The timing of the announcement was terrible because it coincided with a sequence of dire economic data. Unemployment hit 1.9 million. Sterling tumbled to a twenty-three-year low against the dollar. It was officially confirmed that this was already the worst recession since the 1980s. Brown’s repeated mantra about Britain’s resilience was contradicted by the IMF when it predicted that the downturn would be deeper than in the United States, Germany or any other advanced nation.61 This generated confidence-sapping headlines like ‘The deepest recession’ on the front page of The Times62 and ‘It just gets worse and worse’ from the Independent.63
The markets’ initial response to the bail-out was coloured by more horrific news from the financial sector. The banks’ losses were turning out to be ‘higher than anyone had anticipated’ in Government.64 The Royal Bank of Scotland announced losses of a staggering £28 billion, the largest in British corporate history. Stephen Hester, the bank’s new Chief Executive, rang Darling to reassure him that he did not need to be panicked into total bank nationalisation. ‘It is just the market trying to find its level,’ Hester endeavoured to convince Darling.65 There seemed to be no knowing how low that level might be. RBS’s share price fell by more than two thirds in a day. The once mighty bank, worth £78 billion just eighteen months before, was now valued at less than £5 billion despite the injection of so much state support. It was entirely conceivable that the taxpayer might ultimately make a profit, even a handsome return, when the banks recovered and the Government stakes were sold off in the future. At this moment, many voters were bound to think that Brown and Darling were pouring taxpayers’ money into a black hole.
Bankers already competed with paedophiles for the lowest position on the league table of public esteem. There could not have been a worse time for it to emerge that bankers wanted to carry on remunerating themselves as if the crash had never happened. On 5 February, The Times revealed that RBS, 70 per cent of which was now owned by the taxpayer, was planning to pay out large sums in bonuses to senior staff and traders.66 It was then reported that Lloyds, which had also been rescued by the Government, was planning to do the same. So was Barclays, which had tapped the Bank of England for billions of pounds in loans and guarantees.67 This raised anti-banker rage to an even higher pitch. The Government’s response was confused and merely rhetorical. Peter Mandelson exhorted the bankers to ‘understand the heat, the anger that many people feel. They certainly don’t want to see banking chiefs benefiting from past failure.’68 Harriet Harman, flavouring her attack with feminism, denounced the City’s ‘old boys’ network’ to a Labour conference in Sheffield.69 This was well received by activists who liked the sound of banker-bashing. It was less popular with other ministers, who interpreted this as Harman positioning herself to run for leader after a general election defeat.70
From the autumn, and repeatedly since, Brown had promised that ‘excessive and irresponsible risk-taking has got to be punished’ and that he would not tolerate ‘rewards for failure’.71 Yet there had been massive rewards for colossal failure. Adam Applegarth, the man who wrecked the Northern Rock, took a £760,000 pay-off and a pension pot of £2.6 million. Andy Hornby, the fallen ‘Boy Wonder’ of HBOS, was now earning £60,000 a month for consultancy services to the bank he brought to its knees. The non-executive directors of RBS who had not prevented its ruination were still sitting on that bank’s board several months later.
The political heat was increased when Barack Obama announced a salary cap and bonus ban at banks bailed out by the American taxpayer and Nicolas Sarkozy, facing mass protests in France, did something similar. The issue split the Cabinet when ministers met on Tuesday, 9 February. Harman led the charge by giving the Cabinet an abridged version of her anti-banker speech in Sheffield the previous Saturday. The City was ‘rotten’, she declared. They should claw back the bonuses paid to the executives of failed banks. This intervention did not impress all her colleagues. ‘Knee-jerk, crudely populist stuff,’ one minister sniffed after the meeting.72 There was a sharp response from John Hutton, Hazel Blears and others in the Cabinet who contended that they couldn’t just tear up contracts. It might be superficially popular now, but it would do Labour no good in the longer term to be seen as hostile to business. Harman retorted that it was not anti-business to be anti-banker ‘because no-one hates bankers more than businesses’. Peter Mandelson observed to his colleagues that the furore over bonuses was symptomatic of a larger danger. The Government looked as though it was being ‘blown this way and that’ by the prevailing storms in the media. The meeting broke up without any agreement about what they would actually do.73
Brown produced a variety of convoluted verbal formulas, but he did not articulate a robust plan. This paralysis was partly induced by listening to advice from lawyers about the difficulties of unwinding contractual obligations. It was ‘a legal nightmare’, groans one minister at the centre of the discussions.74 The bailed-out banks were under the supervision of John Kingman. The Treasury civil servant was in charge of UK Financial Investments, the body set up to manage the Government’s stakes in the part-nationalised banks. The bank executives argued with Kingman that they needed to be able to pay bonuses to retain staff who could generate profits in their investment arms to help mop up losses.75 Added to this was the psychological legacy of New Labour’s decade of genuflection to the City, a muscle memory which persisted even once the titans of finance were dethroned. ‘There was a big reluctance to lay down the law on salaries and bonuses,’ observes Digby Jones from a pro-business perspective.76 As a result, Labour MPs saw that the Government put itself ‘on the wrong side of that populist wave’.77
The disgraced bankers came out of hiding for a three-hour interrogation by the Treasury select committee. It was not so much a show trial as a pantomime. ‘We are profoundly and unreservedly sorry at the turn of events,’ intoned Lord Stevenson, the former Chairman of HBOS, as if he and the other executives were the unfortunate victims of forces beyond their control rather than the authors of the most spectacular banking failures. As the questioning went on, it became apparent that the bankers were still baffled about what had gone wrong and why. ‘I don’t think I am particularly personally culpable,’ said Andy Hornby, the fallen Chief Executive of HBOS, in a remark he was made to almost instantly regret. ‘You’re all in bloody denial!’ erupted one exasperated MP, Labour’s George Mudie.78 Their performance fed rather than assuaged public anger.
David Cameron saw which way the wind was blowing and decried ‘markets without morality and capitalism without a conscience’.79 This was shameless from the leader of a party which had argued during the boom years for even less regulation. It was Brown’s inability to channel public anger and address it that left the space free for the nimble Cameron to pose as the tribune of the people. Voters were overwhelmingly of the view that the Government should stop the bailed-out banks from paying bonuses.80 Brown’s response was to announce yet another review into City remuneration conducted by a City figure. That was an example of his habit of trying to look as if he was doing something while distancing himself from taking action. ‘We got behind the story,’ laments one member of the Cabinet.81
Every drama must have its villain. The iconic example of the rapacity of the disgraced bankers was Sir Fred Goodwin, the fallen boss of RBS. In mid-February, Treasury officials were going through the RBS accounts when they spotted the enormous pension secured by Goodwin under the severance deal thrown together during the crisis weekend the previous October. It came to some £700,000 a year, which he would start to receive at the youthful age of fifty. Political dynamite in any circumstances, this was going to be absolutely incendiary when millions of voters were facing a straitened future after the shrivelling of their pension funds as a result of the collapse in share prices. The officials told Alistair Darling, who in turn alerted Gordon Brown. Both were also warned that there was no keeping this secret for very long: the pension details would be revealed in the RBS annual report due to be published
in a few weeks’ time.
Looking to defuse this time bomb before it went off, they first hoped to persuade Goodwin to voluntarily surrender at least a portion of his outrageous pension. The task fell to the City Minister, Paul Myners. On Wednesday, 25 February, he telephoned Goodwin to suggest he ought to make ‘a gesture of goodwill’.82 Goodwin later claimed that he had been warned that if he didn’t hand back some of the money, ‘things would get very nasty indeed.’83 The pension became publicly notorious that night. It was leaked to Robert Peston, the Business Editor of the BBC, who shared his scoop with viewers of the ten o’clock news. ‘No shred of shame,’ the cry of the next morning’s Mirror, was a typical headline.84 Some thought the leak had ‘the grubby hallmark of a Labour dirty tricks operation. As the hapless Sir Fred took his turn in the stocks, the Government’s failure to resolve the banking crisis … would get lost amid the sound and fury.’85 Goodwin himself accused the Government of exposing his pension to put him under pressure. If this was a Government leak, the tactic boomeranged. At breakfast-time on Thursday, Darling said that he had only learnt about the Goodwin pension the week before.86 To widespread incredulity, Number 10 said the same on behalf of the Prime Minister.87
Fred the Shred was perfectly cast as a villain. He had walked away from the biggest corporate disaster in British history with an annual pension worth more than many people would earn in a lifetime. Yet the affair could hardly make heroes of ministers who were unwilling or unable to do anything practical to remedy this scandal. The Government was reduced to pleading with Sir Fred to examine his conscience. ‘The ball is in his court,’ the Chancellor told MPs.88 Completely predictably, the hard-boiled Goodwin rebuffed the suggestion that he should make any sort of gesture to public anger. As the media and politicians bayed for his blood, he tried to present himself as the injured party. He claimed that the doubling of his pension pot to more than £16 million had been personally approved by Myners.89 The heat turned on the City Minister and what he had known when the deal was done. Myners said he had not objected because he was led to believe that there was no discretion about the pension. This was an important technical point, but one entirely mystifying to the vast majority of the public, who could not comprehend how Goodwin was being allowed to get away with it. Peter Mandelson escalated the language of outrage about Goodwin in an interview for the Observer in early March, when he called the pension ‘obscene’.90 That same Sunday, Harriet Harman declared that ‘Sir Fred should not be counting on being £695,000 a year better off, because it’s not going to happen. The Prime Minister has said it’s not acceptable and therefore it won’t be accepted. It might be enforceable in a court of law, but it’s not enforceable in the court of public opinion and that’s where the Government steps in.’91 This posturing was mocked by commentators and annoyed Number 10. For it drew attention to the awkward truth that Number 10 had decided to accept what the Prime Minister had called unacceptable.
At a meeting of the National Economic Council, Brown vented his frustration at his ministers. ‘Why are the Tories running the agenda? Why aren’t we getting our message out?’ He directed a blast of temper specifically at Yvette Cooper, the Chief Treasury Secretary, wife of Ed Balls and one of his most loyal allies. ‘Why don’t people know the message? Why aren’t ministers out there?’ he raged at her as colleagues and officials cringed in sympathy and embarrassment. ‘Every Cabinet minister should be doing regional visits.’ Some present thought Cooper was close to tears.92
It was only some months later that Goodwin finally agreed to surrender a slice of his pension, leaving him to scrape by on a mere £342,000 a year.93 In addition, he kept more than £5 million in a tax-free lump sum and a bonus. He also retained his knighthood. Ministers hoped that this was the end of it as a political issue, but it had already done its damage as the exemplification of the Government’s impotence when confronted with the bankers’ excesses.
Brown had told three stories about the crisis. First, that it was made in America. Second, that Britain was uniquely well placed to endure it. Third, that he had the will and the ideas to see the country through. This narrative, which had served him well the previous autumn, was now losing the benefit of the doubt. There were fewer buyers for his ‘made in America’ line as commentators and MPs began to interrogate his stewardship of the economy over the past decade. Hearings and media investigations focused attention on his authorship of the failed regulatory structures. He had authorised knighthoods and given places on Government task forces to the bankers, many of them fellow Scots, who were now in disgrace. A particular cause of squirming was the case of Sir James Crosby. He was forced to resign as Deputy Chairman of the FSA, having been appointed to the regulator by Brown, in the wake of allegations by a whistleblower that he ignored warnings of excessive risk-taking during his time in charge of HBOS.
The previous autumn, for sensible economic reasons as well as self-serving political ones, Brown downplayed the likely severity of the recession and spun up his own ability to deal with it. Many of those boasts came back to taunt him. One Downing Street strategist reported the alarming findings the Government was getting from its own samples of the voters’ mood. ‘What we are hearing from the focus groups is: “Why does nothing appear to be working?” It is the men especially. The men are very angry.’94
Number 10 bombarded the rest of Whitehall with daily demands for initiatives that would help Brown to make his argument that he was the man of action and Cameron was the leader of a ‘do nothing party’.95 Some of these schemes were well-purposed and creative acts of policy, some were ill-conceived and ineffectual, and some reflected Brown’s vice of making announcements that came to nothing. They generated the headlines – ‘Brown acts to help jobless’,96 ‘Brown launches rescue package for small firms’97 – that were desired on the day. But thoughtful Labour MPs became concerned that ‘initiative after initiative after initiative … comes across as white noise to an electorate that wants a bigger story.’98 One member of the Cabinet admitted: ‘People are confused’, not least because the ‘complexity of the various schemes’ meant there were long lags between the trumpeting and the implementation.99 ‘Real Help Now’ was the slogan plastered on Government websites. The help, when real, was rarely now. A ‘mortgage protection plan’ was announced the previous September with the promise that it would spare vulnerable people from being thrown out of their homes. By May, the scheme had assisted just one family in England.100
Some Cabinet colleagues also despaired because ‘Gordon wouldn’t say no to anyone.’ He made promises of financial assistance to just about every union, industry or other lobby group knocking on the door, which ‘spread the money too thin’ among a confusing myriad of schemes.101 This further worsened his relationship with Alistair Darling. The Chancellor disliked the National Economic Council because it cut across the Treasury and was a forum which generated more demands for spending that he regarded as unaffordable. Darling complained to colleagues in Cabinet that Brown was not thinking strategically: ‘He keeps making these random demands for money.’102
Peter Mandelson put his finger on the conundrum. ‘High-level meetings and action … generate big expectations which, in turn, trigger disappointment and market reaction when immediate results are not produced,’ he observed, repeating in public some of the cautions he had been privately giving to Brown about the perils of chasing headlines. ‘There is no value in trying to create a frenzy around these issues every day.’103 His own department was among those guilty of arousing expectations which were not then met. A £10 billion business lending guarantee scheme fell weeks behind schedule.104
The car industry, which employed directly or indirectly a million people, was terribly mauled by the recession. At a summit with the major manufacturers, suppliers and retailers in November, Mandelson sounded sympathetic to their pleas for help while declining to be specific about how he would respond. Paul Everitt, the Chief Executive of the Society of Motor Manufacturers and Traders, anxiously
approached the Business Secretary at the end of the meeting. ‘What’s the timetable?’ he asked. ‘What can I go away and tell our people?’ The feline Mandelson responded: ‘Well, Paul, I’d be very careful. In my experience, it can be very dangerous to raise expectations.’ There then followed a period of ‘radio silence’ when nothing was heard from Government, which left the industry ‘confused as to what exactly was going on’.105 This was partly because Mandelson was wrangling with Mervyn King about the Bank of England’s refusal to extend the same credit to the car industry as it had to the banks. At the end of January, the Business Secretary finally announced a £2.3 billion rescue package, which he said would draw on funds from the European Investment Bank as well as other lending. With a typical anxiety not to be seen reverting to an Old Labour past, Mandelson denied that he was giving a ‘blank cheque’ to ‘a lame duck’. He argued: ‘Britain needs an economy with less financial engineering and more real engineering.’106 Yet the money was dwarfed by the hundreds of billions committed to the banks, leaving those in manufacturing with the impression that Government thought ‘the real economy is a second-order problem that somehow will fix itself if the first-order problem can be resolved.’107 Both the manufacturers and the unions said that no support had been seen several months after the announcement of the aid.108 The most visibly effective form of help for the industry was the much simpler, relatively low-cost car scrappage scheme, which offered a £2,000 inducement to drivers to swap old cars for new ones. It was introduced by Mandelson in May, and car sales began to recover the same month.
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