Alpha Worldwide News

Banks get until 2019 to ringfence high street operations

2011-09-12T04:33:00.001-07:00

Sir John Vickers, chairman of the Independent Commission on Banking, speaks at a press conference on the commission's interim report earlier this year. Photograph: Dominic Lipinski/PA

Britain's biggest banks are to be given until 2019 – longer than had been expected – to implement radical reform of their operations to prevent another taxpayer bailout of the system.

The Independent Commission on Banking – issuing its report almost three years to the day after the collapse of Lehman Brothers which led to the major 2008 bank bailouts – said that banks should ringfence their high street banking businesses from their "casino" investment banking arms.

The much anticipated final report by Sir John Vickers admitted its proposed reforms would cost between £4bn and £7bn but were more practical and less expensive than the full-scale separation of the kind that business secretary Vince Cable had called for in opposition.

The ICB conceded that its reforms were "deliberately composed of moderate elements" but insisted "the reform package is far-reaching".

It said: "Together with other reforms in train, it would put the UK banking system of 2019 on an altogether different basis from that of 2007. In many respects, however, it would be restorative of what went before in the recent past – better-capitalised, less leveraged banking more focused on the needs of savers and borrowers in the domestic economy. Banks are at the heart of the financial system and hence of the market economy. The opportunity must be seized to establish a much more secure foundation for the UK banking system of the future". George Osborne welcomed the report and said: "The government will now get on with implementing the report." He promised legislation would be passed before the end of this parliament – but would give banks the time frame recommended by Vickers. The chancellor is to address parliament on Monday afternoon.

Up to £2tn of assets could end up inside the 'firewall' – including all domestic high street banking services – as the ICB said that the aggregate balance sheets of the UK's banks was over £6tn and that between one sixth and one third of these should be protected from investment banking operations.

While the ICB made it clear that the current crisis in the eurozone should delay the reforms, it also set a deadline of 2019 for implementation of the changes to coincide with the international capital rule changes being introduced by regulators in Basel, Switzerland.

"Postponement of reform would be a mistake, as would fail to provide certainty about its path. However, it is important that the current economic situation be taken into account in the timetable for implementation of reform. The Commission's view is that setting 2019 as the final deadline for full implementation provides ample time to minimise any transition risks."

The ringfencing is expected to have the biggest implications for Barclaysand the bailed-out Royal Bank of Scotland.

But the ICB provided some relief for bailed-out Lloyds Banking Group by back-tracking on an idea that it be forced to sell off an extra tranche of branches in addition to the 632 currently up for sale to meet EU demands on state aid. However, it said that the high street banking businesses – dominated by Lloyds since the rescue of HBOS in September 2008 – should be referred for a full competition investigation in 2015. Lloyds, which had lobbied hard against the proposal, said on Monday it is "currently assessing the full implications".

The British Bankers' Association said: "UK banks are well on the way to implementing the sweeping reforms already brought in and expected to be brought in by UK, EU and global authorities to make banks and the system safer and to ensure that banks can fail in the future with savers and taxpayers protected and the supply of finance to the economy maintained. The ICB's recommendations cover the same important issues. Any further reform measures adopted by the UK authorities need to be carefully analysed and compared with those agreed internationally. It is vital that the full impact any further reforms will have on the economy, the recovery and banks' ability to support their customers in the UK is understood."

US jobs data puts markets on recession alert

2011-09-02T02:10:00.001-07:00

An outdoor job fair in South Los Angeles. Markets fear that the US economy is sliding back into recession. Photograph: Robyn Beck/AFP/Getty Images

Fears are mounting that key US unemployment data will show the world's biggest economy is teetering on the brink of re-entering recession.

US non-farm payroll data – due out at lunchtime on Friday – is expected to show an increase of about 60,000 jobs in August, far below a 117,000 increase in July. Economists at Goldman Sachs warned investors on Thursday that they expect an increase of just 25,000 jobs, compared with an earlier estimate of 50,000. There have even been suggestions that the figure could be negative, which would send further shockwaves through global markets.

Reflecting those fears, gold, the traditional safe haven in troubled times, jumped more than 1% to $1853.

The expected slowdown in job creation is worrying because the US generally needs to add about 150,000 jobs each month just to keep up with the growth in the working-age population.

Fears about jobs and the overall health of the US economy pushed down markets across the world, with the FTSE 100 down 87 points to 5330, a fall of 1.6%.

Tim Schroeders, who helps manage $1bn of equities at Pengana Capital in Australia said: "The US recovery remains anaemic, with lingering concerns over job creation and house prices. Expectations are relatively low for tonight's jobs data."

Ben Potter, market strategist at IG Markets, said traders were suffering with "classic nervousness" ahead of the jobs data. "As it stands, the market is expecting a figure of around 70,000 jobs. However, the whisper numbers have been as low as zero," he said. "So an inline result could see the market move higher."

Michael Hewson, market analyst at CMC Markets, said: "At the beginning of the week expectations were for a number of around 90,000, but as the week has progressed subsequent revisions have moved the bar lower.Thursday's Institute for Supply Management [ISM] manufacturing number gave the markets a brief boost after the headline figure remained in expansion territory against expectations, however after scratching a little below the surface the picture wasn't as rosy as first appeared with new orders contracting at 49.6, and construction spending for July falling back by 1.3% much more than expected.

There now remains a concern in some quarters that Friday's number could well be negative, which would be a shock and certainly give the Fed and the markets food for thought. In any case the consensus has now moved to between 25,000 and 65,000, with the unemployment rate staying at 9.1%."

Clash with Boehner

President Obama is due to unveil his plan to tackle unemployment and revive the economy next week – but only after settling a diary clash battle with John Boehner, the Republican speaker of the House of Representatives.

White House officials had asked Boehner if the president could address a joint session of Congress next Wednesday. Normally, such a request for a big set-piece speech would have been granted automatically. However, growing political friction in Washington led Boehner to deny the request. Boehner said the speech would have clashed with a series of already scheduled votes. But many political experts say the real reason was because it clashed with the next Republican presidential debate.

Obama has been forced to delay his speech until next Thursday when he will arguably be up against even tougher competition: the nationally televised opening game of the new NFL season featuring the defending Super Bowl champions, the Green Bay Packers.

The FTSE 100 index was down 1% to 5357 at 8am, with only two companies – Inmarsat and Rangold Resources – in positive territory. Banks were among the biggest fallers today, with RBS down more than 3%, at 25.42p and Barclays 3% lower at 175p.

The decline in the FTSE was mirrored by similar falls across Europe and Asia, with Japan's Nikkei falling back below the 9,000 points level after six straight days of gains. In the US the S&P 500 is forecast to open 0.5% down.

US authorities to sue big banks over sub-prime crisis

2011-09-02T02:08:00.000-07:00

The FHFA claims banks failed to notice borrowers were taking on mortgages they could not afford. Photograph: Getty Images

US authorities are preparing to sue more than a dozen big banks over claims they misrepresented the quality of mortgages sold during the 2006-7 housing bubble.

The US Federal Housing Finance Agency (FHFA), which is overseeing the remains of failed mortgage giants Fannie Mae and Freddie Mac, is reportedly planning to argue that America's biggest banks failed to check the health of mortgages before they sold them on to investors. The collapse of hundreds of thousands of sub-prime mortgages triggered the 2008 credit crisis and the collapse of Fannie and Freddie.

The New York Times said the FHFA is expected to file the lawsuit against the banks, including Bank of America, JP Morgan, Goldman Sachs and Deutsche Bank, as early as Friday. The agency, which is seeking billions of dollars in compensation, claims the banks failed to notice that borrowers were taking on mortgages that they could not afford.

The FHFA lawsuit, which follows a subpoena issued to the banks last year, demands that the banks pay compensation to cover some of the $30bn (£18.5bn) Fannie and Freddie lost on mortgage-backed securities. Most of Fannie and Freddie's losses were borne by US taxpayers after the government was forced to step in and bailout the pair to the tune of $141bn.

It follows a similar $900m lawsuit filed against Swiss bank UBS in July. At the time UBS said it would "vigorously" defend all charges brought against it.

In total the FHFA issued 64 subpoenas to the issuers and servicers of mortgage-backed securities last year. Last week the agency's director, Edward DeMarco, who declined to discuss the pending lawsuit, said there were "more to come". The banks declined to comment to the New York Times.

Action by the FHFA comes as the US Federal Reserve announced a formal enforcement action against Goldman Sachs "to address a pattern of misconduct and negligence relating to deficient practices" in its handling of mortgage loans. The Fed said Goldman will be legally required to compensate any homeowners that were found to have been financially harmed by the alleged misconduct. It did not speculate on the size of the potential compensation claims.

The Fed's action is the latest step in the US government's investigation of "robo-signing" – in which bank employees signed foreclosure documents without reviewing case files as required by law. The Fed said employees at Goldman's Litton Loan Servicing unit engaged in robo-signing and took actions in foreclosure and bankruptcy cases "without always confirming that documentation of ownership was in order".

Separately, the New York State Banking Department announced that Goldman had agreed to write off $53m of the outstanding debts on about 150 mortgages it owned in New York. Accepting the writedown was a condition for allowing Goldman to sell Litton to Ocwen Financial in a $260m deal late on Thursday.

Europe rejects IMF call for more bank capital

2011-09-01T06:17:00.000-07:00

FRANKFURT | Thu Sep 1, 2011 7:33am EDT

European bankers and politicians leapt to defend the region's banks on Thursday, rejecting an International Monetary Fund (IMF) estimate that they need 200 billion euros ($290 billion) in new capital to reflect sovereign debt losses.

IMF chief Christine Lagarde's call on Saturday for mandatory capitalization of European banks to prevent a world recession has reignited a debate over whether they have raised sufficient capital to withstand a severe downturn.

The clash highlights diverging views about the underlying safety of the European banking system. The IMF and the International Accounting Standards Board (IASB) have both voiced concerns, while European regulators, politicians and banking associations argue that banks have a sufficient capital cushion to cope with market turbulence and worries over sovereign debt after several rounds of capital raising across the continent.

A European source told Reuters on Wednesday that the IMF had estimated European banks could face a capital shortfall of 200 billion euros, a figure rejected by European bankers and policymakers.

The IMF figure is much higher than estimates of banks' capital needs following stress tests in July.

J.P Morgan has estimated that based on the stress-test data, European banks showed a capital deficit of 80 billion euros, with UK banks needing 25 billion euros, French banks 20 billion euros and German lenders 14 billion euros.

The European Commission reiterated it saw no need for drastic action since the publication of the stress test results, echoing comments made by the European Banking Authority on Tuesday.

"Our analysis of the situation hasn't changed, it is in fact shared by the member states. We did have an in-depth discussion when the results of the stress tests for banks were presented and this our diagnosis and there is no reason to change it now," Commission spokesman Amadeu Altafaj told a regular briefing.

The bank stress tests did not factor in the impact of a significant drop in the value of sovereign debt.

A Euro zone official who declined to be named said "We are aware of those (IMF) numbers, but we think there are serious methodological flaws in that paper and discussions are going on with the IMF about them."

Eurozone governments and the European Central Bank disagree with the "very questionable" methodology of the IMF estimates on bank capital requirements, another European government official said. The European Central Bank declined to comment.

The view was echoed by the German Banking Association BdB which represents lenders such as Deutsche Bank (DBKGn.DE) and Commerzbank (CBKG.DE), and the VOEB, which represents troubled lenders such as WestLB. Both insisted there was no immediate need to inject capital into German banks.

"We do not understand how the IMF has come to this conclusion. Earnings statements do not back the conclusion of such a situation among German banks," the German VOEB said.

France took a similar line on its banks, whose shares came under intense pressure during August amid concerns over access to funding, with French Budget Minister Valerie Pecresse saying they were not a cause for concern.

"French banks are now better capitalized than a year ago; they passed stress tests which were extremely tough less than a month ago. I don't think there is any cause for worry over French banks," she said at an event on Thursday.

European bank shares traded slightly lower by 1043 GMT, with the STOXX 600 European banking index .SX7P down 0.4 percent. Meanwhile, key euro-priced bank-to-bank lending rates edged higher, driven by concerns about the outlook for the economy and euro zone banks.

The fight over whether European banks have sufficient capital highlights a flaw in the accounting treatment of sovereign debt, experts say.

"One enormous weakness is that European banks are encouraged to load up on sovereign debt without pricing in the appropriate risk penalty," said Roger Myerson, winner of the Nobel memorial prize in economics in 2007. "It creates the wrong incentives for governments and banks."

Myerson, who was recognized for his contributions to mechanism design theory, said that under Basel accounting rules, sovereign debt is still given a risk weighting of zero.

This encourages banks to buy risky debt without having to build an appropriate capital cushion, and provides an incentive for governments not to address their deficit levels since they are still able to issue debt.

"This looks like the entire problem of the euro zone," Myerson told Reuters.

But accounting body the IASB said European financial institutions should have been more aggressive in booking losses on Greek government bonds. Writedowns disclosed in results varied from 21-50 percent.

At the low end this corresponded to the so-called "haircut" on banks' share of a planned second bailout of Greece now being finalized. A 50 percent loss represented the discount markets were expecting at the end of June.

Eight European banks failed the EU stress test in July, and the total new capital they needed to remedy the situation was 2.5 billion euros ($3.6 billion), less than had been expected before the tests.

($1 = 0.695 Euros)

Brent falls on poor Europe, U.S. data

2011-09-01T06:12:00.001-07:00

LONDON | Thu Sep 1, 2011 9:02am EDT

(Reuters) - Brent crude fell on Thursday as U.S. productivity data and European manufacturing data pointed to a slowing economy, fuelling fears of a decline in fuel demand from industrialized nations.

U.S. non-farm productivity fell by 0.7 percent, the biggest decline since the last quarter in 2008, while new U.S. claims for unemployment benefits last week fell as expected.

Front-month Brent touched $115.27 a barrel, the highest intraday price since August 3, before falling to a low of $113.61. By 1249 GMT, October Brent was at $114.19, down 66 cents. U.S. crude benchmark West Texas Intermediate (WTI) fell 29 cents to $88.50.

The U.S. data was preceded by figures showing weakening German manufacturing activity in August, which grew at its slowest pace in almost two years, and French manufacturing activity, which contracted for the first time since July 2009.

"The main thing putting pressure on oil this morning is the really bad PMI (Purchasing Managers' Index) readings in Europe," Olivier Jakob from Petromatrix said. "We have an contraction overall in Europe in the PMIs, this is confirmation that the economy is slowing down."

The weak European data sent financial markets into a rout, with a broad sell-off only tempered by hopes of further quantitative easing in the United States. <MKTS/GLOB>

"The weak PMIs point to a slowdown in world economic activity," Christophe Barret from Credit Agricole CIB said.

Prices rose earlier in the session after China's manufacturing data showed an improvement in August, raising hopes growth in the world's largest energy consumer could offset slowing industrialized economies. China's PMI rose to 50.9 in August from a 28-month low of 50.7 in July, official data showed.

"Generally China has surprised on the upside and we expect it to continue to do so, although it will continue to moderate growth," said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong.

"We acknowledge the difficulties for China's policymakers to deal with inflation, but we still think that the economy will be stronger than the market is fearing."

China Premier Wen Jiabao signaled on Thursday that controlling inflation would remain a top priority in coming months even as the world economy wobbles.

EYES ON U.S. JOBS

Investors remained focus on Friday's U.S. non-farm payrolls report for August as a guide for direction in the oil market. Payrolls are expected to have increased by 75,000 jobs, according to a Reuters survey, slowing from July's 117,000 rise.

Crude prices rose on Wednesday after a report showed the U.S. private sector added 91,000 jobs in August, while an index of factory activity in the U.S. Midwest in August and U.S. July factory orders were better than expected.

Still, the data continued to portray an economy struggling to mount a sustained recovery, raising expectations the Fed would adopt new measures to shore up the economy.

"It is still mainly the hopes of further liquidity injections from the Federal Reserve that are giving lift to oil prices. From a fundamental perspective, prices have meanwhile exceeded their justified level," Commerzbank analyst Carsten Fritsch said in a note. "As long as speculation about 'QE3' continues in the market, this current exaggeration should remain intact, although the air will get thinner for further price gains."

HURRICANE WATCH

Concern about hurricane-related disruptions to supply in the U.S. Gulf of Mexico also supported oil prices.

Katia strengthened into a hurricane over the Atlantic on Wednesday, while another mass of thunderstorms that could become a named storm this week triggered evacuations of some oil workers from the Gulf of Mexico.

BP (BP.N) began to evacuate more than 500 non-essential workers from four platforms in the region, home to large volumes of crude and natural gas production.

Brent crude gained in the previous session on the back of a sharp drop of 2.8 million barrels in U.S. gasoline stockpiles last week and as North Sea production issues keep European crude supplies tight.

House prices show August fall

2011-09-01T05:42:00.000-07:00

Nationwide says house prices are a 'picture of relative stability'. Photograph: Dan Kitwood/Getty Images

House prices fell by 0.6% in August, according to Nationwide's latest survey, more than reversing July's rise and surprising economists who had expected them to stay flat.

The building society's monthly snapshot of the housing market showed the average price of a home in the UK fell by £2,817 over the month to £165,914. This is 0.4% lower than in August 2010.

Economists polled by Reuters had forecast that prices would remain flat in August, giving a 0.4% rise year-on-year.

Nationwide said house prices had actually increased by 0.1% over the less volatile three-month measure, though this was lower than the 0.3% rise seen in the previous three months.

Its chief economist, Robert Gardner, said a "picture of relative stability" had characterised the market over the past 12 months, and that this was expected to remain the case for the rest of 2011. However, he warned that any increase in unemployment could lead to sharper falls.

"For some time now the residential property market has been moving sideways, as weak demand for homes coexisted with a situation where relatively few homes were coming on to the market," he said.

"A further fall in employment would be likely to upset the relatively delicate demand-supply balance and put downward pressure on prices."

Howard Archer, chief UK economist at IHS Global Insight, said the latest figures were consistent with his expectation that house prices would continue to fall.

"The fall in August ties in with our belief that house prices are likely to trend down gradually over the coming months in the face of persistently weak economic activity, rising unemployment and low consumer confidence. Specifically, we forecast house prices to fall by around 5% by mid-2012.

"We suspect that squeezed household purchasing power, tightening fiscal policy, a weakening labour market and persistent serious consumer concern over the economic outlook will limit potential buyers and weigh down on house prices. On top of that, there are still significant difficulties in getting a mortgage, particularly for first-time buyers."

Nationwide's index is based on mortgages it has approved in the previous month, so does not reflect the whole market. Figures from the Land Registry, which are based on completed sales in England and Wales, have tended to show larger annual price falls than Nationwide in recent months. The figures for July, published on 26 August, showed house prices down by 2.1% year on year.

Housing minister to 'get Britain building again' in market crisis

2011-08-31T04:22:00.001-07:00

Housing minister Grant Shapps has announced plans to 'build more houses' as a federation report shows ownership dropping and 'unaffordable' prices. Photograph: Lewis Whyld/PA

The housing minister, Grant Shapps, has admitted that house prices in Britain have become "too unaffordable", following a report warning that the housing market is in crisis as home ownership falls and property prices soar.

But the minister insisted that government plans would get "Britain building again" as he outlined a number of measures, including planning reforms and a release of thousands of acres of public land, designed to increase the number of homes built.

"The charge is correct. House prices are too unaffordable in this country," said Shapps. "The government's responsibility is to respond to people's aspirations and lots of people … want to own their own properties. I think the government should stand right behind them, and we will."

Shapps sought to reassure aspiring home owners who are priced out of the market, as the National Housing Federation published a study on Tuesday which forecast that ownership in England would slump to just 63.8% over the next decade – the lowest level since the mid-1980s.

The federation, which represents England's housing associations, blamed the bleak outlook on an under-supply of homes, which it warned risked locking an entire generation out of the housing market.

David Orr, chief executive of the federation, said it was time to face up to the fact that Britain had a "totally dysfunctional housing market" with home ownership in decline, rents rising rapidly, and social housing waiting lists at a record high.

Huge purchase deposits, combined with high house prices and strict lending criteria, had sent home ownership into decline in recent years, and the downward trend would continue for the foreseeable future, the federation's independently commissioned forecasts predicted.

With 105,000 homes built in England in 2010-11 – the lowest level since the 1920s – the federation called for more government investment in affordable housing.

Orr said home ownership was increasingly becoming the preserve of the wealthy, and, in parts of England, such as London, the "very wealthy".

He said: "At the heart of this crisis is a chronic shortage of new homes. Despite the overwhelming need to increase supply, house building has slumped to a 90-year low, plunging the country even deeper into the mire.

"Ministers need to make unused public land available to housing associations, local authorities must assess the level of housing need in their area, and housing has to be finally treated as a top political priority."

Doing the rounds of television studios on Tuesday, Shapps blamed a tripling of house prices, between 1997 and 2007, which put home ownership out of the reach of many. "Despite the need to tackle the deficit we inherited, this government is putting £4.5bn towards an affordable homes programme which is set to exceed our original expectations and deliver up to 170,000 new homes over the next four years."

But the NHF said this move represented a 63% cut on the previous programme of spending on homes to rent or buy.

Shapps also pointed to a government scheme to make more public land available for homes. "We are releasing enough government land to build Leicester twice over across the country – it is a massive programme. The new-homes bonus is a multibillion pound incentive to communities to build programmes, and we are hugely reforming the planning system, which is massively complex."

But Labour said that the government's changes to housing policy would make it "harder, not easier" for people to buy property.

Alison Seabeck, Labour's shadow housing minister, said: "For many months Ed Miliband has been campaigning to protect the promise of Britain – the commitment that each generation will do better than the last. The Conservative-led government are breaking this promise by cutting investment in housing and removing the requirement on local authorities to allow new homes to be built, putting renting or buying a property out of reach for far too many people."

The NHF forecast that the proportion of people living in owner-occupied homes in England would fall from a peak of 72.5% in 2001 to 63.8% in 2021. In London, the majority of people living in the capital would be renting by 2021, the number of owner-occupiers falling from 51.6% in 2010 to 44% by 2021, the NHF added.

The only English region experiencing any increase in owner-occupier numbers over the next 10 years would be the north-east, with a rise from 66.2% to 67.4%, the federation predicted.

Jenny Jones, a Green party member of the London assembly, called for better protection for the increasing numbers of people in the private rental sector as levels of home ownership declined. More and more Londoners were relying on "one of the most insecure rental sectors in Europe" where tenants were unable to resist rent hikes and were "scared to challenge slum landlords", she said.

European banks 'may have inflated balance sheets over Greek debt'

2011-08-31T04:18:00.001-07:00

Some banks are using models instead of market values to mark down Greek assets, says the International Accounting Standards Board. Photograph: Stephan Hoeck/Getty Images/Stock4B Creative

The International Accounting Standards Board has said European banks may have inflated their balance sheets and profit and loss accounts by not taking full writedowns on distressed Greek debt.

In a highly unusual intervention, the IASB on Tuesday published a letter from chairman Hans Hoogervorst to the European Securities and Markets Authority saying that some banks were using models to mark down the value of Greek assets, where market valuations existed.

When accounting for trading assets, banks are required under International Accounting Standard 39 to use arm's-length values taken from actual transaction prices to value the assets on their books. Where trading is very illiquid and market valuations cannot be obtained, they can then use valuation models using internal estimates of value.

"There have been indications in the market that some European companies are applying the accounting requirements for fair value measurement and impairment losses in a way that seems to differ from the objective of [accounting standards]. This is evident particularly in their accounting for distressed sovereign debt, including Greek government bonds. Those indications have now been confirmed by recently published financial reports, which show inconsistent application across Europe. This is a matter of great concern to us," Hoogervorst said in the letter.

The letter does not name the banks concerned, but the Financial Times said it related to the accounting of BNP Paribas and CNP Assurances. Both took 21% writedowns on Greek debt, much smaller than the hits suffered by other banks, including RBS, which took a 51% writedown.

"It appears that some companies are not following IAS 39 when determining whether the Greek government bonds are impaired. They are using the assessed impact on the present value of future cash flows arising from the proposed restructure of those bonds, rather than using the amount reflected by current market prices as required," the IASB letter said.

The IASB pointed out that trading in Greek debt was continuing and therefore any values thrown up by those transactions should be used by banks to determine impairments.

"A company cannot ignore relevant market data (including observable transaction prices) when it is clear that market participants would use that data in determining the price at which they would be willing to enter into a transaction for the financial asset."

The writedowns being taken do not reflect market prices as a result, Hoogervorst said. "It is hard to imagine that there are buyers willing to buy those bonds at the prices indicated by the valuation models being used."

A BNP spokeswoman told Reuters: "BNP took provisions against itsGreece exposure in full agreement with its auditors and the relevant authorities, in accordance with the plan decided upon by the European Union on 21 July."

CNP declined to comment.

The IASB is responsible for setting accounting standards but not for enforcing them.

Home ownership 'to fall to mid-80s levels'

2011-08-31T02:22:00.001-07:00

The proportion of people living in owner-occupied homes is forecast to fall to 63.8% by 2021, down from 72.5% in 2001. Photograph: Luke Macgregor/Reuters

The housing market is in crisis as home ownership tumbles and house prices soar, a study has warned.

Home ownership in England will slump to just 63.8% over the next decade – the lowest level since the mid-1980s, the National Housing Federation's forecast, published on Tuesday, said.

Huge deposits, combined with high house prices and strict lending criteria, have sent home ownership into decline, the federation said.

The housing minister, Grant Shapps, admitted that "we have not been building enough homes", but insisted the government was "in the process of reversing that through massive planning reform" and a "massive programme" involving the release of thousands of acres of public land to build new homes.

The National Housing Federation, which represents England's housing associations, warned that the housing market will be plunged into an unprecedented crisis as it also forecast steep rises in the private rental sector and a house price boom. It blamed the bleak outlook on an under-supply of homes in the UK.

The chief executive, David Orr, said: "With home ownership in decline, rents rising rapidly and social housing waiting lists at a record high, it's time to face up to the fact that we have a totally dysfunctional housing market.

"Home ownership is increasingly becoming the preserve of the wealthy and, in parts of the country like London, the very wealthy.

"And for the millions locked out of the property market, the options are becoming increasingly limited as demand sends rents rising sharply and social homes waiting lists remain at record levels."

Shapps said the reason house prices had become so unaffordable was a tripling of prices in the space of 10 years from 1997 to 2007, which put them out of reach for many people.

Asked about the study's forecast for future levels of home ownership, the minister said forward predictions were "hellishly difficult" to make and were "nearly always wrong".

He cited a Halifax survey showing that house price affordability has been "improving quite dramatically" and that prices were more affordable than any time over the last 12 years.

However, he admitted there were significant challenges for first-time buyers and said the government had a responsibility to help home ownership.

Asked about the measures being taken, he told BBC Radio 4's Today programme: "We are releasing enough government land to build Leicester twice over across the country – it is a massive programme.

"The new homes bonus is a multi-billion pound incentive to communitiesto build programmes, and we are hugely reforming the planning system, which is massively complex."

He said thousands of pages of planning guidance and law were being boiled down to about 60 pages in a reform "that even the National Housing Federation, who have produced this report this morning, approve of".

He added that he would be very disappointed if it did not achieve the goal of building more homes.

The federation forecast that, in England, the proportion of people living in owner-occupied homes will fall from a peak of 72.5% in 2001 to 63.8% in 2021.

In London, the majority of people will rent by 2021, with the number of owner-occupiers falling from 51.6% in 2010 to 44% by 2021, it said.

The north-east will be the only English region to see any increase in owner-occupier numbers over the next decade, rising marginally from 66.2% to 67.4%, the federation predicted.

Meanwhile, the average house price in England will rise by 21.3% over the next five years from £214,647 in 2011 to £260,304 in 2016, according to Oxford Economics, which was commissioned to produce the forecasts.

Average rents in the private sector are forecast to increase by 19.8% over the next five years, fuelled by high demand and a shortage of properties.

About 4.5 million people are currently on social housing waiting lists, but only those in the most desperate of circumstances have a realistic chance of being allocated a home.

The federation said that, in 2010-11, 105,000 homes were built in England – the lowest level since the 1920s.

Consumer confidence tumbles amid debt crises and market upheaval

2011-08-31T01:23:00.001-07:00

A shopper on Broadway, New York. Photograph: Chris Hondros/Getty Images

Debt crises and financial market turmoil have triggered sharp falls in consumer confidence in Britain, the rest of Europe and the US, threatening to plunge western economies into a downward spiral. Pessimism among Britons has reached levels usually seen in a recession, while US consumer confidence tumbled to the lowest in two years.

Economists and government officials say the eurozone is being affected by the recent market turbulence caused by growing fears that some governments, led by Greece, could default on their debts. Stock and bond markets have fallen sharply in recent weeks, amid concerns that efforts by eurozone government leaders are not enough to contain the crisis.

Confidence in the US also fell sharply by almost 15 points to 44.5, according to the Conference Board's monthly gauge. This is the lowest level since April 2009 and worse than analysts had expected.

"This is just so ugly," Tom Porcelli, US economist at RBC Capital Markets in New York, told Reuters. "Should we even be surprised by this? Slipping into levels we saw during the recession – that's where the consumer psyche is. They are wondering out loud whether the economy is slipping back into a recession."

A closely watched index measuring UK consumer confidence from GfK NOP dropped for the third month in a row to hit -31 in August, 13 points below a year ago and one point lower than July. The index also hit -31 in April this year, but bounced back the following month boosted by sunny weather and the royal wedding.

Previously, it had only been as low on two other occasions – during the downturn of 2008-2009 and in the early months of 1990. On both occasions the decline in consumer confidence mirrored a slide into recession, noted Nick Moon, managing director of GfK NOP Social Research.

"With an increasing number of indicators suggesting the economy is either stagnating or returning to recession, the continuing loss of consumer confidence is a major worry for the government," he added. "However, despite the four-point drop in consumers' general view of the economic situation over the next 12 months, there has been a small improvement in how they view their own financial situations, indicating people are starting to adapt to the austere economic climate."

The royal feel-good factor has clearly worn off as the US and eurozone debt crises deepened, triggering fears the world economy could slide back into recession. Britons are putting off buying big items such as a car or house, with the major purchases measure staying at -31, down 11 points from a year ago.

In the eurozone, business and consumer confidence declined for the sixth month. The European Union's economic sentiment index fell by 5 points to 97.3 for the EU, and by 4.7 to 98.3 for the 17 countries using the euro, taking the index below its long-term average of 100. Germany, Europe's largest economy which has been the main engine of growth in the past year, suffered the biggest drop.

François Cabau, European economist at Barclays Capital, said: "For the first time since December 2008, both headline business and consumer confidence fell by more than three points. In a month affected by volatile market behaviour, we believe that the deepening of the sovereign debt crisis, combined with the material loss of momentum in the real economy, risks plunging confidence indices into a self-sustaining negative spiral."

Unemployment expectations rose 9.4 points to 25.5, the highest index level since July 2010. Perceptions of the general economic situation in the next 12 months have worsened sharply too, to -23.4 from -14.2, the lowest level since July 2009.

The 5 big hurdles on the road to lasting economic recovery

2011-08-31T01:21:00.001-07:00

A home for sale in Haight Ashbury, San Francisco. The US housing crisis is a destabilising influence on the global economy. Photograph: Robert Galbraith/Reuters

The first indications of the damage caused by the financial turbulence of the past few weeks will be seen on Wednesday, with the manufacturing figures from around the globe. These purchasing managers' indices are closely watched as indicators of industrial orders, and output and any readings markedly below 50 will sound recessionary warning bells.

At the Bank of England, as at the US Federal Reserve and the European Central Bank, there is a weary acceptance that the recovery from the recession of 2008-09 has received yet another setback. Even so, the view is that after a tough few months, the pace of growth will pick up gradually in 2012.

There are alternative views. Nouriel Roubini, the Dr Doom of economics forecasting, told the Wall Street Journal earlier this month that Marx was right when he said capitalism could destroy itself by continually shifting income and wealth from labour to capital.

The greens say it proves that EF Schumacher had it right when he wrote Small Is Beautiful almost four decades ago, and that the world is now being pushed beyond its carrying capacity by an orgy of excess.

The Austrian school of economics says that the sluggish global economyis the result of central bank governors and finance ministers ignoring the teachings of economists Friedrich Hayek and Joseph Schumpeter. Rather than prop up failed banks, policy makers should have let them go bust. The consequence of not doing so is that the west now has a motley collection of zombie banks that are not fit for purpose.

Finally, there are the followers of John Maynard Keynes, who say the problem is that there was a dangerous reversion to economic orthodoxy once the global economy started to recover in the spring of 2009. The Keynesians see the solution as more quantitative easing, less fiscal austerity and public infrastructure projects to kickstart demand.

History would suggest that Sir Mervyn King, Ben Bernanke and Jean-Claude Trichet are right to be cautiously optimistic. Over the past 250 years, industrial capitalism has displayed a remarkable ability to regenerate itself. The mainstream view is that it will do so again, even though the severity of the shock to the financial system means the process will be slower than usual.

But confidence has been dented in recent months as it has become clear that the road to lasting recovery is obstructed by five big hurdles.

1. Europe's debt crisis

Easily the biggest short-term challenge currently is the need to sort out Europe's sovereign debt crisis. King has identified Europe as the biggest threat to Britain's economic prospects and the Bank can already detect evidence that the bickering over Greece's bailout, the perceived vulnerability of Italy and Spain, and fears that already weakened banks could be wiped out by losses on eurozone bonds is having an impact on the willingness of banks to lend. There are already echoes of 2007-08, when interbank lending dried up and the cost of insuring banks against default rose sharply.

The duration and depth of the crisis in Europe mean financial markets are no longer going to be mollified by stop-gap solutions. They want to see the size of Europe's bailout fund massively increased; they want the Germans to agree to common European bonds in order to provide collective security for the weaker members of monetary union; and they want Europe to move quickly towards full economic union. It is not just dealers on Wall Street and the City who see closer integration as the alternative to collapse: George Osborne believes that too.

2. The US housing market

The second obstacle is the American housing market, which has seen a deeper slump over the past five years than was suffered during the Great Depression. Prices are still falling and with a quarter of households in negative equity and mortgage arrears on the rise, consumers feel progressively less well off and that makes them reluctant to spend. The Federal Reserve's quantitative easing programme is designed to help homeowners by driving up the cost of US Treasury bonds, which reduces the interest rates paid on the money Washington borrows. Lower bond yields feed through into cheaper fixed-rate mortgages.

But the desire of consumers to pay down their debts means QE has so far proved ineffective as a cure for the woes of the real estate market. Other more radical solutions are now being canvassed such as federal loans for those homeowners whose mortgages are under water to cover the negative equity. While politically attractive to the Obama regime, this would have trouble getting through Congress even if the programme involved Washington getting a slice of the proceeds when house prices start to rise once more.

3 and 4. Global imbalances

Giants three and four are the two aspects of globalisation that were at the root of the crisis in the first place – the imbalances between creditor and debtor nations, and the financial system.

Little progress has been found through official channels – the International Monetary Fund and the G20 – to deal with the former, running the risk that the global economy will find a new equilibrium through debtor countries deflating rather than through creditor countries reflating. Economists at Lombard Street believe the key imbalance – between China and the US – may eventually be resolved by rising prices in China, which is pushing up the real (inflation-adjusted) exchange rate. Other analysts believe China's continued trade surplus with the US will fan protectionist pressures.

The good news on the global financial system is that banks have spent the past three years building up their capital. Prudential oversight has also been strengthened in countries like Britain through the Bank of England's financial policy committee. The bad news is that flows of credit to the new businesses that will generate the next economic upswing are still lacking. And the regulatory reforms necessary to prevent a future speculative frenzy are incomplete.

5. Oil prices

Finally, there are oil prices. Despite the slowdown of recent months, a barrel of Brent crude is still changing hands for more than $110, five times its price a decade ago. The expectation is that the cost of energy will come down over the coming months, boosting the spending power of consumers. But a return to the 1990s – when oil at $10 a barrel was one reason for strong global growth – appears to be over for good.

Faced with these five challenges – sovereign debt in Europe, a bombed-out US real estate market, an under-valued Chinese currency, a dysfunctional banking system and high oil prices – it is little wonder policy makers are mulling over what more they can do to keep the recovery going. The global economy has slowed to a stall; it would not take much for it to crash land.

Vince Cable: disingenuous bankers are trying to derail reforms

2011-08-31T01:18:00.001-07:00

Vince Cable: 'Banks are in a way trying to create a panic around something which they know has got to happen.' Photograph: Steve Parsons/PA

Vince Cable has accused bankers of using the economic turmoil in Europe to try to derail reform of the financial sector.

The business secretary said that "louder and louder voices" were being raised among some of the big British banks giving warning that regulatory change in Britain would put the recovery at risk.

The Independent Commission on Banking is expected to recommend separating banks' retail operations from their investment arms when it reports on 12 September.

There have been attacks on the proposals from the director general of the CBI, John Cridland, and British Bankers' Association's chief executive, Angela Knight.

Cridland has said taking action to reform the banks now would be "barking mad", while Knight warned imposing the measures on lenders risked denting confidence and cutting the supply of credit.

However, Cable said in an interview with the Times that the fact that there were still fears about the collapse of big financial institutions was "all the more reason for grappling with this issue".

"It is disingenuous in the extreme to use the current context to argue against reform. Banks are in a way trying to create a panic around something which they know has got to happen," he said.

Cable has long favoured the separation of retail and investment banking. He added: "The governor of the Bank of England and many other people have been arguing that we have to deal with the 'too big to fail' problem. We can't have big global banks with balance sheets bigger than British GDP underwritten by the taxpayer; this can't go on and it has got to be dealt with."

The business secretary also said that he did not expect another 2008-style meltdown in the banking sector, but acknowledged that difficulties could still lie ahead for the British economy.

"To my mind, the greater worry is not a massive financial crisis again but it is a general slowing down of western economies, with all the problems that presents for employment and long-term dynamism," said Cable.

In comments reported in the Financial Times, Cridland had said: "Taking action at this moment – this moment of growth peril, which weakens the ability of banks in Britain to provide the finance that businesses need to grow – is just to me barking mad."

He added that a perceived political need for action after banks were bailed out in 2008 was driving the scale and pace of reform, and warned that "there's an own goal here about to be scored if we get this wrong".

European bank stocks plunge as investors shun risk

2011-08-29T04:26:00.001-07:00

The Swiss bank's analysis of reserves and likley profits concludes investing in Greek banks could be costly. Photograph EPA

Credit Suisse, the Swiss bank, has warned investors against buying shares in Greek banks. It was a conclusion reached after lengthy analysis of bank reserves, likely profits and relationship to the ailing Greek economy. But it hardly seemed necessary – there can be few investors queueing up to add Greek bank stock to their portfolio.

That is the case for most European banks. Share prices have dived since last year and despite a few mini rallies, remain depressed. In March Credit Agricole shares topped €12; last week they were just above €6. BNP Paribas shares have slumped from €58 to €32.

The comments of Christine Lagarde, head of the International Monetary Fund, will have done little to calm jittery nerves. She said Europe's banks needed to call on their shareholders for more money to boost their capital buffers and prevent another credit crunch tipping them into bankruptcy.

UK banks are in the same boat. Lloyds Banking Group, which includes Halifax, went above 78p a share last September. Last week it was trading down 56% at 28p. Barclays reached a post-crash peak of 377p in August 2009 and remained above 300p until April this year when it began a slide that leaves the bank stock now struggling at 145p.

But it is the German institutions that have taken the greatest pounding. Commerzbank, Germany's second largest bank, has lost two thirds of its value since March when its share price stood above €6. Its larger rival,Deutsche Bank, has dropped almost 50% from a high of €50 to less than €27 a share.

Analysts argue the German banks face a three-way squeeze. Holdings of financial instruments have been left almost worthless by the Greek crisis. In the never-ending chain that is modern capitalism, German banks have lent funds to institutions that in turn hold Greek sovereign and corporate bonds and other financial instruments such as credit default swaps that insure transactions by Greek companies.

Secondly, there is the struggle to improve profits when European economies are slowing. And thirdly, there are the difficulties faced by the government now most investors believe Berlin will find itself insuring the debts of most peripheral eurozone countries within the next couple of years, whether the German electorate likes it or not.

The generally held view that Greece, Portugal, Spain and Italy will need vast amounts of financial aid from Berlin via the European Central Bank's lending facility has sent the cost of insuring German sovereign bonds soaring and had knock-on effects for banks.

Investors are expected to remain wary of supporting European banks while politicians wrangle among themselves over the extent of the Brussels' bailout fund, the European Financial Stability Facility.

The US has similar difficulties. Bank of America, the largest bank in the US, has seen its share price halve this year to less than $8. Before the crash its value was based on a share price north of $50. Citigroup has dived from $50 to $30 a share and Wells Fargo, considered one of the better capitalised banks, has dropped from $34 to $24 a share.

As in many western countries, many of the worst-hit financial institutions remain in government hands. The biggest mortgage lenders in the US, Fanny Mae and Freddie Mac, are still government owned and in effect bust without federal support.

Germany's Hypo Real Estate bank is in government hands after a €50bn bailout and the UK's Royal Bank of Scotland and Lloyds are still partly nationalised. French banks have escaped, though analysts remain nervous that lending to Latin countries leaves them vulnerable to default.

Warren Buffett, the maverick US investor, has stepped in with a $5bn investment to boost Bank of America's reserves. He expects to make a sizeable return on his capital much as he did following a $10bn injection into Goldman Sachs at the height of the crisis in 2008. But most investors are expected to wait for an economic upturn and political resolution before following his example.

Christine Lagarde calls for European banks to find more capital

2011-08-29T04:25:00.001-07:00

Christine Lagarde, head of the IMF, warned of the risks of another global downturn and said banks need ‘urgent recapitalisation’. Photograph Michael Reynolds/EPA

The British Bankers' Association (BBA) has thrown its weight behind a call from Christine Lagarde, head of the International Monetary Fund, forEuropean banks to be forced to recapitalise to help prevent anotherfinancial crisis.

Fears of a sequel to the 2008 credit crunch are growing because of banks' exposure to weak economies in the eurozone, where countries such as Italy, Spain and Greece are struggling to maintain international investor confidence.

Angela Knight, chief executive of the BBA, said that she agreed with Lagarde, who suggested at the weekend that European banks should be forced to accept capital injections.

Knight said: "I think she is right: some European banks should hold more capital as action is urgently required to stabilise the situation inside the eurozone." But she thought that British banks would not have to recapitalise "because they already did so in 2009-10" and that further strains on the banking system were "more apparent on the continent than here".

But Knight admitted that if Europe lurched into a significant slowdown and the US also faltered, "even British banks will be minded to hoard cash" rather than lend it to companies and individuals. "One could envisage a situation where there would be less readily available credit from the UK banks."

Knight added that British banks could also withdraw capital if the upcoming Independent Commission on Banking orders a split of banks' deposit-taking arms from their investment banking operations.

Lagarde's comments about European banks were made at a central bankers' meeting at Jackson Hole in the US, against a backdrop of concern that some eurozone institutions are being shut out of international money markets.

There is no evidence, however, that UK banks are finding it hard to borrow and Knight said American lenders tended to trust UK banks, "but were far more wary of European institutions".

In one of her strongest warnings yet about the risk of a new global slowdown, Lagarde also said US policymakers should do more to ensure that house prices were not hit by another downward spiral.

The IMF managing director said European banks must be strong enough "to withstand the risks of sovereigns and weak growth. This is the key to cutting the chains of contagion. If it's not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis."

Lagarde spoke after a grisly August in the financial markets when nearly $6tn (£3.7tn) was wiped off the value of global equities amid concern that growth is slowing and governments will be unable to tackle their debt burden.

UBS and Citigroup recently lowered their forecast for global growth, with sharp reductions to its eurozone view and more modest cuts for China, but ruled out the likelihood of a recession for now.

The cuts are the latest in a series of downgrades to global growth forecasts by major securities firms. Morgan Stanley has also cut its global growth view, but was even more bearish: it said the US and the eurozone were "dangerously close to recession".

Household finances squeezed by food and travel costs as inflation continues to rise

2011-08-29T04:23:00.001-07:00

Consumers are restricting their spending, helping to depress the retail industry and UK economy. Photograph: Graham Turner for the Guardian

The soaring cost of food and transport left households £11 a week worse off last month than they were a year ago, according to a survey that reveals the erosion of family spending power.

The average UK household had £166 a week of discretionary income to spend in July, according to the Asda Income Tracker – 6.4% lower than at the same time last year.

Family budgets were squeezed after the cost of travelling increased by 16.5% year on year, according to figures from the AA motoring organisation, while food prices remained high despite food price inflationeasing marginally.

The Asda survey is likely to put pressure on the chancellor, who hascome under fire from business groups and some of his own MPs to boost growth.

Ed Balls, the shadow chancellor, said that George Osborne needed to act to stimulate the economy, which has failed to grow for almost a year.

A forthcoming slew of business surveys will indicate the health of the construction and manufacturing industries. Separate figures from the British Bankers' Association are expected to show that small businesses are struggling to persuade banks to release much-needed cash for investment.

The rate of inflation as measured by the consumer prices index increased to 4.4% in July, from 4.2% in June, with conditions in the labour market also worsening.

Osborne is known to believe that while a combination of wage freezes and inflation has eaten into family incomes, low interest rates have protected 12 million homeowners, who are paying mortgage rates far lower than before the 2008 banking crash. The Bank of England has signalled that rates will remain low for the rest of the year. Many analysts believe they will remain at 0.5% for much of 2012.

The British Chambers of Commerce said over the weekend that the Bank of England should add to its support of the economy with a further round of quantitative easing (QE).

The purchase of government bonds under the QE programme is designed to boost bank balance sheets and promote lending. Up to now, high-street banks have faced criticism for hoarding the proceeds of QE.

Andy Clarke, Asda's chief executive, said that families were under pressure to restrict spending to essentials. "The maths is simple – the rising cost of feeding the family, getting around and increasing unemployment add up to the biggest squeeze on families since the last recession," he said.

The retailer found customers were trying to economise by half-filling petrol tanks and cutting their own hair instead of visiting hairdressers.

July's inflation figures from the Office for National Statistics showed that the cost of clothing and footwear went up by 3.1% year on year – the highest annual surge since records began in 1997.

The cost of water, electricity and gas increased by 4.6% on an annual basis, the highest increase in two years. British Gas, E.ON, npower, ScottishPower and Scottish and Southern Energy have all unveiled price increases in the past few weeks.

Charles Davis, managing economist at the Centre for Economics and Business Research, a thinktank, said: "Pressure on household finances continued to mount up in July as the cost of essential spending grows rapidly while wage increases remain slow."

The pressure on commuters' budgets will further increase when rail fares rise by an average of 8% from January.

Goldman Sachs targeted as 'Jaws' joins battle over banking crash

2011-08-29T04:21:00.001-07:00

Lawyer Jacob 'Jaws' Zamansky has filed a lawsuit against Goldman Sachs. Photograph: John Rizzo/Bloomberg News

He is known as "Jaws", the perfect nickname for a lawyer entangled in a lawsuit filed against a massive investment bank that has been dubbed a "vampire squid" by its critics. But Jacob Zamansky, a renowned Wall Street defender of the little guy, with a record of extracting large settlements from giant firms, does not fear the tough reputation ofGoldman Sachs.

Indeed, he is happy to be helping on a class-action lawsuit against the bank taken out on behalf of a group of shareholders seeking millions of dollars in damages for alleged illegal behaviour. "Goldman misled these investors. So they came to me," Zamansky said.

However, Zamansky's lawsuit is just one of a swarm of legal problems that surround Goldman, whose name once typified blue-blooded banker wealth but now attracts a legion of critics who see it as a byword for out-of-control greed.

Then news broke that Goldman's chief executive, Lloyd Blankfein, had appointed his own lawyer, in the shape of top criminal defence attorney Reid Weingarten. The firm insisted that such a step was merely routine, but some of the bank's detractors saw it as a sign that criminal charges might be edging closer to Goldman and its senior staff. What is beyond doubt is that the bank is facing choppy legal waters due to its actions around the mortgage industry before and during the financial crisis and the bursting of the house price bubble.

The firm agreed last year to a $550m (£336m) settlement in a suit alleging that it misled investors in one sub-prime mortgage investment vehicle. But that could be just the beginning. Goldman has also revealed recently that it could eventually pay out as much as $3.4bn because of other expected legal cases.

This is where suits such as Zamansky's come in. The class action is grouping together a number of shareholders who say the firm's activities around one now notorious security, known as Abacus, have caused them massive losses. But Zamansky says the issue has a wider symbolism for a nation with a moribund economy that many people blame on the actions of big banks. "This gets to the core of the crisis … their business model was against the law," said Zamansky.

Goldman is fiercely contesting the claims and has repeatedly said it did nothing wrong. But what might really worry its top executives is not the rising tide of private lawsuits but the possibility that the US department of justice may be laying criminal charges. The firm was hit with a subpoena in June, asking for documents related to the mortgage security industry and other topics. That follows on from Goldman's starring role – along with other major banks – in a Senate report that detailed numerous examples of bad behaviour as it sought to investigate the origins of the financial crisis. The report found many banks guilty of privately trash-talking the mortgage debt they were happily selling. There have also been allegations, robustly denied by Goldman, that Blankfein may have perjured himself during testimony to the Senate.

The market's sensitivity to the issue was shown by the dramatic fall in Goldman's share price when news broke that Blankfein had hired Weingarten. Indeed, in the space of a few hours more than $2.5bn was wiped off the firm's market value as traders digested the news, although the price later recovered. The instant reaction is perhaps partly explained by looking at some of Weingarten's previous clients, who include executives involved in scandals like Tyco and Enron.

However, Goldman insisted that Weingarten's appointment was routine – and some observers agree. "It was not big news," said Columbia University law professor John Coffee.

Others were less sure. They pointed to the fact that Weingarten is best known for his work as a defence lawyer in white-collar criminal cases and in some ways was an unusual choice for Blankfein if he was not expecting trouble. They also point to Weingarten's close ties to the department of justice, where he has previously worked in its public integrity section.

Whatever happens legally, Goldman's supporters will take heart from the fact that other top banking figures who played key roles during the financial crisis – such as Lehman head Dick Fuld and John Thain of Merrill Lynch – also hired their own lawyers, but have yet to face any criminal charges.

What is more clear is the intense damage done to Goldman's reputation in the years since the crisis. Even as the bank's bottom line has recovered and it has resumed paying out handsome bonuses worth billions of dollars to its staff, it still has a huge image problem. "Their image has been greatly tarnished. They were the best and the brightest, but all that has been called into question," said Zamansky.

Goldman-bashing is now practically a national sport among pundits, who question why banks have remained so wealthy and profitable, even as the country grapples with a devastated housing market and high unemployment.

Even the religious have got in on the action. A group of nuns called the Sisters of St Francis of Philadelphia led a high-profile campaign earlier this year over the huge amounts that Goldman executives were paying themselves. Now they are planning further meetings. "They have a business model, but we have a justice model," said Sister Nora Nash.

Yet many observers say the bank is as powerful and influential as ever. "It is still large. They have close allies throughout the administration and in Congress, and they are going to make a lot of campaign contributions in the coming election," said Baker. Indeed, Goldman's wealth is the subject of a popular mocking Twitter account. Called @gselevator, it purports to tweet the overheard comments of Goldman employees as they ride the company lifts. One recent update read: "Suit#1: Was that really an earthquake? Suit#2: No, I just dropped my wallet."

Perception is important in the world of finance and, with lawyers and the justice department circling, not many people at Goldman are laughing at the moment. "They have become the whipping boy," said Coffee.

Three years after Lehman, a new debt crisis looms

2011-08-29T04:19:00.000-07:00

Financial crisis: traders on the floor of the New York Stock Exchange shortly after the collapse of Lehman Brothers in September 2008. Photograph: Mario Tama/Getty Images

The F word is back. Back in the financial markets, back in the conclaves of central bank governors, back among the manufacturers and the high-street retailers. The four-letter word is fear.

Back in the spring, few imagined that we would be approaching the third anniversary of the collapse of Lehman Brothers on 15 September with such a sense of unease. The belief in early 2011 was that economic recovery was now well enough embedded for central banks to start raising interest rates and for finance ministries to crack on with the job of reducing budget deficits.

Although pockets of optimism remain, the mood today is different. Ben Bernanke, the chairman of the Federal Reserve, has said the US central bank will discuss possible ways to stimulate growth when it meets next month. The Bank of England appears to be heading in a similar direction. There is anxiety at the International Monetary Fund that blanket austerity will tip fragile western economies back into recession. Concerns are once again being expressed about the health of the banks, about America's national debt and, above all, about whether the eurozone can survive its current crisis intact.

Standard Chartered and HSBC were the two UK-based banks to emerge relatively unscathed from the first financial crisis, partly because their global reach allowed them to benefit from the rapid recovery in Asia. This, though, is how the chief economists at the two banks see things.

"America is drowning in debt, Europe is imploding as problems in the euro area intensify, while, in contrast, Asia's economy is cooling, as growth rates moderate from a strong to a solid pace," says Gerard Lyons at Standard Chartered. Putting the possibility of a recession in the US as high as one in three and of an eventual euro crisis as high as one in two, Lyons adds: "It should be little surprise that there is increased uncertainty and heightened risk aversion across financial markets."

Stephen King at HSBC describes the world as a "frozen economic tundra", with the power of central bankers to influence events on the wane. "After the Great Recession, there has sadly been no 'Great Recovery'," King says. He too is unsurprised that investors are rushing for the exit, given the bickering between Democrats and Republicans on how to tackle America's budget problems, and the inability of Europe's politicians to sort out the single currency.

"The west is increasingly looking like a bad version of Japan. And, like Japan, our political leaders are offering few answers."

Collapse

This is not how it was supposed to be. It took time for policymakers to comprehend the enormity of the shock administered to the global economy by the collapse of the US housing market, but once the penny dropped in the autumn of 2008, they were at pains to show that lessons had been learned from the 1930s. Banks were recapitalised to prevent them from going bust, interest rates were slashed, money was created, public spending was increased.

To widespread relief, there was no second Great Depression. Unemployment in the US rose to almost 10% but not the 25% seen in the 1930s. Industrial production and international trade started to pick up in the spring of 2009. By and large, countries resisted the temptations of protectionism.

Over time, however, it has become clear that the recovery has been both slow and costly. If it is aborted, the risk is that the global economy will return to where this all started in 2007, with another crisis in the banking system. The recovery has been slow because the crisis was caused by over-indebtedness among private individuals and banks. Both, in the jargon of the markets, were over-leveraged: they had borrowed an awful lot of money, in other words, in anticipation of asset prices going up and up. When the bubbles burst, households and banks realised how exposed they were. As a result, they started to pay off their debts and even when the cost of borrowing came down to virtually zero, the demand for credit remained weak.

As HSBC's King notes: "The ambient noise of deleveraging is now deafening." But western economies have become so dependent on debt-driven growth in the good years that they are finding the sobering-up process painful. As things stand, it will take the UK longer to return to pre-recession levels of output than it did in the 1930s.

What's more, this lacklustre recovery has not come cheap. As private demand fell, governments stepped up their spending. They cranked up the electronic printing presses, they bought shares in banks and they allowed budget deficits to balloon, gambling that any damage to the public finances would be temporary. Again, things have hardly gone according to plan. Quantitative easing has proved a double-edged sword: it has flooded financial markets with cash and may well have underpinned activity. But it has also pushed up commodity prices, leading to higher inflation and a squeeze on real incomes that has held back recovery.

By effectively nationalising a good chunk of the debts accumulated by the private sector, western governments have now raised concerns about their own solvency. The US has seen its credit rating downgraded; Europe's problems are even more acute after bailouts for Greece (twice), Ireland and Portugal, followed in the past month by emergency action by the European Central Bank to drive down the interest rate on Italian and Spanish bonds.

Just as in the summer of 2008, the assumption is that the global economy will experience a slowdown but not a full-blown contraction. Central banks are still providing massive amounts of monetary stimulus through record-low interest rates, even though finance ministries are tightening fiscal policy by raising taxes and trimming spending. Large corporations outside of the banking sector have money in the bank that could be used for new investment. And consumers should feel better off next year as inflation falls.

Soft landing

Financial markets want to believe the "soft landing" scenario but somehow can't quite bring themselves to do so. The fear comes from the knowledge that commercial banks in Europe are up to their eyeballs in sovereign debt from the weaker peripheral countries, so a default would trigger a feedback loop back into the financial system. Banks have more capital than they had three years ago and are less heavily leveraged. Yet there are doubts about whether they could survive a double-dip recession. And until consumers are spending more freely, there will be a temptation for companies to hoard their cash rather than invest it.

Economic downturns usually go through five distinct phases: bubble, denial, acceptance, panic and recovery. This fifth phase officially started two and a half years ago, but the drip-drip of disappointing news from the around the world in recent weeks has made financial markets highly averse to taking risks. Higher unemployment, slower growth, currency tensions have all led to a rush for safe havens.

The markets are now wondering whether this is one of the rare crises that has a sixth phase – relapse. At root, the suspicion is that the problems that caused the crisis in the first place have not been solved, that politicians are offering weak leadership, and that the next few months could see the start of phase two of the Great Contraction.

Hurricane Irene claims lives and leaves trail of destruction

2011-08-29T04:14:00.001-07:00

A woman rescues belongings from houses damaged by Hurricane Irene in Columbia, North Carolina. Photograph: John Bazemore/AP

New York breathed a sigh of relief on Sunday after hurricane Irenepassed over without major damage to the city, but the storm still caused deaths, serious floods and power blackouts affecting more than a million people as it swept up the north-eastern seaboard of the United States.

Irene weakened quickly after making landfall near Atlantic City, New Jersey, at about 5.30am local time. By the time it made landfall again, at Coney Island four hours later, it had been downgraded by the National Hurricane Center to a tropical storm with winds at around 65mph – much weaker than the 85mph that was forecast late on Saturday.

But while the storm failed to bring the devastating surge of water that had been feared in New York City, it was still powerful enough to claim lives and cause widespread damage elsewhere.

The biggest impact was felt on Sunday night in upstate New York and New England where many communities suffered devastating floods after rivers burst their banks and Irene's torrential rains fell on ground already saturated by unusually high downpours earlier this month.

In the Catskills mountain town of Windham, where Irene dropped 10 inches of rain starting on Saturday night, the downtown area was "wiped out" by flood water, fire chief Michael Scarey told the Mid-Hudson News.

In nearby Prattsville, National Guard soldiers rescued 21 people who had been trapped in a motel by fast-moving water that blew out bridges and roads all over the county, according to Reuters. Local website, theWatershed Post, carried pictures and video of towns across the area that were under water and without power.

Further north, Vermont was experiencing its worst flooding in almost 40 years, according to local reports. Many towns, including Brattleboro, Wilmington, Rutland and Grafton, were under water on Sunday night.

President Barack Obama warned the storm and its aftermath were not over: "This is a storm that has claimed lives.

Our thoughts and prayers are with those who have lost loved ones," he said. "Many Americans are still at serious risk of power outages and flooding which could get worse in the coming days. I want people to understand that this is not over."

Irene claimed three lives as it passed over the north-eastern seaboard. In New Jersey a 20-year-old woman was found dead in her car on a flooded rural road. The woman, who has not yet been identified, had earlier called police after she and her car were washed away by a flash flood.

"She left her house, went in her car and was swept away," said New Jersey governor Chris Christie.

About 30 miles (48km) north-west of Manhattan in New York's Rockland County, a man was electrocuted by a downed power line after he tried to save a child who had gone out into a flooded street that had live wires, officials said. The child is now in hospital in a serious condition.

And in Prospect, Connecticut another person was killed in a fire that investigators believe was sparked by fallen wires.

The death toll now stands at more than 15 with lives lost all along the storm's track from the Carolinas to Virginia and up through Pennsylvania, where a man was killed in his tent by a falling tree, to New York and beyond.

A nuclear reactor in Maryland was shut down after it was damaged by wind. Others were taken offline or were operating at reduced capacity as precautionary measures.

More than six million homes and businesses lost power as the storm passed up the east coast. Two million people were warned or ordered to flee its path. The storm also spawned tornadoes in parts of Virginia, New Jersey and Delaware. A twister destroyed 15 buildings in the popular holiday town of Lewes in Delaware.

But flooding is likely to be the major problem this week. Parts of Philadelphia were heavily flooded, with water reaching street-sign levels in some areas. Flash flood warnings were issued up and down eastern and central Pennsylvania. "The rivers may not crest until Tuesday or Wednesday. This isn't just a 24-hour event," Pennsylvania governor Tom Corbett said on Sunday.

New York's public transport system is likely to be disrupted next week. On Sunday, transport workers waited for winds to die down before they were able to inspect train and subway lines.

New York governor Andrew Cuomo said it was too early to say when normal service would be resumed.

The region's major airports were closed on Sunday and were likely to be closed for at least part of Monday as airlines waited for transport systems to be restored so passengers could reach them.

Hurricane Irene: Michael Bloomberg makes last-ditch evacuation plan

2011-08-28T02:44:00.000-07:00

The Manhattan skyline as hurricane Irene approached New York. Michael Bloomberg has urged people living in the Zone A evacuation area to evacuate. Photograph: KeystoneUSA-Zuma/Rex Features

The mayor of New York, Michael Bloomberg, led a last-ditch, final push on Saturday evening to persuade residents of low-lying and coastal areas to evacuate for their own safety before the arrival of hurricane Irene.

With only a few hours to go until darkness fell and hurricane-strength winds begin to gust over the city, Bloomberg said only 1,400 people had so far checked into evacuation centres, which have been set up to accommodate 70,000.

There were no estimates of how many of the 370,000 people living in the Zone A evacuation area had heeded the mandatory orders, Bloomberg said.

"Time is running out. It's going to get dark in a little while … If you haven't left you should leave now. Not later this evening, not this afternoon, immediately," he urged.

By 9pm on Saturday, as Irene's outer bands began to deliver heavy rain on the city and a tornado watch was issued, the number of people in evacuation centres had risen only to 5,500.

Hurricane conditions are expected to hit New York in the early hours of Sunday, with the eye of the storm brushing over the city at about 10am EDT.

Police patrolled Zone A with loud hailers on Saturday evening, and volunteers knocked on doors in public housing areas with offers of transport, but many residents were refusing to leave.

Outside an evacuation centre in south Brooklyn, near her home in the waterside neighbourhood of Red Hook, Niyelle Manley said that a third of her neighbours were preparing to ride out the storm at home.

"We warned a lot of them but I guess they took it as a joke" she said. Manley, who arrived at the centre with her wheelchair-bound mother, Patricia and her two-month-old daughter, Kallyah, lives in the projects on the first floor of a block near the pier. She talked her mother into leaving, she said, but had no luck persuading seven or eight families out of 20 in her block who remained.

Bloomberg warned those in Zone A who had not left that lifts in public buildings would be shut down and they could find themselves without power. New Yorkers in the prime evacuation zone, including Battery Park City, Coney Island, Manhattan Beach, Far Rockaway, Midland Beach and South Beach in Staten Island, had to be out by 5pm on Saturday.

Political leaders and officials up and down the east coast were echoing Bloomberg's evacuation call as Irene lumbered towards them, bringing wind speeds of 85mph and the high risk of storm surges and inland floods

In neighbouring New Jersey, the governor, Chris Christie, said about 5,300 people had moved into the emergency shelters, with about 1 million in total leaving the shore area over the last 24 hours.

But he said there had been "hiccups", with particular resistance from elderly people in the Atlantic City area. "There are a few remaining residents who have refused to evacuate," he said.

He added: "Certainly we're not going to put you under arrest to make you leave but we do have your safety first and foremost in out minds."

Corey Booker, mayor of Newark, New Jersey, told CNN he had been going door to door warning residents to flee the storm.

"I benefited a lot from the surprise factor as the mayor showing up," he said. "I think they got the point, and hopefully they'll behave appropriately."

The hurricane caused 7ft waves and forecasters warned of storm-surge damage on the coasts of Virginia and Delaware, along the Jersey shore and in New York harbour and Long Island sound.

New York's entire transportation network began closing at noon, for the first time in its history, however there were still almost-normal levels of taxis in the city. Bloomberg said people could walk to one of 78 evacuation centres, and if people were desperate, they could even flag down a police car.

He added that mass transit was "unlikely" to be back in operation on Monday.

Con Ed, the city's largest utility, said it may be forced to cut off power to 6500 customers in lower Manhattan and Wall Street if significant amounts of salt water got into the system, according to Associated Press.

About 1 million people are now without power and the storm has yet to hit a major population centre.

By Saturday afternoon, 500,000 residents had lost power in North Carolina, and utility companies expected more outages as the hurricane moved north. Power outages were also reported in Virginia, Maryland, Delaware and Washington DC. South-east Virginia is also undergoing blackouts. Dominion Resources, the power company, said about a third of its 212,000 customers there were without power by about 4pm. But the heavy rain also took down power lines around the city of Richmond, where about 50,000 were without power, as well as in the Washington suburbs.

The latest advisory from the National Hurricane Centre, in the early evening, put the hurricane 315 miles south southwest of New York City, and said the eye of the storm would move over the mid-Atlantic coast on Saturday night and south New England on Sunday, with maximum winds of up to 80 mph. The hurricane warning has been discontinued south of Surf City, North Carolina.

Hurricane Irene hits New York

2011-08-28T02:40:00.000-07:00

A panorama of New York's skyline taken as Hurricane Irene approached. Photograph: KeystoneUSA-Zuma/Rex Features

5.20am ET: Welcome back to our live coverage of Hurricane Irene's progress, as the eye of the storm is expected to pass through New York City in the next few hours, and move north towards New England.

President Obama: 'This is going to be touch and go'

2011-08-27T16:14:00.000-07:00

Debris and sand littering a road as Hurricane Irene came ashore near Atlantic Beach, North Carolina, 27 August 2011. Photograph: Reuters/Steve Nesius

6.37pm ET: The mayor of Philadelphia, Michael Nutter, has declared the city's first state of emergency in 25 years. He warns of extensive and long-lasting blackouts:

Due to severity of the storm, you may experience power outages of a week, 10 days or two weeks.

Meanwhile, New York City warns that ferry services will soon be ending. The Staten Island ferry already moved to an hourly service and will stop at 10pm, if not sooner. The subway system and other mass transit have been closed for some hours now.

The Washington Post's Capital Weather Gang (@capitalweather) says that DC can expect the worst of the storm-lashing between 8pm and 2am tonight.

6.23pm ET: Youjung Byun writes in with this photo as witness to the manic emergency supplies shopping that was going on earlier on Saturday in New York. Youjung captions his picture thus:

I took a photo of people stacking up foods and water from Key Food Supermarket on Grand Street in Williamsburg, Brooklyn. People in the supermarket were obviously nervous and anxious, most of them filled their shopping cart up full. By the time when I went, the water was sold out.

One guy was using his traveller's suit case: it was filled with canned foods, water and crackers.

6.07pm ET: Further from Suzanne Goldenberg, who has been listening to the 5pm podcast from the National Weather Service's hurricane centre:

The biggest threat, she says, comes from storm surges, with winds piling the water towards the shore line in the Norfolk area, Delaware Bay, the Jersey shore, New York Harbour and Long Island Sound at particular risk.

Note: we have a new moon and extra high tides in any case. High tide is at 8am tomorrow morning for New York City, which pretty much coincides with the arrival of Irene.

Suzanne summarises further:

The update also notes that while Irene might be shifting a little to the east, and out over the ocean, that is unlikely to bring relief. The storm will produce between 6-12 inches of rain across a 150-mile swathe to its west. Some areas can expect up to 20 inches of rain.

The other danger, highlighted in the podcast, is downed trees, with strong winds bringing down trees and causing minor structural damage to buildings.

On cue, here is Patrick Wintour, the Guardian's British political editor, who seems to have chosen a possibly inopportune time to be vacationing in the Hamptons:

We are expecting 70 mile per hour winds over the next 24 hours and power blackouts here in Long Island south seashore. Cars are parked from trees, water in the bathtub, flashlights at the ready and life vests for the young ones. Playing stormy music, ping pong and Lego, and watching the hour but not the weather channel. Roar of the ocean can be heard from kitchen garden and is growing louder. The winds and rain get serious by midnight.

I think we see some British sangfroid there. Keep calm and carry on, Patrick.

Rikers Island prison, home to 12,000 inmates. Photograph: Seth Wenig/AP Photo

5.52pm ET: My colleague Paul Harris draws my attention to this piece from Mother Jones about the status of the Rikers Island prison, which lies in the waters between Queens and the Bronx. (Former IMF chief Dominique Strauss-Kahn, of course, was recently a guest.) The predicament of the prison's 12,000 inmates and guards has a new pertinency as Mayor Bloomberg delivered a tough message about the compulsory evacuation of 250,000 people from Zone A vulnerable areas. Mojo notes:

According to the New York City Department of Correction's website, more than three-quarters of Rikers Island's 400 acres are built on landfill – which is generally thought to be more vulnerable to natural disasters. Its 10 jails have a capacity of close to 17,000 inmates, and normally house at least 12,000, including juveniles and large numbers of prisoners with mental illness – not to mention pretrial detainees who have yet to be convicted of any crime. There are also hundreds of corrections officers at work on the island.

We were not able to reach anyone at the DOC for comment, but the New York Times's City Room blog reported: "According to the city's Department of Correction, no hypothetical evacuation plan for the roughly 12,000 inmates that the facility may house on a given day even exists. Contingencies do exist for smaller-scale relocations from one facility to another."

5.31pm ET: The figure for the number of people without power along the United States' eastern seaboard keeps rising. Suzanne Goldenbergupdates us:

About 1 million people are now without power because of Hurricane Irene – and the storm hasn't even reached the major population centres yet. As the storm moved north, power outages were reported in North Carolina, Virginia, Maryland, Delaware and Washington, DC.

The biggest outages so far are in North Carolina, where more than 500,000 households were without power by afternoon. South-eastern Virginia is also experiencing blackouts. The power company Dominion Resources said about a third of its 212,000 customers in south-eastern Virginia were without power by 4pm.

The heavy rain also took down power lines around the city of Richmond, where about 50,000 people were without power, as well as in the suburbs of Washington, DC.

Mayor Bloomberg updates New Yorkers on City's response to Hurricane Irene. Video: YouTube

5.14pm ET: Michael Bloomberg's remarks about using the law to move people out of the Zone A evacuation areas are the most telling element of this afternoon's press conference. Learning the lessons of Katrina, the New York mayor is not pussyfooting around with the mandatory evacuation of low-lying areas: the message is that if people do not go of their own accord, the police will be force them to leave.

This is a storm where if you're in the wrong place at the wrong time, it can be fatal … the thing that makes the most sense is to first comply with the mandatory evacuation.

Outside the mayor's jurisdiction, on Long Island, county and town officials are also enforcing the compulsory evacuation of some 400,000 people,reports the New York Times.

President Obama with Homeland Security Secretary Janet Napolitano at Fema headquarters. Photograph: Getty Images/Ron Sachs

4.33pm ET: The Guardian's US environment correspondent,Suzanne Goldenberg (@suzyji), has filed this report from Washington, DC about the situation facing the state of Vermont. Vermont, which is at least 200 miles north of New York City, is not normally troubled by tropical storms, but has already seen an unseasonably large amount of rain this month.

Vermont was expected to be well clear of Irene, but White House reporters who visited Fema's headquarters in Washington with Barack Obama earlier today have been told the state is at risk of severe flooding.

Vermont's governor, Peter Shumlin, declared a state of emergency on Saturday. According to the pool report, quoting an unidentified Vermont briefer:

"The weather service is saying that every river in the state will probably flood over the next two days, so we are preparing for that. Our quick water rescue teams pre-deployed. They will be in place by noon tomorrow. And the National Guard is also standing by ready to support us.''

State officials in Vermont are also warning people to be "self-reliant", and brace themselves for the possibility that they will not have power for two or three days.

The eye-catching detail there is "every river in the state" likely flooding.

3.56pm ET: What is conspicuously apparent is that Mayor Michael Bloomberg is making sure that he's out in front of the media and fully engaged. This new tweet (@MikeBloomberg) is typical of his messaging in this weather-related crisis – in marked contrast, as the New York Times pointed out, to his somewhat mysterious absence during last Christmas's snowstorm, for which he took a lot of flak:

I want to assure our city that we will get through this. We are New Yorkers, and New Yorkers have always risen to the challenge #Irene

And so here is also answering questions at this afternoon's press conference, talking about issues of flooding risk, power cuts and telecoms outtages, and also addressing the status of evacuation plans. So far, he says, there are only 1,400 people using the evacuation centres (for locations, see this pdf map):

We've prepared for a large number of people; we're not worrying about running out of capacity. We have room for 70,000 people, with cots and beds for 40,000 … we don't think it'll come remotely close.

He also reports that compliance with the compulsory evacuation of low-lying areas like the Rockaways, on the south shore of Long Island, has generally been good – 80% of inhabitants there have left. But he warns that if people refuse to leave, they will feel the force of the law:

We are going to break down doors if we have to.

The relatively low number of people so far turning up at the evacuation centres tallies with reports from my colleague Karen McVeigh (follow her at @karenmcveigh1), who has been talking to evacuees in Brooklyn:

At one evacuation centre in Brooklyn, close to the waterside neighbourhood of Red Hook, staff said that only "about 100" people had turned up so far. Niyelle Manley, 24, who arrived at the centre with her two-month-old baby Kallyah, and wheelchair-bound mother, Patricia, said that out of the 20 families in her block, seven or eight had stayed behind.

"We warned a lot of them but I guess they took it as a joke," said Niyelle.

The Manleys live in the projects, on the first floor of a block near the pier in Red Hook and left home after a volunteer arranged transport for them. "I ain't happy about it but something has to be done on account of my grand-daughter," said Patricia, 52. They were waiting outside John Jay High School in Park Slope for another vehicle to take them to another shelter better equipped for wheelchair users.

Meanwhile, New Jersey Governor Chris Christie (see Matt Wells's account if his press conference below) has tweeted the following advice

New York braced for chaos as hurricane Irene approaches

2011-08-27T16:12:00.000-07:00

Heavy rain falls from Hurricane Irene in Virginia Beach, Virginia. Photograph: Brendan Hoffman/Getty Images

3.32pm ET: That fourth death attributed to Irene is of an 11-year-old boy in Newport News, Virginia, caused by a fallen tree hitting an apartment building. NBC has the story, and is also reporting that some 300,000 people in Virginia are affected by power outages already, as Irene edges north into that state. CNN makes that up to a total of 670,000 peoplewithout electricity, adding in North Carolina.

A timely warning from Fema, via the LA Times, that even downgraded to category 1, Irene remains dangerous and capable of causing extensive damage. And Defence Secretary Leon Panetta has put 6,500 troops on notice for possible disaster relief work, reports the Washington Post.

3.16pm ET: While we're waiting for NYC's mayor, a veritable storm of hurricane Irene graphics is blowing through. The New York Times's tracker is elegant. The Washington Post's is more mappy. But as rainfall radar illustrations go, this – from WeatherUnderground – is hard to beat. What that kaleidoscope of colours means, apparently, is that 17 inches of rain have fallen on New Bern in North Carolina today.

More gravely, via the @wunderground Twitter feed, NBC is reporting a fourth death caused by the storm. More detail follows.

2.45pm ET: Matt Seaton here with you now, while Matt Wells takes a well-earned break. A strange atmosphere pervades in New York City today. Literally so, in that the only harbinger of the coming tropical storm so far, other than light rain and the occasional heavier shower, is tropical humidity – around 90% according to Accuweather.com.

But as my colleague Paul Harris just reported, it's very odd indeed to see near-empty streets and all the big stores closed on a summer Saturday. Very few cars, too; mainly just yellow cabs and some emergency services vehicles. But an eerie feeling of calm before the storm, as New York hunkers down.

Next up, though, will be Mayor Michael Bloomberg; we're expecting a 3pm press conference update. I'll be covering that, but you can also watch live on the nyc.gov site.

A store in Manhattan, New York shuts down in preparation for hurricane Irene. Photograph: Mario Tama/Getty Images

2.26pm ET: My colleague Paul Harris has been on the streets of the East Village in Manhattan. He writes:

Walking around the usually bustling East Village, the signs of preparation for Irene are everywhere: mixed in with the usual scenes of a New York social weekend. Many businesses are shut. Some have even put tape across their window panes in a bid to minimise damage should the storm break them.

It's an arresting sight, familiar from footage of seeing hurricanes hit more tropical climes, but it is weird to see it on a New York shop front. There was a long queue at a supermarket at St Mark's Place and the local cinema, chain stores like Duane Reade and Starbucks and banks are all closed.

But where bars and restaurants are open they are busy with New Yorkers brunching and drinking as usual. There are some joggers and even one or two beauty salons are still open for business with a few customers getting pre-hurricane mani-pedis. After all, you want to look your best for Irene's arrival on Manhattan.

2.18pm ET: CNN just cut off Christie mid flow. He's obviously too windy even for them.

2.14pm ET: And he doesn't disappoint. Christie is not having any of this category one nonsense. This is a big storm for a big guy and he's on it. Particularly the beach.

The best way to preserve life on the Jersey Shore is for there to be no human beings on the Jersey Shore, given what's about to come. The tracking of the storm continues to be very ominous for our state. While there has been some minor weeaking of the storm to a category one strom, decreasing the wind speeds by 10 or 15 mph is not going to make much difference to what's going to cause harm to people here.

2.07pm ET: Watch out, New Jersey governor Big Chris Christie is up on TV. Yesterday he told everyone to "get the hell off the beach". Apparently they have. Great. Let's see what he has to say today.

2.05pm ET: Reader Simon Frank has been in touch – he experienced Irene when he was in Nassau in the Bahamas, where hurricane Irene passed this week. He writes:

I sat through the storm in a beachside apartment in Love Beach, Nassau, Bahamas. It was a category 3 storm as it barrelled through the Bahamas. We lost power for around 18 hours. There were several trees down, but not a lot of buildings damaged anywhere on the island. The apartment block shook throughout the small hours. The strongest winds I have felt since Frances in 2004.

1.44pm ET: More from President Obama's visit to Fema, tape of which has just been broadcast. He said during the visit:

It's going to be a long 72 hours. The biggest concern is the flooding and the power. It sounds like that's going to be an enormous strain on some states.

1.37pm ET: Progress Energy now says that 273,000 residents are without power in North Carolina. Separately, three deaths have now been confirmed in the state.

First US landfall takes place at Cape Lookout, N Carolina

2011-08-27T16:09:00.001-07:00

Waves crash into Kitty Hawk pier as Hurricane Irene strikes the Outer Banks in Kitty Hawk, North Carolina Photograph: Jim Lo Scalzo/EPA

1.19pm ET: What of those who are experiencing Irene right now?

"There's nothing you can do now but wait. You can hear the wind and it's scary," said Leon Reasor, who rode out the storm in the Outer Banks town of Buxton, and spoke to the Associated Press. "Things are banging against the house. I hope it doesn't get worse, but I know it will. I just hate hurricanes."

Susan Kinchen, who arrived at a shelter at a North Carolina high school with her daughter and five-month-old granddaughter, said she felt unsafe in their trailer. Kinchen, from Louisiana, said she was reminded of how Hurricane Katrina peeled the roof of her trailer there almost exactly six years ago, in 2005. "I'm not taking any chances," she said.

Charlie Koetzle, 55, who has lived in Ocean City, Maryland, for a decade, came to the boardwalk in swim trunks and flip-flops to look at the sea. While his neighbours and almost everyone else had evacuated, Koetzle said he told authorities he wasn't leaving. To ride out the storm, he had stocked up with soda, roast beef, peanut butter, tuna, nine packs of cigarettes and a detective novel. Of the storm, he said: "I always wanted to see one."

12.54pm ET: One of the most significant lines to come out of New Yorkmayor Michael Bloomberg's news conference earlier (see 9.36am ET) was his suggestion that power would be cut pre-emptively to Lower Manhattan (from where I am blogging). Fortunately, Consolidated Edison, the power company, has said it has no such plans.

According to the New York Times, Coned said that if its most vulnerable subsations are flooded, then power may be cut, affecting mostly the financial district in an area bordered by the Brooklyn Bridge to the north, Broadway to the west, and the East River.

That puts the Guardian live blog in the clear – but only just. I am just a few steps away from Broadway and the Brooklyn Bridge.

12.47pm ET: President Obama has been visiting the Fema national response coordination center in Washington, where around 50 staff are working on the federal response. He told staff: "This is obviously going to be a touch and go."

12.43pm ET: We've just published our latest news story on Irene. My colleague Karen McVeigh reports:

More than 2 million people in low-lying and coastal areas were told to evacuate and millions more were preparing for days of hurricane-force winds, rain, power cuts and disruption in its wake.

When it made landfall at Cape Lookout on North Carolina's Outer Banks, Irene was weaker than had been forecast. The National Hurricane Centre in Miami downgraded the storm from a category 2 to a category 1 overnight, as it had weakened from 100mph winds.

It forecast further weakening of the storm over the next 24 hours, but warned winds would be at near-hurricane speeds and the storm would remain large and powerful as it headed toward the mid-Atlantic coast on Saturday night and southern New England on Sunday.

"The hazards are still the same," NHC hurricane specialist Mike Brennan said. "The emphasis for this storm is on its size and duration, not necessarily how strong the strongest winds are."

In New York City, where Irene is expected to arrive on Sunday, Mayor Michael Bloomberg issued a strongly worded warning that the hurricane remained dangerous despite the weakening wind speeds.

12.39pm ET: As Irene tracks northeast, strong>transport systems are shutting down.

In Virginia, authorities have closed the Midtown tunnel and the Hampton Roads bridge-tunnel.

The Maryland Transit Administration is suspending all services tonight. evening. Light rail services will stop operating at 6pm, and the bus and subway service will shut at 9pm.

Transit systems in New York, New Jersey and Philadelphia are already closed.

The Ronald Reagan Washington national airport and Washington Dulles international airport are still open, but most flights are cancelled. These airports may close later. Philadelphia airport will clsoe at 6pm. Also closing today are JFK and LaGuardia in New York, Newark in New Jersey, plus Stewart and Teterboro.

Tomorrow, airports in White Plains, Boston, Portland, Hartford, Manchester, and even Albany in upstate New York are epxected to close.

Already today, according to CNN, 3,367 flights have been cancelled and a further 4,970 have been pulled from the schedules tomorrow.

12.17pm ET: During hurricanes, it is compulsory for TV news networks to make reporters deliver pieces-to-camera in the most rain-lashed areas.

CNN is winning the prize for "best reporter blow-away".

11.57am ET: My colleague Suzanne Goldenberg was monitoring the Fema briefing. Here's her report:

Irene's winds may have maxed out as a category one storm, but people on the east coast are still at risk of flash floods and tornados, officials warned this morning. "I would not advise people to focus too much on category one, two or three. If you are in a hurricane, you are in a hurricane," Janet Napolitano, the homeland security secretary, told reporters at an 11am update.

Irene is not expected to strengthen as it makes its way up the coast, Bill Read, the director of the national hurricane center, said. But the sheer size of the storm still means its carries heavy risks.

The national weather center has already received its first reports of tornado, and Read warned there could be others on the outer bands of the storm. The biggest risk, however, is flooding, with five to ten inches of rainfall expected over the weekend after an exceptionally wet August on much of the east coast.

Even with Irene's diminished wind strength, heavy rains could cause already swollen rivers to burst their banks, putting people inland at risk of flash floods. "When you talk about the category of hurricane that does not explain all the risk" Craig Fugate, the Fema director, told the briefing.

Low-lying resorts, such as Delaware's Rehoboth and Bethany Beach, are at a high risk of storm surges greater than 4ft, Read said. But as an update from the National Oceanic and Atmospheric Agency pointed out on Saturday morning such floods historically are far more dangerous than high winds.

The agency said more than 60% of hurricane deaths from 1970-1999 occurred inland, and were caused by freshwater flooding.

11.54am ET: I've just spoken to someone who was due to fly from Newark, New Jersey to London on Monday morning with Virgin Atlantic. His flight has been cancelled and the earliest Virgin can rebook him is next Sunday. Flights out of JFK are even busier, according to the Virgin operator. Many people's plans are going to be distrupted for days to come, it seems.

11.50am ET: Here in Lower Manhattan, the streets are very quiet. Many shops – even those not in the evacuation zone – are closed. Normally clogged streets are near-deserted, and the tunnels connecting Manhattan with New Jersey and Brooklyn are running unusually freely.

People wait in line to buy groceries next to empty shelves in a Manhattan grocery store on August 27, 2011 in New York City. Photograph: Mario Tama/Getty Images

The few stores that remain open have been cleared of essentials.

11.42am ET: Airlines have cancelled a significant number of flights. United/Continental have struck out 2,300 departures, Delta 1,300, JetBlue have cancelled 900 services. In addition, BA and Virgin Atlantic have started cancelling flights to and from New York and Newark through the weekend and into Monday.

11.24am ET: MSNBC is reporting the first death related to Hurricane Irene: a man killed by a falling tree branch outside his home in North Carolinsa, says Suzanne Goldenberg.

11.23am ET: My colleague Paul Harris has been looking into the reasons why the New York authorities are so concerned about storm surges even though the wind speed forecasts have been downgraded. He writes:

Mayor Michael Bloomberg has warned New Yorkers that the main problem faced by the city is not Hurricane Irene's winds but flooding caused by its storm surge. Christopher Vaccaro, director of public affairs at the National Weather Service, explained that the science behind a surge is pretty straightforward.

Irene is packing such high winds that they basically push a body of water up in front of it, driving it on land and effectively raising the level of the sea ahead of the storm. "The pressure is literally driving a surge of water that rushes inland," Vaccaro said. It is that surge which can overtop sea defences and lead to widespread flooding which will be worsened in some spots by high levels of rainfall on saturated ground.

There is another issue too. The hurricane is expected to make landfall in the New York area some time on Sunday morning and could coincide with high tide which should be around 8am, Vaccaro explained. Finally, due to the natural movements of the moon which controls the tides, tomorrow's high tide is expected to be an unusually high "spring tide". All of which will raise the level of the sea even higher and further worsen the impact of the expected storm surge.

New York is especially susceptible to this threat for two reasons. Firstly, there is simply a lot of low-lying land in the city that is vulnerable to flooding by such unusual conditions. Secondly, it is an urban area with things like subway stations built underground which would easily flood if and when sea water overtops the coastal defences. All of which makes the flooding of Irene more of a threat than the winds. "There is coastal flooding, a storm surge and a high tide. That is a very serious situation," said Vaccaro.

So Stuart Millar's O-grade in physics stood him in good stead.

11.17am ET: Bill Read, the director of the national hurricane center, speaking at the Fema news briefing, is warning of 4ft to 8ft storm surges up the eastern coastline including Delaware, New Jersey, New York Long Island, and up to New England.

11.09am ET: The homeland security secretary Janet Napolitino is speaking at a Fema news conference now. She is urging people to take Hurricane Irene seriously, warning of heavy rain, flooding and power outages "all up and down the eastern seaboard".

11.08am ET: The National Hurricane Center has just released a new update, warning of storm surges of between 5ft and 9ft above ground level in North Carolina, with sustained 85mph winds and tornadoes.

10.45am ET: Here's a summary as we approach mid-morning on the east coast of the United States.

• Hurricane Irene has made landfall at Cape Lookout in North Carolina. That makes it the first hurricane to hit the shores of mainland US since 2008. It has been downgraded to a category one hurricane – the lowest in the five-point hurricane scale. Winds of around 85mph are lashing the North Carolina coast, with reports of tornadoes.

• Preparations are continuing in the major cities, including Washington and New York. The mayor of New York, Michael Bloomberg, said in a press briefing at Coney Island today that the authorities are now expecting winds between 55mph and 70mph to hit the city tomorrow, down from earlier forecasts of more than 100mph. But he said the real threat was from storm-surge flooding. He warned that electricity and gas may be turned off as a precaution. The city streets are quiet, many shops are closed in Lower Manhattan and the subway system is preparing to shut down from noon.

• More than 250,000 people are without power in North Carolina.There have been no reports of any injuries or deaths, but the coastguard in Virginia has been called out on a sea rescue mission. There are reports of localised flooding and downed trees.

• President Obama has declared states of emergency in New York, New Jersey, Rhode Island, North Carolina, Connecticut, Virginia, Massachusetts and New Hampshire. This means federal agencies are mandated to mount emergency responses.

10.25am ET: My colleague Suzanne Goldenberg in Washington has sobering news. She writes:

For those who think everybody must have got the message by now to stay out of the storm – given the endless warnings from officials – consider this: the coastguard was out trying to rescue a small sail boat off the coast of Virginia this morning. It sounds like they are having difficulty getting to the boat as well, at least at first.

Coastguard spokesman John Miller says the sailboat, with two people on board, is about 400ft off the beach. They can't get a small boat or an aircraft to get near it, and are using line-throwing gun to try to pull the people in.

10.13am ET: So, why are the New York City authorities so worried about Irene given that the wind speed forecast has been downgraded to 55-70mph? My colleague Stuart Millar has this on Twitter:

Storm surge is the biggest threat to NYC because Irene covers such huge area, so is pushing a lot of water in front of it. Plus it coincides with extremely high tides due this weekend caused by the new moon – known as astronomical high tides.

Stuart, you should know, has an 'A' at O-grade physics (there's no direct American equivalent, but O-grades were Scottish high school qualifications gained at age 16). We're pitching for someone with better scientific credentials, but I'm going with this for now. Can anyone elaborate? @MatthewWells on Twitter or in the comments below.

9.59am ET: Important pet news from the New York city council: "If you are taking your pet to a shelter please bring a copy of the pet's vaccination and medical records; a leash and muzzle; carrier; and food."

This is not as stupid as it may seem. There are an estimated 500,000 dogs in New York City, only 20% of which are licensed.

9.46am ET: My colleague Paul Harris was also watching Bloomberg's press conference. He was in Coney Island with police commissioner Ray Kelly, touring preparations for Irene. He warned that city transport is shutting at mid-day and thus those who have to evacuate need to do it in the next few hours. "You have to start right now. We've had that lots of people are leaving and that's great," he said.

Paul also noted that Bloomberg is now focusing on the storm surge rather than the winds. "You can't prepare for the best case, you have to prepare for the worst case," Bloomberg said.

Bloomberg also had a clear message for one specific and surprisingly numerous breed of New Yorker: the city's surfers. He warned them not to try and surf waves generated by Irene off the beaches of Long Island. "We don't want to put our first responders lives in danger to try and save you," he said.

Hurricane Irene hits US coast as New Yorkers flee!

2011-08-27T09:14:00.001-07:00

Hurricane Irene is now a Category 1 storm with sustained winds of 85 miles per hour. Photograph: NOAA/Getty Images

Hurricane Irene hit the US coast early Saturday morning with driving rain and winds of 85mph, beginning its journey up the eastern seaboard fromNorth Carolina directly towards New York City and New England. More than 2 million people in low-lying and coastal areas were told to evacuate and millions more were preparing for days of hurricane-force winds, rain, power cuts and disruption in its wake.

When it made landfall at Cape Lookout on North Carolina's Outer Banks, Irene was weaker than had been forecast. The National Hurricane Centre in Miami downgraded the storm from a category 2 to a category 1 overnight, as it had weakened from 100mph winds.

It forecast further weakening of the storm over the next 24 hours, but warned winds would be at near-hurricane speeds and the storm would remain large and powerful as it headed toward the mid-Atlantic coast on Saturday night and southern New England on Sunday.

"The hazards are still the same," NHC hurricane specialist Mike Brennan said. "The emphasis for this storm is on its size and duration, not necessarily how strong the strongest winds are."

In New York City, where Irene is expected to arrive on Sunday, Mayor Michael Bloomberg issued a strongly worded warning that the hurricane remained dangerous despite the weakening wind speeds.

"The greatest danger to us here is from a storm surge," he said this morning. "There is no evidence that the forecast for that is changing."

Mandatory evacuations have been ordered for 370,000 New Yorkers who live mostly in low-lying areas, and for the first time in history the entire public transport system will be closed down, from noon on Saturday (5pm BST). But with only 70,000 places at the 100 evacuation centres, many residents were asking where they were expected to go if they left their homes.

Some 70,000 vulnerable residents, including hospital patients and those in care homes, have already been evacuated.

Speaking at Coney Island, Brooklyn, one of several Zone A areas where mandatory evacuations have been ordered, Bloomberg said evacuees should leave immediately.

"No matter what the track is, no matter how much it weakened, this is a life-threatening storm here," he said, adding: "Staying behind is dangerous. Staying behind is foolish — it is against the law."

Several New York landmarks were under the evacuation order, including the Battery Park City area. Beaches have been closed for the weekend as have most cultural institutions and sporting events have been cancelled. Construction is stopping throughout the city, and workers at the site of the World Trade Centre were dismantling a crane and securing equipment. The five main New York City area airports were also scheduled to close at noon.

Hurricane-force winds from Irene first arrived on the US at dawn, and the eye passed over the southern tip of the Outer Banks an hour later. At the seaside resort town of Nags Head, in Dare county, where evacuations began on Thursday, winds whipped heavy rain, waves obscured the beach and the surf crashed up against the backs of some houses and hotels.

The storm's outer bands of wind and rain lashed the North Carolina coast, leaving some 200,000 people without power, according to Progress Energy. Authorities further up the coast pleaded with residents to evacuate.

With an estimated 55 million people in its path, authorities have issued hurricane watches and declared states of emergency for Delaware,Maryland, North Carolina, Pennsylvania, New England, New Jersey, New York and Virginia.

According to the latest advisory from the Hurricane Centre, an "extremely dangerous" storm tide will raise water levels by as much as 5 to 9 ft in the warning areas in North Carolina and as much as 4 to 8ft above ground level up in the warning areas up through Virginia to Cape Cod, including south Chesapeake Bay. Near the coast, the surge will be accompanied by "large, destructive and life threatening waves."

The advisory also warns of rainfall of between 6 to 10 inches, with isolated maximums of 15inches across the affected regions, including eastern New York, causing flash floods.

But not everyone on the coast were heeding the warnings. At the Red Hook Lobster Pound opposite the New York harbour, owner Ralph Gorham had about $26,000 worth of Maine lobster stored in a refrigerator, plus a tank filled with live ones.

"I'm staying," he told the Associated Press. "But if we get, say, a few feet of water in here, it'll be a huge loss."

Bloomberg has previously come under fire after a storm in December when officials were unprepared for 2ft of snow. Subway trains, buses and ambulances got stuck in the snow, some for hours, and streets were impassable for days.

But with Irene approaching, the NY authorities are not taking any chances.

Transit officials said they can't run once sustained winds reach 39mph and they need at least eight hours to move trains and equipment to safety. The subway system won't reopen until at least Monday, after pumps remove water from flooded stations.

Hurricane Irene: New Yorkers panic buy as reality sets in

2011-08-27T09:01:00.001-07:00

New Yorkers evacuate apartment buildings in Manhattan's Battery Park, as hurricane Irene approaches. Photograph: Timothy A Clary/AFP/Getty Images

You get used to odd sights in New York, especially in the East Village, a crowded artsy neighbourhood known for a bohemian mix of hipsters and gritty old-timers, which boasts a bar on virtually every corner.

But panic-buying supplies for a hurricane? That was still a novelty for even the most jaded Manhattan eye. Yet there they were: crowds of people lined up outside local supermarkets and thronging "deli" corner stores.

The queue outside the Trader Joe's supermarket on 14th Street stretched all the way down the block, filled with a cross section of East Village life from suited-up young office workers to people clad in gym gear to smartly dressed nighthawks.

Seeing the line it was easy to be briefly disappointed at a lack of fortitude in a city that celebrates a reputation for toughness and scepticism of danger. But, gratifyingly, the line for the cheap wine shop next door was even longer. If these New Yorkers were going to face down a storm, they were determined to do it with a glass in hand. And, suddenly like the much-loathed tourists who constantly earn the natives' ire, many New Yorkers were stopping to gawp and take pictures. "This is crazy!" exclaimed one young woman.

But insane or not, this was reality as New York waited for the ominous arrival of Hurricane Irene. The monster storm slammed ashore in distant North Carolina morning but kept heading north-east, putting New York's forest of skyscrapers firmly in the track of the storm. Hurricanes are not supposed to venture into this north-eastern corner of the US, but no one had told Irene. Like a determined, sharp-elbowed New Yorker herself, she barrelled towards the city with no heed for conventions.

So New York battened down the hatches. Suddenly residents paid attention to the emergency maps put out by City Hall that colour-coded the dangers of flooding. "Are you in zone A, B or C?" became a vital question as people consulted the map, which showed which parts of the city Irene could put underwater. As a category one storm – and weakening — it was only the people in the bright orange zone A who had to worry about evacuating. But that still covered vast swathes of the city from the seaside resort of Coney Island to the hipster paradise of Williamsburg, to the smart, moneyed apartment buildings of Battery Park City on the southern tip of Manhattan. In a city obsessed with its social stratifications, Irene proved a great – and rare – leveller.

Many did leave. Some 370,000 people were ordered to get out of their homes and neighbourhoods by city officials. Roads out of the city filled with traffic. People all over hoarded supplies of food, filled pots and pans with water and bought torches and batteries. They were just obeying what Mayor Mike Bloomberg had told them. The mayor, often slammed for his busy-bodying efforts to stop New Yorkers smoking and get them to count the calories in their fast food, was pulling no punches. "Mother Nature is much stronger than all of us," Bloomberg told his fellow citizens as he urged them to prepare and stay safe. He even warned that ignoring the mandatory evacuation order could – technically – earn someone jail time, though he accepted it was unlikely. "We do not have the manpower to go door to door and drag people out of their homes… but if you don't follow this, people might die," he insisted.

Certainly Bloomberg and his own staff were taking no chances. The mayor took the unprecedented step of cancelling all the city's subway trains and buses from noon on Saturday, bringing the city to a grinding halt long before the first gusty winds of Irene arrived anywhere near the Statue of Liberty. He personally rang members of the Wilpon family – who own the Mets baseball team – and got them to cancel their weekend games. Broadway, too, shut down as no less than 23 plays and musicals closed their doors. "The safety and security of theatregoers and employees is everyone's primary concern," said Paul Libin, chairman of the Broadway League. It marked the first time the Great White Way had closed since the terror attacks of 11 September, 2001. In effect, New York was being forced to stay indoors. Zoos closed, concerts were cancelled and even the city aquarium – whose denizens might welcome a flood – shut up shop. Airports began to shut down as Irene approached, cancelling hundreds of flights.

For those evacuated, 65 public shelters were opened across the city where food, drinking water and solid, firm walls were provided. They were sited in schools, colleges and other buildings with cots laid out, blankets distributed and advice pamphlets handed out. In typical style the New York Post tabloid offered a guide to the best and worst ones. "Location, location, location!" it began. After all, no self-respecting New Yorker wants to be seen in the wrong kind of hurricane shelter.

Some hospitals and old age homes, such as those on outlying Staten Island, were also evacuated with residents and patients getting into ambulances and being shuttled to higher and safer ground. Everywhere people were getting ready. The FBI warned employees to pack away files from their desks in case windows smashed and let the storm's lashing rains into their offices. A local internet company, Towerstream, announced it was opening up its networks and offering Manhattanites free Wi-Fi. Some bars and restaurants vowed to stay open through the storm. But others prepared to close, especially as many of the kitchen staff who keep the city's thousands of eateries open often live in outlying neighbourhoods and the cancellation of public transport had left them stranded.

So, as the city began to come to a halt, many New Yorkers watched the approach of Irene on their televisions. The historic nature of the storm – no hurricane had ventured this close to New York since Gloria in 1985 – meant that the cable news channels went into overdrive. The familiar sights of weather-beaten correspondents standing in driving rain and high winds to deliver frantic pieces to camera filled the TV schedules.

Though Irene appeared to be weakening and becoming less organised it still packed enough of a punch to wallop North Carolina's coastline as it made landfall on Saturday. Its 85 mph winds brought down power lines, pounded beaches, flooded buildings and felled trees. A string of major cities, like Philadelphia, Boston and Hartford, prepared for the worst. In total more than two million Americans have been told to flee Irene. In the betting mecca of Atlantic City, all 11 of the resort's casinos shut down: only the third time this has happened since gambling was legalised in New Jersey.

That, perhaps, reflected the frank comments of the state's rotund and notoriously outspoken governor, Chris Christie. "Get the hell off the beach!" he had told his state's residents. "You're done, its 4:30, you've maximised your tan."

But in New York there were a few residents who were more than a little sceptical of the intense preparations. Jamaican-born builder Mark Lewis, who was spending Saturday working on fitting a client's bathroom in Manhattan, was distinctly unimpressed. He had seen big hurricanes hit his homeland throughout his childhood, including a monstrous Category 5. "This is nothing, man," he said. But then again perhaps the city could be forgiven for taking all necessary precautions. After all, last Tuesday New York was shaken by a rare earthquake. Now Hurricane Irene was bearing down.

The past few days in the city have felt a little like a disaster movie. No wonder most people were just waiting nervously for it all to be over.