The Chancellor abandoned the Luxembourg meeting to rush back to London. Arriving at the Treasury shortly after three o’clock, he went straight into a crisis conference with all his senior officials and then went to see Brown at Number 10. Darling said that leaks were making things impossible. They needed to ‘bring it forward, do it now, announce it on the Wednesday’.65 The Chancellor had been deeply alarmed by a telephone conversation with Sir Tom McKillop, the Chairman of RBS. ‘How long do you think we’ve got?’ asked Darling. The banker responded: ‘I think we’ve got a day.’66
The Chancellor told the others that he feared ‘the banking system was on the verge of collapse.’67 Shriti Vadera agreed: ‘We have to keep things moving.’ They had to get a deal announced before the markets opened the next day. Yet many of the bankers were still insisting that they could ride out the storm. Brown gave the order: ‘Whatever they say, plough on.’68 One senior civil servant, who had previously despaired of Brown’s inability to make timely decisions, was impressed. ‘He’s really good in crises in a subject he understands. He’s energised by it.’69 Mervyn King and Adair Turner of the FSA were called to Number 10 to finalise the details.
The Governor, who was now as petrified as the politicians that major banks were about to fold, had started to make massive covert emergency bridging loans to HBOS and RBS. Only a handful of people were told about these clandestine loans for fear that public knowledge would precipitate multiple bank runs. Even members of the Bank of England’s Monetary Policy Committee were kept in the dark. At the peak of the emergency loans, the Governor demanded over £100 billion of bank assets as collateral because he was so scared that these fragile institutions would go bust and be unable to repay. The secret loans were a desperate holding measure to buy a bit more time for these banks; they were not a solution to the crisis of confidence threatening to bring down the financial system. King agreed with Brown and Darling that the only hope of forestalling a collapse was to have a comprehensive recapitalisation plan announced before the markets opened the next day.
That evening the bankers were summoned back to the Treasury. Fifty billion pounds in direct support – an adrenaline shot into the stuttering heart of the banking system – was on offer from the Government. The ‘crunch negotiations’ were with Lloyds, RBS and HBOS, who ‘had nowhere else to go for capital except the Government’.70 Despite another torrid day, many of the bankers were still stubbornly in denial. ‘We still had this problem of how to put capital into a bank which says it doesn’t need it,’ says one present on the Government side. ‘This would only work if they expressed willingness to come in.’71 In some cases, the leaders of banks simply didn’t want to face up to the fact that they had led their institutions to the brink of collapse. As John Gieve notes, ‘for the boards and chief executives this was their strategy in tatters.’72 As a collective, they were also apprehensive that publicly accepting that they needed as much as £50 billion would magnify the panic by revealing what a desperate state they were in. ‘There was a lot of resistance to the quantum,’ says one senior Treasury official at the centre of this negotiation. ‘They thought it would scare people.’73
Barclays and Lloyds TSB protested most strongly about the size of the bail-out and argued that the sum should be cut in half. Andy Hornby of HBOS, whose bank was already being swallowed up, was ‘completely silent’. HSBC, who were sound enough to genuinely not need support, ‘were in it for the ride’.74 Darling felt the banks had a ‘big psychological problem’ with accepting state intervention. ‘Banks basically don’t like governments. They don’t want governments to have anything to do with them.’ It took them a while before they got to the ‘growing realisation that if the Government didn’t help, then that was it’.75 There was an exception. As the evening wore on, Sir Tom McKillop and Sir Fred Goodwin were finally beginning to face up to reality. ‘They were not in denial any more,’ says a senior official. ‘They knew they were in a very difficult position.’76
Thrown into the deep end of this crisis was Paul Myners, whom Brown had recruited as City Minister in the reshuffle just four days before. Myners recommended himself because he knew his way round company boardrooms. His CV included the chairmanship of Marks and Spencer, Land Securities Group and the Guardian Media Group. He started his life in an orphanage having never known his parents. Myners was quite a rare thing: a rich man from the City with Labour sympathies that came from conviction not merely expediency. ‘He was the right man for the job’ in the estimation of John Gieve, ‘rather relished it’ and played ‘a critical role’.77
The key, face-to-face negotiations between the Government and individual banks were held across an oak table in Myners’s second floor ministerial office. Curries were ordered in from Gandhi’s, an Indian restaurant in Kennington, which prompted some of the press to headline it as ‘the Balti bail-out’. The curry was scoffed by civil servants. Myners didn’t get any and neither did the bankers. ‘It is not our job to feed them,’ John Kingman told a fellow official and perhaps calculated that empty stomachs would help concentrate the bankers’ minds.78 One bank executive was parked between negotiating sessions in the room where the food had been served. He was marooned there with only the lingering aroma of tandoori for company. When he was eventually let out, ‘he didn’t look very happy.’79
satisfied that the deal was broadly done, Darling went to bed at shortly before two in the morning. Myners continued to work on the detail through the night along with Nick Macpherson, the Treasury’s Permanent Secretary, Kingman, Scholar and other officials.
The next morning, Wednesday, 8 October, Prime Minister and Chancellor met before dawn to sanction the final stages of the deal and discuss how they would present it at the Number 10 news conference early that morning. Shriti Vadera says: ‘It was for me the scariest moment because we had no idea who was going to follow, no idea what the markets would think, no idea what the public would think, no idea whether it would boost confidence.’80 Brown continued to be gripped with apprehension that there would be a violent voter reaction against rescuing the banks. ‘People won’t understand this,’ he said repeatedly before the news conference.81 He later gave a public hint of his fears when he said: ‘We hadn’t yet persuaded other countries that it was a necessary thing to do. No-one had talked in these sorts of figures before. It could have been an initiative that went entirely wrong because no other country was prepared to support us.’82 One minister very close to him reports: ‘The morning the bail-out was announced, Gordon was convinced that was it. He really thought it was going to be a political disaster.’83
The sums were unprecedented. On top of the £50 billion directly injected into banks to strengthen their balance sheets, it was further revealed that the Government was putting up £250 billion in guarantees of lending in the inter-bank market. The special liquidity scheme, which allowed banks to dispose of mortgages by exchanging them for Bank of England bonds, was doubled in size to £200 billion. This stunning total of £500 billion in support of Britain’s paralysed financial system was the biggest and most comprehensive rescue package of its kind by any Western government since 1945. Even then, it would not prove to be enough.
‘People saw it was a very good holding statement,’ says Paul Myners. ‘But taking that to specificity was going to take more time.’84 Precise terms and conditions had yet to be negotiated, bank by bank. Everyone assumed they would have several months to complete this; no-one yet knew that it would have to be done in less than a week.
In politics, how you place the blame can be as important as how you play the game. Fearful of a public backlash, the Prime Minister was anxious to displace culpability to the other side of the Atlantic and on to the reckless banks. ‘It’s pretty clear to me that this problem started in America,’ he said at Number 10 that morning. ‘It started with irresponsible actions and lending by individual institutions.’85 To his great relief, early reaction to the bail-out from the markets and media seemed to be positive.86
At nineteen minutes to noon that day, just as Brown was about to appear in the Commons for Prime Minister’s Questions, he took a call from Mervyn King. With the minutes ticking away to the first PMQs since the summer break, Brown needed some good news from the Governor. The previous night, when the Governor had been called over to Number 10 to agree the basic structure of the bail-out, he had been urged by both Brown and Darling to cut interest rates. King was now calling Brown to report that the world’s most important central banks had agreed to make the largest co-ordinated cut in rates there had ever been.87 The move was announced at midday London time, setting up Brown for his best half-hour in the Commons for many months. He gave a patronising welcome to David Cameron’s support for the bank rescue plan and then squelched his opponent by reminding the Commons of the inconsistent and contradictory statements the Tory leader had made about the crisis. ‘Novice!’ gleeful Labour MPs jeered at an unsteady and wounded Cameron.88 They ecstatically waved their order papers at the end of Questions.
Any sense of triumph did not endure for long. The half-point cut in rates across the world, a move which once would have been regarded as sensationally bold, was now viewed as too little and too late to restore confidence in the ability of central banks or governments to arrest the crash. Fresh waves of selling broke over the markets.
The scale and speed of events appeared to be turning the Prime Minister unusually giddy. Making a speech that evening, he was interrupted when a mobile rang in the audience. Brown joked: ‘I don’t know if another bank has fallen.’89
His rare excursion into black comedy was a mask on his fear that even the huge bail-out plan he had just announced wouldn’t avert a total collapse. Shriti Vadera was lying on the sofa in her ministerial suite, trying to catch up on some of the sleep lost during the Tuesday night negotiation, when Sir Fred Goodwin rang. He was now ready to admit that RBS desperately needed capital from the Government and at once. ‘You’ll be shocked by the number,’ Goodwin said to Vadera. ‘It’s ten billion.’ She responded: ‘I am shocked. That’s quite small. I think you need a lot more than that.’90
She reported the conversation to Brown. While trying to sound publicly confident, the Prime Minister privately knew that they were on the brink. A global bank like RBS, with its massive international exposure, was still in peril of going down in the absence of recapitalisation by America and the Europeans. There was only so much one government could do in a global financial pandemic that required co-ordinated international action. ‘We’ve got to get the others to do this,’ he sweated to his close allies. ‘If they don’t do it very soon, RBS will collapse on us. That will be a disaster.’91 From then on Brown worked the phones trying to persuade other leaders that they should follow the British lead.
Iceland, whose massively over-extended banks had imploded, was going bust, the first entire country to be bankrupted by the crisis. In response to the Icelanders’ refusal to pay back billions of pounds of British savers’ money, on Thursday Brown resorted to anti-terrorism powers to freeze Icelandic assets.
World markets were in a death spiral by the end of the week. There was a vertiginous sell-off across the board as investors dumped stocks, commodities and currencies. The markets had no faith in their own ability to stabilise, nor in the capacity of governments to rescue them. The crisis of capitalism so long predicted by communists had arrived even if they were no longer in a position to take advantage of it. Every major index was plunging, day after day. Wall Street suffered the worst week in its history. Stocks on the Dow lost 18 per cent of their value in just five days. General Motors, once the pride of the American car industry, was now worth less than it was in 1929. London and Frankfurt were down 21 per cent on the week. Japan’s Nikkei index crashed 24 per cent. ‘Black Friday’, the name given to 10 October, was too tepid a headline for what was happening. There was no precedent for this combination of a worldwide collapse in asset values, a global run on banks and the freezing up of all credit markets. Dominique Strauss-Kahn, the head of the IMF, warned that the world’s financial system was on ‘the brink of systemic meltdown’.92
Major depositors were now so scared about the state of RBS and some other British banks that they were trying to withdraw – and willing to pay large penalties for early withdrawal – all their money. At the Treasury, an alarmed Paul Myners saw that this ‘was happening with more than one bank’.93
This was the day, of all days, that Brown was spending out of London on a ‘regional tour’ along the M4 corridor. He had embarked on it as part of a campaign to explain to voters why he was giving billions to the banks. ‘I want you to know that we are doing this for you,’ he argued in a podcast94 hurriedly recorded that morning in which he contended that the bail-out was vital to save jobs and businesses. So it was from a train carriage with imperfect phone reception that he spoke to Angela Merkel, Nicolas Sarkozy and other European leaders to urge them to recapitalise their banks as well.
The British plan, unveiled by Brown and Darling just forty-eight hours earlier, was supposed to have bought the Government three months to resolve the crisis at the most endangered British institutions in an orderly fashion. This was time they no longer had. By the end of Black Friday, says John Gieve, HBOS and RBS had ‘run out of money’.95 Alistair Darling agrees ‘they had run out of capital.’96 Treasury officials confirm that these two massive banks would not be able to open their doors on Monday morning.97
This was a stunning development for the bankers and the politicians. If both HBOS and RBS went down, it was thought highly likely that they would tip over Barclays, which would in turn crash Lloyds TSB. The chain reaction could topple the majority, even perhaps all, of the major British banks. Sober experts like John Eatwell ‘thought there was a real possibility of a total banking collapse. That is, the banks actually shutting their doors and all the cash machines stopping, which would be a complete disaster.’98 Alistair Darling believed ‘we faced a situation where the banking system right across the world, never mind Britain, could have collapsed.’99 Paul Myners agrees that they were now ‘very close’ to ‘a series of dominos falling’ and ‘a systemic collapse of the banking system’.100 John Gieve concurs that ‘we were right at the brink of two of our major banks closing and if those two closed that would have a knock-on effect. You could have got Northern Rock times ten.’101 Mervyn King was also in no doubt that ‘not since the beginning of the First World War has our banking system been so close to collapse.’102
That would be a cataclysm without precedent. Cheques would be valueless. Credit cards would be useless. With the cash machines shut down, families would not be able to buy food. ‘Literally you wouldn’t have any cash. The money would disappear.’103 Most of those things regarded as the essentials of modern civilised society would cease to function. The public order implications were nightmarish. A hedge fund manager who lives in Sussex later told me that he went to a local farmer that weekend and bought a flock of sheep out of fear that this would be the only way to feed his family.
Most Britons understood that something serious was unfolding, but the awesome gravity of this crisis was concealed from the public precisely because of the sheer terror that would have been ignited had the truth been known. Few outside Government and the banks fully appreciated just how close the country was to an apocalyptic implosion of its entire banking system. Britain teetered on the lip of the abyss.
The bankers were called back into the Treasury on Friday evening for what became known among those involved in the crisis negotiations as ‘the long weekend’. In the words of Alistair Darling: ‘The deadline that all of us set ourselves was seven o’clock on Monday morning when the markets would open. You couldn’t have the markets opening with the deal not done. That would have been catastrophic.’104 They had just forty-eight hours to avert apocalypse. They worked ‘through the night every night’ from the evening of Friday to breakfast-time on Monday. Some at the Treasury found it ‘slightly surreal’ as ‘all these bankers slipped in and
wandered around the building, looking lost.’105 There were so many people crowding into the Treasury that they ran out of chairs. Bankers, lawyers and six-figure consultants ended up sitting on the floor to do their business.
The situation was further complicated because both the Prime Minister and the Chancellor were out of the country for stretches of this pivotal weekend. Darling flew out to Washington for a meeting of the finance ministers of the G7. Tom Scholar went with him while Nick Macpherson and John Kingman stayed back in London ‘minding the shop’.106 The mood at the Washington summit was deeply frightened. ‘People were in a state of shock about the scale of what was happening,’ says one present. ‘Stock markets around the world were falling by 5 per cent a day and looked like they would never stop.’107 Darling responded with anger and alarm when he was shown the first draft of a statement prepared for the G7. He agreed with Scholar that it was ‘a crappy communiqué’: three pages of platitudinous waffle which would make the panic worse.108 Hank Paulson looked a wreck. He was publicly still committed to his contentious TARP scheme, which had only won approval from Congress at the second attempt. Privately, the US Treasury Secretary revealed to Darling that he was preparing to switch tracks and fall in with the idea of recapitalisation. The British were suspicious of Christine Lagarde. They feared the French Finance Minister was under instructions from the Elysée Palace not to agree anything of substance so that Nicolas Sarkozy could claim the glory by announcing a grand plan at the European Council in Brussels the following week.109
Darling argued to his G7 counterparts that recapitalising banks with public money – the British approach – was the only solution with a chance of working in these circumstances. He received support from the Japanese. Normally among the most passive attendees at international meetings, the Japanese delegation argued with a rare passion that the rest of the world needed to learn the searing lesson from their country’s banking crisis of the 1990s that inflicted a ‘lost decade’ on Japan. Mervyn King was also at the Washington talks. The Governor took to using a line from another King, Elvis Presley. What they needed, he said, was ‘a little less conversation, a little more action’.110
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