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If you're of a nervous disposition don't turn to page 20 of , .

These are the last ever financial results for HBOS as a discrete entity: it was recently swallowed by Lloyds - which now has a bad case of indigestion.

The horror story that's told under the heading "corporate" from page 20 onwards is of a bank that appears to have had a death wish.

For all the criticism of the alleged excessive risks taken by HBOS's mortgage department - as per the charges levelled at the bank by its former head of regulatory risk, Paul Moore - the most reckless lending and investments were made by the bit of the bank that provides services to companies.

This corporate division generated losses of £6.8bn in 2008 from loans and advances to businesses of £116bn.

It has had to write off an average of 47% of those loans in this area that have gone bad. Almost 12% of all its corporate loans are now classified as impaired or damaged. And as a percentage of the total corporate lending book, the impairment charge is just under 6%.

On the basis of those statistics, HBOS appears to have left a big bag of money open on the pavement with a sign saying "borrow what you want".

HBOS was too exposed to the property sector; it was too exposed to housebuilders; it was too involved in relatively low-quality private equity; and it made the classic mistake of doing what bankers used to call "pig-on-pork", or taking equity stakes in creditor companies.

As I've said before, it is amazing that the Financial Services Authority, the City watchdog, didn't feel it was appropriate to rein in HBOS's corporate lending department.

In particular, it's odd that the FSA didn't apparently appreciate that the ability of a lender to properly assess credit risk can be dangerously damaged when that lender thinks it's going to make massive returns on equity investments (the notorious "pig-on-pork").

So poor old Lloyds now owns what can be seen as one of the worst-quality loan books on the planet.

Which means that the big message of HBOS's shockingly bad results is that Lloyds lacks the resources to cope with potential future losses.

That's why Lloyds has been in talks with the Treasury on a deal that would see taxpayers taking on the liability for much of the future losses on around £250bn of loans and investments.

These insured assets would include almost the whole of HBOS's corporate loan book, a load of HBOS's mortgages (where the impairment charge has also risen significantly) and a bunch of silly investments made by HBOS's treasury operation.

This insurance deal would be the equivalent of the protection taxpayers yesterday gave to Royal Bank of Scotland - though on terms that may look worse for Lloyds, since HBOS's portfolio of loans to companies is viewed by the government as exceptionally high risk.

To state the obvious but frightening point, HBOS's £10.8bn overall loss was generated last year, before the recession really bit on the ability of personal and corporate customers to keep up the payments.

As of last night, it looked as though agreement was near - which mattered, since the City was aware that both sides had set a deadline of this morning to announce the deal.

However, it's almost elevenses and no deal has been announced.

Is this a matter of grave concern? Probably not.

As I understand it, there is no major difference of principle between Lloyds and the Treasury on the bailout terms.

There's been a technical hitch, the equivalent of what goes wrong when you type the wrong numbers into a mathematical formula.

The point is that the Treasury and its advisers have constructed a model that generates a price for the insurance that we as taxpayers are selling to the banks on the basis of various different measures of the quality of assets to be insured.

So if the data that goes into the model isn't quite right, the wrong answer will be generated on material issues like how much of the loss on loans should stay with Lloyds' current shareholders and how much Lloyds should pay for insurance in the form of new non-voting shares.

The glitch can be solved. And it will be solved, though possibly not till Monday or so.

Because what HBOS's stupendous losses demonstrate is that Lloyds will not thrive again without a fairly substantial financial prop being provided by taxpayers, by you and me.

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• - What's this?

Having looked at the relevant part of Royal Bank's accounts, it does not seem to me that the bank was obliged to pay Sir Fred Goodwin a £650,000 pension with immediate effect.

The rules of its pension fund are that it was "allowed" to pay an early enhanced pension to a member who "retires early at the request of the company".

But it was not obliged to do so.

Also, and very relevantly, if the company had dismissed Sir Fred, rather than asking him to retire, then again he wouldn't have been eligible for these generous benefits.

So why did the board of RBS feel it was proper to give a £650,000 pension for life to the chief executive that many blame for the colossal mess at RBS?

And did all board directors know about and approve the arrangement?

It would be odd if they didn't know, because Sir Fred has his own "funded, non-registered" pension arrangement outside of the main pension scheme. And the bank would probably have had to transfer an estimated £8m or so into that personal scheme to lift it to the required amount to finance the £650,000 payments (the total value of Sir Fred's pot, as I disclosed yesterday, is £16m).

Then of course there's the question of .

Stephen Hester, the new chief executive, told me this morning that the Government approved the pension settlement with Sir Fred - which is potentially very embarrassing for the Chancellor and the Prime Minister.

I am told that the Treasury did indeed know last autumn that Sir Fred's pension pot had increased to a breathtaking £16m.

But it seems that ministers and officials believed at the time that Royal Bank had been obliged to make the payment. They claim to be gobsmacked to have since learned that the bank had discretion over whether to pay it.

They also point out that last autumn, when Sir Fred's departure terms were agreed, the state wasn't yet a shareholder in the bank. And they therefore relied on Royal Bank's chairman and non-executives to make sure Sir Fred received the minimum to which he was legally entitled.

Some may say that - if this was how it transpired - the Treasury was perhaps being naïve.

And if it were to turn out that any minister knew that Royal Bank could have said no to Sir Fred's bumper pension, well that would not be great for the image of a government which insists that it detests payments to executives for failure.

UPDATE, 15:09PM: I have learned the following material facts about how Sir Fred's pension payment was agreed.

The initial decision was taken - I am told - over the fraught weekend in October when ministers made clear that they wanted Sir Fred out of the bank.

The deal with Sir Fred was done by the bank's then chairman, Sir Tom Mckillop, in consultation with the senior non-executive director of the time, Bob Scott.

I am told the City minister, Lord Myners, was told about the pensions arrangement.

What's unclear is whether Myners was aware of the cost of the deal or that the bank wasn't obliged to pay the full £650,000 to Sir Fred with immediate effect.

The full board wasn't told about the pension settlement till January.

UPDATE, 16:52PM: Here's yet more on this tale of who agreed to give a £650,000 pension for life to the chief executive blamed by many for the colossal mess at RBS.

The initial decision was taken over the fraught weekend in October when the Treasury was bailing out our banks for the first time.

On the evening of Saturday 11 October, the City minister - Lord Myners - met Royal Bank's then chairman, Sir Tom McKillop, and the senior non-executive director of the time, Bob Scott.

Lord Myners urged that Goodwin be removed from his post - but was told by Sir Tom that the board had already agreed to do so.

The City minister told Sir Tom that it would be inappropriate for Sir Fred to receive a termination bonus or to be able to exercise his share options.

However, in the presence of a senior lawyer, Lord Myners was informed by Sir Tom that Sir Fred would walk away with a pension pot valued at £16m - and that this was a contractual obligation.

Lord Myners felt he couldn't challenge an arrangement that therefore seemed obligatory - though presumably he now wishes that he had done.

The question that now arises is what did Sir Tom mean by "a contractual obligation" - since it is now clear that the board had discretion not to give Sir Fred £650,000 per annum aged just 50.

UPDATE, 17:17PM: I am being faxed a copy of a letter from Goodwin to Myners which claims that Myners agreed the pension should be kept out of the departure negotiations. Sir Fred is not planning to volunteer to return any of his pension pot.

UPDATE, 17:30: In Sir Fred's letter to Lord Myners, Sir Fred says that he made substantial financial sacrifices when leaving Royal Bank. And he insists that Lord Myners told two senior Royal bank directors that further "gestures" would not be required, which was interpreted as meaning that Lord Myners was sanctioning the pension settlement.

Here is the letter [PDF].

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• - What's this?

Royal Bank of Scotland has not only announced the - but it's also being shored up in what some will see as Britain's biggest ever bailout.

The Treasury has announced that we as taxpayers will provide insurance to Royal Bank against future losses on £325bn of loans and investments.

First losses of up to £19.5bn on those impaired assets will be taken by Royal Bank.

But to prevent the losses wrecking the bank, we as taxpayers will be injecting up to £19bn of new capital into it, in the form of non-voting shares.

Also, losses greater than £19.5bn will be born by us - by taxpayers. In a prolonged severe recession, those losses could be substantial.

What we're getting in return is a £6.5bn fee - in the form of yet more of these non-voting shares.

And RBS has given a legally binding commitment to increase lending by £25bn in 2009.

We already own 70% of Royal Bank - and that stake could rise to a maximum of 75% after today's deal with the Treasury.

So it matters that Royal Bank becomes a profitable bank again.

Its new chief executive, Stephen Hester, announced RBS would be reducing its running costs by more than £2.5bn a year.

I put to him on the Today Programme that this would lead to job losses around the world of more than 20,000. His non-denial was that job cuts would be substantial.

Or to put it another way, in rebuilding this pillar of our economy there'll be pain for employees and possibly for taxpayers.

UPDATE, 11:56AM: Here are a few additional thoughts about the mother of all banking bailouts.

First, the total injection of capital by shareholders - that's including the £20bn we subscribed in October - looks set to hit £39bn.

That's a colossal amount of our money at risk - although in theory we could make a profit on it in a few years if Stephen Hester were to succeed in mending RBS and in flogging our shares back to the market (but to state the bloomin' obvious, the value of shares can go down as well as up).

It is of course reassuring for us as taxpayers that Royal Bank's share price has risen very sharply this morning, as we own 70% of the ordinary shares (and, as I've explained, that stake could rise to 75%).

But there's probably a ceiling through which the existing ordinary shares will struggle to break for some years, because of the pre-emptive rights over dividends of the new B shares that are being issued to the Treasury (to taxpayers).

As for the potential hit that could be taken by taxpayers on the massive insurance policy we've written, that's anyone's guess.

If there were - say - losses of 10% on the insured loans and assets, our share of that loss would be just under £12bn. Or rather more than the £6.5bn fee we're being paid.

So let's hope the rescue of Royal Bank - and the similar underpinning of Lloyds that's expected tomorrow - has the virtuous consequence of limiting the depth of the recession and thus feeds back to the banks in a positive way, in the form of reduced losses on loans.

And since we're on to Lloyds, it would be wrong to assume that the Treasury will insure its loans on identical terms to those provided to Royal Bank.

My understanding is that the government views the corporate loan book that Lloyds acquired when it bought HBOS as more poisonous than most of the assets it has insured at Royal Bank.

Which means that Lloyds may well have to pay more to taxpayers - to you and me - for the life-preserving protection we're giving it on around £300bn of ill-judged loans.

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• - What's this?

This is a story that very briefly left me lost for words (and please don't say "long may it last").

Authoritative sources have told me that Sir Fred Goodwin, the former chief executive of Royal Bank of Scotland - who is widely blamed for the colossal mess it's in - is already drawing a pension of £650,000 a year.

He's only 50 and he's got it for life. His pension pot, which generates the pension, is worth a handsome £16m.

Perhaps unsurprisingly, when I informed the Treasury we were about to run this striking story, I was told that ministers were very unhappy about the generous terms of Sir Fred's early retirement package.

So UK Financial Investments - the offshoot of the Treasury which manages taxpayers' stakes in our big banks - is investigating, with RBS's board, whether there is any way of clawing back some of the pension entitlement (see below for a full copy of a statement given to me by the Treasury).

Now before you pull your hair out, I should mention that Sir Fred didn't take any money by way of compensation from RBS when he left the bank.

And his entitlement to a pension at 50, in the event that he was asked to leave RBS, was an arrangement put in place some years ago and applied to other directors too.

Even so, the disclosure that he's set up very nicely for life will spark some controversy.

After all, RBS will confirm tomorrow that it made record losses for a British bank last year of around £8bn before a massive writedown of goodwill on the takeover of the toxic rump of the Dutch bank, ABN.

And after the goodwill writedown, Royal Bank's losses could be as high as £28bn, a record for any bank.

Its woes of course have led to it being rescued by us, by taxpayers.

We have a 70 per cent stake in RBS and we're about to insure the bank against future losses on £250bn of dodgy loans and investments.

The terms of that unprecedented insurance will also be unveiled tomorrow.

My understanding is that RBS will pay a fee in the form of non-voting shares equivalent to around 2 per cent of the insured assets, so over the five-year life of the scheme we as taxpayers would receive a further stake in RBS worth up to £20bn.

But we may well incur substantial losses on that £250bn.

It's not beyond the realms off possibility that future losses on those impaired assets could be £50bn.

If RBS's existing shareholders were to take the first 5 per cent loss, which seems likely on the basis of the current state of talks between the bank and the Treasury, that would generate a £12.5bn hit for the bank and its shareholders

But 90 per cent of the rest of the loss would fall on the Exchequer, on us as taxpayers - so there could be a total loss for us of up to £33.75bn.

So it's against that background, of taxpayers giving enormous, unprecedented support to this damaged bank, that Goodwin's £650,000 for life may upset a few of you.

PS Here is the Treasury's statement:

"Since they became aware of this issue UKFI have been vigorously pursuing with the new Chairman whether there is any scope for clawing back some or all of this pension entitlement and whether the Board took the decision in the full knowledge of the facts.

UKFI has agreed with RBS that the bank will review all aspects of Sir Fred's tenure in office with a view to testing to the full any potential for legal redress, including the potential for recouping pension provision.

This is another example of the culture of rewards for failure that we are determined to sweep away for the future.

We are committed to cleaning up the banking system - both the financial balance sheets of the banks and behaviour of those who lead them."

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• - What's this?

My jaw was on the floor after the first 45 minutes of watching the chairman and chief executive of the to the Treasury Select Committee.

To say that Lord Turner and Hector Sants admitted there were shortcomings at the City watchdog in the years before they arrived would be a bit like saying Nelson Mandela oversaw a modest change in the constitution of South Africa.

They totally repudiated what they called the philosophy of the FSA prior to the near total collapse of our banking system in the autumn.

Lord Turner said that the FSA, as a matter of principle, did not question whether banks had appropriate strategies. It adhered, or so he said, to a free-market ideology - as preached principally by Alan Greenspan, at the time the world's most powerful central banker - which broadly said that banks would by definition behave rationally.

The only role for the FSA at the time - according to Turner - was to make sure that the structures, systems and processes of the banks were ticketyboo. So it verified stuff like whether there were a sufficient number of bodies in the risk-management department; or whether the right kind of management and risk information was being gathered and disseminated to the right people; and so on.

But it wasn't apparently proper for the FSA to challenge banks on whether they should be growing so fast in the mortgage market, or loading themselves up with collateralised debt obligations manufactured from toxic subprime loans, or funding themselves to an ever-increasing extent from the sale of mortgage-backed securities.

I'm so shocked that I've come over all cockney. All I can think of to say is "can you Adam-and-Eve it?"

And my own answer is "no", if I'm honest.

Sants made an equally gobsmacking disclosure. He said that in the past, when deciding whether someone was fit-and-proper to be a senior banker, almost the only consideration for the FSA was whether the candidate was a crook. But it didn't take much of an interest in whether the bank might be appointing a dunderhead, an incompetent, as a steward of our precious savings.

There is some reassuring news, however. Turner and Sants both insisted that it's all change at the FSA.

The watchdog is now crawling all over the strategies of the banks and examining where these institutions that are so central to our economy are heading.

And competency is now a formal requirement for the FSA for appointment to the board of a bank. The FSA has even decided that it's going to meet and interview candidates for top positions at banks, to verify whether they cut the mustard.

If you said "about time too", I wouldn't be at all surprised.

Here are two more shocking disclosures.

Turner conceded that neither the FSA nor the Bank of England had a formal, legal responsibility for maintaining the financial stability of the system.

And he also said that the FSA would be increasing the capital requirements for the trading activities of banks by several hundred per cent.

This means that the securities trading and investment banking activities of the likes of Barclays will become more expensive for banks, much less profitable. Banks will be deterred from engaging in the kind of financial engineering that led to the creation of all those poisonous, subprime-based investments.

But it also implies that - again - the FSA got it wrong to a mindboggling extent in another absolutely core area of its regulatory responsibilities.

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• - What's this?

When I was the City Editor of the Sunday Telegraph in 2004, we wrote about a and used by its executives.

We had chapter and verse on the plane: its make (a Falcon 900 EX with a list price of £17.4m); its registration number (G-RBSG); and its flight log.

But for several days before we published, RBS denied to us that it owned the plane and, finally, it only conceded its existence when I pointed out to a senior executive that the bank was in danger of looking a bit silly if we published everything we knew about the jet alongside RBS's on-the-record statement that the thing was a mirage (no pun intended).

I was reminded of the incident a couple of days ago, when I learned that the plane which didn't exist is now up for sale, by a new management team at RBS that wants to prove its penny-pinching credentials (there are rather a lot of used private jets on the market right now, so it's moot whether RBS will get a decent price).

To be clear, the reason we were interested in the plane all those years ago is that it struck an odd contrast with the reputation of RBS's chief executive, , as a ruthless cost-cutter. The point about private jets - for shareholders who own banks - is that the expense of using them (let alone the capital outlay in buying them) is usually more than the price of first-class and business-class travel on a mainstream airline.

And there were other manifestations of a culture that didn't appear to be particularly solidly based on its stated and laudable adherence to the "" principle.

There was the employment of Sir Jackie Stewart, Jack Nicklaus and Sachin Tendulkar as "global ambassadors" and the sponsorship of the Williams F1 team, for example - which may well have added some kind of sparkle to the RBS brand, but whose value is tricky to measure.

RBS was a slightly odd organisation in those days. In many ways, it appeared remarkably successful. Having acquired NatWest and expanded massively in the US, it was one of the world's biggest and most profitable banks.

But it was always rather secretive and surprisingly defensive: I'm struggling to remember a single on-the-record interview given by Goodwin to a broadcaster or newspaper (even though in private conversation, he was always engaging and interesting).

It was more inward looking than most huge international companies, and was very prickly about even mild criticism.

That said, many in the City, and many journalists, admired the bank for its efficiency and Goodwin for his "Fred-the-shred" moniker - his reputation as perhaps the most fearsome and effective cost-cutter in UK corporate life.

So it's striking that the new chief executive, Stephen Hester, has identified some £1.5bn to £2bn of cost savings at the bank, which are apparently above and beyond what has already been disclosed. And Hester will announce as much this Thursday.

Some of those cost-savings presumably relate to the toxic rump of the giant Dutch bank, ABN which was foolishly acquired by RBS after the onset of the credit crunch in the autumn of 2007. And Goodwin too would doubtless have spotted them.

However a proportion of those savings - which may well lead to job losses of some 20,000 or so over the next two or three years (though RBS won't provide a precise number) - were available for some time and not reaped by Goodwin. Or, at least, that's what I'm told.

It's a bit odd.

None of which is to detract from Goodwin's initial achievement of integrating NatWest into RBS with remarkably little visible stress on customers or the organisation.

But it does perhaps give substance to the observation of those at RBS who say that - towards the end of his tenure - too much power within the bank was concentrated on Goodwin and that he did not delegate enough to other managers.

Goodwin must of course be right, as he said to the Treasury Select Committee, that it would be simplistic and naïve to place all the blame for the mess at RBS on him. To do so would be to ignore the collective failure of the bank's board and its owners, its shareholders, to rein in the banks' foolish expansion and to check its reckless investment in poisonous assets.

Even so, Goodwin was neither a bystander nor - perhaps - the UK's supreme "shredder".

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• - What's this?

Taxpayers may become liable for £500bn of poor loans and investments made by Royal Bank of Scotland and Lloyds TSB.

Negotiations are at an advanced stage on what the Treasury has called its Asset Protection Scheme, which would involve taxpayers insuring banks against future losses on their less prudent lending and investment.

It is understood that each of Lloyds and Royal Bank hopes to insure £250bn of their loans and investments.

They are working towards a deadline of Thursday for Royal Bank and Friday for Lloyds to agree the outline of the deal with the Treasury.

If £500bn of their assets are insured, this would be a bold attempt by the Treasury to achieve two outcomes: first, to strengthen their balance sheets to avoid having to nationalise the banks fully if their losses increase; second, to release resources within the banks to generate perhaps £30bn or £40bn of new lending to companies and home buyers.

It would also, however, lift the total of British taxpayer support for our banks since the start of the credit crunch - in the form of loans, guarantees, insurance and investment - to a remarkable £1.3 trillion, more or less equivalent to the entire annual output of the British economy or GDP.

Sources close to the negotiations said that there are still important disagreements between the Treasury and the banks on the terms of the deal.

One contentious area is the size of the loss - known as the first loss - that the banks must incur before taxpayers pick up the tab.

The Treasury wanted the banks' owners, their shareholders, to be liable for the first 10% of the loss.

But on £500bn of assets, that 10% loss would potentially destroy their balance sheets - and thus end up weakening the banks, rather than strengthening them.

Second, is the size of the fee payable by the banks.

This would be in the form of participating preference shares to be issued to the Treasury and would probably be classed under banking regulations as core tier one capital - which means they would reinforce the financial robustness of the banks.

These shares would carry no votes. So the government's voting control of Royal Bank would remain at 70% and 43% for Lloyds TSB.

But if the fee were set high, the government's economic interest in these banks - it claims over the banks' assets - could approach 100%.

In the sense of rights over the banks' profits and assets, there would be little or nothing left for Royal Bank's and Lloyds' private sector shareholders. This would represent "economic" nationalisation of the banks, if not formal nationalisation.

The banks and Treasury officials, together with teams of City advisers, are struggling to construct a formula that avoids this economic nationalisation.

Update 2009-03-03: In the first paragraph of this note, I referred to "Lloyds TSB". Following the acquisition of HBOS, the bank is of course now called "Lloyds Banking Group". For Lloyds, most (but not all) of the assets to be insured by the new Asset Protection Scheme are expected to be loans and investments that were originally made by HBOS.

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• - What's this?

The number of house purchases financed by mortgages fell by half last year, in part because of a collapse in the availability of mortgages.

The had a role in causing this trauma - which made it particularly difficult for young people to buy homes - because of its insistence that repay £27bn it had borrowed from us, the taxpayers.

Some £18bn was repaid last year - a rare bit of good news for the public finances that is seen by some as a disaster for the wider economy.

But the Rock has now been told that it doesn't have to repay the rest, for now at least.

And the government will provide around £10bn of new taxpayer loans to the Rock so that it can .

In total, the Treasury's decision to revitalise this nationalised bank will mean that there should be £28bn of additional finance for mortgages in the UK over the next year or so compared with 2008.

That's equivalent to more than 10% of all gross mortgage lending last year - making this arguably the government's most significant attempt to prop up the housing market.

So the big question is whether there's actually an appetite for mortgages, whether the problem right now is a shortage of loans or a collapse of confidence by possible buyers and a lack of demand.

My understanding is that the Rock will endeavour to exploit what demand there may be, by offering mortgages that may be more suitable for first-time buyers than much of what's on offer from the big banks.

I'm told it will offer mortgages worth 80% or 90% of the value of properties, compared to the 75% loans that are now the industry norm.

That may not represent a return to the Rock's extreme bull-market ways of offering 100% mortgages - the kind of behaviour which the prime minister yesterday suggested .

But a 90% mortgage is not exactly risk free, at a time when house prices are still falling.

What's also significant about the Treasury's announcement is that it can be seen as confirmation of the government's intent to revitalise the Rock and - in time - return it to the private sector.

However there's a signal that Northern Rock's stock of existing mortgages contains too many toxic loans for them to be left inside a bank that wants to thrive again: so the book of older mortgages is being hived off to be managed separately from the new improved Rock that will provide new loans.

Is it realistic to expect a serious Rock revival?

If the defiant pride it generates in its home in the North East is anything to go by, Northern Rock can prosper.

On my recent visit there, I was struck by the burning desire of almost everyone I met to see the bank reborn as a prudent bank for a new financially conservative age, rather than the shamed victim of the credit bubble that turned to crunch.

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• - What's this?

As you'd expect, the prime minister tried to take credit in his Observer article yesterday for abolishing what he called the "old short-term bonus culture" (he swanked that "we are changing the bonus system").

But bankers who've been in the game for a while - a bit longer than the vaunted era when "boom and bust" had supposedly been abolished - tell me he could have gone much further in his reform of bonus payments at Royal Bank of Scotland.

It's true that the new approach at RBS should reduce the risk that its bankers will receive bonuses for deals that turn out to be stinky - because payments will be deferred till it's clear whether those deals have really benefited the bank.

But even this amended bonus system still represents a one-way bet for bankers, a wager they can't lose.

In keeping with the norm of the past decade or so, RBS traders and advisers will continue to be rewarded if they make a profit when investing other people's money, the balance sheet owned by Royal Bank's shareholders, not their own capital.

So what's the worst that could happen to them if they didn't make a profit or even if their deals generated losses?

Short of losing their jobs, they simply wouldn't get the bonus.

Unlike proper entrepreneurial risk-taking, of the sort routinely practised by RBS's clients, there's no risk to the bankers' personal wealth: they wouldn't be poorer when the bank made a loss, they just wouldn't be any richer.

A genuine reform of the bonus-culture, one that would really put the kibosh on bankers taking foolish risks, would re-introduce the concept of the "malus" - or the idea that when a firm does badly, or a deal goes bad, the partners (in this case the de-facto partners, the top executives) take a hit and suffer a permanent diminution of wealth.

Much of what went wrong with the banking system in the past few years was that all the bonus accrued to salaried bankers, while the malus fell on shareholders.

It was rational for bankers to up the ante in the global speculative game, because they scooped the lot if they won, but any losses fell on the banks' owners.

In fact the losses at some banks turned out to be too big even for shareholders, which is why we as taxpayers have had to prop up so many banks across the world.

So guess who currently faces the malus?

Yes, since we own all or much of our biggest banks, the prospect of the malus is with taxpayers - and only the bonus (albeit deferred and subject to longer-term performance criteria) goes to the bankers.

This doesn't sound quite fair, does it?

Surely the prime minister could have transferred some or all of the malus back to the bankers themselves?

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• - What's this?

"They are the servants now".

That's the nub of Gordon Brown's vision for our banks, as outlined in an article he's written for the Observer newspaper.

Which in a sense is a statement of the obvious, since almost no British bank would be alive today if it weren't for the support of British taxpayers in the form of loans, guarantees and investment from us.

But what's striking is that although he has extraordinary and perhaps unprecedented power over the banks, the prime minister's programme of change for the banking system is strikingly conservative (small "c").

And much of what he's suggesting will be seen as closing a stable door that was left wide open during his many years as chancellor.

Even his eye-catching reflection that perhaps "we should control new mortgages for more than 100 per cent of house value" isn't a formal pledge to outlaw those homeloans that have been shown to be particularly risky by the losses experienced on them by Northern Rock.

What's perhaps more significant is that the prime minister explicitly rules out a formal separation of retail deposit-taking and investment banking.

Under this prime minister, banks that look after the savings of households and businesses will not be banned from engaging in speculative trading in securities, even though such trading and investment has caused so much of the losses that have hobbled the banking system.

He is saying no to a British version of the 1933 Glass-Steagall Act, or the kind of sweeping reconstruction of the banking system that was prompted by America's Great Depression (arguably, an important contributor to our current woes was the abolition in 1999 of the prohibition on US commercial banks engaging in investment banking - which allowed the creation of the modern, horrifically loss-making Citigroup).

This is how Brown puts it: "We do not envisage, as some have advocated, a rigid divide in future between 'narrow banking' - retail and corporate deposit taking - and investment banking and trading conducted at an international level".

Much flows from this, including that we as taxpayers will continue to provide a guarantee to banks, even those engaged in what many would see as high-risk international speculation, that we won't let them collapse..

Why is the prime minister keen to maintain this pact between taxpayers and institutions that underwrite and sell equities and loans transformed into tradable securities? Well he remains persuaded that "global financial flows and liquid capital markets have brought massive benefits to our economy".

So Brown is keeping the faith with financial globalisation: "there is no room for parochialism or protectionism in our model of the future", he says.

But note that he says global banking can only be made safe if there is effective global regulation, not "a patchwork of national regulators."

So it's worth pointing out that there is a bit of a rupture here between the traditional notion that where taxpayers' money is at stake, decisions should be taken by national governments (that there should be no taxation without representation).

Or to put it another way, the sanitisation of financial globalisation explicitly requires us to be happy as taxpayers to underwrite global banks that call themselves British, even though we as taxpayers would have only modest influence on the rules constraining the behaviour of those British global banks.

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Here's a short Newsnight film about my recent visit to the North East, where I discussed the ³ÉÈË¿ìÊÖ's coverage of Northern Rock and the banking crisis with local business people, former Rock employees, trade unionists and shareholders.

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• - What's this?

As you may have noticed, I have escaped for a few days to re-charge, with great lungfuls of the delicious air of west Wales.

It's been quite a test of self-discipline to resist the temptation to publish thoughts on the rise in the Baltic Dry (and whether this means the Chinese manufacturing machine is back on line) and on whether the Royal Bank is building a sustainable bank or committing commercial suicide with its new approach to the payment of bonuses.

There should be plenty for us to discuss on my return, next week.

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• - What's this?

The profits warning just released by Lloyds is shocking.

The loss at HBOS - which is a fraction under £11bn - represents a new record loss for a British bank (if goodwill write-offs are excluded, to be boringly technical for a second).

Lloyds says that on a statutory basis HBOS - which it bought earlier this year - lost £10bn in 2008 plus a so-called policyholder charge of £0.9bn (so just under £11bn altogether).

And on a statutory basis, the profit for Lloyds was was just under £1bn last year.

So on a merged basis for the two banks together, the result for 2008 would have been around £10bn.

Which is enough to turn most bankers white, even those hardened by the battles of the past 18 months.

What generated the colossal loss at HBOS was, to a large extent, eye-watering charges of £7bn on corporate loans that have gone bad - in part reflecting the recession we're in.

But Lloyds says that the loss on loans to companies is also the result of Lloyds applying its more conservative accounting standards to HBOS's loan book - which is one serious kick in the tender parts for HBOS's previous executives.

HBOS also suffered the indignity of incurring further big losses on its holdings of assorted dodgy investments.

It is a terrible humiliation for HBOS's already bashed-up previous chief executives, Andy Hornby and Sir James Crosby.

And it's pretty embarrassing - to put it mildly - for Lloyds' chief executive, Eric Daniels.

Lloyds didn't have to buy enfeebled HBOS - even though the government encouraged it to do so.

And only this week, Daniels insisted that, in time, Lloyds would make good money from the takeover.

This afternoon's is investors having serious doubts about whether Lloyds was right to buy HBOS.

Daniels will hope that those investors don't start to have serious doubts about whether he is the right man to attempt to rebuild a bank that many would say has been seriously weakened by the acquisition of HBOS.

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• - What's this?

If I were a supporter (and you may know that I'm not) I would be a bit confused by the .

Chelsea believes there's a strong signal that Roman Abramovich is committed to the club for the long term in the conversion of more than half his £700m loan to the club into equity.

Since there's been speculation that he wants out (which he denies), that matters.

And that he now has £370m of equity in the club isn't trvial - but perhaps for reasons that are slightly different from those expressed by the club's management.

The injection of equity strengthens Chelsea's balance sheet. And it means that were Chelsea ever to look like a profitable business, and were credit markets ever to recover, the club could probably fund itself through borrowing from commercial sources rather than relying on Mr Abramovich's largesse.

In fact the big thrust of its results is that of an organisation painfully struggling to transform itself from a rich man's plaything into a rationally managed company.

On the positive side, turnover is up 12% and underlying losses are down 43%.

On the less edifying side are the £23m of compensation payments to Jose Mourinho, Avram Grant and five members of the coaching staff (being sacked as a manager of Chelsea is better than winning the lottery).

Also wages (excluding the managers' payoffs) rose from a handsome £133m to a magnificent £149m - which means that Chelsea continues to create more multi-millionaires among the players than an investment bank in its prime.

But like an investment bank Chelsea is taking a vow to live slightly less high on the hog. This summer it wants to fund player purchases through the proceeds of player sales - and a big shake-up of the squad looks very likely.

Chelsea says it wants to stop using Mr Abramovich as the world's biggest piggy bank from the start of the next season, when it hopes to cease asking him for extra cash.

And the club hopes to break even on one measure of cash fllow (earnings before interest, depreciation and amortisation) by June 2010.

What does it all mean?

Well, there is an implication that Mr Abramovich isn't a seller today. That's not surprising, because selling Chelsea at this stage of the cycle would probably be one of the fastest routes available to losing a few hundred million.

But he and the club's executives are doing what they can to transform Chelsea from a trophy asset that only a multi-billionaire could own into something that might be described as a business.

And if that remarkable transformation were achieved, Mr Abramovich could perhaps sell the club without suffering a humiliating loss and without leaving Chelsea as an over-mortgaged financial wreck.

Perhaps these latest results can be seen as the first manifestation of Chelsea preparing for life without the Russian billionaire - even though it dare not contemplate his exit quite yet.

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• - What's this?

Are there greater hypocrites in the world than British institutional investors?

These days, they bellyache about the excessive risks that were being run by big companies in the boom years.

They've put irresistible pressure on banks to raise regulatory capital and on other big companies to pay down debt.

Which is fine and dandy but long overdue - a closing of stable doors after more or less every horse has galloped over the horizon.

Lest we forget, it was these same shareholders who less than two years ago were putting extreme pressure on companies to gear up, to increase borrowings, to take advantage of the availability of cheap plentiful debt for takeovers and to finance buybacks of shares.

If Royal Bank of Scotland and HBOS were recklessly lending a massive multiple of capital resources - as no one today can possibly deny - they were doing so for years in the full view of their owners, who said thanks for the dividends and rarely asked whether the dividends were sustainable.

And here's the tragedy. Those owners were us - the millions of British people saving for a pension, who innocently mandated a bunch of numpties at investment institutions to look after our retirement savings.

These investment institutions were supposed to ensure that the big companies in which we're invested serve our interests - instead of which they encouraged these companies to maximise short-term profits regardless of whether the future was being dangerously mortgaged to the hilt.

To call this a failure of corporate governance is the equivalent of describing the second world war as a breakdown of diplomatic relations between Britain and Germany.

Which brings me to of $19.5bn by Chinalco - a giant Chinese resources group - in Rio, the metals and minerals group.

Doubtless we'll hear carping from the investment institutions that Rio is selling at an inopportune down-phase of the commodity cycle and that it's flogging too much influence over its affairs to a minority investor.

But there is another way of seeing this deal.

Rio is securing a 60-year loan from the Chinese.

It's selling a right to buy its shares in the future at a massive premium to the prevailing share price.

And Rio is forming partnerships with Chinalco in individual mines - which should bring in new Chinese customers and help with the development of new mines in China's growing sphere of influence throughout the emerging economies.

Of course Chinalco's investment can be seen as another worrying manifestation of how economic and financial power has shifted from west to east.

But if that's happening, it's in part because the Chinese are prepared to invest for the long term to create sustainable enterprises.

And can Rio's board be blamed if - under pressure from its existing shareholders to pay down borrowings - it concludes that it's in the interest of all its owners (whether they acknowedge it or not) to lock in a relationship with a Chinese business and a Chinese economy which commit their capital for the rewards that may come in ten years, not ten minutes?

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• - What's this?

Paul Moore, the former head of risk at HBOS, has won the big argument.

In 2003 and 2004, he warned HBOS's senior directors that they were expanding the bank's loan book too fast: HBOS was lending too much.

Guess what? He seems to have been right.

HBOS went to the brink of collapse because it financed its lending growth by raising funds on wholesale markets - and when wholesale funds became progressively harder to obtain after the summer of 2007, HBOS was careering toward the cliff edge.

It is alive today only because it was rescued by an injection of capital from taxpayers and by being taken over by Lloyds.

So no-one in their right mind would argue that Moore got it wrong in respect of the big issue - though Moore's critique was not that funding would dry up, but that borrowers would have difficulty repaying (which is an important nuance).

And since Sir James Crosby was chief executive of HBOS at the time Moore was making his complaints, history - or the closure of wholesale markets - has made Sir James look like a bit of a nit.

Which is why if Sir James had not as deputy chairman of the Financial Services Authority, the City watchdog, he would probably have been forced from office over the coming weeks and months by unforgiving public opinion.

But that does not mean that Sir James was wrong - in a legal or regulatory sense - to have asked Moore to leave HBOS or to have rejected some of Moore's concerns.

Moore's dossier of complaints that HBOS and Sir James were taking excessive risks was thoroughly investigated by KPMG, the accountancy firm.

And KPMG's conclusion - that HBOS had appropriate risk controls in place - was accepted by the Financial Services Authority.

My understanding is the FSA stands by that judgement.

Which is not to say that either the FSA or Sir James would have no regrets that HBOS did not check its lending growth.

But - amazing as it may now seem - HBOS and the FSA did not believe, in 2004 and 2005, that it was appropriate to assess the riskiness of its rate of growth on the basis that funds from wholesale sources could vanish.

What's the point? Well, it's that Sir James was not obliged to resign as the FSA's deputy chair because of evidence that he broke any law or regulation.

And the FSA put no pressure on him to resign.

Sir James chose to resign because he wanted to protect the FSA from incessant criticism by media and opposition politicians that its number two had made a chronically bad judgement as chief executive of HBOS.

So the lesson of hindsight is that Sir James made a disastrous judgement about HBOS's rate of expansion - but not that he committed a crime or a misdemeanour.

And some would say that it's right that he quit, because all of us are paying for his misjudgement with the massive financial support that taxpayers have been forced to give HBOS.

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• - What's this?

Eric Daniels, the chief executive of Lloyds Banking Group, will make a personal statement today to MPs on the Treasury Select Committee that he won't be taking his bonus for 2008.

You may feel that's a "dog bites man" kind of story. Surely no senior executive of a bank would dare take a bonus ?

And in the case of Lloyds Banking Group, it would be doubly controversial for Mr Daniels to receive a so-called payment for success, in that its share price has tumbled (along with that of all banks) and taxpayers have taken a stake of 43% in the group.

But until just a day or two ago, Lloyds was insisting that the board was still planning to pay bonuses to its executives directors, because (it said) the group had performed better than its peers.

It did make one concession to the growing climate of hostility towards bonuses for bankers.

When Lloyds received an injection of funds from taxpayers in October to shore it up, Lloyds did say that all bonuses for executive directors would be payable in shares.

So how much is Mr Daniels giving up?

Well, he's entitled to receive up to 225% of his basic salary of just over £1m (which rose 7.8% last year).

In other words, the bonus could have been more than £2m.

But to be clear, his statement to MPs will be a personal one - it does not represent policy by the board of Lloyds Banking Group.

Or, to put it another way, Lloyds' non-executive directors are yet to decide whether the five other executive directors on the board should receive their bonus entitlements of up to £6m in total.

They, however, will today be assuming that their bonuses are also dead and buried, because it's difficult to see how they could take the reward if their leader is refusing the icing on his cake.

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• - What's this?

Apologies carry weight when they are accompanied by a clear explanation by the miscreants of what they did wrong and why.

And the problem with is that they lacked a detailed account of why they did what they did.

Mistakes were admitted - but motivation was glossed over.

Sir Tom Mckillop and Sir Fred Goodwin of Royal Bank of Scotland both conceded that buying the toxic rump of ABN after the start of the credit crunch in the autumn of 2007 was a howler of the first order.

Lord Stevenson and Andy Hornby of HBOS admitted their bank had become too dependent on unreliable finance from wholesale markets and had lent too much to property and construction companies, among other things.

But they gave little clue as to why they made these remarkable errors.

Were their banks gripped by a get-rich-quick bonus culture that led them to take excessive risks in the pursuit of short-term profit?

There was a faint nod toward that, but no acknowledgement that the remuneration system that enriched the few at the expense of the many might have been a serious problem.

Did they lack the knowledge and skills to assess the risks they were running? They all denied that they weren't up to the task of controlling their huge, complex and sprawling banks.

Were there inadequate checks and balances in place, lousy governance, the wrong people on the wrong board committees? They all looked a bit nonplussed.

Perhaps it's too early to expect those in part to blame for our economic woes to fully understand the motivation that led to the calamitous meltdown of their banks and the near collapse of the entire financial system.

Perhaps they never will grasp fully what went wrong. But it matters that we learn the lessons, so we can design a sounder, safer financial system.

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Here's the good news for the former bosses of Royal Bank of Scotland and HBOS who are being this morning by the Treasury Select Committee.

There's so much really bad financial stuff happening in the world that perhaps their past mistakes won't be quite as humiliating for them as would otherwise be the case.

For example UBS, the former pride of Swiss banking, has just disclosed that its losses in 2008 were around £12bn - that's about 50% more than the eyewatering losses made by Royal Bank last year, during the last disastrous phase of Sir Fred Goodwin's reign.

And in Russia regional banks are talking to the government about how to reassure overseas banks that they can repay around $400bn of debts over the next few years.

Yuk.

To paraphrase , this financial mess is global and as bad as we've seen for 100 years (although to nitpick, the Governor of the Bank of England thinks it's the worst banking crisis since just before World War One, so not quite a century).

So what should the MPs ask the erstwhile heads of HBOS and Royal Bank about the extreme local difficulties they succeeded in engineering for themselves?

If I had one question for each bank, these would be them:

For Andy Hornby, former chief executive of HBOS, I would ask how on earth he allowed the bank to abandon tried and tested banking risk controls. What I mean by that is that he gave licence to his team to take stakes in big companies as well as lending to them.

That went against all traditional banking practice, because it meant that the banks' judgement about the credit-worthiness of companies wanting to borrow vast sums was clouded by the enticing prospect of making fat profits on shares held in those borrowers.

Or to put it another way, good banking judgement was overwhelmed by at least one of those seven deadly sins.

In the early 1990s, when I was banking editor of the Financial Times, it was regarded as almost a scandal when the so-called clearing banks held shares in corporate customers. Over the past few years, at HBOS and at other banks, this dangerous mixing of lending and investing became commonplace - with disastrous consequences.

So the question to Mr Hornby - who is not a banker by training and yet went on to run one of our biggest banks - is why he didn't spot this danger (among many other dangers - such as the bank's excessive reliance on unreliable sources of funding, inlcluding sales of mortgage-backed bonds).

As for Sir Fred Goodwin, who for years was the supremely confident CEO of Royal Bank, the big question is why, oh why, did he buy the bulk of the toxic giant Dutch bank ABN right at the top of the market.

This deal would have bankrupted RBS, were it not for the generosity of taxpayers. And he can't claim there were no serious voices arguing against this takeover. There were many asking the question whether this was a deal too far.

Doubtless he and Hornby and their respective chairmen will say sorry this morning. But they need to do more.

They need to give a convincing narrative of how they made their egregious errors, so that we can all learn from their mistakes - and make new mistakes next time, rather than repeating these particularly disastrous howlers.

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• - What's this?

The end is nigh for the get-rich-quick remuneration schemes that were prevalent in banks.

That's pretty clear, given that even the City watchdog, the Financial Services Authority, today criticised the way that senior bankers were rewarded for taking risks that blew up their banks and the economy.

But is there no longer any respectable case for paying bonuses to any bankers?

John Varley, Barclays' chief executive, told me it was right and proper that he shouldn't receive a mega-bonus - but that surely it would be wrong for him to deprive mortgage advisers and branch staff of a few thousand pounds if they hit their targets.

His peers too have said to me that what went wrong at banks like Royal Bank of Scotland, HBOS and Northern Rock, wasn't the fault of tens of thousands of junior employees - so why should they be penalised?

The answer is the one given by the Tory leader David Cameron today, which is that if taxpayers hadn't rescued those banks then those employees wouldn't have jobs, let alone bonuses.

So perhaps all bankers should simply count their blessings that they work for banks perceived to be so important to the prosperity of us all rather than for Woolworths - where there was no taxpayer bailout and 30,000 were made redundant.

Here's the other bit of special pleading by bankers, which is that brilliant traders and assorted rocket scientists would defect to rivals if their pockets weren't stuffed with massive financial incentives (including the promise of bonuses).

Let's not examine whether these geniuses have made such a valuable contribution to their institutions or to the general good - or whether they might have brought western capitalism to the brink of collapse.

Let's just ask City head-hunters whether the market is booming for financially creative bankers.

Errr. What the head-hunters tell me is that there's always a market for good people, but - to put it mildly - demand is not what it was.

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• - What's this?

Although has recovered a good deal in the past few days, the bank's value has still plunged more than 80% over the past year.

And its market value as of Friday night was £8.8bn - which is just a bit more than the £6.1bn that the bank has just announced as its statutory pre-tax profit for 2008.

In other words, investors are valuing Barclays at a little bit more than the value of a single year's profit.

What does this mean?

Well, it implies a couple of troubling things.

First, it shouts that investors believe that the prospects for Barclays are pretty dire - that they regard the £6.1bn of profit as an interesting historical factoid of little relevance to the future earning power of this bank (or perhaps any bank).

The City is basically saying that the profitability of banks such as Barclays has been squeezed in a semi-permanent way.

Second, the low share price rather reinforces the notion that the accounting rules for banks aren't really capturing the economic reality.

Even if you take the view that investors are being too pessimistic about what lurks around the corner for Barclays, there is something rather extraordinary about Barclays declaring a profit on this scale - and adding more than £5bn of retained earnings to reserves - and yet being deemed by the Financial Services Authority to have needed to raise more than £10bn in new capital.

It is of course clear that the City watchdog and other regulators allowed banks - perhaps negligently - to grow and grow on the basis of weak foundations, with too little capital underpinning them.

But there is nonetheless a terrible inconsistency between Barclays' apparent financial success and the verdict of the FSA that it was dangerously short of capital.

All of this just adds to a general sense of anxiety that the official way of painting what's going on at a bank - through the annual audited figures - doesn't capture the reality.

Which is not a trivial issue. Because the markets that underpin the workings of our economy won't function again properly unless and until we have a strong sense of what's happening inside our banks.

UPDATE 0905: Barclays' 14% fall in profits looks like a triumph compared with the huge losses suffered by its big rivals, Royal Bank of Scotland and HBOS.

But all is not quite what it seems, because Barclays' performance has been flattered by some one-off and unusual gains on deals.

That said, investors liked what they saw and the Barclays share price has risen.

And what about the heated issue of the moment, bonuses?

Well, John Varley, Barclays chief executive, told me that what he calls the variable element of pay at his bank has fallen by almost 50%.

And he concedes that some bankers' pay was - for a period - excessive.

But the Chancellor is saying he will have the right to stick his nose into how Barclays rewards its staff, because the bank wants to participate in the scheme by which taxpayers will insure banks against losses on their more foolish loans and investments.

So it's moot whether Barclays' remuneration practices will silence critics of the City's big-bonus culture - especially since Vince Cable, the Liberal Democrats' scourge of the banks, is trying to shine a bright light on Barclays' highly profitable business that helps companies reduce their tax bills.

SECOND UPDATE 1000: I am trying to assess the significance of the astonishing increase in the value of Barclays' reported assets and liabilities, from £1,227bn to £2,053bn.

Barclays' gross assets and liabilities are now significantly greater than the annual output of the British economy.

At a time when banks are supposed to be shrinking their leverage for all our sakes - especially their exposure to other financial institutions - this is not wholly reassuring.

Part of that growth in the balance sheet stems from the impact of the fall in sterling on foreign-currency assets and liabilities. And part stems from an increase in loans and advances of £124bn (which isn't trivial).

But the biggest increment was "£737bn attributable to an increase in derivative assets", according to Barclays' finance director, Chris Lucas.

That sounds worrying. But he insists that the derivative exposure would be £917bn lower if the accounting rules allowed the bank to show the net position with individual customers or counterparties.

What Barclays is saying is that - in effect - it has lent £917bn to a bunch of institutions but has also borrowed £917bn in matching quantities from the identical bunch of institutions, so the net exposure is nil.

But that's only reassuring up to a point - because what the net position obscures is all sorts of niceties such as the differing maturities of the reciprocal claims with the counterparties and also the rights of Barclays and the counterparties in the unlikely event that one of them were to go bust.

Broadly, if you want to be anxious about the prospects for Barclays you would say that its balance sheet is becoming even more complex and substantial, when the painful lesson of recent history would be that fortune favours smaller banks engaged in simpler transactions.

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On the face of it, the independent review of the UK banking industry commissioned by the Treasury should be radical.

In explaining why it needs a review, the Treasury identifies grave failings by non-executive directors of banks and by the owners of banks.

Boards and shareholders allowed remuneration practices which bestowed vast riches on individual bankers for taking risks that subsequently hobbled their banks and the economy. .

This was the result, or so the Treasury implies, of boards being given inadequate information and also being stocked with directors lacking the skills to assess banks' complex operations.

As for the big institutions which own the banks shares on behalf of those of us saving for our retirement, they failed to monitor what was going on inside the banks.

It all represents a terrible indictment of our stock-market based system of owning and managing big companies.

But anyone hoping for revolutionary recommendations from the Treasury's review is likely to be disappointed.

The Chancellor has appointed Sir David Walker to chair the review. - and he is seen in the City as one of them.

Based on his track record, Sir David is expected to try to fix the current governance system rather than declaring it bust and in need of replacing.

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Alistair Darling and George Osborne both this morning played the role of grownups who are furious at the naughty, greedy behaviour of bankers.

And both made it clear - in interviews with Andrew Marr - that bankers' pay bonanza is well and truly over.

Which gives no wriggle room for banking executives, since Darling is the current Chancellor and - if opinion polls are correct - Osborne is the future Chancellor.

So how are they proposing to limit bankers' pay?

Well perhaps the most interesting remark by Darling is that he intends to impose restrictions on bankers' remuneration for all banks in receipt of any kind of serious financial support from taxpayers, and not just banks where taxpayers have a big shareholding. .

Darling was explicit that his interference in banks' pay arrangements would go wider than Royal Bank of Scotland, Lloyds, Northern Rock and Bradford & Bingley, or those banks where the state owns the whole bank or part of it.

The Chancellor feels he has the right to limit bonuses and set conditions on pay at any bank propped up by us, by taxpayers - which broadly includes all British banks, since they've all received exceptional loans and guarantees from taxpayers over the past few months..

But in practice, the Chancellor will impose his will on pay during the current and very active negotiations on providing insurance to banks for future losses on their dodgy loans and investments.

There's a logic here, in that taxpayers will be taking huge amounts of risk away from banks and bankers - and since rewards in a market-based system are supposed to be linked to risk, the remuneration of banks' employees should fall very significantly indeed.

But this will put Barclays in a very tight spot: it wants to participate in the taxpayer insurance scheme, but has also been desperately keen to preserve its independence over remuneration.

The Chancellor's change of position on pay will be infuriating to Barclays' board, which thought that by raising capital from the Middle East rather than from Westminster it had escaped being nannied on pay by Darling and Gordon Brown.

But Barclays' directors and those of other banks will not be able to run for comfort to George Osborne and the Tories.

Osborne told me this morning that he feels bankers were for years being paid too much for taking minimal personal risks (although these risks were excessive for their own institutions and for the economy).

The shadow chancellor said that if banks don't limit their pay and bonuses over the next couple of years, the government should instruct them to do so (and, he said, the government has every right to do so).

And he added that the enormous sums earned by bankers must go forever, that it's completely inappropriate that a banker should earn twenty times that of a heart surgeon.

All of which rather implies that the luckiest bankers may turn out to be those who were sacked last year for their incompetence and managed to walk away with payoffs and fat pensions.

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• - What's this?

On 13 October, after receiving significant financial support from taxpayers, Lloyds TSB this: "Although they will be entitled to take cash as an alternative,ÌýLloyds TSB will ask executive directors to receiveÌýtheirÌý2008ÌýbonusÌýentitlementÌýin Lloyds TSB shares. These will be subject to a restriction on sale until December 2009."
Ìý
In other words, the board of Lloyds - which is now called Lloyds Banking Group - expected to pay substantial bonuses to the bank's most senior executives in respect of their performance last year.

There are five of these , led by the chief executive, Eric Daniels. And their aggregate entitlement to bonusesÌýwill run to millions of pounds.

As of now, Lloyds still intends to pay this bonus.

However, Lloyds' board has a few weeks to decide whether to press ahead. What should it do? Should Lloyds' executive directors be paid a bonus?

The executive will feel they have earned it - in that the financial performance of Lloyds TSB, before it bought HBOS, was quite a lot better than that of many other banks.

Also, Mr Daniels and his team will feel they've already made a sacrifice, by agreeing to take the payment in shares that can't be sold for a year rather than in ready cash.

But paying any bonus in any form to any banker right now is contentious, to put it mildly (see my assorted notes of the past couple of days).

And at least one reason for not paying the bonus to Lloyds' directors is that the bank's recent share price performance has been lamentable. As I've pointed out many times, it's tricky to pay fat rewards to managers of a business when the owners of said business are being mullered.

That said, part of the explanation for Lloyds' weak share price is that it recently bought HBOS, which has been incurring horrible losses on loans to companies and is expected to suffer further as mortgage borrowers run into difficulties.

Lloyds would argue that it was doing the world a favour by effectively rescuing the battered owner of the Halifax.

But Lloyds didn't buy HBOS as an act of charity, even though it was encouraged to do so by the prime minister and the Treasury. Eric Daniels expects to make good profits out of HBOS in years to come.Ìý
Ìý
So if the City has become nervous of the risks in turning HBOS around, then it might be sensible for Mr Daniels and his team to show restraint on pay and cancel their bonuses for 2008 - in the hope and expectation that they can prove in years to come that their confidence in the benefits of the takeover were well-founded.
Ìý
Oh, and then there's dirty, grimy politics.
Ìý
Taxpayers own 43 per cent of Lloyds, via the state'sÌýshareholding which is managed by UK Financial Investments.

Although that's not majority control, it's big enough to veto any substantial decision that Lloyds might want to take. So if Lloyds' board decides to pay substantial performance-related wonga to Mr Daniels and his senior team, that puts on the spot those who are looking after the taxpayers' shareholding.

Which means, as if you needed telling, that the prime minister - who made his reputation in the early 1990s as the scourge of the so-called "fat cats" - will have to decide whether Eric Daniels and his team deserve a few million pounds of bonus.

The partial nationalisation of the banking system is generating all sorts of intriguing new challenges for government.
Ìý

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When Gordon Brown entered Parliament more than 25 years ago, did he ever in his wildest dreams believe he would have to decide on the bonuses of 177,000 bankers?

Because that's what the prime minister - in partnership with the Chancellor, Alistair Darling - will have to do in the next few weeks.

How so?

Well, Royal Bank of Scotland, owner of NatWest, has to announce in March what bonuses it will be paying its 177,000 employees in respect of their performance for 2008.

And although the government has said that it wants RBS to operate in a commercial fashion, the rescue of the bank last autumn means that it is 70% owned by the state, by taxpayers, by us.

Which means that - whether he likes it or not - the buck for any of RBS's actions stops with the prime minister, with Gordon Brown.

And decisions don't come any more fraught than whether RBS should pay bonuses.

For the avoidance of doubt, although the Royal Bank board will take a view about how much bonus to pay, it will look to Darling and to Brown for their approval.

"But surely," you may say, "this is a no-brainer: RBS shouldn't pay a penny of bonus."

Just last month, Royal Bank announced that it made a record-breaking, eye-watering loss of up to £8bn in 2008 and its share price plunged. In those dire circumstances, how could it pay a bean of bonus to any of its bankers?

Well, Royal Bank's board believes it would be mad, bad and dangerous to pay no bonuses at all.

Here's why.

That colossal loss of up to £8bn stemmed from the crazy lending and investment decisions of perhaps 500 people - many of whom have either left the group or won't be paid a penny of bonus.

That leaves more than 176,000 staff across the world who've worked hard and generated valuable profits.

They feel they've earned a bonus, because they identify with their own bits of the bank, not the entire gargantuan sprawling entity.

What's more, even in this time of nasty recession in the financial services industry, the best of RBS's staff could still move elsewhere.

So the fear of the bank's board is that if it were to pay no bonuses, tens of thousands of its employees would be demotivated and all its best bankers would quit to go to rivals.

You may shout "who cares?" - and you may argue that the Royal Bank would be better off without the clever-clogs who didn't prevent the stupid loans and investments in the first place.

But we shouldn't forget that RBS is a complicated global business with more than £2000bn of assets.

And if the staff were staffed only by dunderheads and mediocrities - well, the bank could spiral into disastrous, irreversible decline.

Which would be a big and expensive headache for all of us, since - to repeat - we own 70% of the group.

It would be in our interest, presumably, to sell our 70% stake back to the private sector for a profit one day - and that would be impossible unless RBS were perceived to be a commercial success.

So RBS's board believes it still has to pay bonuses. Although it acknowledges that bonuses have to be slashed, probably by more than 50% on average.

Also, it concedes that it can't pay much in the way of cash bonuses. The rewards would therefore be in the form of bits of paper, funny money, proxies for shares - which promise a return in years to come.

But there would nonetheless be a valuable bonus - perhaps equivalent to 10% of salary for branch staff and many times that for the top advisers and traders.

And even with a 50% cut in the overall value of bonuses, the aggregate cost of bonuses would be several hundred million pounds, possibly not far off £1bn (this is my estimate).

So will Gordon Brown wish to be seen to be sanctioning bonuses running to several hundred million pounds at a bank taken to the brink of collapse by its crazy loans and investments?

It's the kind of dilemma that would make even the toughest prime minister weep.

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Here's the argument for why no senior banker should receive a bonus, perhaps for several years.

This is not to say that all bonuses are the devil's currency and should be outlawed.

But it's about the idea that a bonus should be a reward for exceptional performance.

And the reality is that there is no big bank in the western hemisphere whose share price hasn't fallen in the past 18 months.

In other words, the senior executives of our banks have been responsible for the destruction of wealth (the wealth of anyone whose pension scheme is invested in shares) on an unprecedented, mind-blowing scale.

Since the owners of banks have been impoverished (and, to repeat, millions saving for retirement are owners of banks), it's very difficult to see how senior executives of banks should receive a penny of bonus.

There's a double argument why über-bankers should not be paid even a farthing of performance-related remuneration - and this argument can be extrapolated from no less august a source than , chairman of the Financial Services Authority.

It's that almost every senior banker trousered bonuses over the previous few years on the basis of profits that turn out to be a chimera, an illusion, unreal.

The point - which is implicit in Turner's analysis - is that banks' wholesale banking and treasury operations booked as profit both capital gain and income from assets that have subsequently turned out to be poisonous.

Much of this capital gain never crystallised, it was not converted into cash. Yet bonuses - in the form of hard cash and shares - were paid out on the basis of this nebulous capital gain.

Over the past 18 months, these assets - the collateralised debt obligations, the credit default swaps, and so on - have generated mind-bogglingly huge capital losses, which have hobbled not only individual banks but the entire global financial economy. And the global recession is the malign progeny of this banking disaster.

So if bonuses are really supposed to be generated by exceptional performance, bankers should now be paying money back to their organisations.

Which means that almost any senior banker who feels that he or she deserves to be paid more than their basic salaries (and these salaries are not trivial) may not be living on the same planet as the rest of us.

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In the land of the brave and the home of the bonus, the new US president is about to impose a ceiling on the pay of executives in private sector companies that are rescued by the state.

That ceiling, according to overnight reports, will be $500,000 (around £350,000) - or $100,000 more than President Obama receives.

In the US, reports of the substantial bonuses paid to executives in banks propped up by taxpayers have been incendiary.

The impression has been created that top bankers are partying on their private jets while taxpayers foot the bill - and while millions of ordinary Americans lose their jobs and homes.

Not pretty.

The market for talent is - of course - global. Or at least that's what big UK companies say when gilding the remuneration packages of their senior execs.

So it will be pretty tricky for the British government to ignore the new US norm for running a semi-nationalised business.

At the moment, those running banks in receipt of massive financial support from taxpayers - Royal Bank of Scotland, Lloyds Banking Group and Northern Rock - are earning multiples of £350,000 a year.

The justification is that they're cleaning up a mess created by others.

But if the ratchet on pay over the past few years was upwards only, well, gravity has reasserted itself.

Those running banks or car manufacturers or any business which would fall over in the absence of funding from taxpayers will probably have to take much of their reward in the form of the nice warm glow that they ought to feel for doing their public duty - and defer the bonuses for a year or five.

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Here's a jaw-dropping measure of the failure of the banking system over the past nine months.

Through just one funding initiative, the Bank of England's Special Liquidity Scheme, taxpayers have pumped a staggering £185bn into 32 British banks and building societies - according to figures released a few minutes ago.

The Bank of England has provided this £185bn in the form of Treasury Bills - which are short-dated government bonds that can easily be turned into cash. And in return it has received £287bn of collateral from the banks, in the form of loans made by those banks.

All of those loans received from the banks have been securitised or turned into tradable securities. And most of them are residential mortgages converted into mortgage-backed securities.

So the best way of seeing all this is as a three-year loan of £185bn to the banks, made by all of us as taxpayers, for which we've received £287bn of assets.

And, what's more, we've received a fee of 1.15% for our trouble.

For British taxpayers, that doesn't look such a terrible deal. The risk of loss to us, given that we've lent £102bn less than the face value of the collateral we've been given, looks pretty small.

But it shows you quite how serious it was that the commercial market for mortgage-backed securities had collapsed and quite how desperate the banks were to raise cash.

The banks were prepared to pay through the nose for our money, because without taxpayers' financial support they would have collapsed.

Here's another number that gives me the willies.

The Bank of England says that as at 30 January 2009 it values the £287bn of collateral at £242bn.

That implies that the value of these mortgage-backed securities has fallen by £45bn or nearly 16%.

Or to put it another way, the Bank of England calculates that our banks and building societies have lost £45bn on just these mortgages and loans.

Which is a scarily big number - and may explain why the Governor of the Bank of England has consistently refused to rule out the possibility that some of our biggest banks may yet have to be fully nationalised (though the Treasury's new scheme to insure the banks against some of these losses may prevent nationalisation).

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Almost exactly two years ago, the chief executive of Rolls-Royce - the UK's most successful manufacturer - gave a stark warning about the risks to the UK of the government's "everything's-for-sale" industrial policy.

Sir John Rose told the FT: "It is pretty obvious that if businesses are not from a particular country, and the brand, and the routes to market and the intellectual property and everything else are vested somewhere else, then any decisions that are made about investments and dis-investments will have a national flavour. They are bound to, it is human nature."

This was so against the political and industrial consensus at the time, it was as if Sir John had blown a raspberry at the Queen.

Because Rolls makes stuff (dirty great turbines, among other things) that giant overseas companies actually wanted to buy, Rose was listened to politely by ministers - and ignored.

Today, however, the nationality of businesses suddenly seems more important.

As Rose said, it is human nature for a business with operations all over the world to favour its home country when making decisions about where to expand - or, as in the current horrible economic climate, where to cut.

So it should be no surprise that an Italian company IREM, hired by Total of France on a construction project in Lincolnshire, should itself be employing Italian workers. In a way it would have been more surprising, at a time when money is tight all over the world, if IREM had shunned its own people and had hired new British workers.

And British ministers can't complain about the behaviour of Total or IREM, because it's been an article of faith for them that an open economy is a successful economy - which is why Peter Mandelson, the Business Secretary, hasn't complained about them.

The UK is an outlier in the degree to which it has put all its assets in the shop window and welcomed almost all and every possible overseas buyer of its companies. Even in the US, the great champion of the market, there are many more restrictions on the sale of businesses to foreign interests.

But Wimbledonisation - the notion that Britain is the winner even if none of the economic players are actually British - became official dogma.

As the UK sold its power industry, its few remaining car makers, its merchant banks, and its airports, the theory was that it would gain access to top quality management from abroad and lots of lovely cheap capital from foreign sources.

British consumers would benefit from the lower prices that would be the consequence of overseas businesses' deployment of this low-cost capital.

The money the UK received for its corporate trophies would be reinvested to create the trophies of the future.

And British businesses would shape up thanks to the more intense competition they faced.

So for years, the UK could look down its nose at those countries that took patriotic pride in the size and success of their companies.

The UK didn't care that not a single leading investment bank in the City of London was British, or that its airports were owned by the Spanish, or that every single mass-market car was made by the Japanese, or the Americans or the Germans, or that its power was supplied by continental interests.

The growth rate of the relatively open British economy went up a gear and unemployment fell - while unemployment in the more closed German and French economies remained resolutely high and their growth was more lacklustre.

But there was always a doubt - and one which I raised in this blog - about whether the openness of the UK economy would serve the British people quite so well when the economic going became tougher.

We'll know soon enough whether those fears were legitimate.

What we know already is that the shortage of credit is worse here than in many other countries because a disproportionate number of foreign banks supplied loans to UK households and businesses - and they've gone home, taking their credit with them.

By contrast, at the World Economic Forum that closed yesterday, the Indians and the Chinese were swaggering about how they've benefited in the global recession from retaining domestic control of their important industries, especially banking.

This is not to argue that a return to protectionism - the erection of national barriers against trade and flows of capital - would be anything other than disastrous, for the UK and for the world.

History does indeed tell us that protectionism in a worldwide downturn is the shortest route to slump and depression.

But, as Sir John Rose said two years ago, if Britain has become a giant "aircraft carrier" for foreign companies, jobs won't naturally go to British workers - unless British workers have a massive competitive advantage.

This is how he put it: "I think there is a growing recognition that if we believe we are going to be a knowledge-based economy, then not having a world-class education system is a disadvantage."

Or to put it another way, even if the British shouldn't weep about not winning at Wimbledon and should celebrate that it's the best tournament in the world, we should aspire to be a nation of players, managers and umpires - not a nation of ball boys.

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