Just over a year had passed since the US treasury announced its rescue of Fannie Mae and Freddie Mac, the two giant American mortgage banks, in one of the biggest financial bailouts in banking history. A week later as the news of the collapse of Lehman Brothers rocked the City of London, Fitzwilliams came to the conclusion the crisis which had been simmering was serious, much, much, more serious than he had realized. The UK was facing its worst banking crisis in history and with the imminent collapse of HBOS the contagion spread with the prospect of the country’s entire banking system seizing up.
Fitzwilliams’ rush into cash was a desperate move, but if the big banks went under, then smaller banks, like the Irish Netherlands, would be sucked down in their wake. That frantic weekend, as Fitzwilliams tried to unravel the wild rumours sweeping through the City, came a report that the Financial Services Authority was about to shutdown HBOS’s ATMs.
He remembered how Threadneedle Street had struggled to find a solution to avoid pandemonium in the country’s banking system and how fraught officials at the Treasury had attempted to put a clamp on information, which in turn only led to even more speculation. On the other side of the channel things had looked just as bad as contagion spread to Europe, infecting the Dutch Belgian finance group Fortis which was desperately struggling to keep afloat.
The deroute of Britain’s banks could be traced back to the deregulation of building societies under the Building Societies Act introduced in 1986. Demutualization had created specialized mortgage banks like the Northern Rock and West Mercian, whose collapse was brought on by the explosion of the housing bubble, threatening conventional banking and forcing the government into the merger of Lloyds TSB’s and HBOS.
In early October as the crisis deepened the Chancellor and the Governor of the Bank of England headed for Washington for a meeting of the International Monetary Fund. Britain’s banking system was teetering on the brink of collapse and share values were in free fall. Instant, urgent and exceptional action was called for by the G7 finance ministers and central bank governors.
The following Sunday morning leaders of UK banks met in London to hammer out a plan to save the country’s financial system from collapse. Pandemonium would have been let loose on London’s Stock Exchange the following morning if a government plan had not announced. The countdown to the opening bell had begun.
That night was a veillée d’armes with Fitzwilliams and his team camping at the bank’s headquarters. It was just before 5.30am when Fitzwilliams was awoken from an uneasy sleep by the strident beeping of his cell phone. The caochán spoke in a low urgent tone: ‘They’ve come to an agreement, fifty billion will be pumped into the banks and the “Shred” will go.’
Fitzwilliams woke Kennedy and they headed for the trading room where their head trader sat before an array of screens watching Far Eastern markets.
‘Okay Jim let’s go, we’ll start with the banks.’
The battle of Threadneedle Street was unequal, the leaders of the stricken banks had fought a rear-guard action to avoid what was effectively nationalization, but there was little other option. The meetings had gone on long into the night and after just a few hours’ sleep the Chancellor finalized the last points of the plan.
Sir Fred Goodwin, the CEO of RBS, would long remember that ultimate and dramatic meeting with the Chancellor. Goodwin had sat like a felon before his judges; silent, his face blanched, as the death sentence was pronounced. His abortive takeover of ABN Amro had ended in disaster. The government was forced to intervene to save RBS from almost certain ruination as it choked trying to ingest the hugely outsize mouthful forced on it by Goodwin. The Chancellor demanded Goodwin’s instant resignation, then announced the government’s plan to take control of RBS with a bailout of twenty billion pounds to save it from the same fate as Lehman Brothers.
The plan to inject billions of pounds into Britain’s banks was publicly announced at seven on the Monday morning to the immense relief of the City where share prices shot up at the news. The sum was staggering, never before had the country seen a bailout of such enormous proportions.
That evening, when the closing bell sounded on Wall Street, the Irish Netherlands investment arm looked back on its best day ever, chalking up vast profits as banking shares rocketed. Fitzwilliams’ gamble had paid off. The longest day at the Irish Netherlands’ headquarters closed when the camp beds were finally stored away. There was little or no risk of insider trading accusations given the ongoing turmoil. Through a complex maze of trades Fitzwilliams had pulled the bank back from the brink and to boot seized the opportunity to buy back large blocks of his bank’s own shares. In the heat of the battle, where fear and confusion ruled, audacious action always paid off.
The night had been hugely profitable for both Fitzwilliams and Kennedy. Their Treasury mole and the bank’s loyal traders would be richly rewarded for their services. As for Goodwin, suddenly a nobody, he described the Chancellor’s action as ‘a drive-by shooting’, conveniently forgetting neither RBS nor HBOS could have survived the financial maelstrom without government intervention.
Unknown to the heads of just about every financial institution, the Royal Bank of Scotland and HBOS had been secretly kept afloat with the massive input of emergency government funds as Britain looked into the abyss.
Fitzwilliams, thanks to the information leaked by his caochán, had made a killing. Without government intervention and the right timing, his gamble would not have been possible. By his daring action the death knell for RBS and HBOS, signalled the renaissance of the Irish Netherland Bank.
The Bank of England had poured over sixty billion into the two stricken banks in a desperate move to keep them afloat. The occult support for HBOS had begun October 1, two weeks after the collapse of Lehman Brothers, when financial markets went into a series of convulsions that came to a climax on November 13. The money, without which the banks would have gone under, dragging the whole British economic system down with them, was repaid some six weeks later.
Goodwin was treated as a pariah for his role in the bank’s financial collapse and the meltdown of a large part of Britain’s banking sector. During the secret discussions which led to the effective nationalization of RBS, Goodwin was harshly rebuked for his management style and conduct.
That fatal Sunday evening, as the Treasury hammered out details for an emergency rescue package for Britain’s troubled bankers, it was evident to Hoppkins that the fate of RBS was sealed. Later he recounted to Fitzwilliams how it had been brutally clear to all those present, except the bankers themselves, that HBS and HBOS were finished. The game was up when RBS, one of the world’s largest banks, found itself in a desperate situation, facing imminent collapse, along with HBOS.
The arrogance and stupidity of the country’s leading bankers had led to the implosion of Britain’s banking system. ‘Fred the Shred’ Goodwin had played golf whilst RBS faced the fatidic moment. Given his past authoritarian reputation it seemed incredible that a person of his ilk should have been in control of one of Britain’s most important banks. His personality was exposed for what it really was when, on being forced to resign, he emphatically rejected any idea of surrendering the least penny of his multi-million pound pension pay-off.
Chapter 39 GOODBYE TRADITION
The Plan Page 39