Till Time's Last Sand

by David Kynaston

  It has been Bank-wide co-operation at its best, and that best has been magnificent. It has brought home once again to everyone concerned the total interdependence of all parts of the Bank, and the dedication at all levels which is such a valuable asset.

  Yet of course, quite apart from the institutional changes about to come into effect on 27 October, the new world was already becoming a reality – and, from the perspective of politicians, central bankers and commentators, often a disturbing reality. Back in July, in a note to the governor for his eyes only, Walker related how he had been rung the day before by Fred Vinton of Morgan Guaranty, to inform him that ‘a proposition’ had been put to two of his bank’s ‘young capital markets Group traders’ that ‘they should leave MG and go as a team at a salary for each of £400,000 a year with a minimum two-year contract, with provision for bonus payments on top’. The rest of Walker’s note reflected the Bank painfully starting to wrestle with an increasingly mobile, avaricious world where the City was no longer a club and where club rules no longer applied, let alone Cobbold-style Etonian standards:

  Vinton said that he was not asking the Bank to intervene to seek to abort this proposition, but felt that we should be aware … I thanked Vinton and said that I fully shared his concern that remuneration on this scale marked an extraordinary escalation beyond anything that I had previously encountered.

  Vinton told me this afternoon that the house is Kleinworts and that the deal has now been done …

  All this seems to me to represent a very unsatisfactory state of affairs, and I have no hesitation in recommending that you or the Deputy call in Michael Hawkes [of Kleinworts] for a sharp word. We have of course accepted realistically that City remuneration in internationally competitive business has had to go up and you have gone to considerable trouble to explain this to sceptics and to the City’s many detractors. But performance-linked remuneration on this scale for two under-30-year-olds takes the inflation into a quite different league from anything seen hitherto. It suggests that Kleinworts are envisaging a pace of activity and turnover that, prima facie, might give supervisors cause for concern; it gives a quite unhealthy inducement to the young individuals concerned to think that they can walk on water, a dangerous state for executives in any business; and it is hardly likely to reflect well on Kleinworts’ judgement or the reputation in the City when, as seems certain, the terms of this transfer become publicly known.37

  On 7 November, a fortnight into the Big Bang era, the Bank’s Ian Bond briefed Blunden: ‘It is already clear that the objectives of the changes have been met: the equity market is more liquid and deals are more keenly priced. The gilts market passed its first test – with the tender offer – very well.’ The gilt-edged market was of course the Bank’s particular responsibility; and Ian Plenderleith, head of Gilt-Edged Division, would describe the immediate prelude to 27 October and its reassuring reality once that half-dreaded date finally arrived:

  I promised the banks that if ever the world came to an end and something went terribly wrong, we’d have what came to be called an ‘Armageddon button’, which they could ask us to press, which would bring the whole thing to a grinding halt, which would have been terrible but was some sort of comfort to them. And when Big Bang started the banks very kindly got together and gave me a wooden plaque with a brass door bell on it with a little thing saying ‘the Armageddon button’, and I used to keep it in my room.

  If that was gratifying, so too was election night in June 1987, as Thatcher won her third decisive victory, the market shot up and the Bank’s gilt-market dealers spent the night in the dealing room, with the Bank issuing stock at 2 am. ‘It sold out straightaway,’ recalled Plenderleith, ‘and we issued some more at about 7 am and that sold out straight away, and by the time we went off to breakfast we had sold about 5 billion gilts during that night and done about 10 per cent of the year’s borrowing requirement, which I regarded as a great coup.’ More generally, the Bank felt able by early 1989 to publish a positive report on the first two and a bit years of the gilt-edged market since Big Bang. Liquidity had improved; dealing costs had declined; despite fierce competition, there were still almost two dozen market makers (compared with what was virtually a jobbers’ duopoly prior to Big Bang); the Central Gilts Office Service, a joint venture between the Bank and what was now called the International Stock Exchange, provided ‘computerised book entry transfer facilities and assured payments arrangements’, operating with ‘a high degree of reliability’; and in terms of official operations, the market’s ultimate rationale, the new structure had ‘enabled the authorities to extend the range of their funding techniques, eg through the use of auctions’.38

  Infinitely less satisfactory in the Bank’s eyes during these years was the City’s reputation: high in profile but low in esteem. As early as December 1986 the Guinness affair (involving a share-support operation earlier in the year) was making the headlines; and the following month, possibly after a degree of government prompting, Blunden successfully demanded the resignations of two top people at Morgan Grenfell, the merchant bank most heavily implicated. Soon afterwards, in February 1987, Leigh-Pemberton accepted in an interview that standards were coming ‘under great strain’, and that it was ‘inevitable’ that ‘we are going to have to have more bodies, more rules, and more law’. One of those new bodies was the Board of Banking Supervision: set up by the 1987 Banking Act, and part of the Bank (in the same sense that the present-day Monetary Policy Committee is part of the Bank), its stated purpose was advisory, reviewing decisions rather than making them. In practice, the banks still essentially looked for their supervision to the Bank’s more familiar supervisory faces, with Morse that February, in his capacity as chairman of the British Bankers’ Association, paying a telling visit to the governor, in which he emphasised that ‘the problem of secret and confidential information and the close relationship between supervisor and supervised’ meant that ‘there was no other alternative’. What about SIB? ‘I am increasingly coming to the view that it would be desirable for Kenneth Berrill [its first chairman] to go as soon as we have a successor,’ Leigh-Pemberton wrote in September 1987 to Lord Young at the DTI. ‘I sense a distinct hardening of opinion in the City on this question, not only among those who have always been sceptical or opposed to the SIB.’ The governor was soon taking soundings. ‘I am told that what is most important is that the new Chairman should listen to advice from practitioners,’ he informed the minister – as opposed, he added, to someone who ‘spends his time asking his in-house lawyers for advice’. In the event, the person chosen was one of the Bank’s own, David Walker, who became SIB’s new chairman in 1988: a victory for the City, undeniably, although Walker was hardly a man for the easy life or soft option. The scandals, meanwhile, continued to come. One was the investment firm Barlow Clowes, which collapsed in May 1988 some eight months after Blunden had issued a written early warning, ignored by the DTI; another, more intimately concerning the Bank, was the Blue Arrow scandal, involving a share-support operation in September 1987 hatched by NatWest’s merchant banking arm. The DTI very belatedly launched an investigation in December 1988, and two months later Blunden learned from the Treasury that ‘there are those in the DTI who are not adverse to seeing this as an opportunity to put the Bank into as embarrassing a position as they have found themselves over Barlow Clowes’. The report was published on 20 July 1989, and soon afterwards Lawson observed to Leigh-Pemberton that ‘it was very important to maintain the prestige of the Bank of England, and of the Governor in particular, and this would be reinforced if it was known that the Bank had acted firmly in this case’. The Bank did act accordingly. NatWest’s chairman, Lord Boardman, resigned next day; a week later he was in the governor’s office, complaining to Leigh-Pemberton about the Bank’s ‘press treatment’ and declaring that in the whole Blue Arrow affair he had been ‘constantly wrong-footed by the Bank in terms of public relations’.39

  NatWest and the other main clearers were presumably
paying attention when the governor in October 1987 spoke in Belfast about the ownership and control of UK banks. ‘We are now seeing London emerge,’ he told an audience of local businessmen, ‘as a focal point of the world’s financial markets; and this is due, in no small part, to our willingness to see foreign companies come to the United Kingdom to do banking business and, on occasion, to take control of British institutions. In my view that policy invigorates the London markets and their participants.’ He went on, however, to assert his conviction that ‘it is of the highest importance that there should be a strong and continuing British presence in the banking system of the United Kingdom’, given that ‘it runs counter to commonsense to argue that the openness of the London market must be carried to the point where control of the core of our financial system – the payments mechanism, the supply of credit – may pass into the hands of institutions whose business aims and national interest lie elsewhere’.

  That would remain the Bank’s formal position, but two years later saw further significant internal debate. At a first meeting, it was generally agreed that there existed a UK banking ‘core’ of the ten or twelve largest banks and building societies, with the merchant banks being outside that core and not necessarily to be given the protection more likely to be accorded to the core institutions. At a follow-up meeting, discussion opened up. Brian Quinn, an economist at the Bank who was now in day-to-day charge of banking supervision, declared that, quite apart from possible ‘prudential considerations or economic arguments in the traditional sense’, he ‘felt that there was something special about the banks at the centre of the credit and payments system’; Leigh-Pemberton said that he ‘broadly agreed’; but George countered that he not only ‘found it extremely hard to envisage circumstances in which the UK national interest could be damaged by foreign-owned core banks’, but ‘believed it was important not to damage the interests of shareholders by preventing takeovers by foreign institutions willing to pay the highest price’; and Andrew Crockett (recently returned to the Bank, after some sixteen years at the IMF, to be in charge of the international side) agreed that ‘only in very rare circumstances would a foreign takeover of a core UK bank be liable to damage UK interests’, noted that he was ‘concerned that our policy might be swimming against the tide of history’, asserted that ‘the trend was towards fewer, larger, multi-national institutions’, and concluded that ‘competition between cultures could be beneficial to the UK’.40 All these were revealing observations, on the cusp of the decade of globalisation.

  Back in 1987, Leigh-Pemberton’s Belfast speech had a particular context. Late that July, the governor received a visit from Midland’s Sir Donald Barron, who told him that the bank (once the world’s largest) had received an unwelcome takeover approach from the advertising agency Saatchi & Saatchi. Maurice Saatchi, reported Barron, had said that he ‘felt capable of handling the management and financial side of Midland Bank, though admitted to some ignorance of the supervisory requirements’. Next day, the governor passed on the news to Lawson, who ‘said that on the face of it, it was difficult to take this bid seriously’; a month later, Blunden informed the governor that Rodney Galpin had been asking Saatchi ‘a number of searching questions’. Even the venerable Jasper Hollom, seven years after leaving the Bank, was drawn into this episode of pure top-of-the-market froth, with Blunden noting in mid-September that the former deputy governor had called in to see him, apparently ‘in his new role as adviser to Maurice Saatchi on his determination to enter the financial sector’; but, added Blunden, it had been made clear to Hollom that ‘we would be determined to resist a move such as that threatened against the Midland’. Unsurprisingly, the brothers did not get very far with their audacious initiative, but Leigh-Pemberton still made a point in his Belfast speech not long afterwards of emphasising that he would ‘need some persuading before an industrial or commercial company is allowed to take control of a bank’.41

  That was on Tuesday, 13 October. Later that week, on the Thursday night, the great storm caused scenes of devastation across much of southern England, including the loss of many of the finest trees on the governor’s Kent estate. That Friday, with the City barely functional, Blunden was to be seen wandering around asking whether any of the juniors knew how to call a Bank Holiday – no one did. A deceptively calm weekend ensued, before on Monday the 19th and Tuesday the 20th came the greatest crash, across the stock markets of the world, for over half a century, a long overdue correction of overpriced shares exacerbated in New York by waves of automatic selling from computerised program traders. That week, Leigh-Pemberton was mainly in the Balkans, deciding not to cut short his prearranged trip; so that left Blunden in charge, as he and his colleagues worked harmoniously with the Treasury and the deputy governor himself stayed in constant touch with Gerald Corrigan at the New York Fed. Led by the Fed’s Alan Greenspan, and generally supported by the politicians, this generation of central bankers consciously sought not to repeat the mistakes following the Wall Street Crash of 1929, but instead relaxed monetary policy and pumped large volumes of liquidity into the system. Panic was thereby averted, but it was still a line in the sand. ‘1987 was the first time that central banks and governments ran scared because of concern for securities markets,’ Robert Pringle (founder-editor of the magazine Central Banking) would write five years later. ‘Someday they will have to stand and fight …’42

  In any case, in October 1987 itself, Bank/Treasury harmony failed to last the month. The cause of a new if temporary bout of friction was the controversial fate, following the market crash, of the government’s huge privatisation issue of $7,250 million of BP shares – fully underwritten the week before the crash, despite the obstinate Sir John Nott, now at Lazards, resisting Leigh-Pemberton’s personal plea that the issue would not be complete without the participation of that merchant bank. As markets plunged, Lawson came almost immediately under pressure, particularly from the North American underwriters, to pull the issue. At a meeting on the 20th, he was supported by Blunden in his instinctive determination not to, though with the Bank compelled by the terms of the underwriting agreement to be playing the role of neutral umpire between the Treasury and Rothschilds, whose silky-tongued Michael Richardson spoke for the underwriting group. With dealing in the new shares due to begin on the 30th, the pressure on Lawson to save the skin of the underwriters was almost unrelenting. On the 27th a tantalising might-have-been occurred when Blunden took a phone call from Robert Maxwell, offering to put together a consortium of ‘five or six people’ to cover the issue. ‘He said that this group’, noted Blunden, ‘would be “buyers of last resort” and would be motivated by the dual opportunity of profit and service.’ The deputy governor ‘thanked Mr Maxwell for keeping us informed, adding that he would not seek to discourage him from this initiative’. The crunch came on Thursday the 29th. Some six hours late – to Lawson’s considerable annoyance, given that he was due to inform the Commons that evening how he proposed to resolve this intensely invidious situation – the Bank shortly after 6 pm faxed through its five-page recommendation, mainly written by George. The chancellor’s vexation increased when he read it: the Bank’s first preference was to pull the issue; its second preference was for Lawson to institute a buy-back (or ‘floor’) arrangement that would save the underwriters roughly three-quarters of the £1,000 million that they stood to lose. Thoroughly unimpressed, he rejected both solutions and announced a far more robust compromise, by which the issue went ahead but with a much less generous buy-back arrangement. In this he was strongly supported by Thatcher, who was as disappointed as her chancellor was by the Bank – perhaps unduly influenced by Richardson – seemingly giving so little weight to the sanctity of contract and the international reputation of the City. In the event, Lawson’s scheme proved a resounding success: so much so, indeed, that in an ill-advised initiative the Bank’s press office sought to claim the public kudos for the Bank, something which the chancellor not unnaturally found a bit rich and which prompted hi
m to ring the governor at his Kent home. ‘He was genuinely horrified,’ recalled Lawson, ‘and I am sure was entirely innocent.’43

  During the dramas that autumn, Leigh-Pemberton perhaps took comfort from the progress being made on a vital – if far less high-profile – international front.44 Since the mid-1970s the Basel Committee on Banking Supervision, chaired by the mid-1980s by the Bank’s Peter Cooke, had been addressing the question of capital adequacy, with an increasing emphasis on the question of harmonisation of standards in order to ensure a level playing field for global banks. The critical impetus, though, came in 1986 from a Fed/Bank bilateral initiative, with a Leigh-Pemberton/Volcker dinner at New Change early that autumn starting to get things moving. The original push was from the American, much concerned about global economic imbalances, but the governor responded positively, not least in the context of the imminent Big Bang; and quite suddenly, the road opened to a common regime for bank-capital adequacy that would spur wider international agreement. ‘An audacious political choice disguised as a technical regulatory matter,’ is how Steven Solomon would describe the logjam-breaking move in his 1995 account. ‘It was tantamount to a ganging up by the two leading international financial centers. The implicit threat was that other nations would either submit to the US–UK capital definitions and standards or face exclusion of their banks from London and New York. In one bound it by-passed the multilateral negotiations going on within Peter Cooke’s G10 Basel supervisors committee as well as within the EC [European Community] …’ Crucially, it worked: in January 1987, the Fed and the Bank went public with their accord; and a year and a half later, in June 1988 following much cajoling of the Japanese by the Fed and of the Europeans by the Bank, the Basel Accord (subsequently known as Basel I) was formally agreed by the world’s leading central banks – in effect committing internationally active commercial banks to minimum capital worth 8 per cent of risk-weighted assets, with at least half of that capital to be Tier 1 (‘pure’) capital. Inevitably, weaknesses in Basel I would subsequently emerge, such as imprecise risk-weighting methodology, susceptibility to regulatory capital arbitrage and inadequate focus on market and interest rate risk as opposed to simply credit risk; but it was still an important, pioneering agreement doing much to enhance the general authority of central banks, an authority increasingly under challenge since the 1960s and the slow death of the Bretton Woods system; while at home the Bank would make the Basel Accord the cornerstone of its supervisory regime.