11/07/2012 Newsnight

Tonight, our banking model is broken, so how do we fix it? We're

above London's financial district to take a panoramic view, with the

Treasury Minister, Mark Hoban, an expert panel, and an audience of

City insiders. After the LIBOR crisis, is this the moment the

system is finally changed? It might be you need some sort of state-

backed institution to lend to longer term project that is are

difficult for private entrepeneurs to discount the returns on. I think

there is a case for all of those in a modern society. We will be

discussing what's wrong with the banks and trying to work out

whether there's an alternative to the way we do things now.

Also tonight, after a massive rebellion by Tory MPs on Lords

reform, it looks like the coalition's not responding. Or at

least not as it should. Does it need to shut down or be rebooted,

for trust to be re-established. coalition Government is moving

beyond, outside the original coalition agreement I think really

for party unity, and also in the national interest, it is important,

as with many other countries, that the agreement is reviewed mid-term.

The British company that made a fortune round the world selling

bomb detectors that didn't work. A Newsnight exclusive report. Now the

police bring charges. Good evening. A cesspit, that's how

one Bank of England boss described the LIBOR scandal this week, and

it's not over. Bob Diamond, the former Barclays boss, hit back at

MPs today, saying claims he misled them were unfounded and "terribly

unfair". But it's now likely Mr Diamond will have to testify on

Capitol Hill, and meanwhile here, on this hill, this ancient,

venerable city behind me, there is pressure for faster and bigger

reform of the banks. But what kind of change? How will it come? In a

moment we will discuss things, where they go next, with a minister,

our panel of experts, and a small audience of people with, as they

say here in the City, skin in the game.

First, to the people at the cold face, starting with one banker, all

too notorious, in the business. Just like the bar it is set in, the

Alex cartoon, currently in the Telegraph, is a City institution.

But for the sharp-shouldered finance types, real and fictional,

the world is changing. I think the LIBOR scandal may be the last straw.

I think it has proved the straw that broke the camel's back. This

man, who writes the Alex cartoons, is all too aware of the impact of

the latest LIBOR scandal. Suddenly, there's all this focus on the City,

they are in the public eye, and Alex used to like that, he used to

like common people looking at his Porsche, and his suit and being

impressed by it. Now he doesn't like the scrutiny any more.

doesn't want to be scrutinised at all? Not the way he's being

scrutinised right now. And the change is not just coming from

regulators any more. Since the LIBOR scandal started two things

have changed, politicians have had it up to here with the banks, and

to regulation and rhetoric the gloves are off. And secondly,

ordinary savers have started to vote with their feet. Since January

half a million people have moved their money out of the five big

banks and into ethical, mutual, or local banks. In the past two weeks,

the Coe op has seen a 25% in-- Oc- Op has seen 25% increase. Ethical

banks are report ago 200% increase. LIBOR, it seems, has brought City

dodginess into the lives of millions.

People are obviously very upset about bonuses, they are concerned

about SME lending, they are concerned about stability and the

integrity of the financial system. What LIBOR has done is it has made

them start to question whether they are paying a fair price for the

products and services which they rely on, their mortgages, their

loans, their childrens' student loans and pension pots. They can

see their personal decision to bank with bank that is a mainstream

provider is starting to impact on the macro level concern. But could

Britain really switch to an alternative type of banking,

focused on people and businesses with non-astro no mamic bonuses, on

a human scale? Anne Paul's house was damp and cold, she needed a

loan to renovate it, she worked for a bank, but no bank would lend her

the money at affordable rates, despite her being a homeowner.

the winter, my son would see things, look mum, that wall isn't very good.

I would say we would try to put something in front of it and do the

best you can. Now she has the money from something called the London

Rebuilding Society a community- funded finance scheme. They have

changed their approach as seeing the customer as an individual, not

one of their customers just. It was this disconnect between Britain's

massive banks and the needs of people, that the Vickers report was

supposed to address. Only ring- fenced banks would supply the core

domestic retail banking services, taking deposits from individuals

and small businesses and extending overdrafts to them. Vickers

mandated Lloyd's to sell 650 branchs to encourage competition,

and he made one big proposal about the structure of our banks. The

Vickers' proposals would split the banks internally, but some

politicians want to go further, and separate retail and investment

banking completely. And, you have to whisper it in place like this,

there is even a proposal to abolish leverage, completely.

Leverage means a bank borrowing money against the cash it holds,

lots of it. And the problem is, it can go wrong for boring banks as

well as risky ones. The problem is the good bank is going to be invest

anything good assets, which can go bad. Which can become bad assets,

just like Italian bonds used to be very safe assets, and Lehman

Brothers' bonds were safe assets, now they are bad assets. The more

radical solution is known as "limited purpose banking", it was

considered as a blue skies option under Vickers, and then discarded.

Its designer thinks it is the only way forward. There is 10,000

separate mutual funds in the US. The ones 100% equifinanced had no

trouble in the crisis. If you don't borrow any money you can't go broke.

If you have a financial system consisting of a lot of little

mutual funds, none of which are leveraged or borrowed, none of them

can fail. The plan says simply, all regulated banks, investment furnds,

hedge funds et cetera, become mutually owned. So your savings

account becomes like an investment, and it can be lent out to

businesses. But the bank itself can't go to the markets and borrow

money. To the extent that households and firms need to borrow,

to buy homes, or to invest in new products, that's where the real

advantage of leverage comes from in economics. It is not to have the

financial intermediaries to borrow and gamble. We don't need the

intermediaries to be leveraged. This week has not been happy for

the image of the City. Here is how the man who regulates it described

the LIBOR market. We can't be confident in anything after

learning about this. This cesspit. How did that go down? Jim O'Neil

manages �780 -- $780 billion of others money e manages the part of

Goldman Sachs that manages people's savings and pension funds. Do you

do people feel about this rush of negativity going on? Understandably

and justifiably some of the emotional language being used,

there is quite a bit of annoyance. The City ranges from people that

are doing jobs probably that most normal people don't get bonuses or

get paid that much, to those that are victimised in the populist

current mood. You have British institutions, whose prime purpose

is to support Britain's economy and Britain's role in the world. And

then you have a much larger number of institutions which includes

parts of those British institutions, whose purpose is primarily because

of the time zone, the English language, and serving the world's

needs. And they don't have to be in London. Despite that threat, he's

simple theyic to a bigger division of labour -- sympathetic to a

bigger division of labour in banking, and would go further on

one issue. With the most basic of lending to individuals and

companies, you need utility-type banks, and it looks like Vickers

has recognised that. We certainly need, despite the mood, investment

banks, now being divided as casino banks. You need those that can take

risks and risky things, you just don't need them to be big enough to

cause enormous problems. And it might well be that you need some

sort of state-backed institution, particularly to lend to longer term

projects, which are difficult for private entrepeneurs to discount

the returns on. Hold on a minute, we have the boss of Goldman Sachs,

saying it might be a good idea, if the state owned a bank? Well, I

think if you look around the world, some of the countries that have

with stood the crisis the best, happen to have those.

He has impuned my integrity. bankers, the politicians, and the

regulators have a massive image problem, formerly a cosy elite,

they are now finger-pointing like crazy as the anger mouoints. How is

this going down with the City's most iconic banker. Is he worried?

I think he has an escape plan somewhere. Where will he go? They

are all buying defensible land, they think there will be civil

unrest, they are buying private islands where they can have a

primary army on them. What is for sure, is that this particular

island no longer feels the same about the money men. Joining me

here, with the City behind us, is Mark Hoban, secretary to the

Treasury. People are moving their money out of the high street banks,

and you heard there, a lot of people in the City behind us, most

of whom are honest people, furious with some of the emotive language

coming out of parliament about this industry. You are the Financial

Secretary, what are you doing about it? We are doing a range of things,

we are implementing the proposals of the Vickers Commission, to ring-

fence retail banks. Eventually? line with the timetable Vickers

announced. We are organise ago major overhaul of the financial

system in the City, we are promoting competition in the

banking sector to encourage more people to shop around. And they

are? And last Friday, we pubished a paper in the society sector toe

make them more attractive. And Lloyds Bank is negotiating the sale

of 650 branches to the Co-Op. many branches will that leave for

the big five remaining banks? will still have significant market

share, the key thing is to ensure there are new challenges in the

market. We sold Northern Rock to Virgin Money, we need to make it

easier for people to move their bank accounts. And the Independent

Commission on Banking made proposal about doing that. And people can

shift their money easier, and we can see a flourishing competitive

landscape. That will keep bankers' on their toes. It hasn't so far,

they are not on their toes? That is why we are starting the process. We

are also looking at the regulation of the City. We are giving the

financial conduct authority, the conduct regulator, much bigger

powers, more teeth, more intrusiveness. We saw some of that

the week before last, when it introduced measures to compensate

businesses who had been mis-sold complex interest rate ops. The this

year, in April, we had Barclays and the FSA in a bit of a conversation.

The FSA told Barclays they were aggressively, they had an

aggressive pattern of effectively pushing the rules beyond acceptable

limits. This was done, presumably, in private, I'm presuming, did you

know about that? The regulator is independent. They don't come to the

regulators and say one of the British banks is pushing the rules

here? We have an independent regulator, we make sure they have

the powers they need to take action. That is why one of the regulations

going through parliament at the moment, we are giving the Bank of

England and the financial conduct authority much more powers to take

action to tackle some of these practices. Hold a minute, we see,

now, thanks to the freedom of information requests, the way that

e-mails fly around on an hourly basis between Whitehall and the FSA

and the Bank of England and these banks. Are you seriously telling me

that the Government had no idea there was something wrong at

Barclays, which the FSA had actually identified? Look, you know,

the FSA is responsible for regulating financial services.

say they had no idea? We know what they are responsible? I don't think

you would like it Paul if Government ministers interfered in

the financial regulation of independent businesses t has to be

done independently at arm's length. We have to make sure they have the

powers they need to tackle wrongdoing in the City, we are

doing that. The point seems to be to outside observers, that the

Government is consistently behind the curve on these things, were you

shocked when you suddenly found out that LIBOR had been manipulated by

this major British bank, were you shocked? The reality is this

Government is taking action to reform depings service, and

Meredith Vickers said we are leading the world in attempts to

reform -- John Vickers said we are leading the world in attempts to

reform the banking system. That is why when we found out what was

going on in Barclays and LIBOR, we got the report done, how to

regulate LIBOR in the future, and how to ensure there are criminal

sanctions in place to prevent it happening to LIBOR again. We are

taking action to sort out this mess and make sure we have a City people

can be proud of. And one place that employees, it employs two million

people across the country, to make sure it thrives and service the

economy. We know it is an important employer, and we know that the

Vickers proposals may not have stopped what was going on in

Barclays. That the structure wasn't going to be stopped by creating a

ring-fence inside it, it was failure of regulation and

management. What more can you do, than what Vickers, what you have

accepted from Vickers, what more can you do to assure the British

public that there won't be mother banks like this, after, eventually

in 2019, Vickers is implemented? Vickers is range of things we are

doing to sort out the financial sector. It won't be enough in

itself to solve the problems, that is why we are radically reforming

financial regulation and giving the Bank of England more powers T will

take over the division of banks t will use its jupltd to intervene

and act. That is what people - judgment to intervene and act. That

is what people want to see. We have set up parliamentary inquiry on so.

Brorder issues flowing from the LIBOR-fixing scandal, -- broader

issues flowing from the LIBOR- fixing scandal. Something Vickers

has drawn back you will accept? What the parliamentary ip inquiry

is looking at is the ethic -- parliamentary inquiry is looking at

is the ethics in the banking system. There is a range of steps taking,

to change the banking structure and regulatory system, we have

identified problems that need to be tackled. You have given more power

to the Bank of England, your own colleague, Mr Andrew Tyrie, said to

the deputy Governor of the Bank of England, this week, this does not

look good, they have missed the Barclays LIBOR manipulation,

despite discussion it at committee in 2007. Do you think it looks good

the way the Government has handled the LIBOR communication? We need to

learn the lessons that are going on, that is why we need to act. People

want to see the action and see the mess sorted out. Thank you. Stick

around for main. We are going to talk to our panel of experts. I'm

joined by our panel to discuss their thoughts on how to fix our

broken banks. Martin Wolf, the Financial Times journalist, who sat

on the Vickers' commission. We have a specialist in industrial policy,

and from the industry body City UK, Chris Cummings.

Chris Cummings, the reputation of this industry is in shreds, despite,

as I say, the vast majority of the people working in it being honest,

hard working, talented people. What are you do about it? I think there

are a range of things we can do. Let me first of all say the fact

that some people tried to rig LIBOR is completely unacceptable.

Wrongdoing has happened, it has been traced by the regulator, and

the banks involved have co-operated. I come back to the point that you

made, this industry is a national employer, two million people work

in financial services, two-thirds of those outside London. This is

actually a national industry. Something that we want our public

to be proud of tkpwhin. We want our employees to be -- again. We want

employees to be proud of. Yes we want to work with the regulator and

the Government, in order to address these problems. But actually, what

we need to be inculcating is a reputation where it is not enough

to obey the rules, we have to do the right thing, that is more

important. Presumably you will stop quibbling about Vickers, and

spending money on lobbyists to tweak the edges of the Vickers'

proposals to become more acceptable to members S that a promise?

industry is working very closely with Vickers. We know, and the

result is it is watered down? is a range of views out there.

There are certain things we want to see s and working with the

timetable laid out. I think it is for the industry to prove good

faith, that is really what we have been doing. You will accept it, in

full, you will stop the rear guard action, you will accept the

implications, your members will, of a fairly hard, eventual 2019, break

within these banks. They won't be gaining that? We need proposals

that work in practice what can look like rear guard action, is actually

significant discussions on the detail to make sure we have a

banking system that is as robust that everybody wants to see, but

which still enables small businesses to get the loans they

want to see, individuals to get the banking services they want. That is

the heart of the industry's discussion with regulators and

Government, on highly complex and technical matters. The senior bosss

in your industry spend considerable time in dinners together, they have

time and privacy. When they do this, do they discuss the culture at all.

If so, why are they constantly shocked when it is revealed that a

whole desk worth of people n this bank or other, is fiddling the

system. Do they ever do anything about the culture. Do they even

recognise it? Talk to any chief executive, in the City or across

the country today, whether that's in banking, insurance, whether in

Asset Management, in pensions. The one thing that everybody is

concerned about these days is delivering a better culture. One

that focuses on helping people get the loans they need, the savings

that they want, and small businesses. So it really is at the

heart of matters today. We will come back to you.

You sat on this Vickers' commission, could it have stopped what happened

at Barclays? No, they weren't designed to. They were asked to

look at the structure of the banking system to make it more

resilient, and to improve competition. I think we have given

sensible recommendations on that. There are many matters of the

conduct of financial institutions, which is essentially what this is

about, which clearly didn't fall been that view. There were

important issues that were affected by global and European regulation,

which we obviously couldn't do anything about, so we focused very

clearly on what we were asked to look at, and this sort of behaviour

would not have been eliminated by that. That's for somebody else to

look after, as you said, that is a profound cultural issue, we weren't

asked to sort out the culture of banks. We have a regulatory

structure where the Bank of England sits on top of it, you saw Paul

Tucker at the committee, it didn't look very good, Andrew Tyrie, the

chair of it. The regulatory system, do we have the new one up to

scratch to learn about further malfesiants? It is absolutely clear

that the ball slipped between all these hands. Now it is absolutely

clear who is responsible, pretty well, it is the bank. The bank,

before the crisis, basically wanted to get rid of regulation, they

weren'ted interested. Now they surely are interested. I don't

think look -- they weren't interested, now they surely are

interested, I don't think looking at the past will tell us what to do.

I would expect regulation for the next ten or 15 years to be really

fierce, everybody knows how stupid they look as a result of these

series of catastrophys. The horse has bolted. You heard Jim O'Neil of

Goldman Sachs, surprisingly to me, suggest a state investment bank,

this is something you and the people you work with in your

research proposed. What would it do and add to the mix. We have heard

people leaving mainstream banks, why do you need a state one?

two different reasons. One is the one we have been hearing there, a

counter cyclical lender, because private banks and businesses lend

or spend too much during the booms and too little during the bust. You

need the counter cyclical state policy in terms of bank lending.

What is not said is you also need a state investment bank, we are

seeing that in China and Brazil, to provide courageous capital in high-

risk areas. What is interesting, is these investment bankers, as well

as venture capitalists, talk about themselves as loving risks, they

are entreprenurial, they are out there to look at the great types of

investment that is might actually be nurturing long-term growth. If

you look at where they have been investing, it is not in areas that

created Silicone Valley. What would you do on the wider issue. You are

somebody who is listened to people on both sides of parliament, for

the wider issue of the industry, what is the number one thing would

have to happen now? We have open up the debate about a state investment

bank. We have the RBS, which is the skeleton there that we could

transform very quickly. The point is not again just to talk about an

institution and say where weather it is good ored bad, it is about

the ecology of what type of banking system we need, to provide the

patient and committed finance. That, by the way. If we look at the

eurozone, why is Germany so competitive? Why is it a surplus

country, where as Portugal, Italy and Greece are in this terrible

situation? They have a state investment bank as well as these

regional banks that have been lending, not only counter

cyclically, but also better companies.

You think it is a rubbish idea, what do you think? I think some of

those banks are the worst in the world. I started my life in

development, I recognise the good cases, there have been some very

good state investment banks, and there have been a lot of

unbelievably bad ones. If you promise me it will be a very good

bank in the UK, state investment, I wouldn't buy it, I wouldn't be

easily convinced of it. A couple of members of the audience. Gemma, you

work for a wealth manager, Brooks McDonald, how does this feel to you,

your colleagues out there watching this tonight and crying into their

champagne, what does it feel like? Banks need to earn back our respect,

but we can't use a sledgehammer to correct a house of cards. The

challenge is that low level regulation hasn't worked, but

heavy-handed regulation could be as damaging, and hit the man on the

street hardest, in terms of higher borrowing costs, reduced credit

availability, and potential job losses as well. You are

representing Move Your Money, people winding up this getting your

money out of Barclays, et cetera. What would you say to the

Government right now? I would say to listen to customers, half a

million people have moved their money this year already, out of the

big high street banks, and into alternatives, like mutuals, local

Credit Unions, and ethical banks. I would ask the Government to carry

on making it easier for people to move their money, and to release

regulations that make it hard for these banks. They work for local

communities, and for the UK economy, to make it easier for them to grow.

We will come back to you Mark Hoban in a moment. I wonder if anybody

else on the panel, there is an he can sis tension problem here, we

all -- existential problem here, we know these guys are struggling to

try to defend the industry, which is a strategic industry for this

country, like it or not. Not doing a great job of it, let's put it

that way. What would you do, what is the number one thing you would

do to bring the situation to a head? I think that we should

implement our proposals in full. And there are some important areas

where they weren't being implemented in full. One of the

most important, which directly relates to a scandal, you mentioned,

is we felt retail banks, should not be selling derivatives to people

who don't understand them. That is exactly what has happened in this

very important case, and the Government has, unfortunately,

ignored that recommendation F we implement the proposals in full, it

will make a difference in the determine to how the banks operate.

There is a danger if we accept rate -- separate commercial and

investment banking, we are assuming small businesses will use the small

banks, we need investment. We need to ask what sort of companies we

want in the country, innovative companies that are producing jobs.

Most SMEs don't create net employment, there is a small

percentage of them, these high- growth, innovative companies, they

need proper investment banking, they are not going to be satisfied

by low-scale commercial banks. are out of time. Quickly to throw

this to Mark Hoban. You do recognise this is a turning point,

it has been a torrid couple of weeks for the place behind me and

people who keep their money in banks? It has been a difficult few

weeks. The important thing is tone sure we take the action needed, --

to ensure we take the action needed so the banks with underpin the

economy, they can lend money to businesses, take long-term

decisions to promote growth, to offer good deals to consumers. We

want to see people shop around, so there is more competition on the

high street and businesses. Let's get a better outcome for the city,

and the two million people across the UK who work in financial

services. We all live in hope for all of that. That is all from us

here in the Financial Times building in central London. Thanks

to all my guest, back to you in the studio.

Maybe it is that tetchy, end of term feeling, at the close of a

parliamentary session. As MPs prepare to leave for their holidays,

their grumpiness over Lords reform turned to questions about the very

future of the coalition Government itself. The Prime Minister told his

MPs today that he make one more attempt to win them over on Lords

reform in the autumn, and then draw a line and move on. Liberal

Democrats do have the nuclear option of bringing down the whole

coalition, with potentially dire consequences for their party in any

general election. What happens now? Our political editor, Allegra

Stratton is here. Are they all could have chillaxing this summer?

What I find interesting is the Olympics and Jubilee, were always,

the people like me were told, is the rebooting moment for the

coalition and a feeling of happy Britain, Richard Curtis-esque, and

the Prime Minister would preside over it, it would be great moment

for the coalition and trying to achieve majorities in the future

for the Prime Minister. And what will happen with the Olympics is

you and I will be watching it, but the machinery of the Conservatives

will have to press very hard on the Tory rebels that rebelled in such

large numbers last night, to get them on to side. We got a sense of

it in our discussion last night with David Laws and others, that

they weren't going to leave this, they were going to come back. You

have had, this evening, the Prime Minister say, we are going to have

one last try. Somebody described it to me, when you are trying to

figure out what the grounds for consensus will be, it is incredibly

difficult, they say a 3-D chess board being shaken, there is so

many different interests and grounds for consensus that may or

may not be possible. That is what the Prime Minister and his team

will be trying to figure out over the summer. I don't suppose anybody

seriously thinks the Government will end, or the coalition will end.

But there is a risk of tit for tat meanness, point scoring on both

sides? I think that the Liberal Democrats believe if they don't get

Lords reform there won't be boundaries. This brings us back to

the idea of how the Tories think they will get their majority in the

future. Boundary review is very important for them, they think it

delivers them anything between 15- 20 MPs t makes it more difficult

for Labour to win majorities in the future. The Liberal Democrats are

saying we will simply block that. They don't mind if the public think

that is at this timeor at that time, that could also be -- think that

could be tit for tat, they think that could be construed as strength.

What about Ed Miliband? principle he's in favour, he's

having a good summer, but he's blocking it because of the

practicalities of this. For some that is not edifying politics.

molt we will hear from three politic -- in a moment they will

hear from three political insiders. And now an issue rarely centre of

how MPs are dealing with it. You might have noticed there have

been a few gliches with the coalition recently, little problems

with the budget, little disagreements over Europe.

Problems with the LIBOR scandal, and last night, of course, that

battle over Lords reform. Time, some believe, for something

of a coalition reboot. Now is a good time to have a cool,

calm reflection, on what remain of the coalition, by taking it and

having a review of the Government itself. David Cameron's first

problem is many of his backbenchers aren't very happy right now.

Last night's vote was a as -- as much a symptom of that over the

disquiet over specifics of Lords reform. Not only do they feel

valued, but there is no chance of promotion, and they don't get

called in for a chat any more. They don't feel under any obligation to

support David Cameron when he needs them to. Crunch the numbers and

last night's rebellion looks even more spectacular. Out of 171

Conservative backbenchers, who voted last night, only 80 voted for

the Government. 91 voted against, and a further 19 abstained, some of

them may have simply been unable to attend. Many of us fear...Connor

Burns was one of ten MPs who had to leave their junior jobs after

voting against the Lords Reform Bill. I resigned yesterday, I voted

loyally for every vote for this Government and the coalition since

I was elected a member of parliament. I'm going away more

unhappy than I have been for a very long time. I didn't want to resign,

I resigned over something in the last parliament, many members of

Government voted for and remained in Government. Do you think

backbenchers feel taken for granted? What you see often in

television discussions, you will see somebody speaking for the

coalition and the Liberal Democrats, and there is a sense that we need

sometimes people who are speaking for the Conservative Party. This is

a coalition for both the Conservatives and the liberal

leadership, but there is also a coalition within each party,

between the leadership and the backbenchers. That needs work.

Today was the last Prime Minister's Questions of the parliamentary term,

and Mr Cameron was rather teased by the Labour leader about what

happened last night, particularly over an apparent bust up he had

with the unofficial head of the rebels, the Lib Dem MP, Jessie

Norman. He lost control of his party, and not for the first time,

he lost his temper as well. We understand it was fisty cuffs in

the lobby, with the member for Hereford and south Hertfordshire. I

notice that the posh boys have ordered him off the estate today,

he doesn't seem to be here. Who does the Prime Minister blame

most for the disarray in his Government? The Lib Dems or his own

backbenchers. If the best he can do today is a

bunch of tittle tattle and rumour, how utterly pathetic. In fact, the

MP in qi, -- question, Jessie Norman, wasn't in hiding, but

meeting the Queen in his constituencies, he declined to

discuss his row with the PM. Ask I ask you what Mr Cameron said to you

yesterday? No it is a private matter. Apparently he's furious

with you? No comment. Meanwhile the Lib Dems feel a bit bounced too, by

Conservative MPs, who they say, are ignoring the coalition agreement.

deal is a deal, and it is important you stick to that deal and to the

contract, if you like, that you have entered into, that is why I

think it is important, not least because so far both parties have

stuck to that deal very effectively, that we continue to do so. That is

why it is important we deliver House of Lords reform, it is a

clear commitment in the coalition agreement. By contrast, today, one

of Mr Cameron's own backbenchers said what should happen is the

coalition agreement should be reviewed. The whole issue around

Lords reform is because it was felt that this wasn't clearly defined in

the coalition agreement, this agreement is specific, it is 400

pages long. And yet this wasn't clearly defined in that it said we

should reach consensus, and then bring forward proposals. It didn't

talk about legislation and consensus hasn't been reached. It

is sometimes felt that the coalition Government is moving

beyond, outside the original coalition agreement. For party

unity, and also in the national interest, it is important, as with

many other countries, that the agreement is reviewed, mid-term.

Tonight, at a meeting with his party, Mr Cameron said he was

prepared to give Lords reform one more try, but then would draw a

line under the matter. However, not many expect the Liberal Democrats

to be so willing to drop the issue. With me now to give their own end

of term report are three wise heads of Westminster, Danny Finkelstein,

Amber Elliott and Steve Richards. First of all, when you talk to Tory

MPs, why did so many of them, 91 of them, feel so emboldened or annoyed

to rebel? There are two things, they don't like the scheme, they

think it will lead to a bad House of Commons, as a Home Office Lords

that will challenge the House of Commons, they don't believe in the

principle of election, even though they are elected themselves. I

suppose the other thing they are not committed theelojically as the

Liberal Democrats are to the coalition deal. The Liberal

Democrats went to the party and got the whole party committed behind

the coalition deal, people felt a sense of investment in it. The

Conservatives didn't go through the same process, so their MPs feel

more justified in their own lines to rebel. Shouldn't David Cameron

have thought of that before? certainly have got to look at your

party management when you have lost so many MPs. But, on the other hand,

this was always going to be very difficult. It was the reason why it

wasn't a priority for the Tories, it splits the Conservative Party.

In terms of where it leaves the coalition, do you think the

relations are bound to be pretty tetchy into the summer and autumn?

Someone described it to me as we're at the bump in the road, we know

the bump is there, we know we have to get over it, we don't quite know

how yet. I saw Nick Clegg this evening, he was sort of a lot more

downhearted, shall we say, about the future of Lords reform than he

was previously. He was saying, look it is up to David Cameron to sort

it out over the summer. We are going to go away and come back to

it, but I won't agree to it unless we get the programme motion which,

is the timetable for Lords reform. How far do you think trust is

necessary in this. It is obviouslinessry at the very top

between Nick Clegg -- obviously very necessary at the very top

between Nick Clegg and Cameron, does it matter elsewhere or does it

become tribal? They are two separate parties running in a

coalition. When it is said, rightly, that Conservative MPs feel strongly

about this as a matter of principle. It is admirable they are sticking

up for Nair beliefs and threatening their ministerial careers. -- their

beliefs and threatening their ministerial careers. However there

was an agreement, and I understand why Nick Clegg is feeling down, he

has delivered on many issues that were difficult for the Lib Dems,

tuition fees and other things. It is difficult for them to have a

profound sympathy for the Conservatives, when they had to

jump some of their deeply-held beliefs to back other areas of the

coalition. There is another issue as well, that is that with

electoral reform, that was a painful moment for Nick Clegg, but

Cameron delivered the referendum, he ruthlessly won it, he delivered

it, that was the deal. This was delivery on the substance, and he

can't do it. I think there are causes for real tension now. Do you

think the worry is there will be reprisal, that some Lib Dems will

be unwhippable, and party at the top might be irritated? If you part

company with the them you are in unchartered territory. If you look

at what is in front of the coalition, if you end up not having

the Lords, the Lib Dem leaving the Government to vote against the

boundary reviews, you are looking at a coalition spliting up over

issues that the public don't care about. That is not doable for the

Liberal Democrats or the Conservatives. You need a

compromise, either they drop both those things, or David Cameron is

going to be able to come back to Conservative MPs with something on

the Lords they will accept, and that Nick Clegg will accept too.

There must be a range of such compromises, because Nick Clegg

cannot possibly and David Cameron cannot possibly allow the

Government to fall on such an issue. Do you broadly agree with that,

that the Government will not fall on this issue, but some how they

have to stagger on for the next two years? I can't see them falling

over this issue. For the last two years we have had the Liberal

Democrats saying they are in the Government for the greater good, it

is because of the public they are doing this. Although they could be

in a burning building with no exits, Danny was suggesting that today?

The problem is they could turn around and say that is enough, you

haven't delivered it and we are out of here, it looks like they were in

it for self-interest. They are in a difficult place. Nick Clegg is

trying to distance himself from Lords reform, saying it is up to

David Cameron to sort it out, we have delivered t you co-signed the

word in the white paper, you are in it, whether you like it or not.

Where does it leave the leader, the Times had a story suggesting that

Nick Clegg after the AV referendum failed was offered by David Cameron,

something, what do you want. The Tories, apparently, accord together

story thought he would say scupper NHS reform, he didn't, he went for

this, that could be a big mistake in his own judgment? If you don't

get it, having put yourself so closely in line with a particular

issue and you don't get it. Obviously it is devastating on many

levels, you have to explain it to your party that you failed to do it.

He will have an answer, that it is not his party, they are all united

behind it. But the others, however, it is still not deliverable for him.

And so, it is very difficult for him. As I say, having failed to get

electoral reform, to note get this, and meanwhile have to explain why

you are endorsing more of the sort of policies associated with the

Conservatives, puts him in a very difficult position. What about

David Cameron's position on this, does the size of the rebellion, and

also the coverage that has suggested there were nods and winks

saying we wouldn't be tooishcated - - ircated by this? It isn't the

issue for them is the aren't they stkpnt get AV is nobody -- didn't

get AV is nobody isn't interested. This isn't the issue that is a

problem for them. The problem in Nick Clegg's case is to be seen to

be supporting responsibly, as a governing party, that can be

trusted in a coalition. The issue for David Cameron is he seen to be

in touch and competent, and those are issues about the real economy,

and this is just an issue they have got to sort out between the -- them,

because the electorate doesn't mind. For Ed Miliband, a few months ago a

lot of columnists were writing him off, not now? We have had the

situation with Tony Blaired today. I think the problem for Ed Miliband

s he has to find way to be constant. He has big highs, like bark close

and Levy, and then he has lows. -- Barclays and lefson, and then he

has lows. Until he is seen by the public as a trustworthy figure he

has problems. He has to say he's a man that is better for you than

David Cameron and you can trust me more on situations like the economy.

In that sense, since the budget, that may have changed one or two

things. I have talked to a few Tory MPs who are a bit irritated

defending certain things that were reversed S that all good news for

Miliband? -- is that all good news for Miliband? I slightly disagree.

On the whole he has been a pretty constant performer, it is

interesting that the way he is perceived has changed. Today at

Prime Minister's Questions, I noticed a lot of commentators

tweeting that it was a brilliant performance from Ed Miliband. It

wasn't that much different from performances six months ago, but

the context has changed. When you have a Prime Minister who can't

deliver his own parliamentary party, and the Deputy Prime Minister

feeling betrayed by the Prime Minister for not doing so, as

leader of the opposition you were in a stronger position than you

were, which has always been pretty good. Is Lords reform dead in the

water? I think they could find a compromise. They have either got to

do that or drop t they can't possibly break up over it. I think

he's looking to have 120 elected peers by 2015, that is what he will

push on and Cameron hopes so too. Dead or alive? In the end they will

find a compromise that won't really please any of them, but might get

them through this particular hurdle. A British businessman is to face

criminal charges over a supposed bomb detector he sold to countries

around the world, including Iraq, which paid �50 million for the

devices. Jim McCormick has been remanded in custody and will appear

in a London court tomorrow, charged with multiple counts of fraud. A

Newsnight investigation revealed the product made by Mr McCormick

didn't work. This is how the called bomb

detector was sold, with extraordinary claims about how it

can detect explosives, powered only by the use of static electricity.

The device didn't come cheap. Iraq, one of Jim McCormick's biggest

customers, spent $85 million on t at a cost of around $40,000 each.

They are still used at police checkpoints today. Jim McCormick,

shown here on a visit to Baghdad, runs a security company, based in

Somerset. Filmed by BBC Points West in 2009, Jim McCormick claimed that

these cards are the key to how the device work, and they can detect

everything from explosives to dollar bills and ivory. Ideal

conditions you can be up to one kilometer away. So this card will

help this device spot explosive as kilometer away. Under ideal

conditions, yes. After a string of deadly bombs in

Baghdad, we began investigating the device, which Jim McCormick has

said he has sold to some 20 countries around the world. In

early 2010, we managed to obtain a set of Mr McCormick's special cards,

and brought them to Cambridge University's computer laboratory,

to analyse them for us. There is nothing to programme in these cards,

there is memory, no microcontroller, these are shop theft prevention

cards. It couldn't be programmed then to detect TNT? Absolutely not.

We told the Government the results of our investigation, and it

immediately banned the export of the ADE-651 and similar device, to

both Iraq and Afghanistan. Now, after a long and complex

international investigation, Jim McCormick has been charged. He will

face six charges under the Fraud Act 2006. Three count of possession

or having under his control a device for use in the course of use

for fraud. A further three counts of manufacturing or supplying a

device, knowing that it was designed to be used in the

commission of a fraud. McCormick has been remanded in

custody, and due to appear at a court in London tomorrow.

That's all tonight, we leave you with news that the man who brought

bunga-bunga into the English language, Silvio Berlusconi mayk

staging a comeback, despite charges -- bay be staging a comeback,

despite charges of having sex with a 17-year-old hanging over them, it

is thought he may make a bid for # The Italian

# Take a chance # And try to steal a fiery kiss

# The Italian # When you hold me

# Don't just hold me Hello there. There is a brief

window of fine weather for most of us on Thursday, but not everywhere.

A little bit of rain across the north-east of Scotland. Rain

pushing into the south western parts of England as well. Inbetween

a fair amount of dry and at times fairly sunny weather to be enjoyed.

That is difficult to find in recent days. Temperature-wise, still

fairly disappointing, getting up into the high teens, possibly the

low 20s in one or two of the brighter spots. The rain moving in

well across south Hampshire, and heavy by then across parts of Devon,

Cornwall and Somerset. The rain edging into South Wales, along with

a freshening breeze. For North Wales you might well hang on to

sunny skies into the afternoon, and across Northern Ireland,

essentially, it is a fine day, with spells of sunshine, lingering on.

But still disappointing temperatures, 14 or 15 degrees,

western Scotland still dry, rain badly needed across the Western

Isles, a persistent drought here, 12 degrees in Inverness, very poor

here. It doesn't get warmer here as we go into industry as well.

Edinburgh struggling 13 degrees, the high with cloud hey skies and a

cool breeze to go -- cloudy skies and a cool breeze to go with it. It