New measures could make Mandelson the country’s most powerful banker

A second bank rescue package in the New Year is being prepared by the Treasury, according to Whitehall sources, in what amounts to an admission that the earlier bail-out has not worked - and they include the taxpayer taking over the banks' 'toxic' assets.

Mervyn King, Governor of the Bank of England, hinted at the extra package when he wrote in a letter to the Chancellor on Tuesday: "Additional measures, building on the government's package to support the banking system announced in October, will probably be required to underpin lending to households and companies."

King's remarks sparked speculation that with inflation tumbling possibly to one per cent next year, the Bank of England could print simply more money to pump prime the economy - so-called "quantitative easing".

But Alistair Darling and Gordon Brown are considering more direct action. Businesses threatened with bankruptcy by the banks could be offered cheaper loans directly by the Government, making Lord Mandelson, the Business Secretary, the biggest banker in the country.

This would be like resurrecting the old National Enterprise Board set up in 1975 by Harold Wilson to oversee the existing public stake in industry. It's being pushed by Vince Cable, the Lib Dem spokesman on the economy, who has turned out to be the most accurate soothsayer of the financial crisis. It would also gladden the hearts of the Old Labour stalwarts on the Government benches.

The wilder extremes of the ideas floating around Whitehall include a plan to take all the 'toxic' assets of the banks - the sub-prime type loans which are so dodgy they fear making any more bad investments - and isolating them into a holding reserve, a so-called 'bad bank', freeing the banks to lend again. This would require nationalising all the main banks in Britain as a short-term measure until they could be put back into the private sector again.

The idea being pushed by George Osborne, the Shadow Chancellor, that the Government should underwrite loans, is also being considered - even though Brown and Darling has been scathing in public of the Tories' detailed plans.

THE MOLE: BANK CRISIS

FIRST POSTED DECEMBER 18, 2008