LABOUR apparatchiks have a favourite story about Lord Levy, summing up his famously overbearing manner.
The tale captures just how much Levy prizes his status - and particularly his carefully-cultivated relationship with Tony Blair. Given the events of recent months, however, it is unlikely the Prime Minister any longer feels quite so warmly about his
friendship with the peer, who has become known to one and all as "Lord Cashpoint".
Levy and his Jaguar were at the centre of things again last week. He had been celebrating his 62nd birthday when the Metropolitan Police stepped in to spoil the party by asking him to attend Colindale Police Station.
The man who gave the world Alvin Stardust was finally becoming a household name in his own right. The slick silver hair, the perma-tan and elegant clothing, even the car, have become indelibly associated with the "cash-for-peerages" allegations that have stricken New Labour in recent months.
That association between Prime Minister and fundraiser has been mutually profitable, notably because Levy's famed abilities have bankrolled Blair's leadership and three winning election campaigns. Yet now, as their methods and motivations come under intense official scrutiny, it could prove to damage their reputations beyond repair - and, potentially, see them sharing a billet in the dock. Levy was arrested seconds after he pulled into the car park at Colindale on Wednesday afternoon, as police investigating allegations that the government awarded honours in return for donations to the Labour party served notice of their serious intent.
The shock was not confined to the man in front of them, but reverberated around the Labour movement and significant sections of the business community. Nowhere was the astonishment as intense as behind the door of No 10 Downing Street, which insiders claimed was plunged into "meltdown". Blair's aides spoke of their "outrage" at the treatment meted out to Levy, who had attended voluntarily, but the overwhelming emotion was dread. "People have been running all over the place," one said. "It was not expected."
Blair has been waiting for those close to him to face questioning for several weeks now, but his vigilance has not reduced the danger: if Levy tumbles as a result of this traumatic start to his 63rd year of life, he has made it clear privately that he will not be the only one to fall.
The peer had informed the Prime Minister of his appointment with the police the night before. Blair was back in Downing Street following his duel with David Cameron at Prime Minister's questions, when an official suggested he should turn on the television news. Blair had not expected an arrest.
It is over three months since Scotland Yard announced that it was investigating the allegations, following a complaint from the Scottish National Party. Suddenly it had exploded in the Prime Minister's face.
He had allowed Levy and his staff to pump almost £14m from 10 secret loans into Labour's coffers, and then endorsed applications for four of the lenders to become peers. A leader famed for his astute political judgment suddenly appears hopelessly unwise; even then, the case against him, Levy and the tight circle around them is based on factors much more serious than that.
Taking loans as an alternative to donations has become accepted practice among political parties since Blair himself introduced his own "clean-up" legislation in 1997. Although his act demanded that all donations above £5,000 had to be declared - and foreign donations were banned - it introduced a significant loophole which stated that loans "at commercial rates" were permitted, and did not have to be disclosed. Predictably, as Labour officials have somewhat feebly insisted since, their main rivals were taking full advantage of the unintended get-out clause.
Initially, Labour shunned a loophole that could have pulled in extra millions for party funds - notably during the 2001 general election. Their former general secretary, the controversial Margaret McDonagh, had been informed of the "dodge", but refused to take advantage of it.
"The political judgment of the people who eventually allowed it to happen... I just can't understand what they were thinking of," said one trusty of McDonagh's regime. "Whatever people thought of Margaret, she was very sharp about these things. She would have seen how bad taking secret loans would have looked once they were disclosed."
McDonagh left in 2001. After David Triesman had been briefly in charge, Labour appointed 31-year-old Matt Carter. Some of the party's older guard still maintain that the younger, less experienced Carter was largely put in position because he would be more malleable than the veterans who had preceded him in the post. If so, it turned out to be the case.
It was a full year before the 2005 general election that Blair, his chief-of-staff Jonathan Powell, Levy and Carter met in the Prime Minister's ample Downing Street study to discuss how to return a Labour government with dwindling revenue. The four men swiftly decided to ditch the principled avoidance of the loans loophole.
One of Blair's closest confidants subsequently confessed to Scotland on Sunday that the dramatic move was agreed to save the party from bankruptcy. "Why did the party do it? Because the party was skint," he said. "We weren't going to get beaten up if the others were doing it."
More significantly, however, Blair's friend also revealed that the men had to talk each other around before finally agreeing on the landmark decision. Like McDonagh before them, they knew the move would look questionable - and the Prime Minister knew what the ramifications were.
"Blair knew exactly what was going on," the confidant added. "It wasn't a matter of convincing him because it was absolutely legal. It was a matter of everyone convincing each other."
They were not the only ones who would need convincing of the propriety of the enterprise.
Scotland on Sunday understands that the police questioning - of many of their 48 interviewees and of Levy himself - has revolved around one simple inquiry: if the people involved were willing to hand over money to the party, why did their contributions have to come in the form of loans, rather than straight donations? The lenders exposed - Rod Aldridge, Barry Townsley, Derek Tullett and the rest - are, after all, generally self-made men of fabulous wealth, who would hardly view a loan to an indebted political party as a sound business investment.
Labour's response has been that the arrangements demonstrated an honest intention to repay every last penny of the 12 huge cheques that slid into its account at the Co-operative Bank over a six-month period last year. More convincing is the suspicion that taking loans, rather than donations, meant the cash was kept secret at a time when Labour's links with business remained a touchy subject.
"It's a damn sight easier to ask for a big loan than a big donation," one party insider explained last night. "And there is always a good chance with these very rich people that, once the money has been out of their accounts for a few months, they won't care about it and will change it into a donation anyway. And, yes, maybe the best bit is that you don't have to declare the loans."
The more cynical accusation, and the one which the Metropolitan Police have been grappling with for the past four months, is that at least some of the lenders were promised "rewards" - in the form of peerages or even government contracts - in return for their largesse.
Levy is merely one of the first of the inner circle to feel the policeman's knock -
Ian McCartney and Lord Sainsbury have also been ticked off the interview list by police, while the rest know they are getting closer to their own big day. It is clear that deputy assistant commissioner John Yates is making his meticulous way towards Downing Street. The net is tightening, slowly and inexorably, around Blair himself.
It is believed that the Prime Minister may fly back from an official trip to the United States to speak to the Met in early August. He should, at any rate, have been interviewed by the start of the conference season in September. Loans for peerages will lie heavily upon him for the entire summer.
The challenge for the police is to connect the decision to accept loans to the agreement that some of the lenders should soon afterwards appear as Labour nominations for the House of Lords. If the police can prove that the two were linked, those responsible could face prosecution under the 1925 Honours (Prevention of Abuses) Act.
Beyond that, however, officers are also considering the options for prosecution based on existing conspiracy and corruption laws. The new track reflects the number of people involved in the operation.
As the lenders were required to fill in forms certifying their nominations for the Lords, the "inner circle" with knowledge of the loans was widened to include two of Blair's closest aides - Ruth Turner and John McTernan.
These advisers were then tasked to travel up to Wythenshawe Hospital in Manchester to have the 'applications' signed by then-party chairman Ian McCartney, who was recovering from heart surgery. It later transpired that at least one of the forms - food magnate Gulam Noon's - came back filled out "incorrectly", because it disclosed details of the loan, the only one to have declared the financial link. It is believed that Powell then informed Levy that someone had to approach Noon to have the form altered.
Insiders from both Labour and opposition parties are convinced that this traffic of paperwork - between Downing Street and then to the Appointments Commission - is the key to the investigation.
The gravity of the investigation was demonstrated by Levy's arrest, which apparently came after he said something that conflicted with documentary "evidence" already in the possession of the police.
Levy may gain some solace from the knowledge that his great friend the Prime Minister already shares his troubles. Like a wounded animal, Blair has been beset by his hungriest predators in the last few days. From the Left, Labour's refuseniks are suddenly convinced that the latest cloying crisis has further shut down their leader's options and made it impossible for him to go on and on as threatened.
"Early next summer has always been seen as the latest possible date for him to go, and that looks more definite as we go on," one MP crowed last night. "He is plain wrong to say that Labour has not been singled out in the public mind over this scandal - like it is a plague on both our houses. The lesson from the Tory years is that if you are in power you get the brunt of the criticism.
"People seem happy to bide their time but, if Blair comes up with a conference speech like this every year - that it's 'business as usual' - then it's a whole new ball game."
More than ever, however, Blair's problems in maintaining a struggling "whiter-than-white" brand reflect favourably on his most eager rival. Gordon Brown's allies are already talking up the virtues of steering clear of unhealthy financial interests or links with big business.
"This demonstrates the difference between the way Blair and Gordon build up their political bases," one government source observed. "Tony does it largely with rich people and famous people and business people, while Gordon has spent over 20 years building a grass-roots support network.
"It keeps coming back to the fundamental point that we did give peerages to our donors, and everybody knows that."
