Till Time's Last Sand

by David Kynaston

  The size of the operation was daunting, involving as it did (even if only for a short time) a trebling of our balance sheet. Our main aim was to minimise the various risks to which the Bank would be exposed. One important aim was to see that the period during which the funds were with us was as short as possible. Another was to reduce as far as possible our own discretion. To the extent that any scope existed for us to exercise judgement as to whether or when or how any particular payment was made, we could be vulnerable to criticism or legal action if anything went wrong. In addition, even if we had fully secured ourselves legally there were the commercial risks inevitably involved with such large sums and what one might call the political risks: e.g., if something had happened to the hostages while in flight at about the time we were making the payment to Iran that we were legally required to do, we could suffer great criticism …

  Back in London, meanwhile, the linchpin figure was Derrick Byatt, chief manager of the Foreign Exchange Division and providing the technical expertise to enable the Bank to be escrow agent for the transaction. ‘During the final crucial days of the operation,’ his obituary would record, ‘he was in the office day and night, sleeping when he could on a camp bed in the conference room adjacent to his office.’ Undeniably the whole episode was a feather in the Bank’s cap – and perhaps much needed, at a time when it was feeling distinctly unloved.13

  The real international challenge during Richardson’s governorship still awaited. ‘Almost certainly the most dangerous financial occasion of the second half of the twentieth century,’ would be Charles Goodhart’s verdict on the LDC (less developed countries) debt crisis that broke out in the second half of 1982, as first Mexico and then Argentina and Brazil were unable to refinance their borrowing. ‘If the loans to these countries had been marked to market, some, perhaps a majority, of the major money-centre international banks in the world, and especially those in New York, would have been (technically) insolvent, and the world’s financial system would have faced a major crisis.’ Not least because he was able to mediate between two powerful but personally incompatible central bankers – Paul Volcker of the Fed and Karl Otto Pöhl of the Bundesbank – it was a situation that brought out the best from Richardson’s formidable armoury.

  A handful of gubernatorial moments stand out from an immensely complicated narrative. In early September, at the IMF’s annual meeting held that year in Toronto a few days after the leading central banks had arranged through the BIS a $1.85 billion bridging loan for Mexico, Richardson was very much one of the ‘Big Four’ – along with Volcker, the Swiss National Bank’s Leutwiler and the IMF’s Jacques de Larosière – in not only keeping Mexico (and thus the New York clearing system) going, but starting to apply moral pressure on the commercial banks to limit repayment demands; a day or two later, back in London, Richardson told Volcker on the phone that he was ‘haunted with the fear that nothing would happen unless someone was prepared to take a very positive lead’ and that ‘the time might come when they would both have to take the initiative with the banks’; later in September, as the Argentine situation rapidly deteriorated but the British government felt it impossible so soon after the Falklands War to adopt a constructive position, it was Richardson who paved the way to the UK and Argentina unfreezing each other’s assets, thereby making it possible to start dealing with the Argentine debt problem; by October, a dialogue was in train between the governor and the British clearing banks – some of which (above all Lloyds) were horribly over-extended in Latin America – to discuss their provisioning; late that month, a dinner at Richardson’s St Anselm’s Place home saw Volcker, Leutwiler and the host working out how to co-ordinate Volcker’s debt plan, including the vital question of how to bring onside the commercial banks without the central banks themselves providing long-term (as opposed to bridging) loans to the debtors; and on 22 November, this time in the governor’s flat at New Change, Richardson gave another dinner, where he, de Larosière, Leutwiler and the Bank’s overseas director, Anthony Loehnis, sat down with six leading commercial bankers from around the world, including Morse of Lloyds, and successfully explained that there was no alternative to a cohesive approach from what was in effect the creditors’ cartel. Much else still lay ahead – including the formation of co-ordination groups of the principal lenders and eventually the invention of ‘the Matrix’, an indispensable device in getting the banks not to pull the plug unnecessarily through believing they were going to be at a competitive disadvantage if they did not – but it was starting to become clear that there would be no total meltdown. ‘I would just marvel over Richardson’s patience and the deliberate care in getting the Europeans on board,’ recalled Volcker a decade later. ‘My style is to walk into a room and say, “Here’s the problem and here are some solutions,” and expect everyone to get on board in two minutes. He understood it took two hours of explanation over dinner to get them on board.’14

  By this time, towards the end of 1982, the international debt crisis so preoccupied Richardson that, although sixty-seven, he hoped to continue to serve as governor for a year or two beyond the end of his second term in June 1983. Given, however, that the final decision rested with Thatcher, that was never a realistic possibility. Nor was it realistic, in terms of the succession, that his deputy, McMahon, would get the job, with Thatcher telling a confidant (according to her biographer, Charles Moore) that ‘he’ll never be Governor of the Bank of England while I’m Prime Minister’. Or as Dow put it on behalf of the other end of the mutual dislike, ‘Kit was too transparently a good and honest liberal, not disposed to like her, nor her ways.’ What, for the second time round, about Morse? Howe pushed hard for his school contemporary, calling him ‘my brilliant fellow Wykehamist’, but to no avail. ‘He is clever, anxious to appear so, and never surely a lady’s man,’ was how Dow interpreted the prime minister’s veto, while for all Morse’s intellect and international experience it did not help that he had a temperament seldom hot for certainties. The obvious merchant banker candidate was David Scholey – on the Court, one of the City’s stars, and by now running Warburgs; but there seems to have been a feeling in the Treasury that he was perhaps a little young and might instead be just the man after the next governor had served a single term.

  Who would that be? The announcement, taking almost everyone by surprise, came two days before Christmas: the NatWest’s Robin Leigh-Pemberton. In his mid-fifties, ‘he seemed too much a gentleman, too little a professional’, as Dow reflected, before going on:

  His record would be unlikely even as a caricature of a well-off, traditional conservative: Eton, then Classics at Trinity College, Oxford, after which the Grenadier Guards and the bar; a gentleman farmer with a couple of thousand acres of family land near Sittingbourne in Kent, member of the County Council in the Conservative interest (‘but that was a long time ago’), now Lord Lieutenant of the county; Brooks and the Cavalry Guards Club; chairman of a lawnmower firm called Birmid Qualcast, and on sundry government committees; and successively regional, then national, director; then (since 1977 – also a surprise appointment) chairman of the National Westminster.

  External reaction was largely negative. ‘A cause for concern,’ observed the Financial Times, while the Economist did not try to deny either that he was ‘ill-equipped for the job’ or that the appointment was ‘provocatively political’. Why had Thatcher chosen him? The obvious explanation was that, after the largely unhappy government/Bank relationship of the previous few years, he was someone whom she felt could be relied upon to do her bidding; Christopher Fildes would later surmise that she wanted someone at the Bank who would ‘stand up for the right’ even if the next general election ‘went wrong’; while Dow nearer to the time offered a double theory:

  In the first place, he got on with her. In her feminine way, this seems a sine qua non. The qualities that enabled him to get on with her were that he was a conservative, in an entirely natural, robust, and unenlightened way; that he was masculine; and that he charmed her
. In the second place, he came from the world of the ordinary banks. The appointment was unconventional in this: he was the first clearer ever to get the post … She thinks not in niceties, but of the end result – whether the clearers’ base rates go up or down. She hankers after a direct lien on them. Why not have someone from that world, who might have some authority over it – and listen to you?

  Whatever her motivation, Leigh-Pemberton hardly helped himself with his early public pronouncements after the news had broken. Inflation was ‘vastly more dangerous to democracy than Communism’; in relation to the international debt situation, ‘If ever there was a crisis it is now over’; and ‘Are they ever necessary, these 2 a.m. crisis meetings?’ Unsurprisingly, the mood in the Bank was at best cautious, and within months McMahon had revamped the Deputy Governor’s Committee, describing the change as ‘an initiative by top management of the Bank to take decisions or make recommendations without involving him [the next governor] in a lot of detailed discussion’.15

  Yet while Richardson was still governor there remained one important area of unfinished business: the square mile itself, where during the early 1980s, as in the 1970s, the signs were mixed about the reality of the Bank’s once taken-for-granted authority. Specifically, there occurred in 1981 two episodes throwing serious doubt on that authority. The first was Richardson’s failure, despite his best efforts, to dissuade Howe from including in his March budget a one-off levy on the clearing banks, amounting to some £400 million. The very next day, meeting the clearers, he ‘expressed regret that his efforts had not been more successful’, at which point Morse ‘intervened to say that the Chairmen were indeed conscious of the Governor’s efforts in this regard, and were grateful for them’ – a gracious exchange, but twelve years later it would be a revealing moment when, at a Bank/Treasury meeting, the latter’s Rachel Lomax ‘recalled that when the wind-fall profits tax was imposed on the banks, Nigel Lawson had been concerned that it would diminish the effectiveness of the Governor’s eyebrows’.

  The other 1981 episode also involved the question of suasion. This was the question of the ownership of the Royal Bank of Scotland (RBS), with Richardson happy by the spring to see it being taken over by Standard Chartered but deeply disturbed by the arrival on the scene of an unwelcome counter-bidder, the Hongkong and Shanghai Banking Corporation (HSBC). Crucially, meetings between Richardson and HSBC’s Michael Sandberg, at which the governor’s eyebrows were raised to their fullest height, only entrenched the counter-bidder’s determination. The Bank’s negative attitude had a rational basis – including concerns that if HSBC (still based in Hong Kong) took over RBS, then the Bank might find itself in a position of ‘responsibility without power’ in terms of supervision-cum-lender-of-last-resort – but poor personal chemistry between two strong-minded men accustomed to getting their own way also played a part. In the event, both bids for RBS were referred to the Monopolies and Mergers Commission (MMC); and during the summer, Richardson was disconcerted to discover not only that the British clearers intended to stay neutral in the matter (Morse explaining to him that ‘the fundamental reason common to all four banks was that they would have to live with HSBC in the future’), but that neither the Treasury nor the City gave encouragement when he tried to push the idea of legislative powers to strengthen the Bank’s control over the ownership of British financial institutions. Towards the end of the year, with the MMC’s decision imminent, the Bank was coming under significant press criticism, including what McMahon called ‘a lot of obviously deliberately leaked stuff that we were being protectionist and stuffy’, as well as the Sunday Telegraph ‘raising the whole question of a potential resignation issue [for Richardson] and also suggesting that the Prime Minister would not be displeased to see us discomfited’. In the Spectator, Fildes saw the stakes as undeniably high: ‘If the Bank of England loses this battle, its authority will never be the same again. On that authority, much hangs. It is felt throughout the City of London – in the banks and beyond them. It lies behind the whole of the City’s system of self-regulation.’ Finally, in January 1982, the MMC pronounced that neither bid should proceed, and the government agreed. RBS lived to fight another day, while for Richardson it was perhaps a score-draw: neither the outcome he had originally wanted nor the one he had argued so strongly against. It remained for Sandberg to pay a final visit before flying back to Hong Kong. ‘He straight away declared his purpose to be “to doff his hat”,’ recorded McMahon; and at the end of a ‘relatively easy conversation’, during which the visitor explained that his bank still hoped to get into UK deposit banking, ‘the Governor said that if at any time he had any proposals or ideas he, the Governor, would be glad to hear them and talk them over …’16

  Other aspects of the Bank/City relationship in the early 1980s revealed a stronger Bank, not least when in 1981 it determined that it would no longer be solely the prerogative of members of the Accepting Houses Committee – which is to say the leading merchant banks – to have their bills rediscounted by the Bank at its ‘finest rate’. ‘Here, as in some other areas,’ Richardson explained to the clearers, ‘the Bank felt a tension between its desire to support the interests of British banks and the need to maintain London as an attractive international centre.’ The complaints were predictable, including from Barings, but apart from high-street deposit banking it was starting to become increasingly clear in which direction that tension would be resolved. The importance of London’s standing as an international financial centre also played its part in the Bank’s initially cautious but ultimately firm support for the start of a financial futures exchange, with Richardson doing the formal honours when LIFFE (London International Financial Futures And Options Exchange) opened for business in the Royal Exchange (moribund for most of the century) in September 1982. There was also the thorny matter of Lloyd’s insurance market – traditionally not an area of Bank surveillance let alone interference, but by this time deeply scandal-ridden. Increasingly the feeling at the Bank was that Lloyd’s was badly under-managed, needing more independent input; and shortly before Christmas 1982, Richardson asked an outsider, the management consultant Ian Hay Davison, to go there as its first chief executive, having influenced Lloyd’s in offering him the job in the first place. With some reluctance, Davison eventually agreed – ‘Above all I admired Gordon Richardson and he asked me: I would not have accepted for anyone else’ – and that marked the start of the clean-up of one of the City’s defining historic institutions.17

  By this time, however, the Bank’s central City preoccupation was on more familiar terrain: the Stock Exchange. This was a story going back to the late 1970s and the decision by the Labour government to refer the Exchange’s rule book to the Restrictive Practices Court. The hope was that the change of government in May 1979 would make a difference; but when Richardson two months later emphasised to Wass ‘the disadvantages of the Restrictive Practices Court and in particular the time it would take to reach a conclusion and the high costs involved for the Stock Exchange’, the deflating response was that the new trade secretary, John Nott, was being ‘very rigid on this’. So it proved, and over the next few years the Stock Exchange found itself almost completely hobbled by having the well-intentioned but inappropriate Office of Fair Trading (OFT) on its back, with the eventual court case not expected to be heard before 1983 at the earliest – and with the Stock Exchange expected to lose. By 1981 the Bank was starting to think hard about that institution’s future, with McMahon canvassing internally in May the abolition of not just single capacity (that is, member firms having to be brokers or jobbers) but also minimum commission, on the grounds that ‘the services provided by the broking community – research, analysis, etc – might be improved by the concentration that would undoubtedly occur’. Then during 1982 it stepped up a gear, particularly under the influence of David Walker, newly made an executive director. That summer he sent a key paper to the Treasury, arguing for abandonment of the reference and an urgent inquiry (independent of the
OFT) into the single-capacity question and if possible the fixed-commission structure also:

  World securities trading is changing very fast, with a particularly strong push into new areas by American houses such as Merrill Lynch and Salomon Brothers, and if the London market is to avoid relegation to the second or third division in the world league, with eroded invisibles earnings, the Stock Exchange in London needs to be flexible and responsive to the new challenge. The pace is brisk and time is short: very large change is likely on the world securities scene over the three years now in prospect before the Restrictive Practices Court rules. The risk is that, by then, the Stock Exchange will have lost ground to some extent irretrievably.

  Additionally, in the context of the Stock Exchange Council having reluctantly raised to 29.9 per cent the maximum external stake in a member firm, Walker highlighted the weak capitalisation of many of those firms. ‘It is unlikely that many outsiders, including potentially merchant banks and life assurance companies as well as other foreign houses,’ he wrote, ‘are likely to commit sizeable amounts to invest in the securities market while the present planning blight persists.’ In short, and crucial to London’s future as an international financial centre in the new era of borderless capital flows, the Stock Exchange somehow had to be rescued from its insular, debilitating imbroglio.

  No independent, non-OFT inquiry took place, but during the winter of 1982–3 the Bank worked hard on the issue. In particular, a clutch of papers by Andrew Threadgold (of the Economics Division) and John Footman (of the Industrial Finance Division) examined the Exchange in fine-grained detail. Their work culminated in February 1983 in the Bank’s green paper on ‘The Future of the Stock Exchange’, produced under the auspices of Walker and Douglas Dawkins. It contained serious warnings about the possible consequences of ‘wholesale deregulation’, defined as ‘the removal of all of the restrictions governing market entry, minimum commission and single capacity’. Such consequences might include the market becoming ‘less liquid and prices more volatile’ as the result of a diminished role for market-making; ‘less unified trading’ following the abolition of single capacity (because going off the market floor meant trading was less centralised); and, if market entry was loosened, ‘failures and defaults would be likely to increase’. Even so, the green paper still advocated the desirability of an alternative structure to the status quo, one that involved significant deregulation; and commending the paper to Eddie George (another recently appointed executive director), Walker made optimistic noises: ‘Getting the Stock Exchange into what I think the Americans call a more dynamic mode will be of great importance. I am confident that it can be done.’ Nevertheless, huge uncertainty still existed, not least in relation to what was generally after the abolition of exchange controls a rapidly changing business environment. ‘I am trying to find more published material on what outside firms would like to do given a relaxation of the Stock Exchange rules,’ Footman informed Walker later that month. ‘So far I have seen none. One way of getting a better feel of this is to talk privately to senior officials in the major merchant banks, and possibly to the major US securities firms in London through whom we have, through Gold and Foreign Exchange, fairly close contact. But even so, we will have to rely an awful lot on guesswork.’ Moreover, of course, there was still the whole hanging question of the court case. Helpfully, Richardson himself was by now fully engaged and starting a series of constructive conversations with the trade secretary (Lord Cockfield) and to a lesser extent Howe; so that by the time of the general election on 9 June 1983, he and Walker had (according to Dow) ‘just about persuaded’ them that ‘the case should be withdrawn from the Court in return for an undertaking by the Stock Exchange to reform’.18