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Bank of England Governor Mervyn King said policy makers are prepared to reduce interest rates as low as needed to prevent a recession from fueling deflationary pressures.

Asked whether he would take rates to zero, King said today policy makers “are prepared to cut bank rate to whatever level is necessary'' to make sure inflation hits the central bank's target. The Bank of England's forecasts, published today, said inflation may slow “well below'' their 2 percent goal in 2009.

The pound dropped to a record low against the euro after King today forecast a deepening recession. The bank has already trimmed the benchmark rate twice in the last month, reducing it by 1 1/2 percentage points last week to a five-decade low of 3 percent.

The downturn has worsened in the past month, reports show. Unemployment rose at the fastest pace in 16 years in October, house prices are falling the most in a quarter century and manufacturing is in its worst recession since the early 1980s. Until last week, the central bank's benchmark was the highest among the Group of Seven nations.

“Today's inflation report is a courageous acknowledgment that they are definitely behind the curve and quick action is definitely needed,'' said Chiara Corsa, an economist at UniCredit MIB. “Risks of a deflation scenario loom at the horizon.''

Pound Decline

The pound dropped to 82.38 pence per euro, extending its decline this year to 10 percent. Against the dollar, it dropped to the lowest since August 2002, falling to $1.5201 and has lost a quarter of its value since January.

The deterioration in the U.K. currency can be “a helpful part of the rebalancing, provided it doesn't affect our ability to meet the inflation target,'' King said. The bank has “no wish to see it fall very sharply.''

The Bank of England's key rate is now the second-highest among the Group of Seven nations. The Federal Reserve last month lowered its main rate to 1 percent, matching the lowest in a half century, and this month the European Central Bank cut its benchmark by a half point to 3.25 percent.

The Bank of England's forecasts show the U.K. economy will contract through 2009 and inflation will slow below the government's 1 percent minimum unless it cuts rates further short term cash loan.

Deflation Concern

Slowing growth and falling commodity prices are sparking concerns that inflation could give way to deflationary pressures. U.K. manufacturers' raw material costs and output prices fell at the fastest pace in 22 years in October, the Office for National Statistics said Nov. 10.

The central bank's forecasts, presented as fan charts, show deflation has slipped into the range of possible outcomes over the next three years and King conceded there's a “risk'' that consumer prices will start to fall. The bank's central forecast is still for an inflation rate just over 1 percent, based on market interest rate expectations.

The Bank of England tries to hit a central inflation target of 2 percent and is obliged to keep it within a range of 1 to 3 percent.

Today's report prompted some banks to lower forecasts for the benchmark U.K. interest rate. Barclays Capital and BNP Paribas forecast a 1 percentage-point reduction at the December decision, compared with an earlier prediction for a half-point cut.

King, fielding criticism that he underestimated the risks facing the economy, said “the world has changed'' since the collapse of Lehman Brothers Holdings Inc. in September.

“We have seen the biggest banking crisis since the outbreak for the First World War and arguably even bigger than that,'' he said. The forecast revisions are the largest the Bank of England has made since gaining rate-setting authority in 1997.

In a television interview pooled among broadcasters, King said that while the U.K. faces “unprecedented times,'' the economy may improve as soon as next year.

“I think 2009 will be a difficult year but I would hope that by the end of that we would start to see clear signs of improvement,'' he said.

“When the facts change, then we'll change bank rate,'' King said. “That's what we've done, and we're ready to do it again.''

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Four real estate teams are bidding to be named master developer of the 67-acre Hill East project, formerly known as Reservation 13, which would connect Capitol Hill to the Anacostia River waterfront just south of RFK Stadium with 5 million square feet of new development.

The respondents are:

• EastBanc Inc., which remade the West End and Georgetown with luxury retail, housing and hospitality, including two Ritz-Carlton hotels.

• Franklin L. Haney Co., which developed more than 15 million square feet of space made a failed bid to buy the Washington Nationals. The company has partnered with Bethesda-based Donatelli Development, Chapman Development, Combined Properties Inc., Banneker Ventures LLC and Tudor Holdings.

• Hunt Development Group. is partnering with Mosaic Urban Partners. The team also includes four D.C.-based developers, which have all worked on mixed-use projects in partnership with the city: William C. Smith & Co., Abdo Development LLC, EYA Development and the Jair Lynch Cos.

• Urban Atlantic leads another team that also includes nine other partners: Vornado/Charles E loans until payday. Smith, Trammell Crow Co., Elm Street Development, Blue Skye Development LLC, Brickstone Development, Eagle Vision Ventures LLC, Dynamis Advisors, Sun Edison and Ellis Denning Development.

The 67-acre project has been pegged as a chance to create a model neighborhood for environmentally responsible development, one that would minimize stormwater runoff — the source of 75 percent to 90 percent of pollutants entering the Anacostia River — and possible include a source of renewable energy.

D.C. officials in the office of Neil Albert, deputy mayor for planning and economic development, hoped to lure teams with a “track record of developing projects at the forefront of sustainable design initiatives,” according to the request for expressions of interest the city issued in May.

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BancorpSouth Inc.’s net income fell 22 percent in the third quarter as the company put more cash aside to cover expected loan losses.

The Tupelo, Miss.-based bank holding company (NYSE: BXS) posted net income of $28.3 million on $173 million in revenue, compared with net income of $36.3 million on $165 million in revenue in third quarter 2007.

Earnings were 34 cents a share, compared with earnings of 44 cents a share in the year-ago quarter.

A consensus of analysts had expected earnings of 43 cents on revenue of $181.6 million.

The company increased its provision for loan losses to $16 24 hour payday advances.3 million in the quarter, up from $11.2 million in the second quarter.

Non-performing loans, those that are 90 days or more past due and payment is no longer anticipated, increased to $65.2 million, or 0.68 percent of all loans and leases. That was up from $46 million, or 0.49 percent, at the end of the second quarter.

At the end of the third quarter, BancorpSouth had $13.3 billion in total assets.

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The redemption value of recyclable bottles in Oregon could raise to 10 cents under a plan proposed by a state task force.

The Joint Interim Bottle Bill Task Force, a group convened by the Legislature to consider changes to the state’s landmark bottle recycling legislation, on Monday released a draft of proposals it will recommend to lawmakers during the next session in January.

Perhaps most critical is a call to increase the nickel redemption value on all recyclable bottles to 10 cents. The task force noted that Michigan, the only state with a 10-cent refund value, has the nation’s highest redemption rate for beer and soda bottles at 90 percent.

Among the other recommendations:

— To further expand the Bottle Bill to include sports drinks, coffees, teas, juices, wines, liquors and other beverages (excluding milk or milk substitutes) effective Jan best payday advance. 1, 2013.

— To support a proposal by beverage distributors to create a network of bottle redemption centers. The distributors have proposed using the money from unredeemed bottle deposits for up to 90 redemption centers statewide.

— To have the state collect the value of unredeemed bottles if the industry-led plan for redemption centers is unsuccessful.

— To limit the redemption of beverage containers purchased out of state.

The draft recommendations are scheduled to be discussed during a Bottle Bill Task Force conference call on Tuesday.

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Bank of England Governor Mervyn King should stop giving banks “lessons in morality'' and focus on preventing financial collapse, said Patrick Minford, a former adviser to Margaret Thatcher.

“The bank has been detached and not got the point that we have serious disarray in financial markets,'' Minford, who is now an economics professor at Cardiff University, said today in an interview. “Its role is to get in there and sort it out, not make quasi-regulatory moralistic noises at this stage of the game.''

King will next week unveil a planned revamp of money-market operations to help the banking system weather the crisis. The Bank of England, which joined a global round of surprise rate cuts this week, has yet to reduce the penalty on emergency loans and the mortgage securities it accepts as collateral must have the highest credit rating.

“I think the bank has performed so badly it's asking a lot for people to trust them,'' said Minford. “The banks themselves must feel really let down. For the Bank of England to offer extra help in giving banks a good spanking is really offensive.''

The U.K. central bank has so far refrained from lowering the margin at which they set the so-called penalty rate. The European Central Bank halved the margin it charges banks hours after the coordinated rate cuts. The Bank of England's penalty rate is set at one percentage above the benchmark rate, currently 4.5 percent, double the margin set by the ECB.

`Lessons in Morality'

“It is really not King's job to read us lessons in morality at this stage,'' Minford said. “It's to get behind the banking system and avoid the consequences of collapse. That involves a scheme, very broadly drawn in terms of acceptable assets, the broadest range of assets to be accepted by the bank.''

The bank's emergency lending program accepts as collateral residential mortgage-backed securities issued in the U.K. or European Economic Area rated AAA, the highest level. On such securities with a maturity date more than a decade away, it will lend only 78 pounds ($134) for every 100 pounds in loan value, a “haircut'' of 22 percent, its strictest terms. The comparable discount for government debt of similar maturity is 5.5 percent, while government agency debt is discounted by 14 percent.

“The special liquidity scheme has one major flaw: they charge a huge fee to provide liquidity,'' Minford said. “They have been feeding the problem. They need liquidity at base rate, plus a small penalty rate.''

The U.S. Federal Reserve and other central banks on Oct. 8 delivered a coordinated round of interest-rate reductions to protect economies from the worst financial market crisis since the Great Depression. The Bank of England cut its rate by half a point after keeping it unchanged at 5 percent since April.

`Kicking and Screaming'

“The Bank of England's behavior has been a major contributor to the crisis,'' Minford said. “They've been dragged kicking and screaming into the role they've been forced to undertake.''

Former Bank of England policy makers have said more rate cuts will be needed. Christopher Allsopp, a member of the monetary policy committee from 2000 to 2003, said that the bank will probably need to follow the rate cut with “another big one.''

“The Bank of England is now faced with possible meltdown and deflation,'' said Minford. “The central bank needs to get behind the banking system and avoid the consequences of collapse.''

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Treasury Secretary Henry Paulson and congressional Democrats hammered out a consensus on spending up to $700 billion to rescue the financial industry. There isn't consensus on whether it would work.

Lawmakers reached agreement yesterday as House Republican leaders backed away from opposition to the proposal after it included plans to create insurance for mortgage-backed securities. The House and Senate are scheduled to vote on the bill early this week, although it wasn't clear last night that it has sufficient votes to pass the House.

Giving Treasury authority to buy so many distressed securities from lenders is without precedent, and it's unclear how the government will pay prices that strike a balance between protecting taxpayers and preventing more bank failures.

“This has a reasonable chance of pulling back from the brink and having some success, but it's far from certain that will be the case,'' said former Fed Governor Laurence Meyer, now vice chairman of consultant Macroeconomic Advisers LLC in Washington.

“The markets are going to love it because it's a massive subsidy of shareholders and unsecured creditors,'' said Nouriel Roubini, chairman of Roubini Global Economics and economics professor at New York University. “But you're not resolving the two fundamental issues: You still have to recapitalize the banking system, and household debt is going to stay high.''

U.S. stock futures fell on concern that plan won't avert more failures, with the S&P 500 future for December delivery down 2.1 percent to 1189.30 at 10:35 a.m. in Paris. The dollar gained 1.9 percent against the euro to $1.4342 and treasuries also gained.

Immediate Cash

The bill gives Paulson $250 billion at the start to buy assets, increasing the amount to $350 billion upon “written certification'' from the president that the secretary is “exercising the authority'' to buy assets. The Treasury chief, or whoever succeeds him, may use the remaining $350 billion if Congress fails to reject a request for it within 15 days.

The proposed law lets Paulson buy assets “at the lowest price that the Secretary determines to be consistent with the purposes of this Act.'' The bill doesn't require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used “when appropriate.'' Treasury officials declined to discuss how the plan will be implemented.

Democratic and Republican leaders trust that Paulson can avert a collapse after Lehman Brothers Holdings Inc. filed for bankruptcy and the government was forced to take over American International Group Inc. Success hinges on whether he can help banks raise capital after $556 billion in writedowns and losses, and get credit flowing through the economy.

`Far Worse Pain'

“We have clearly seen a run of failures of financial institutions not like anything we've seen since the Great Depression,'' House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters yesterday. “If we didn't do this, there would be far worse pain in the sense of the lending freezing up.''

“It's a fragile situation,'' Paulson said in an interview on CBS television's “60 Minutes'' program broadcast yesterday. “It's gotta do it, and we're going to make this work.''

The draft legislation was posted on the House Financial Services Committee's Web site yesterday. It includes a provision to give taxpayers equity stakes in the companies that benefit from the plan.

The bill has a section aimed at limiting the pay of executives at companies that take advantage of assistance by prohibiting tax deductions for officials that exceed $500,000, which is half the normal deductible limit payday loans. It also allows “clawbacks'' of money already paid to executives at troubled companies and forbids so-called golden parachutes.

Community Banks

The legislation takes steps to let some 800 community banks that held preferred stock in Fannie Mae and Freddie Mac before the mortgage giants were taken over by the federal government on Sept. 7, make better use of losses for tax purposes than they would otherwise be allowed.

House Republicans offered early resistance to the Paulson plan. They complained that it put the country on the road to socialism and instead argued that elimination of the capital gains tax would spur a wave of investment that would render the bailout plan unnecessary.

House Minority Leader John Boehner of Ohio commissioned Virginia Representative Eric Cantor to draft a rival plan without telling Democrats or Paulson. The plan, which depended on self- funded insurance premiums, was abandoned after Democrats lashed out at Republicans at a White House meeting Sept. 25.

Limited Insurance

Ultimately, Republicans got none of the tax breaks they sought, though the bill includes a limited self-funded insurance program for companies that benefit from the bailout. Last night Boehner, the top House Republican, urged his colleagues to support the bailout plan.

Some House Republicans, such as Representative Mike Pence of Indiana, are still holding out. “We now have a deal that promises to bring near-term stability to our financial turmoil, but at what price?'' Pence said in a letter to colleagues.

Pence called the plan “the largest corporate bailout in American history'' and that it would “nationalize almost every bad mortgage in America.''

Paulson, the 62-year-old former Goldman Sachs Group Inc. chairman, said such a strategy is necessary to stabilize financial markets. “We will have turbulence and turmoil in our financial system for some time, but I believe that this is going to work,'' he said on “60 Minutes.''

`Some Doubts'

Yet as members of Congress and their staffs worked late nights over the past week negotiating and writing compromise legislation, money markets failed to improve. “It just raised some doubts in my mind whether this was going to be sufficient,'' said Meyer, who was on the Fed board when the Asian financial crisis struck in 1997.

Should the plan fail, “there may have to be a more substantial participation by the federal government to buy mortgages,'' Frank said last night. Any alternative proposal would involve “significant purchases directly of the foreclosed mortgages.''

Paulson and Federal Reserve Chairman Ben S. Bernanke, who will be on a five-member oversight board for the program, have signaled that their priority is shoring up the nation's banks even if it means they don't get taxpayers the cheapest prices for the devalued assets the government buys.

The proposal also sets the stage for an overhaul of financial regulation next year, something Frank is already planning. The draft bill requires the Treasury secretary to report to Congress and make recommendations by April 30 on whether to regulate additional participants in the financial markets.

“It'll give us some temporary respite from the earlier pressures,'' said Joseph Mason, a Louisiana State University finance professor who formerly worked in the bank-research division of the Office of the Comptroller of the Currency. “If we don't use that respite to design more permanent policy, we will find ourselves back in the same place.''

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Glen Terry, president and CEO of Tri-Valley Bank, resigned abruptly to take the president and CEO role at struggling Vineyard National Bancorp in Corona, the parent of Vineyard Bank N.A.

Terry left Tri-Valley Bank after just four months on the job.

John Rockwell, chief operating officer, and Eugene Jeanne, chief financial officer, will oversee Tri-Valley Bank during a transitional period as it undertakes a search for a new CEO. Rockwell served as interim chief financial officer after founding CEO Bill Nethercott left the bank earlier this year to help start another bank in San Francisco.

Having just gone through a CEO search several months ago, Tri-Valley already has a search firm and a list of potential candidates for the CEO position, said Jim Snell, chairman of Tri-Valley Bank, who added that Terry’s resignation, which he received via e-mail on Sept, 15, came as a surprise.

“I’m upset by it, but it’s not a devastating blow,” Snell said.

Three-year old Tri-Valley in August said its total assets topped $100 million. Near the end of the third quarter, the bank had $82 million in deposits and $78 million in loans, with a substantial amount of new loans in the pipeline, Snell said. The bank’s ratio of noncurrent loans to total loans stood at 0.63 percent at the end of the second quarter. While the bank has reported a net loss of $680,000 this year through June 30, Snell said that a noncash stock option expense that has hurt earnings goes away effective this month.

Vineyard announced Terry’s appointment, and the appointment of Lucilio Couto as executive vice president and chief credit officer, on Sept payday loan. 18. Terry's appointment was effective Sept. 12, according to Vineyard.

Terry, a Vineyard shareholder, was elected to Vineyard’s board of director at the bank’s annual meeting on Aug. 5. He was part of a alternate slate of directors proposed by the bank’s previous CEO, who was mounting a proxy fight.

Vineyard, with $2.2 billion in assets, has struggled amid huge losses from soured real estate loans. It is operating under a consent decree with the office of the Comptroller of the Currency, its regulator, that required the bank to establish a compliance committee, and name a new president and CEO and chief credit officer by Oct. 31. It must also maintain appropriate regulatory capital levels; just Friday it proposed raising as much as $250 million through a private placement of convertible debt and common stock in an effort to raise capital. Vineyard has offices in Los Angeles, Marin, Orange, Riverside, San Bernardino, San Diego, Santa Clara and Ventura counties.

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An obscure U.S. Treasury Department fund that Robert Rubin once used to save the Mexican economy may provide cash to preserve the savings of investors in U.S. money-market mutual funds.

The Treasury will use the $50 billion Exchange Stabilization Fund to insure publicly offered retail and institutional funds, the department said in a statement. The move comes after the Reserve Primary Fund this week became the first in 14 years to break the buck, or drop below $1 a share, exposing investors to losses.

The ESF — a mix of U.S. dollars, euros and yen — was created in 1934. It enables the department to buy and sell currencies to stabilize the dollar. Because it is outside congressional control, Treasury secretaries have been able to tap it for a number of other purposes, including the 1995 bailout of the Mexican economy orchestrated by then-Treasury Secretary Rubin.

The use of the fund in the past “has been very controversial,'' said Peterson Institute fellow Edwin Truman, former head of the Federal Reserve's international-finance division. “It is, on the basis of its prior use, a stretch to use the Exchange Stabilization Fund for domestic financial- stability purposes.''

Record Redemptions

Nevertheless, Truman said it's “appropriate'' for the Treasury to consider all options. Interest rates on the shortest-maturity Treasury securities fell to almost zero this week as money-market funds, fearing redemptions, rushed to raise cash. Investors pulled a record $89.2 billion from the funds on Sept. 17, according to data compiled by the Money Fund Report, a newsletter based in Westborough, Massachusetts.

The Treasury's use of the ESF doesn't always attract headlines payday advance low fees. Late last year and early this year, Secretary Henry Paulson authorized a bridge loan to Liberia to address some technical issues with the African nation's debt-relief transactions at the International Monetary Fund and World Bank.

In 1995, however, Rubin's move drew heavy criticism on Capitol Hill, including calls for his impeachment.

The peso was plunging as Mexico appeared close to defaulting on billions of dollars in short-term borrowings. After Congress refused a direct loan, Rubin persuaded former President Bill Clinton to send Mexico $20 billion from the fund, then talked the IMF into lending another $17.8 billion. Mexico later paid back all the money, with interest.

End Run

This time, an end run around Congress isn't likely to create a huge outcry, said Paul McCulley, a portfolio manager at Pacific Investment Management Co.

“You never can legislate the nature of crisis or how it may unfold,'' he said.

The ESF held $49.97 billion as of the end of August. Treasury officials told reporters they don't expect to use the entire amount, since strict rules that require money-market funds to invest in safe assets will likely prevent widespread failures.

Given that some of the fund is in foreign currencies, using it all domestically would require selling euros and yen, which might be tricky, said Wrightson ICAP chief economist Louis Crandall. However, “it could probably be arranged'' with other central banks, he said.

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European Union Commissioner for Economic and Monetary Affairs Joaquin Almunia said he has no “clear idea'' how long the financial-market turmoil will last.

This year “may be one of the hardest years we can remember,'' Almunia said today at a conference in Madrid. “We still don't have a clear idea of how long we'll be living in such a difficult situation.''

The euro-area economy contracted in the second quarter for the first time since monetary union began almost a decade ago, buffeted by record-setting gains in the euro and oil prices, while the yearlong credit squeeze has led in the past two weeks to the collapse of Lehman Brothers Holdings Inc. and the government takeover of Fannie Mae, Freddie Mac and American International Group Inc.

“The degree of optimism has reduced in past six months,'' Almunia said faxless payday loans. “Many thought we were at the beginning of the end of the financial tension.''

Almunia said the European Central Bank has a “clear awareness'' of the dangers inflation poses for the economy, though price growth probably peaked at 4 percent in June and July.

“Inflation in August has started to slow in the euro region,'' he said. “We can expect that this deceleration won't just continue, but will become more evident.''

And this “will help avoid errors of the past with second- round effects,'' Almunia said.

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Financial giant Merrill Lynch & Co. agreed late Sunday to sell itself to Bank of America Corp. for about $44 billion, according to reports late on Sunday.

The Los Angeles Times reported that Merrill will get $29 a share in BofA stock (NYSE:BAC) — a 70 percent premium to Friday’s closing price of $17.05, but less than a third Merrill’s (NYSE:MER) all-time high of $97.53 reached in January 2007.The combination, if approved by shareholders, comes with the backing of federal officials worried thhat Merrill would follow Lehman Brothers Inc.(NYSE:LEH) to the brink of failure, the Times reported citing unnamed sources.

The Wall Street Journal reported that Bof A considered a bid for Lehman, but decided that Merrill was a better deal cheap payday loans. Barclays PLC was also considering buying Merrill, but both potential buyers backed off after it was clear there wasn't going to be government aid similar to what JPMorgan Chase & Co. got from the Federal Reserve when it bought Bear Stearns Cos. in March.

As a result, Lehman Bros. was reportedly preparing a bankruptcy filing that would would allow most of the firm’s units to continue operating as the business is wound down, the Journal reported.

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