by Paul Hoffman
‘So they are connected?’
Glover ignored him. ‘The clearers borrow in the international money markets and when the international banks see that the clearers are going to incur heavy losses on the collapsing secondary bank, they refuse to roll over loans to the clearers. If one of the clearers is particularly heavily exposed, a run on the banks begins. Stage four, fear spreads to the currency markets, there are heavy exchange losses. Financial institutions who have loaned into weak sections of the economy – property, say – are now in danger of collapse. Stage five . . . the international banking system breaks down.’
Glover sat back stony-faced.
‘And stage six, Mr Glover?’
Glover leaned forward again. ‘There is no stage six. What I’ve outlined is the collapse of the world economy.’
The light flashed on from above. ‘Let me say, Mr Glover, I had no idea banking could be so exciting . . . so apocalyptic.’ The judge beamed and looked around the dark empty space. The Dark Figure laughed appreciatively. The light switched off. The Dark Figure’s expression instantly turned to one of utter disdain. He looked at Glover.
‘And what did the Bank do to prevent this terrifying prospect?’
‘We launched what became known as the lifeboat. We got the clearing banks to advance money to the secondary banks to match the sum of money that worried depositors had withdrawn from them: four hundred million in all.’
The Dark Figure looked puzzled and for a considerable time said nothing. He started to speak and then stopped, considered for a little longer, then spoke quietly. ‘Let me get this straight, the clearers paid four hundred million pounds into the secondary banks.’ He paused again. ‘Where did the four hundred million pounds come from, Mr Glover?’
‘It was the money that worried depositors had taken out of the secondary banks and put into the clearing banks.’
‘I see. So . . .’ the Dark Figure seemed to be working something out, ‘. . . what you’re saying is that the depositors fearing for their savings in the secondary banks withdrew their money and put it in the elephant-shaped clearing banks – Lloyds, Barclays – then the clearing banks took the money so deposited and lent it back to the secondary banks?’
‘Yes.’
‘The money just went round in a circle.’
‘In a manner of speaking.’
The Dark Figure looked at Glover and for some time said nothing. Then he sniffed loudly and began again. ‘The upshot of all this being that the Bank decided to become involved in the supervision of all banks.’
‘To be pedantic,’ said Glover with obvious pleasure, ‘we merely extended the definition of what a bank was.’
‘Ah, but, Mr Glover, not quite, I think. It was most certainly not the case that you extended the definition. The elephant-shaped definition didn’t alter at all, did it? There were still proper banks – the clearing banks – which were large creatures with long memories – and not-so-proper banks – the secondary banks . . . the duck-shaped banks.’
‘If you’re referring to the two-tier system, that’s one way of looking at it.’
‘Oh, I am, Mr Glover,’ said the Dark Figure, in the sonorous voice of someone who has worked long and hard to get to this point and who sees victory just ahead. ‘I am referring to it.’
He declaimed to his audience of two. ‘Your Honour, we come now to the crux of our presence here today.’
‘A presence can’t have a crux.’
‘Thank you, Your Honour. We come to the heart of the matter that brings us here today: the two-tier banking system.’ He announced it as though it were the name of an infamous train robbery or a particularly unpleasant massacre. ‘An act of regulatory incontinence that will live long in the annals of regulatory shame, a supervisory device that will go down in the history of superintendence as a defilement, a desecration, a disreputable disgrace that forever befouled, besmirched and blemished the entire—’
‘Get on with it!’ cried the judge, hammering his rubber gavel squeakily on the bench.
The Dark Figure gasped with frustration. He swore under his breath and turned back to Glover. ‘Mr Glover,’ he said stonily, ‘would you please explain how you set about dealing with the secondary banks.’
‘We formed a new office—’
‘Is it not the case’, interrupted the Dark Figure, ‘that many in the City felt that this was all you did? Was it not the case that forming a new office, as you put it, actually consisted of no more than screwing a wooden plaque onto a door with the word supervision printed on it in gold letters?’
‘That’s what was said by some.’
‘And I suppose you’re going to suggest this wasn’t fair?’
‘It was not. We significantly increased our supervisory staff, applied strict criteria with regard to the risk–asset ratio. They had to provide proper statistics and submit themselves to questions about their balance sheet.’
‘And did these admirable new checks and balances apply to the banks who used to be your only responsibility – the elephant-shaped banks?’
‘No.’
‘Really? And why was that?’
‘They had not been the problem. Indeed, it was largely the elephant-shaped banks, as you insist on putting it, which were responsible for rescuing the secondary banks. It hardly seemed fair to reward them for the considerable risks they took by lumping them . . .’
Glover realised his mistake but he had gone too far.
‘Go on, Mr Glover, you were saying.’
Glover did not reply.
The Dark Figure continued. ‘You were saying, lump them in with the lower classes, the barrow-boys of the banking business.’
‘I was certainly not saying that.’
‘I would hope not, Mr Glover. The proper elephant-shaped banks you defend so passionately for running what one of our earlier witnesses called upright, straightforward, legitimate banking businesses rescued the secondary banks, no doubt partly for the highest motives but also because they had lent money to the banks at risk. It follows, therefore, that they, too, had been imprudent – in a number of cases, very imprudent indeed. The lines between your two tiers were seriously blurred even before the two-tier notion was decided upon. Thank you, Mr Glover.’
The light went out over Glover’s head and the Dark Figure intoned theatrically to the vast, empty space, his hands behind his back:
‘It is now ten years later. Governor Letherby has retired. A Conservative government has been in power for five years and, after much hardship, the economy is beginning to boom. Private industry is leaner, many nationalised industries are dead, dying or under notice that they will be privatised. There is money about, a lot of money, and it’s flowing in and around the City in unthinkable amounts. Old restrictions are being cleared away and the market in money is free. This is a world of risk, venture, of ambition and opportunity. This is a huge world, enormous, splendid – and enormous, splendid borrowings are needed to feed its appetite for yet more borrowings. The Bank, too, has changed. Jobs have been shed and overmanning is a thing of the past. In a world fat with money, its custodian is lean, hard-bodied.’
The Dark Figure paced up and down. ‘It is April 1984. In the department of banking supervision a woman, thirty-eight or so, is working late. She has money worries – not electricity bill concern, or mortgage rate angst but big money, fat money, splendid money worries. Her pale face and tired blond hair are caused by economics. Her dry skin is due to the collapse of the Bretton Woods agreement, to the freeing of money from its cage; her stiff neck cracks when she moves it wearily from side to side because of an IMF loan to a dying government with its three-day weeks and unburied dead. Her never-quite-satisfying sleep is caused by Milton Friedman whispering in her ear all through the night. And because government expenditure must be reduced, she has too much work to do, too many banks, too far apart, to try to understand. As she labours late into the night, she does not realise, as she tries to make sense of the returns lying in profusion
on her desk, that thirty years of history is about to collapse on top of her.’
The Dark Figure approached another of the couches. It lit up to reveal the woman he had just described.
‘Be upstand— Oh, sod it!’ he said irritably. ‘Just state your name for the record.’
‘Marianne Fraser, Deputy Bank Supervisor.’
‘How many banks were you responsible for at this time, Ms Fraser?’
‘Two.’
‘Was this an unusually large number?’
She seemed uncertain as to her reply and did not answer quickly.
‘Come along, Ms Fraser,’ said the Dark Figure irritably, ‘it’s not a difficult question.’
‘It doesn’t seem to me to be necessary to badger the witness,’ boomed the judge.
The Dark Figure turned sourly. ‘As your lordship persists in reminding me, there is a great deal to get through and little time in which to do so. But if your lordship now takes a different view . . .’
‘No, I don’t. I want you to get on with it and I want you to stop badgering the witness.’
The Dark Figure gave a contemptuous nod of acquiescence.
‘Was being responsible for two banks particularly burdensome?’
‘In this instance, yes, it was.’ There was a sharpness in her response that contradicted the sense of passive defeatism which until then had seemed almost as much a part of her as her hair.
‘And why was that?’
‘The two banks were Continental Illinois, which was on the verge of collapse because of bad debts in the oil and gas industry, and the Johnson Mathey Bank, JMB. On its own, Continental Illinois was a full-time job and JMB should have been.’
‘Should have been?’
‘I knew that something odd was going on but I couldn’t identify what it was.’
‘But that was your job, finding out what was wrong, wasn’t it? A supervisor’s job is to supervise. You must have had a specific remit. Did you follow it?’
‘Yes.’
‘Why didn’t you know what was going on, then?’
She breathed out heavily, annoyed.
‘We were expecting JMB to report on its financial status for the quarter ending in March but it didn’t arrive. I repeatedly pressed them for it and finally it turned up in June.’
‘And what did you find?’
‘JMB had loaned the overwhelming majority of its capital base to just three people.’
The Dark Figure looked down disapprovingly. ‘Breaking one of the cardinal rules of banking in doing so.’
‘Yes. Even if they’d loaned the money to ICI and GEC it would have been . . . imprudent.’
‘And this unholy trio were very far from being ICI and GEC, is that not so?’
‘They were not the kind of good names we consider it wise to lend such enormous sums of money to.’
‘And what were these names, Ms Fraser I think we should be told.’
She wrinkled her nose in bankerly distaste.
‘Nogbad the Bad. Dennis the Menace. And Ming the Merciless.’
‘What kind of sum are we talking about?’
‘Sixty million pounds, thirty million pounds, ten million pounds.’
‘What did you do next?’
‘I requested a meeting for July. They held out for August. I agreed.’
‘That was good of you. Do you regret your generosity?’
‘Anyone can be wise after the event. There was no evidence that any of the three were . . .’ She broke off.
‘Splendid financiers?’ prompted the Dark Figure patronisingly.
‘Yes,’ she said. ‘As a result, there was nothing more I could do. After all, this wasn’t a second-tier bank.’
‘Ah, indeed!’ exclaimed the Dark Figure triumphantly. ‘As defined by the Bank’s own published criteria, JMB was a proper bank, reputable, of good standing, with appropriate professional skills. It was prudent, a quality so much admired by the Old Lady of Threadneedle Street that it is mentioned three times in as many pages in its annual report of that year. In short, it was an elephant-shaped bank.’
She did not answer this barrage of rhetorical sarcasm and the Dark Figure was content to let it sink in. ‘I owe you an apology, Ms Fraser,’ he said finally. ‘Here I was, I have to confess, thinking that someone had blundered and that this someone was you. But in fact you could not have done otherwise than request a meeting, allow a delay and make a few suggestions, could you? Because JMB was the kind of bank that, in Governor Letherby’s words, did not require’, he looked down at his notebook, ‘ “an elaborate statutory system of supervision which might only succeed in rendering trouble at the expense of initiative”.’ He turned with his most theatrical swirl. ‘I put it to you,’ he said, in an accusatorial rush, ‘that JMB were nothing less than financial satanists, and that their version of running around a cemetery in their birthday suits chanting the mass backwards and disembowelling a black goat over the figure of a supine virgin expressed itself in their taking the advice of the Comptroller of the United States currency in 1863 and reversing every single one of his laws of sound banking. They fostered speculation, put enormous sums in the hands of a greedy few, gave the benefit of the doubt to rascals, treated extravagance as a virtue and not the handmaiden of crime. They were tempted by large returns, bankrolled splendid financiers . . .’ he looked triumphantly around the hall, ‘. . . and when it came to the straightforward, the legitimate and the upright, they showed only a genius for the Byzantine, the aberrant and the grotesquely recumbent! Thank you, Ms Fraser, that will be all.’
The Dark Figure turned to another couch. ‘You are Roy Doyle, a colleague of Marianne Fraser?’
‘Yes.’
‘Did she share with you her concerns about JMB?’
‘She discussed them frequently – it had become a bit of an office joke about whether JMB or Continental Illinois would crash first.’
‘Very amusing, no doubt,’ said the Dark Figure pompously. ‘But did she seem alive to the problems with JMB as early as she should have been?’
Doyle looked irritably at the Dark Figure.
‘Have you any idea how complicated the affairs of JMB or any bank actually are? They employed eight thousand people. Do you know what it takes to find out what on earth is really happening in a structure of that size when the only information you’ve got is late, incomplete and put together in a way that makes it difficult to know what’s going on? And that was only half her job. She was trying to sort out the mess at Continental Illinois as well.’
‘So, the entire economy of the western world was brought to the brink of collapse by one over-worked female regulator? How simple, and how convenient for your superiors. There are no guilty senior men, there are only guilty junior women. What should this inquiry recommend, Mr Doyle? That the next great world economic crash can be avoided by firing all the women at the Bank of England and hiring twice as many men?’
‘Don’t be absurd!’ said Doyle angrily.
‘So, what are you saying? That it was the arrival of all these new secondary banks that lowered the tone? Is that what you mean? Deal with the rotters with gaps in their teeth and go back to the good old days when we all went to the same school?’
Doyle smiled sardonically. ‘JMB wasn’t a secondary bank so . . . no, that’s not what I mean.’
There was a sudden movement of the Dark Figure’s lips at this sneer, an I’ll-get-you-for-that rictoid flicker. But he did not respond directly. ‘Mr Doyle, your immediate boss was Clive Howatt, the assistant director.’
‘Yes.’
‘Was he informed of Ms Fraser’s problems with JMB?’
‘Yes.’
‘What did he do about JMB when it was drawn to his attention?’
‘To be honest, there wasn’t all that much to be done. JMB was a primary bank – we’re not the police. The two-tier system was all about trusting the trustworthy old banks and concentrating on the unknown new ones. I think it’s a rational way of doing it.’
‘So you agreed with the system of two-tiers?’
‘I didn’t say that, I said it was a rational system. I didn’t say it was right.’
‘Well, we’ll come back to that later. Go on.’
‘Howatt saw that Marianne Fraser was asking for better statistics more frequently but, based on what they were telling us, she was doing the right thing.’
‘And that was it?’
‘He had other things to deal with.’
‘Indeed?’
‘He wasn’t there all that often,’ said Doyle with deep reluctance. ‘He’d been appointed to sort out the department in 1982, but as soon as he came in he was also given a major responsibility for representing the bank in New York over the South American debt crisis.’
‘Which involved . . . briefly?’
‘Most of Central and South America couldn’t repay their international debts and were threatening to default. If they went ahead, to put it simply, the entire world banking system would have collapsed.’
‘So Mr Howatt took his eye off the ball?’
‘Well, it depends,’ said Doyle indignantly, ‘whether you see an entire continent defaulting on its loans as more important than a bank that’s being lazy about its returns and is pushing its luck with regard to its spread of debt. What we didn’t realise then was that the collapse of a single bank could mean the collapse of the world economy as well. Howatt was travelling back and forth from New York practically every week for most of 1983, and when he returned full time to the department, just as the situation at JMB started to look more serious, he got shingles.’
‘A most unpleasant condition,’ interrupted the judge. ‘I’ve had it myself, leaves you exhausted and you can’t do anything properly. Took me months to recover.’
‘What makes you think you did?’ muttered the Dark Figure. He turned back to Doyle. ‘So, Mr Howatt was in bed with his Concorde-aggravated conniptions, having saved the world from financially incontinent Argentinians, with the result that the private joke between the hapless Ms Fraser and her colleagues as to which of the banks she was responsible for would crash first remained all too private. So it was that when JMB informed the Bank towards the end of September 1984 that their two largest loans to their splendid financiers were not backed up by anything more substantial than the fog that surrounded their wheeler-dealings, it came as a shock for which the senior men at the Bank were ill-prepared. However, at first it seemed merely serious – a question of a trip in another lifeboat round the ragged rocks where financially ragged rascals ran then pump in some money from the clearers to make up for the bad debts and all would be well.’ Pleased by his donnish wit, he clasped his hands behind his back and walked towards the now furiously writing Winnicott.