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's 72% fall to £848m in its first half may sound dreadful.

And no company would enjoy seeing its earnings drop by more than £2bn.

But the decline is only slightly more than was the previous day by .

And things could have been worse.

HBOS's losses on its exposure to security markets knocked for six by the credit crunch have increased only a little to £1.1bn from the gruesome figure it disclosed only a few weeks ago, when it was raising £4bn of new capital in a rights issue.

Probably the most worrying trend is a rise of £225m in charges on mortgages where the borrowers are having trouble keeping up the payments.

And its mortgages classified as impaired have risen 21% to £5.1bn.

There was also a doubling to £469m in the charges for loans to companies that are going bad.

HBOS warns that losses on mortgage and corporate lending can only get worse.

How much worse. Well some clue is given this morning by the house-price stats issued by the .

These show that the averge house of a UK residential property have fallen £17,000 or 9% since the peak reached last October.

Which means that those taking out a 90% mortgage last autumn have now had more-or-less all their equity in their properties wiped out.

That's unsettling, but HBOS believes has sufficient capital to weather the storm that it expects to continue till at least the end of next year.

What a contrast with the fortunes of our energy and commodity companies, which are generating eye-watering volumes of cash from the rise in prices that is putting so much upward pressure on inflation and downward pressure on our economic growth prospects.

Take .

It has this morning that in just the three months to the end of June, its operating cash flow increased from $10.6bn to $15.9bn.

So in sterling terms, Shell generated three times as much cash in just three months as the profits earned by our biggest mortgage bank over six months.

That statistic is the flip side of the squeeze on living standards afflicting most of us from the rise in the cost of finance and the basics of living.

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• - What's this?

was supposed to be the British bank relatively immune to the credit-crunch losses afflicting most of the world's big banks.

So a fall of 70% or almost £1.4bn in its pre tax profits for the first half of the year is something of a shock.

It blames what it calls market dislocation, or highly volatile conditions in the world's financial markets, and implies that its shareholders should ignore these problems - and concentrate on the progress of the group elsewhere.

Certainly the rest of its banking business looks in pretty good shape.

Its share of new lending in a depressed British mortgage market has soared to more than 24%, and it has made these new homeloans "at significantly increased new business margins and at an average new loan-to-value ratio of 63%".

Or to put it another way, the ill wind of the general mortgage drought means much fatter mortgage profits for the small number of bigger banks that still have the ability to lend.

So, in general, Lloyds TSB's basic banking operations look robust.

But that so-called market dislocation - a phrase it mentioned so many times in its statement that I lost count - has generated losses of almost £600m.

And what Lloyds calls "adverse volatility" in its substantial insurance operation has generated a further half a billion pounds of charges.

Lloyds is putting a brave face on it all by increasing its dividend by a modest 2%.

However the 70% fall in statutory profits is real - for all that Lloyds would prefer that we focus on what it calls "underlying" profit - and is a worrying possible augury of horrors that may in the coming days be disclosed at our other banks, as they too disclose their results.

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I have learned that the Treasury may give a taxpayer guarantee to billions of pounds of bonds known as mortgage-backed securities created by banks out of high quality mortgages, in a radical attempt to revive Britain's rapidly shrinking mortgage market.

Officials from the Treasury are examining such an ambitious and controversial scheme in response to a dire assessment of the outlook for mortgage finance to be published at 10am today by , the deputy chairman of the City watchdog, the Financial Services Authority.

Sir James is that a chronic shortage of mortgage finance for homebuyers and homeowners which has persisted for months will continue throughout this year, 2009 and 2010.

In April, Sir James was asked by the chancellor, Alistair Darling, to examine what "market-led initiatives" might be necessary to improve the functioning of markets in mortgage-backed securities.

He was commissioned to do this because of the importance of the market for mortgage-backed securities, which grew explosively after 2000 and became a vital source of funding for British mortgage lenders.

Sir James is understood to have concluded that by 2006 finance from the sale of these securities - which are packages of mortgages lent to homebuyers - was equal to two-thirds of all net new mortgage lending in the UK.

By the end of last year, the total stock of UK mortgage-backed securities was a staggering £257bn - equivalent to around a fifth of the value of the British economy - out of total residential mortgages of £1200bn.

But almost exactly a year ago, with the onset of the phenomenon now known as the credit crunch, demand for these bonds completely dried up.

It has since become almost impossible for any bank to issue mortgage-backed securities. So banks simply don't have the cash to meet even the current reduced demand for mortgages from homeowners who need to refinance their debts and from prospective homebuyers.

As I wrote in May leading banks are expecting the net increase in mortgage lending to fall to £60bn in 2008, from £110bn last year and a similar amount in 2006. That's a drop of 45% - a shrinkage that reflects a collapse in mortgage approvals for house purchase.

Nor is the plunge of the mortgage-backed securities market the only funding difficulty being experienced by banks. They are struggling both to raise other forms of wholesale funding and to extend the maturity of their existing debts

Also the squeeze on the money they have available for new mortgages is exacerbated - according to Sir James - by their obligation to repay around half of their existing mortgage-backed borrowings over the coming three years.

And adding to the banks' woes is that as they reduce the supply of mortgages and increase the cost of homeloans, there is likely to be a rise in the number of mortgage holders who can't pay their debts. A consequential increase in defaults would further deplete their capital resources and their ability to lend.

So, broadly, mortgage finance is now only available to those with utterly reliable earnings and deposits equivalent to at least 25% of the value of what they want to borrow.

Sir James warns that the availability of finance to all other consumers - including most first-time buyers - is much reduced and likely to remain so.

As for what little lending there is, that's now dominated by the UK's biggest five or six banks, with small banks and building societies making almost no new loans. Sir James expects many mortgage intermediaries to disappear.

He also expects the shortage of mortgage finance to exacerbate the fall in house prices (doh!) and the weakness of consumer spending (double doh!).

What's to be done?

He believes it may make sense for the government to attempt to re-open the market for mortgage-backed securities, to prevent the banks becoming so strapped for cash that the housing market would go from decline to meltdown.

Sir James says there are two leading contenders for government intervention in this market.

One would be something along the lines of an idea put forward by the , with the Bank of England becoming - in effect - the market-maker of last resort for mortgage-backed bonds.

On this model, which would be seen as an extension of the £100bn so-called Special Liquidity Scheme the Bank announced in the spring, the Bank would agree to lend to almost any financial or investment institution against the security of mortgage-backed bonds bought by the relevant institution.

The Bank would be guaranteeing that if the market for such bonds were shut, it would make sure that the bonds did not become totally illiquid.

However the much more radical suggestion mooted by Sir James - and under active review by the Treasury - would be for the government to guarantee, on commercial terms, billions of pounds of better quality tranches of new mortgage-backed securities.

Or to put it another way, the taxpayer would be providing a promise that it would pick up the tab in the event that the value of of those securities was impaired by a huge rise in repayment difficulties or defaults by mortgage borrowers.

Which would be pretty controversial, as it would be seen as taxpayers underwriting a huge slug of the mortgage market.

Some would argue that our entire mortgage industry would be nationalised, although that would probably be overstating it.

To be clear, Sir James may yet - when he issues his final report in September or October - recommend that the government should not intervene, on the basis that such intervention may create more difficulties than it would solve.

But the tenor of his report suggests that there would be significant risks to the health of the economy from doing nothing.

And although the chancellor, Alistair Darling, has no intention of trying to prevent house prices from falling - in that he acknowledges that it would be mad and futile to attempt to rig the housing market in a fundamental way - Darling is deeply troubled by the risk that the chronic shortage of mortgage finance could lead house prices to fall much further and faster than would be warranted on the basis of notional economic fundamentals.

What Darling would like to prevent, if he possibly can, would be house prices overshooting on the way down, just as they overshot on the way up, and thereby wreaking massive damage to the economy.

With the full force of the tide against him, he'll find that a challenge.

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It's been one of the longest negotiations in corporate history, but I have learned that of France - in partnership with - is likely to announce early next week that it is buying , the UK's nuclear power generator, for more than £12bn.

"There's a push to conclude a deal before the holiday," said an executive close to the companies. "We hope it will be done in the next few days".

The owner of eight UK nuclear power stations has been on the auction block for months, largely because the government wants to sell its significant "economic interest", which is equivalent to a stake of more than a third in the company.

British Energy's board is insisting that EDF pay more than 750p a share, perhaps as much as 775p - which would value the company at well over £12bn - having rejected an offer of 680p made by EDF in May.

The deal is not yet finalised and could still be delayed. But as and when the deal is done, up to a quarter of Britsh Energy is likely to remain British.

Centrica, owner of British Gas, is negotiating with EDF to be its minority partner in the acquisition and may end up paying around £3bn for a 25% stake in British Energy.

That should give Centrica preferential access to future nuclear power and a valuable hedge against future movements in energy prices.

The sale of BE to EDF would be controversial for many reasons - such as whether EDF should have exclusive rights to develop a new generation of power plants on BE's existing sites and whether a business of strategic importance to the UK's future energy needs should be handed to a company controlled by the French government.

But I am going to look at an issue that's just as important but has been largely ignored: what will happen to the £4bn plus that would be received by the Department for Business when its stake is sold?

The proceeds are to be given to an institution called the , to pay for the huge future costs of decommissioning British Energy's existing nuclear power station and making them safe. Those costs would be huge - many tens of billions of pounds.

The Nuclear Liabilities Fund has already received more than £2bn, after the government sold some of its British Energy stake (at a price much lower than today's) to investors.

Now it's what happened to that cash after it was received by the Nuclear Liabilities Fund that could prove highly controversial: the money was lent back to the government by being put into the National Loans Fund. That's a safe place to put the money, but the rate of interest paid by the National Loans Fund is miserly - just over 5% at the moment - and there's no opportunity for capital appreciation.

So there's zero chance of that money growing in value enough to make a serious dent in the future costs of decommissioning, unless the cash were taken out of the National Loans Fund and reinvested in a range of assets that offer the possibility of capital appreciation.

Or to put it another way, there's an argument that the Nuclear Liabilities Fund ought to be allowed to behave like those that have been created from the Middle East to China, which are investing their respective nations' wealth for the long term.

So why did the money end up in National Loans Fund?

Well, maybe going for security last year, when markets were in turmoil made some sense.

However it may also be relevant that deposits into the National Loans Fund count as deductions from public sector borrowing. In other words, when the money goes there, it makes the public finances look stronger.

Which also means, at a time when the public finances are looking a bit shakey, that it's pretty difficult for the Nuclear Liabilities Fund to take all that cash out of the National Loans Fund - to do so would be to inflate public sector borrowing figures, at a time when they already look pretty ghastly.

The Nuclear Liabilities Fund will also be under immense pressure from the Treasury to put the next lot of BE proceeds, that chunky £4bn, into the National Loans Fund.

If it were to do that, some would argue that the government would be putting its short-term financial interests ahead of the long-term nuclear safety of the UK.

So what if the trustees of the Nuclear Liabilities Fund simply told the Treasury to hop off?

Well, they could try. But my understanding is that the government has retained the right to instruct those trustees what to do with their cash. So the trustees may end up having no choice but to use the British Energy proceeds to shore up the public finances, rather than to insure all of us against the mindboggling costs of cleaning up nuclear Britain.

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Morgan Stanley looks to be a very lucky bank indeed.

On Friday, after the 11am close of the HBOS rights issue, it received orders in colossal size from hedge funds which were covering their respective short positions in the stock of the mortgage bank.

Morgan Stanley sold HBOS stock to these hedge funds, by creating short positions for its own book.

In this way, it went short to the tune of 2.3 to 2.4% of HBOS's equity.

And because HBOS's share price enjoyed a strong surge on Friday, Morgan Stanley took out this short at a very attractive average price.

Which is why, as I pointed out yesterday, it may well end up in profit on this massive flop of a rights issue, even though it is sitting on something approaching £750m of HBOS shares that HBOS's battered shareholders did not want to buy.

And the short is just big enough to reduce Morgan Stanley's net shareholding in the enlarged HBOS to a fraction below the 3% disclosable limit.

So the US investment looks very smart.

For Morgan Stanley, the fact that it was responding to orders from clients, rather than soliciting those orders, is terribly important.

It feels that it can't be accused of profiting at customers' expense from its privileged position as joint lead manager of HBOS's rights issue.

And for the avoidance of doubt, I have checked with the FSA - and the City watchdog has confirmed both that it was kept abreast of Morgan Stanley's dealings (and those of the other lead manager, Dresdner Kleinwort) and that it nodded an okay for these deals.

That said, Morgan Stanley was in possession of valuable price sensitive information, at the time that it went short of HBOS.

It knew - and the market didn't - how much of the underwriting for the £4bn rights issue had been placed with long-term investors likely to hold the HBOS shares that would be forced upon them, and how much of the underwriting remained on its own books.

It therefore had a strong sense of the potential size of the overhang of HBOS stock and how that would weigh on HBOS's share price.

Also, Morgan Stanley would have known that the rights issue had flopped (though at the relevant time it would not have known the precise number of HBOS investors who had spurned the share sale). But that debacle was blindingly obvious to all professional investors, so was probably less of an advantage.

To reiterate what I said yesterday, I am persuaded that neither Morgan Stanley nor Dresdner (which also shorted HBOS) broke the rules.

But if you or I had known what Morgan Stanley knew and had shorted HBOS on Friday, we would probably be prosecuted for alleged insider trading.

So the rules - and the City's custom and practice - that allowed Morgan Stanley to go short to the tune of something like £250m look archaic and in urgent need of reform (along with much of the rest of the apparatus and antiquated regulations surrounding how our companies raise equity capital).

UPDATE 16:22

Here are a couple of extra relevant details.

1) The traders at Morgan Stanley putting in place the short last Friday from 11am onwards were not given official information about the scale of the rights flop.

2) Senior management at Morgan Stanley did not learn the grim details of the flop - that as little as 8 per cent of the rights shares had been taken up by shareholders - until shortly after 4pm on Friday.

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Morgan Stanley and Dresdner succeeded in placing a further 29.5% of the new HBOS shares, worth £1.2bn, during the course of the day. Which is no mean feat.

But that still means that Morgan Stanley, Dresdner and the sub-underwriters have been stuffed with 62%, worth £2.6bn.

I would say ouch. But here's the real feat.

As I understand it, neither Morgan Stanley or Dresdner will emerge with a disclosable stake in HBOS, viz a stake of 3% or more.

How so? Well after the rights closed at 11am on Friday, they were both allowed to take a short position in HBOS, to cover themselves against a future fall in the HBOS share price.

So they duly shorted HBOS in massive size. I understand Morgan Stanley took a 2.4% short position in the mortgage bank - which is huge.

Clever old Morgan Stanley and Dresdner have won brownie points from HBOS for not wobbling during the fund-raising, even though it was blowing a gale in markets.

And after fees, the HBOS short-positions, and other hedges (including, as I mentioned earlier, a short position for Morgan Stanley in Royal Bank of Scotland), they may even end up with a profit on the deal.

But here's what I find a little bit odd - that they were allowed to short HBOS's shares, at a time when the market was unaware of the full extent to which the rights issue had flopped.

On Friday, Dresdner and Morgan Stanley both knew that existing shareholders had shunned the rights issue, since they were organising the share sale. But the market was only given the information this morning.

That information was - in theory at least - highly price sensitive. You'd think therefore that both Dresdner and Morgan Stanley would be banned from dealing in HBOS on their own account till the market had been told the extent of the rights take-up.

But apparently no such prohibition applied. Which reinforces my view that the current rules relating to rights issues are - to put it mildly - utterly bonkers.

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The Treasury has ditched controversial proposals to raise additional tax from companies that locate intellectual property, such as drug or technology patents, in low-tax countries.

But it has simultaneously postponed plans to abolish the tax that companies pay on dividends they receive from their respective overseas operations.

The Treasury's decision to ditch the controversial tax reform is just the latest example of how difficult it is for any government to raise tax from big businesses, since in a globalised world they always have the option of relocating abroad.

That's why the burden of taxation is being shifted in many major economies to taxes that "stick" - notably taxes on consumption and on the income of individuals and small businesses, which find it relatively hard to relocate abroad.

But as the economy slows down, it is becoming harder and harder for the Treasury to increase taxes of any sort - which is why it is considering changing the fiscal rules, which restrict how much it can borrow to fund public services.

Many big companies are likely to welcome the Treasury's change of heart, which is set out in a letter sent in the last few minutes from , a Treasury minister, to the employers' lobby group, the CBI, and to the 100 Group (which represents the finance directors of the UK's biggest businesses).

A number of multinationals had warned that their tax bills would rise to unacceptable levels if the Treasury were to tax earnings generated abroad from patents and other forms of intellectual property.

Some threatened to move their headquarters overseas to escape the incremental tax.

A Treasury official said that the government had been surprised by quite how many companies feared they would pay additional tax.

Companies as diverse as the world-leading drinks group, Diageo, and the advertising giant, WPP, had been muttering about moving their domiciles out of the UK to lower-tax countries.

However, WPP's concerns were not about the taxation of intellectual property but about a related reform to rules concerning "". It is unclear whether WPP's fears will be allayed.

The shadow chancellor, George Osborne, accused the Treasury of "another u-turn". Mr Osborne claimed that Alistair Darling had made seven u-turns in the year since he became chancellor.

However, the Treasury denied that there had been a U-turn. It said that a proposal had been put out for consultation and that it had responded to what business wanted.

The Treasury had been keen that the Exchequer should benefit from profits earned on patents and products developed in the UK, often with the help of UK government subsidies. It feared that some companies were developing valuable patents in the UK and then registering them offshore for tax purposes.

As a quid pro quo for levying this additional tax, it was offering to exempt from tax all cash repatriated to the UK in the form of dividends from overseas subsidiaries.

UPDATE 17:44: The Treasury hasn't allayed the fears of the likes of WPP and possibly also Diageo. Because the technical notes to the letter sent today by Ms Kennedy imply that Her Majesty's Revenue & Customs still wants to get its mits on earnings attributed to controlled foreign companies in tax havens such as Luxembourg and Leichtenstein.

So the Treasury can't yet be confident that the threatened exodus of British multinationals is off the agenda.

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• - What's this?

's £4bn rights issue has been an absolutely colossal flop.

It is, in fact, the quintessence of a flop.

The deal will probably enter the City lexicon as the phrase "doing an HBOS", to mean how not to raise money - though that would be unfair, because HBOS is the victim of a rights-issue system that is cumbersome and slow (and should therefore be reformed).

But here's the important point.

HBOS has got its money, some £4bn.

So this is not a case of an important bank being deprived of vital capital.

What's happened is that its own shareholders don't want the new shares, or at least they want only 8% of them.

Shareholders cold-shouldered the sale because the price of HBOS shares (and other banks' share prices) plummeted at the make-your-mind-up moment last week, after the woes of Fannie Mae and Freddie Mac took investors to the brink of nervous breakdown.

The remaining 92% of HBOS rights shares will go to the underwriters, unless they can be placed in the market over the next couple of days.

That means about £2.2bn of stock will be shared between just two investment banks, and (they kept about 60% of the underwriting on their own books, and distributed about 40% to other investment institutions).

Here's what's irksome for HBOS.

Underwriters like Morgan Stanley and Dresdner are reluctant buyers of shares in these circumstances, not long term investors - even though both have hedged their exposure to HBOS and are therefore not facing colossal losses.

The market knows that the underwriters would want to sell their stock at the earliest opportunity, which would keep HBOS's shares under downward pressure at a time when the weak housing market is doing quite enough to depress its shares.

So HBOS is keeping its fingers and toes crossed that investors who actually want to hold its shares can be persuaded to buy in the coming hours.

To digress for a second, the way that the likes of Morgan Stanley and Dresdner hedge or lay off their underwriting exposure raises some jolly interesting questions. If for example a Morgan Stanley short-sells stock in another bank as a hedge, that short-sale can have the effect of actually depressing HBOS's share price, however brilliant Morgan Stanley may believe it is in neutralising contagion.

That said, Morgan Stanley and Dresdner have shown significant backbone in backing HBOS in a financial climate that's probably as bad as it could possibly have been. They did not wobble in the way that did a few weeks ago during 's turbulent fund-raising.

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The chairman of one of the world's most powerful banks has warned that house prices in the UK and the US are likely to fall for another two years.

Sir Win Bischoff, the chairman of the US banking giant Citigroup, has told me that he expects it will take two years for these markets to find a floor.

The interview will be broadcast on the News Channel at 22.30 tonight (and at various other times), in the first of a new series of interviews with business leaders, called Leading Questions (click to watch it).

Citigroup, till recently the world's biggest bank, yesterday announced it had lost $2.5bn in the three months to the end of June, taking its cumulative losses in the past nine months to $17bn - largely due to massive writedowns of its holdings of subprime and other investments.

However the bank's latest losses were less than analysts had been expecting.

Sir Win expects the credit crunch, the fraught conditions in financial markets, to continue through 2009.

Along with its huge presence in investment and corporate banking, Citigroup is one of the biggest consumer banks in the world, with a massive presence in the US and a serious one in the UK, where it owns Egg.

So Sir Win's remarks to me that he expects house prices to fall for another two years on both sides of the Atlantic carry weight.

Citigroup is selling assets and cutting costs by shedding staff, to cope with these harsh new conditions.

It employs around 12000 just in the UK (and 370,000 in total) - and Sir Win says there will be redundancies all over the world, some of which will be compulsory.

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The is insisting that there's nothing new in this morning's disclosure in the that the chancellor is planning to revise the fiscal rules that control how much the government can borrow through the .

It says that Dave Ramsden, the Treasury's chief economic adviser, said precisely that to the after this year's budget.

If he did, the shameful truth is that it passed me by - and was apparently unnoticed by the ruling party, the opposition and the media.

More importantly, the Treasury has now confirmed that the rules will be changed, though without saying quite how - for the reason that the Chancellor, Alistair Darling, hasn't made up his mind and won't do so till the pre-budget report in the Autumn.

The current rules are these: over the course of the economic cycle, the government can borrow only to invest (or not to fund current expenditure, like Ramsdens' wages); and the ratio of national debt to GDP must not exceed 40% in any given year (in a recent Today interview, the PM got this one wrong - which I found a unsettling, since they were his great invention in 1995).

So why would the government want to amend these?

Well, we're knocking up against the 40% debt limit. Which means that, in the new economic cycle (probably starting now, in the Treasury's idiosynchratic view), there would be very significant constraints on public-spending growth.

That might not be in the interests of an economy that's slowing down fast, and could perhaps benefit from a bit of oomph contributed by the public sector. And it might also not be in the interests of a Labour Party facing a general election in less than two years.

So any reform would almost certainly make it easier for the government to spend a bit more in our current straitened economic circumstances.

But more that that, it's very difficult to predict what will happen to the precise wording of the rules.

Here's the dilemma for chancellor and prime minister.

These rules have been stretched and tugged and tweaked since they were introduced in 1997, to make absolutely certain that they weren't breached. And in the process their credibility has been damaged.

But they still matter.

They were, along with giving control of interest rates to the Bank of England, the symbol that New Labour had made a decisive break from so-called old Labour in its stewardship of the economy.

To put it starkly, they buried Labour's past as the tax-and-spend, boom-and-bust party and allowed it to claim that it was the new natural party of government.

The rules were forged in the furnace that created that formidable reputation for economic competence that G Brown once enjoyed - which some of us are old enough to remember (and one of us even wrote a book about).

So although the rules have become irksome and inconvenient for the government, it would be perilous for the prime minister if they were dumped or changed in a very significant way - a vital part of his political soul would be extinguished.

Some might ask, without the fiscal rules who is Gordon Brown?

UPDATE 14:01

I can't find any quotes from Dave Ramsden to the Treasury Select Committee in which he says that the fiscal rules are being re-examined for possible revision. And the Treasury is no longer sure that they exist. So perhaps I, the rest of the media and MPs weren't asleep at the time.

Hoowever, on July 3 2007 - or more than a year ago - this is what Darling said in an interview with the FT (which was his first interview as Chancellor):

FT: "Can I ask you a couple of questions on the macro economic framework. You said stability is clearly going to be the most important piece of continuity. If we're looking at the Treasury's own way of looking at the economy, we've now come to the end of the cycle. Do you think this is a time to start reflecting on the fiscal rules and the monetary framework? Is there any need for any changes?"

Alistair Darling: "Well, I think on the first one, I don't think the Treasury has formally made a decision on. That's clearly something that I need to reach a decision on at some stage. But I think that the fiscal rules we have have made a contribution to the very stability that I've talked about. But as Gordon has said in the past...you always keep these things under review. But I think that people want to make sure that we have that certainty that Government is going to conduct itself in a way that it is prudent in relation to the finances, both in terms of the golden rule and the sustainable investment rule.

"But, like all these things, of course you keep them under review. But if you ask me am I going to tear all these things up, then having done this for the last ten years let's go off on a different course, no, I'm not. Because I think that that would be to discard a pretty central plank in everything that we've done."

Darling referred back to this interview - when talking to the World at One an hour ago - as evidence that for some time he's been considering a change in the fiscal rules. But his remarks back then can also be seen as manifesting strong support for the spirit of those rules.

It remains to be seen whether the spirit of the rules will be preseved in any future re-writing.

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• - What's this?

Strong bankers will weep. But so too should most of us as bank customers.

Because the of how banks make money from concludes that charges are opaque, that there isn't sufficient competition in this market and that excessive profits are probably being made.

And it also finds that "the bulk of consumers pay little or no attention to the key elements of either insufficient funds charges or the interest they earn on credit balances". Are we thick, or what?

The other headlines are:

1) Banks make more out of personal current accounts than they do out of savings and credit cards combined;

2) The bulk of what they make out of current accounts comes from those controversial charges on customers who exceed their agreed borrowing limits (a stonking £2.6bn) and from net interest on debits and credits ( £4.1bn from paying us next-to-nothing on credit balances and charging us an arm-plus-other-limb on overdrafts);

3) Customers responsible for 1.4m accounts pay over £500 a year in charges, and four million incurred over £200;

4) Total aggregate revenue for banks from personal current accounts was £8.3bn in 2006, or £152 per active account (shout it loud: "these accounts are not free");

5) Insufficient-fund charges increased by 17% between 2003 and 2007;

6) Banks made £1.5bn in paid item and maintenance fees on an average aggregated unarranged overdraft balance in 2006 of £680m - a tasty return of 220% (I'd like some of that please);

7) More than a fifth of us are unaware of charges till we incur them;

8) Only 6% of customers switched to a new bank in the past 12 months, one of the lowest switching rates in Europe;

9) There's been some attempt by and to compete on price (which most would see as a good thing) but the big banks, , , and compete on "quality" (or to put it another way, they make a bundle from the status quo).

The big point, according to the OFT, is that this is not a healthy market in which excessive profits are eliminated through competition: it is concerned that "additional profits made from less visible elements" are not being "fully competed away in terms of lower fees in other areas".

It adds that too much profit comes from vulnerable, low income and low saving consumers, or those who incur the fat charges for borrowing more than has been agreed. And this group is cross-subsidising better-remunerated and better-organised customers, who are given the so-called "free" banking service.

That's unfair, the OFT implies - and many would concur.

The implication is that the competition watchdog will endeavour to push through a radical reconstruction of this market.

If it were to succeed, the banks would end up making less profit from current account services, which is a horrible prospect for them when they're facing quite a squeeze from their imprudent lending of the past few years.

And many of us might have to get used to paying an explicit charge for banking services.

Although if the OFT were to succeed in actually improving competition in this market, we won't necessarily be worse off. It's simply that we'll know what we're paying, rather than kidding ourselves that our current account services are free.

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Are British managers in general sufficiently competent to be given the benefit of the doubt as and when their respective businesses run into trouble?

Even ten years ago, the answer would have been probably not...Back then, British-born managers were like their co-nationals in today's Premier League: workmanlike, functional, but rarely as skilled or classy as their overseas counterparts.

Since then, UK PLC has become a bit more like the Premier League, in that we've imported quite a battalion of highly paid talented execs from all over the globe...

But what about the Brits? Are they any more adept as managers than they were? My impression is that management standards have been raised very considerably. Today I rarely encounter an absolute dud running a big or small business. A decade ago, quite a big part of my life was lunching with corporate clots.

The relevance of this is that David Cameron has today made a to reform our bankruptcy law in a way that would give considerably more power to managers to protect their own jobs and the integrity of their businesses when they face difficulty keeping up the payments on debts.

That would have been a bit impetuous even a few years ago - because raising our economic game, improving our productivity, probably required the forces of creative destruction to blow relatively unchecked through the economy, laying waste to the long tail of poorly performing businesses.

It was probably good for the UK that our insolvency procedures were tilted a bit more than those of the US towards the extinction of overstretched firms.

However, although we may not yet be world business champs, we're much higher up the league table than we were. So I can see the argument, as we head into what may be a prolonged period of challenging economic conditions, for doing as the Tory leader suggests, and trying to put in place a new legal framework (modelled on America's Chapter 11 arrangements) that would allow managers of financially challenged businesses a little more breathing space to come up with a credible rescue plan.

In theory, this would be more than a job-protection scheme for execs: it could save some unnecessary redundancies and hardship lower down the corporate hierarchy.

But it would be wrong to assume that even for business, the benefits of such a reform would outweigh the costs. If the power of creditors to pull the rug were reduced, lenders might well put up the cost of providing credit to compensate for the additional risks they would be shouldering. And that could have a negative impact on the formation of new businesses and on investment by existing one.

So changing our insolvency procedures should not be done lightly. But among business leaders there is a sense that Cameron has come up with a decent idea at the right time (which is not what they say about all his policies, especially those on airport expansion and changes to the planning system).

UPDATE 11:49AM: I have two other concerns about the Cameron Chapter 11 proposals.

First, that in straitened times there is a risk that when a company freezes payments it can cause serious contagion to trade creditors and suppliers. So saving one business could inflict mortal damage on others.

Second that in certain sectors, protecting one business from creditors can be anti-competitive. Just look at the bloated US airline industry, where inefficient airlines in Chapter 11 have periodically had an unfair cost advantage over their more efficient rivals, thanks to the waiver in their obligation to pay what they owe.

So although what Cameron wants seems attractive, he won't find it easy to come up with a practical and workable proposal.

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UPDATE: The deal is now done. The board has agreed to be taken over by S, at a price of one Santander share for every three A&L shares. A&L's acting chairman Roy Brown says his board couldn't turn the offer down because of what he called "the significant external risks presented by the deterioration in economic conditions and the continuing turbulence in the financial markets".

But one of A&L's larger investors is hopeful that Santander is not the only bank left in the world with steel cojones. Its head of UK equities, David Cumming, is trying to encourage a counter-bid from another financial institution, to push up the take-out price.

He says: "This is a gorgeous deal for Banco Santander. They are acquiring Alliance & Leicester on giveaway terms.

"Given the potential integration benefits other banks must surely be reviewing their options. I would be amazed if no one else counters with a higher offer in the next few months."

We'll see. A&L has been vulnerable to a takeover for months, and no one but Santander has been prepared to put a firm offer on the table.

Which is not a surprise? As I wrote here last night (see "It's jobs, stupid"), most banks are trying to improve their capital ratios - so it takes a lot of nerve and a good deal of spare capital to take on A&L's £40bn plus mortgage book, plus the rest of its balance sheet.

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I can exclusively reveal that it's Santander which has made a takeover approach to Alliance & Leicester. If successful the deal would see A&L merged with , which is also owned by the giant Spanish bank.

The takeover - if successful - would be a great relief to the City watchdog, the , because it believes big banks are more robust in these uncertain times.

However A&L has been a source of important competition in the UK's relatively concentrated banking market. So there will be some concern that the disappearance of A&L as an independent entity would leave too much power in the hands of the big banks.

UPDATE 09:40AM:

When A&L announced last week that it had recruited a new chairman, Alan Gillespie, I wondered if it would be a short-lived job, since Santander has been sniffing around this bank for some months.

In fact, Gillespie doesn't turn up till 8 September - which may be a shame, since he's a former Goldman Sachs banker and his advice might be valuable. But, as a clever ex-Goldman partner, I wonder whether he negotiated any kind of compensation in the event that he was made redundant before he even arrived.

The market seems to think the takeover will go through, although the hedge funds are hopeful that A&L - whose share price has soared almost 50% this morning - may be able to squeeze a couple of extra pennies from the Spanish.

The offer is being pitched at 299p per share, valuing the bank at £1.26bn - which is 37% more than on Friday but probably a snip for a business with a decent name that claims it has a relatively conservative lending portfolio (though some analysts and competitors argue that A&L rather overstates it claim to be uber prudent). Santander has done its investigations of A&L's balance sheet - its due diligence - and likes what it sees.

Don't forget that this was a business valued at more than £5bn in 2006 - which was a crazy bubble-market valuation but is not completely without relevance.

A&L says that shareholders should perhaps view the offer as worth 317p a share, since it is planning to pay them an interim dividend of 18p. That's within sight of the current market price of 326p - up 49% on the day, and warming the cockles of some long-suffering A&L shareholders.

The wider story however is that one bank at least, Santander, doesn't believe the UK housing market is a write-off. It wouldn't be taking on A&L's massive mortgage liabilities if it didn't see serious profit in financing the purchase of our homes.

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Robbie Fowler, the former Liverpool and England striker, has been investing in property for 15 years and is long of more than 900 houses. They may not all be up to WAG standards but that's quite a hoard.

So says John Goodfellow, chief executive of the and chairman of the Building Societies Association (in an article published in "").

A less ambitious buy-to-let tycoon is Joanna Page, the spellbinding Stacey of "Gavin and Stacey". She says (in this week's ) that she owns eight residential investment properties, worth around £1m (and also a house in South London that she occupies).

They're in good company. Senior civil servants, former ministers, an erstwhile City watchdog, broadcasters and bankers have all swanked to me at various times about their mini property empires.

Now that buy-to-let looks as fashionable as pebbledash, and has become a byword for bungling, they're feeling a little bit anxious, a touch sore. But so long as they bought over several years and haven't borrowed too much on short-term fixed rate deals, they'll lose capital but probably not the lot.

As for Goodfellow, he says Skipton contemplated making a takeover bid for B&B and that his building society would be interested in swallowing .

Goodness knows whether his regulator or Skipton's members would be altogether relaxed about this mutual quintupling its size with one of these deals. But it's rather touching that mutuals like Skipton - which just a few years ago were written off as irrelevant and obsolete - can swagger a bit, while the likes of B&B perhaps regret their institutional sex changes.

More exposed to real hardship than many buy-to-let investors are hundreds of thousands of owner-occupying families, with 90% or 100% mortgages of recent vintage.

Many may end up with negative equity in their homes during the current market downturn. If they're relatively young with little in the way of other savings, their personal finances may be in the red for an extended period.

The prospect is daunting for them, especially since younger families are also being disproportionately squeezed by the jump in energy and food prices.

Naturally, it's the plight of low income homeowners which is prompting bankers, builders and estate agents to bend my ear and insist that the government absolutely must do something to put a floor under collapsing house prices (those who run these battered businesses may also be worrying a little about their own career prospects).

"The electorate won't forgive the prime minister if he allows the housing slump to continue", or words to the effect, is a menacing claim I hear a good deal.

But the bankers should be careful what they wish for. If the were to directly intervene in the mortgage market, by - for example - providing mortgages directly or guaranteeing banks' homeloans, there would be consequences for the banks.

Taxpayers would I think be reluctant to allow , for example, to lend their money unless that bank became a much simpler, more risk-averse organisation. The government, as protector of taxpayers' interests, would probably impose severe restrictions on how and where the banks operate. And bankers might have to be paid on a par with civil servants.

It's quite an amusing thought - although for all the way our banks miscalculated risks over the past few years, it probably wouldn't do us good for the creativity of our financial sector to be wholly regulated away.

Just look at the mess at and , the so-called state-sponsored US mortgage banks, for two good reasons why you wouldn't necessarily want the government underwriting British mortgages.

So if a Treasury bailout isn't such a brilliant idea, some bankers are looking for succour from the , the City watchdog.

They whinge that it's the FSA's fault that banks are not lending enough - because the banks are being forced to strengthen their balance sheets by holding more capital as a proportion of loans, which means they can't lend as much as the economy needs.

Here, in fact, are the horns of a proper dilemma.

It would be crazy for the FSA to allow the big banks to weaken their balance sheets - or to cut their capital ratios - at a time when the economic outlook is troubling, to put it mildly. Without a cushion of capital to absorb future losses, the financial system could come properly unstuck.

However, precisely because the banks are lending less to both consumers and businesses right now to build up their capital ratios, economic activity is slowing down. And that slowdown increases the likelihood that unemployment will rise, which in turn would trigger massive writeoffs in the value of homeloans, as the jobless found themselves unable to keep up the mortgage payments.

Or to put it another way, the very act of forcing the banks to hold additional capital relative to assets or loans at this sensitive moment could magnify future erosion of that very capital and batter the financial system at a later date - which would send the economy into a more vicious downward spiral.

To perform my normal trick of stating the bloomin' obvious, what matters far more than the fall in house prices is what happens to unemployment. But quite how the government could pre-empt a possible future rise in joblessness when its own balance sheet is stretched and interest rates can't be cut lest inflation takes off, well that's a riddle I can't quite unlock.

UPDATE, 14 July, 07:05AM:

When the US Treasury Secretary makes an emergency statement on a Sunday from the steps of the Treasury building in Washington, something has gone seriously awry in the world's biggest economy.

In the past few days the machines that fund the US housing market - or the two so-called government sponsored banks, Fannie Mae and Freddie Mac - had come perilously close to collapse.

After two years of falls in the US housing market, investors believed they were almost bust - for all the denials issued by regulators and politicians.

And if they were unable to lend, well the US housing market would probably implode - with dire consequences for the financial system and the entire global economy.

Mr Paulson has asked Congress for the authority to lend unlimited amounts to Fannie Mae and Freddie Mac and to inject unlimited amounts of new capital into them.

Separately, the US Federal Reserve has said it will give them access to emergency funds.

All this will be viewed as an unbreakable pledge to nationalise these colossal institutions, should that prove necessary.

It means Fannie Mae and Freddie Mac won't collapse - but at quite a cost to the US public finances.

For decades the US government and international investors have conspired in a convenient fiction, that Fannie Mae and Freddie Mac are supported by the state and yet are not formally on the public sector balance sheet.

That's allowed them to raise money for lending to US homeowners at much lower rates than would have been possible had they been normal commercial banks.

Mr Paulson has now made a formal promise to bail them out.

Which means that if he were to claim that their five trillion dollars in liabilities are still not liabilties of the Federal government, well I'm not sure anyone would take him terribly seriously.

Arguably therefore America's national debt is now equivalent to more than the size of its economy - which may make international investors more wary of holding dollars and dollar assets.

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A government document has been leaked to me which may come to be seen as the last gasp of Blairite New Labour.

It has the unappetising title of "Understanding the Public Services Industry: How big, how good, where next?" and it was commissioned by John Hutton, the Secretary of State for Business - who once-upon-a-time was a Blairite ultra and is now, apparently, an enthusiastic Brownite.

The paper, written by - the head of and a former member of the - claims that this administration's controversial outsourcing and contracting-out of public services has created a world-leading industry for the UK with great export opportunities.

Julius is brainy. So her argument shouldn't be dismissed lightly. But trade unions on the left and Tories on the right are both likely to argue that her paper is consultant-backed spin, or a clever public-relations campaign deficient in real economic meat.

So what exactly is "public services industry"? Well, it's those private and "third sector" enterprises that provide services to the government or to the public on behalf of government. So it includes hospital cleaners, and suppliers of IT to Her Majesty's Revenue and Customs, and trainers of military pilots and managers of private-sector prisons, inter alia.

It's true they all have one big thing in common, which is that they are in receipt of public money. Which means that if they have a shared, valuable, highly developed skill it is in persuading ministers, or local councillors or civil servants to hand them our precious tax wonga.

But arguably what differentiates the hospital cleaner from the software engineer working in HMRC is more significant than the fact that they are both in receipt of public money. Call me unimaginative, but a provider of IT services seems to me to be an IT company, not a "public service" company, even if those IT services are bought by the NHS.

So the attempt by both Julius and Hutton to claim that the public services industry represents a huge homogenous industry seems a trifle ambitious. Others might say it's pretentious and absurd.

But for the record, Julius claims that the contribution to our economy made by the public services industry is £45bn, way greater than food, beverages and tobacco (£23bn), communication (£28bn), electricity, gas and water supply (£32bn) and "hotels and restaurants" (£36bn).

However all that really means is that the government has been handing vast and growing amounts of our tax revenues to private-sector providers of many and varied services.

In fact, the most interesting statistic in the report, perhaps, is that growth in revenues for these recipients of our tax dosh was an impressive 6.8% per year in real terms from 1995/6 to 2003/4. Interestingly, as we elided from the Blair era to the Brown months, the rate of growth slowed very significantly - to 2.9% per annum since 2004.

Which perhaps indicates that the current prime minister isn't quite as enthusiastic about outsourcing, contestability and all that as his predecessor.

To give Julius and Hutton their due, there is a plausible patriotic case for cheerleading on behalf of this slightly nebulous industry - which is that other countries seem to be following the UK's lead in handing over increasing amounts of public service provision to commercial firms, such that there may be a substantial export opportunity for British service providers.

Hutton, in fact, seems to be reinventing himself as the Thatcher of our time: she exported privatisation to the rest of the world; he wants to convert the citizens of other countries to the notion that their public services should be provided by our private sector firms.

It's a worthy ambition. And there is a good case to be put that promoting competition for public service contracts and also between public-service providers reduces the cost of those services while sometimes improving the quality of those services (though there are also plenty of examples of the public purse being handsomely ripped off by private sector bunglers and incompetents, especially when it comes to IT).

But to be clear, it's the competition or bidding contest that tends to yield those benefits, rather than the identity of the provider as from the private, voluntary or public sector.

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I have learned tonight that a vital £400m fund raising by Bradford & Bingley, the battered buy-to-let bank, has been rescued for a second time.

Leading City institutions have rallied round to provide £179m of vital equity following a last-minute decision by the US private-equity house, Texas Pacific Group, to walk away from the deal.

TPG backed away from providing the new money after Moody's, the credit rating agency, decided it was downgrading the debt of Bradford & Bingley.

It would have been disastrous for confidence in the bank if new money was not found to replace TPG.

So the City watchdog, the Financial Services Authority, has played a central role in helping to organise what will be seen as an emergency fund-raising.

Now that the cash has been found, bankers say there is no reason for B&B's depositors or creditors to have any concern about it fundamental soundness.

However this is the second time in just the past few weeks that this vital fund-raising has gone to the brink of collapse.

TPG's decision to turn its back on B&B, having initially been characterised as the brave rescuer of the bank, may well lead to it facing criticism.

UPDATE 22:48: The City institutions behind the rescue are the ones that were behind Clive Cowdery's recent attempt to take control of B&B.

Cowdery walked away after he was refused access to B&B's books by the bank's board, led by the chairman, Rod Kent.

Mr Kent's decision to pin his hopes on TPG now looks to have been misplaced. Some shareholders may question whether he should remain at the helm of the bank.

A formal announcement of the fund-raising rescue will be made some time during the course of the night. Without it, B&B's shares would have collapsed (again) in the morning - and they are likely to be pretty weak anyway, following the Moody's downgrade.

It was confirmed around midnight that a group of leading City institutions UPDATE 06:26, 04 July:(with more than a nudge from the Financial Services Authority) has rescued B&B's emergency fund raising, as I revealed last night.

The technical detail is that B&B will (once again) revert to a conventional rights issue of shares to raise the £400m in total it wants. The rights issue has been underwritten by the investment banks, Citigroup and UBS (both of which have recently had to raise precious capital themselves).

The per-share subscription price will remain 55p. And a shareholder group including Legal & General, Standard Life, the Pru and HBOS's Insight arm is promising to support the expanded rights issue. They are B&B's largest shareholders and were also the backers of Clive Cowdery's rebuffed plan to acquire a controlling stake in B&B.

So B&B will raise its capital - which should be of great comfort to B&B's depositors and creditors.

However, Moody's announcement last night of its downgrade to B&B's credit rating makes for pretty dismal reading. It talks of a "substantial deterioration in the bank's asset quality" and warns that arrears will worsen on its buy-to-let mortgages in coming months.

So the news about B&B is good and bad. Last night bankers were expecting B&B's share price to fall this morning.

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