

Labour has rediscovered its industrial interventionist tendencies of the 1960s and 1970s. The last Budget of the Parliament was all about creating new state banks to promote invest in high tech companies and green projects, along with generous tax breaks to encourage investment by smaller companies.

What little new money the chancellor pumped into the economy was in the form of temporary targeted fiscal reliefs, worth about Β£1bn in 2010/11, for business.

By contrast, George Osborne and the Tories have re-found a love for the tax-simplifying ambitions of Nigel Lawson in the 1980s. His most eye-catching policy is to reduce the headline rate of corporation tax from 28% to 25%, and to cut the small companies' rate from 22% to 20%, financed by abolition those investment allowances and other reliefs that Labour has been expanding.

This is a significant divide: Labour is providing a tax carrot for companies to invest more, because it is fearful that if left to their own devices, and in the current uncertain climate, business would hoard rather than spend; the Tories would hope that businesses would be motivated to seek growth by the prospect of paying out less tax on incremental revenues.

As for the Lib Dems, they would probably see this argument as something of a side show.

You'll know Vince Cable's line because he hasn't waivered from it since the recession bit in 2008 - which is that the banks have to be compelled to lend more to viable businesses (and for those who think it matters, he has said this longer and louder than Labour and the Tories).

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Royal Bank of Scotland has received at least five indicative bids for its specially created Williams & Glyn's operation, which it is being forced to sell by the European Commission.

By this afternoon's deadline for first round bids, RBS had received preliminary offers from Santander, the giant Spanish bank, Sir Richard Branson's Virgin Money, another Spanish bank, BBVA, the Australian bank, National Australia Bank and a private equity outfit, JC Flowers.

The bank, advised by UBS, will now begin the process of whittling the bids down to a couple, with a view to naming a single preferred bidder by July or August.

The final selling price is expected to be over the book value of Williams & Glyn's net assets, which is between Β£1bn to Β£1.5bn.

But bankers say that how much of a premium RBS ultimately receives is difficult to judge.

One said that Williams & Glyn's is a difficult operation to sell because its business customers feel very loyal to RBS and may not want their accounts transferred to a new owner of the branches.

Santander was always expected to make the highest offer, for two reasons.

First, Williams & Glyn's specialises in small business banking, where Santander is under-represented in the UK.

Second, Santander already has very substantial UK operations and would probably find it easiest in a technical sense and least costly to separate Williams & Glyn's 318 branches and Β£20bn of loans from the rest of RBS.

Also Williams & Glyn's is just small enough, with a 2 per cent share of the retail banking market, for a takeover by Santander not to be blocked by the competition authorities: some analysts believe Santander could be prohibited from buying the pure retail operations of the cleaned-up Northern Rock and of Lloyds's Cheltenham & Gloucester, to be sold within the coming year or so.

Virgin Money, which is receiving financial backing from the deep-pocketed US investor, Wilbur Ross, would dearly love to buy Williams & Glyn's but would find it difficult to justify offering as much Santander.

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Powerful brands can survive a good deal of battering.

Some would say that the US food giant Kraft is putting to the test - with the controversial manner in which it bought Cadbury - the extent to which consumers may turn against the products of a company perceived to have done the wrong thing.

MPs on the business select committee today concluded that Kraft had "acted both irresponsibly and unwisely" by first promising to keep open Cadbury's Somerdale factory while endeavouring to buy the confectionary maker and then promptly changing its mind once the deal had been done.

This, said the MPs, had damaged Kraft's reputation in the UK and soured its relationship with Cadbury employees.

Kraft has tried to mend its image with a series of commitments, to always produce the totemic Dairy Milk in the UK, to avoid further plant closures for a couple of years, and to protect staff pensions, among other things.

These promises will need monitoring, say the MPs.

But monitoring in one thing; enforcing is quite another.

The point is that Cadbury is now merely one important part of a huge, sprawling international conglomerate.

And Kraft will grin and bear the criticisms. How else to interpret the decision by its chief executive, Irene Rosenfeld, not to woo MPs by refusing to give evidence in person to them?

What would hurt much more would be any sense that all those positive qualities associated with Cadbury's illustrious history as a highly responsible employer - qualities which have burnished its brand for consumers - were being erased by the negative publicity generated in recent weeks.

Kraft's owners, which include Warren Buffett's Berkshire Hathaway, would not be best pleased if the company failed to nurture what most would describe as Cadbury's rare and precious assets.

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There is - arguably - no more valuable benefit from working in the public sector than the pension arrangements, which typically pay out a guaranteed proportion of each employee's income.

Such final salary schemes are expensive and have become something of a rarity in the private sector.

The CBI calculates that this pension promise is worth, on average, 26% of every public-sector worker's salary.

This, says the CBI, is unaffordable: the employers' organisation estimates that a proper recognition of the cost of public sector pensions would more than double the national debt and add Β£10bn to the true cost of government every year.

And it says that with average earnings in the public sector now greater than private-sector earnings, the historic case for the state providing superior pensions to its employees has gone.

The CBI urges whichever party wins the election to replace pensions linked to salary with new pensions determined by how much each employee puts in.

These could still be free of risk (unlike most pensions offered today by private-sector employers) but would be much less generous.

The model for the CBI would be Sweden's "notional defined contribution" approach.

All of which has financial logic.

But any new chancellor may be a little nervous about shining a bright light on this liability at a time when the public-sector's soaring conventional debt is the most pressing challenge of the moment - although the Tories have announced a limit on pension payments to those officials on highest earnings.

And any new prime minister may be a little nervous about going into battle, within weeks of a general election, against public servants paid to carry out the new government's will.

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Some 14 years ago, when it was clear that Labour was heading for victory in the looming general election, I asked the then deputy prime minister Michael Heseltine whether he was concerned that so many business leaders were cosying up to Tony Blair.

Not at all, he said. It's almost a Newtonian law that business gravitates to power.

They would be letting their companies down if they failed to fawn to the prime minister-in-waiting, given that government has the ability both to award valuable contracts to the private sector and also to seriously muller business through misguided taxes and regulations.

Oh, and there are also those nice knighthoods and political peerages that a friendly premier might be able to nudge in a business leader's direction.

In a way, therefore, it may be a bit surprising that we haven't seen more business leaders come out for Cameron and Osborne.

From that I haven't concluded that they don't rate them or dislike their policies - just that they are taking a pragmatic view that the outcome of the election is less of a done deal than was the case prior to the 1997 election.

So how to assess today's letter from 23 business leaders backing the Tories' proposal to partly reverse the government's plan to increase National Insurance?

First things first: I don't doubt the business leaders' sincerity when they warn that the NI increase will precipitate job cuts.

In fact I haven't met a single person in business who is celebrating this tax rise - and the main business lobby groups have today thrown their weight behind a campaign to replace the NI rise with public-sector cost savings.

But I should also point out that there wasn't a single signatory who made me think "wow, didn't expect him to be on a list of proponents of a Tory policy".

That doesn't mean that they are all card-carrying members of the Tory party or donors to the Conservatives (some are).

It's just that I've observed for some months the likes of Sir Stuart Rose of M&S and Justin King of Sainsbury becoming quite chummy with what you might call New Conservatives', or the leadership clique around David Cameron.

And in the business circles in which I mix, there's been lots of chatter in recent months that one or both could find themselves on the Tory benches of the Lords or doing a job for a Tory administration.

Also, there was a chunk of the letter that gave me a powerful sense of deja vu (or deja entendu, to be more precise).

It's this bit:

"The state must look to enable our public servants to make savings. This can be done by removing the blizzard of irrelevant objectives, restrictive working practices, arcane procurement rules and Whitehall interference."

Now I have heard something very similar from the lips of New Conservatives' favourite businessman, Simon Wolfson, chief executive of Next - who happens to be one of the signatories, and is very close to the Cameron/Osborne gang.

None of which is to say this letter of endorsement of an important Tory policy from some business heavyweights is trivial - just that it isn't terribly surprising.

That said, it would be wholly inappropriate to feel any pain on Labour's behalf, since in the past both Gordon Brown and Tony Blair milked for all it was worth any backing they received from a half-credible entrepreneur.

But it's worth noting that the interests of business and the interests of the country are not identical.

Some of the companies on the list, such as Diageo and Xstrata, derive most of their revenue outside the UK, for example.

And the owners of most of them are a thoroughly international bunch.

Actually I should point out that the business leaders are writing in a personal capacity, and not on behalf of their companies.

Which I suppose may influence the weight you attach to their views (for better or worse).

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Those busy busy Ofcom people are at it again. And this morning they are proposing quite a .

On this occasion they can be seen as - that's what your mobile phone provider pays the mobile service you ring when you telephone another mobile phone - should not be greater than the direct cost of "terminating" the call.

Ofcom is proposing a very steep fall in that termination charge, by almost 88% or 4p a minute in phases from 2011 to 2015.

So for example if you are calling O2, Vodafone or the merged Orange/T-Mobile, the termination charge paid by your mobile phone provider will drop from 4.3p a minute to 0.5p a minute over those four years (and from 4.6p to 0.5p if you are calling 3).

So does that mean that that you'll be better off to the tune of almost 4p per minute of calls for every call you place to one of the big mobile phone services?

Well there should be a big benefit if are ringing a mobile from a landline. The provider of your fixed line should pass the saving on to you, given that there's pretty intense competition in that market.

So that slight trepidation that some of us still have when calling a mobile from the home phone should be ameliorated a bit.

But what about the big mobile phone companies? How will they react?

Some 16% of their UK revenue comes from these charges. That's quite a lot of revenue to be at risk.

So they'll try and recoup it - perhaps by putting up the cost of so-called data traffic, or what they receive when you send texts or access the internet on your mobile, or possibly by reducing the subsidy they pay on handsets.

The important point about the proposed change is that it penalises the incumbents and levels the playing field to the benefit of younger mobile phone companies.

The logic works like this: the market leaders, Orange/T-Mobile and O2, are currently in effect guaranteed a big chunk of income, because they have the most mobile customers in the UK and know that they'll receive substantial termination charges when those customers receive calls; those guaranteed revenues are now set to shrink fast; which means that they will have less of an endowment of protected revenues that they can channel into initiatives aimed at crushing new entrants.

So perhaps the biggest benefit to consumers will be that we'll see more competition from nimbler, younger mobile phone providers. Which should deliver some combination of lower prices and better services - although right now it is impossible quantify the monetary gain for consumers with any precision.

By the way, I should point out that this is not Ofcom's final ruling. There's still a bit of consultation to come before the new termination charges are set in stone - and even at that stage, the mobile phone companies could appeal to the Competition Commission.

That said, a more competitive landscape for mobile looks a pretty certain prospect.

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