The End of the Party
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Brown and Darling were reluctant to go so far as to nationalise every bank, but they were coming to agreement that they needed ‘a generic solution’ to recapitalise all the troubled institutions.27 Brown first started to think about this seriously during his summer holiday when he talked about it in general terms with his closest advisers, principally Ed Balls and Shriti Vadera. ‘What was the mechanism became the big question.’28 By the autumn, it was apparent that the markets could not supply the solution. Only vast sums of public money would do the job.
While increasingly persuaded intellectually that this was the correct course, Brown was highly fearful of the political fall-out. He expected outrage among voters if taxpayers’ money was used to save banks from their own follies. ‘How do we explain this to people?’ was the Prime Minister’s repeated question to Balls, Vadera and his new best friend, Peter Mandelson.29
Brown would later boast that he was the inspired author of a grand plan that was emulated around the world, as indeed it was. But during the gestation of the bank bail-out he was gripped by this private terror that it would destroy him politically. The financiers were being flayed across the media spectrum and denounced for their reckless greed in speech after speech on party conference platforms that autumn. Brown felt even more exposed because there was scant international cover to help legitimise the idea of bank bail-outs. ‘No-one else is doing it,’ he worried to his intimates. Neither Nicolas Sarkozy in France nor Angela Merkel in Germany were pumping their taxpayers’ money directly into banks. The Americans were not recapitalising in this way either. If Britain acted alone, Brown worried, ‘Where is this going to leave us?’30
The Prime Minister hoped to bring the Americans round when he flew out to New York in the last week of September. As the plane crossed the Atlantic, Sarah Brown strolled towards the back to chat to the accompanying journalists. As a treat for them, she brought along the Australian super-model Elle Macpherson, who was doing an appearance for charity with the Prime Minister’s wife.31 While the reporters at the rear of the plane were distracted by the celebrity eye-candy, up in the first-class cabin sat the Prime Minister gnawing on his dilemma about the banks. He made a long-scheduled address to the UN General Assembly on Thursday, 25 September. The focus was originally going to be global poverty, but the trip was now dramatically reshaped by the crisis. It was here that Brown first talked of ‘the end of the Age of Irresponsibility’.32 He diverted to Washington for a hurriedly arranged meeting with George Bush on Friday afternoon. The President looked strained. Documents marked ‘Top Secret’ were scattered on his desk. Brown quickly got to the point and endeavoured to persuade Bush to look at recapitalising American banks. The President responded with a lack of interest. He explained that he had been arm-twisting Congressmen to vote for the different strategy of creating a toxic dump for bad debts: Hank Paulson’s $700 billion ‘Troubled Asset Recovery Plan’. Brown felt obliged to express support when reporters asked him about TARP. In private, he thought the American scheme was going to be expensive and ineffective.33 He came away from the White House disappointed and dispirited.
Just before he got on the plane home from Washington, a document was faxed through to the Prime Minister’s party. It was from Jeremy Heywood, back in London, who had pulled together the clandestine work on recapitalising banks which had been done at Number 10, the Treasury, the Bank and the FSA.34 On the flight home, Shriti Vadera and his other advisers gathered round Brown in the first-class cabin. He now knew for certain that going ahead with a bail-out would mean taking a course that the Americans seemed dead set against. ‘It felt very lonely.’35 That magnified the risks that voters would rebel against giving billions to the banks. Yet Brown was beginning to reach the conclusion that he had no choice but to take the gamble. The perils of delay were underlined by the frantic weekend trying to find a buyer for the Bradford & Bingley and the continuing evaporation of credit for institutions, large or small. It was getting perilously close to the point where blue chip businesses might not be able to pay their employees. As they crossed the Atlantic, Brown addressed his advisers: ‘I think we’re just going to have to do this.’36
The next shattering blow to confidence came on Monday, 29 September. Paulson’s TARP scheme was rejected by Congress, where representatives railed against writing an enormous blank cheque with American taxpayers’ money for a poorly presented scheme of suspect merit to save financial institutions from their own stupidity. Within moments of the no vote, Wall Street was hurtling downwards, plunging a record 777 points in a day. Though a panicked Congress passed TARP four days later, the damage was done. Fresh spikes of fear convulsed global markets. Lending rates skyrocketed even higher. Major financial institutions folded on both sides of the Atlantic. Night after night, news bulletins showed frenzied dealers yelling in trading rooms and staff who had lost their jobs in the City carrying boxes of belongings from crashing citadels of finance. In a single week, 734 second-hand Ferraris were put up for sale. The Dow dived below 10,000 for the first time since 2004.
Fear fuelled itself and infected leaders around the world. Frightened governments began to act unilaterally to try to insulate their national banks from the pandemic of panic. Ireland, faced with the collapse of its banks, broke with the rest of the European Union to guarantee all deposits. On Sunday, 5 October, Angela Merkel appeared to follow suit by suggesting she was ordering a unilateral guarantee of 570 billion euros in deposits held in the German banking system. This threatened to endanger the rest of the EU by encouraging investors to suck their money out and transfer it to Germany. At the Treasury, officials spent Sunday ‘frantically trying to speak to someone in Germany’ to clarify their intentions. ‘There was no-one there. Germany wasn’t answering the phone.’37
The next day, there was so much carnage on the British stock market that it was dubbed ‘Meltdown Monday’. The FTSE 100 suffered its biggest one-day points fall on record when almost £100 billion was wiped off the value of Britain’s top hundred companies. A stand-out target for this latest selling frenzy was the Royal Bank of Scotland. That morning, RBS’s Chief Executive, Sir Fred Goodwin, was addressing a roomful of investors in the opulent ballroom of London’s Landmark Hotel near Marylebone station. In a half-hour presentation, he endeavoured to reassure them that the bank was still sound. One fund manager then raised his hand: ‘In the time that you have been speaking, your share price has fallen 35 per cent. What is going on?’ Goodwin turned white.38
The Chief Executive of RBS was the son of an engineer from the unglamorous Glasgow suburb of Paisley. He gained a reputation for maximising profits through ruthless cost-cutting which earned him the soubriquet ‘Fred the Shred’. Founded in 1727, RBS had been the reliable but unexciting old lady of Edinburgh banking until 2000, when Goodwin arrived with an aggressive strategy for expansion. Like so many of his ilk, he took advantage of the over-tolerance of risk and indulgence of excess during the bubble. On both sides of the Atlantic, financiers had successfully lobbied politicians to relax the laws to make banking safer which had been introduced in the wake of the 1929 Wall Street Crash. In the 1980s and ’90s, they tore down the firewalls that previously separated high street retail banks, serving the public by looking after savings and making loans, from the much riskier activities of investment banks, which place colossal bets as market speculators. The utility banks behaved more and more like casino banks. Behind the respectable, boring high street exteriors of the retail banks, there were gambling dens at the back. RBS had hugely expanded into derivative trading. During the years of success, Goodwin was feted by the City for transforming a sleepy Scottish institution into the world’s fifth-largest bank. RBS expanded its loan books to a size where they were enormous in comparison with the resources of the nation that ultimately had to underwrite them. The bank’s assets and liabilities were almost $2 trillion apiece. Its balance sheet was larger than the entire GDP of Britain.
This was one manifestation of the decade of global dominance enjoyed
by financiers in New York and London. Not only had they convinced themselves that they were close to being gods, but their huge wealth and deceptive success dazzled politicians, who were beguiled by the myths of unrestrained markets, ever-rising asset prices and endless growth. In the boom years, RBS’s behaviour did not arouse the apprehension of Gordon Brown. It attracted his admiration. Goodwin was knighted for ‘services to banking’ in 2004. Two years later, Brown appointed his fellow Scot to his International Business Advisory Council. The title that Goodwin truly deserved was fool’s gold medal in the fiercely contested competition to be the most stupid British banker. He continued to pursue a megalomaniac lust for expansion even once it was evident that the bubble was burst. His most ruinous purchase – paying a vast price for ABN Amro, a Dutch bank loaded with toxic assets – was made in autumn 2007 when the credit crunch was already beginning to bite. The collapse of the derivative markets and the soaring cost of short-term loans in the wake of the Lehmans bankruptcy left RBS ‘really hanging over the edge of a cliff’.39 The bank’s chief revealed the precariousness of the position to George Osborne. ‘We’re on a hair trigger,’ he confided in a telephone conversation with the Shadow Chancellor. ‘He was having to arrange overnight financing for the Royal Bank of Scotland’s positions and it would take only one thing to pull that trigger and he couldn’t get the overnight financing.’40
This made it even more imperative for the Government to get together a rescue plan. Shriti Vadera, on Brown’s behalf, had joined forces with Tom Scholar, who had become Managing Director of International and Finance at the Treasury, to put together a secret and informal committee of City advisers to work up a blueprint for a recapitalisation. They turned to the few bankers not tainted by the crisis who could be expected to offer an impartial opinion. One was Peter Sands, the Chief Executive of Standard Chartered, who hosted a meeting on 2 October at his City headquarters to develop the plan. The next day, Vadera presented their conclusions to the Prime Minister. Brown continued to agonise between the political risks of action and the perils to the financial system of inaction. ‘He knew he had a choice,’ says Peter Mandelson. ‘He could be paralysed in fear in reaction to what was happening or he had to react with boldness, with decisiveness and take a great deal of policy and political risk. He chose the latter.’41 Brown was also hurried to a decision by the pace of events and rumours about his intentions. The plan was supposed to be secret, but word that the Government was considering this momentous step began to seep out. An infuriated Prime Minister privately blamed this on ‘blabbing’ by Mervyn King, who had briefed David Cameron and George Osborne that there would have to be a state-financed rescue. He suspected that the tip-off from the Governor had prompted the Tories to announce their conversion to a bail-out in weekend television interviews.42 On the evening of Sunday, 5 October, Brown, Darling and King met to discuss the recapitalisation plan and ‘decided we were definitely going ahead’.43 Paul Myners, who had just been recruited as the City Minister, agrees that this was when they came to the conclusion ‘that something big needed to be done, with an element of shock and awe, with big numbers’.44 The initially hesitant Brown was now impatient for the bail-out to be put into action as soon as possible. ‘When are we going to do this?’ Brown badgered Darling and other ministers. ‘Which day?’45 The answer would partly depend on whether the banks were ready to accept that they needed help.
While the Prime Minister worried about the political consequences of giving billions to the banks, the irony was that the bankers were hugely reluctant to take the money. The chairmen and chief executives were coming over to the Treasury for clandestine crisis meetings on a ‘weekly or twice-weekly’ basis.46 The Chancellor chaired an important encounter on the evening of Monday, 6 October. All of Britain’s seven big banks along with the Nationwide building society were represented round the table in the conference room just outside his Treasury office. Mervyn King and Adair Turner, the head of the FSA, were also present. The mood was grim after the day’s record plunge in share prices. Darling began by expressing his irritation that the plan for a bail-out was already becoming public knowledge and urged everyone around the table to keep their discussions secret.
The Treasury, the Bank and the Financial Services Authority had by now done ‘a ton of work’ on the state of the banks and it told them that RBS and HBOS in particular were perilously close to having ‘no cash’.47 Yet the bankers were reluctant to admit it. One bank chairman explains that this was partly because ‘no-one liked talking about their problems in front of their competitors.’48 Alistair Darling agrees that this was a difficulty with these group meetings: ‘When you’ve got ten people in a room, no-one is going to put their hand up and say: “Excuse me, could we have a private word because we’re really in a terrible position.” ’49 It was also because they were in collective denial. ‘There was no acceptance or recognition on their side that they needed capital,’ says a Treasury official present. ‘That was the case until a very late stage.’50 Ego was another explanation for the bankers’ refusal to face reality. Accepting that they needed Government support meant acknowledging that these supposed titans of finance had brought their businesses to the edge of collapse. ‘They were struggling to keep up with the pace of events – that’s the truth of it,’ says John Gieve. ‘Their line throughout was you should help us with the liquidity because the markets are illiquid, but we have solvent, viable enterprises.’ He found them ‘reluctant to accept that actually they weren’t viable and they were slower to come to the view that they needed recapitalisation on a big scale than we were.’51 When Sir Fred Goodwin held private talks with ministers that evening, he was still denying that RBS had a problem with capital. The most he was prepared to admit was that his bank might have ‘the wrong sort of capital’.52 Darling thought he had a way of detecting when one of the bankers wasn’t coming clean. Their body language spoke more truthfully than their lips. ‘I’m no expert, but you just had to look at people’s demeanour. You could generally tell how much trouble someone was in by the extent to which they denied they had a problem.’53
The conclave chaired by Darling was followed by a meeting of bank chiefs alone where they argued about what sort of deal to do with the Government. The Chancellor took the opportunity to slip away to Number 11, where he was very late for a reception he had thrown for journalists. When he finally turned up, he joked to a group of reporters: ‘All my political career people have been telling me to stop being so left wing, to give up on socialism, to move away from the left, follow the focus groups and embrace the centre. Now they want me to nationalise the bloody banks!’ Martin Bright of the New Statesman remarked that he seemed strangely calm. ‘The panic will come later,’ deadpanned the Chancellor.54 He maintained his forced jollity for a little while and then left his own party after less than an hour to hurry back to the Treasury. The Monday night meeting broke up without agreement on the terms of a bail-out. When Brown was informed of the deadlock, he reacted with angry frustration.55
The Chancellor was woken at four the next morning to be driven to RAF Northolt to board a chartered jet to Luxembourg for a meeting of European finance ministers. He landed in pelting rain at just after seven. One of his officials was alarmed by what he was reading on his Blackberry and passed it to the Chancellor. A version of the Monday night meeting with the bankers, the one at which Darling had urged secrecy on everyone, was posted on the blog of the BBC’s Robert Peston. He wrote that ‘a trio of the biggest banks’ was blaming Darling for not presenting ‘a fully elaborated rescue plan’ and had told him to ‘pull his finger out’ and come up with the money.56 This disclosure of the crisis talks at the Treasury intensified the mayhem on the markets. As one banker says: ‘Banks are very easy things to destabilise. You only need to start a rumour that someone can’t pay and it brings about the very thing you fear. That is why the Peston story was so destructive.’57 Both Treasury officials and bankers in the room deny responsibility for the leak and insist that the a
ccount supplied to the BBC was a distorted version of what occurred. At the time, the Government blamed the banks, but one Treasury official contends: ‘Banks would never sit round a table and say “we’re fucked”.’58 There was considerable suspicion among some Treasury officials and bankers that the leak came from Number 10 trying to satisfy the Prime Minister’s desire to force the pace. ‘Gordon’s time horizon is extraordinarily short. He’s always thinking how do we get ourselves out of a corner and put someone else in a corner,’ comments one banker with intimate experience of how the Prime Minister liked to operate.59 Earlier leaks had forced forward the announcement of the Lloyds TSB take-over of HBOS and revealed the Bradford & Bingley deal before the legal documents had actually been signed. ‘They wanted to get the bail-out show on the road,’ says a bank chairman. ‘All these leaks have the characteristic of someone trying to make things happen faster than they were.’60
Whoever was responsible for leaking to Peston, his story had catastrophic consequences. By the time Darling started the Luxembourg meeting with his European counterparts, there was a feeding frenzy of bank shares. His officials called him out to report that the share price of RBS was ‘dropping like a stone’.61 Darling went into an anteroom to make calls back to Britain to try to find out what the hell was going on.62 When he returned to his European colleagues, they could see that Darling was ‘clearly tense’.63 Christine Lagarde, the Finance Minister of France, read the alarm on the face of her British counterpart.
I remember clearly Alistair standing up, leaving the room, coming back. Being in and out very much. That worried me quite a bit, because the previous recollection that I had of Alistair having to leave the room, and eventually not returning, was at the time when Northern Rock collapsed.64