Till Time's Last Sand

by David Kynaston

  Another retrospective strand of the autumn 2008 drama concerned LIBOR – the average interest rate calculated through submissions of interest rates by major banks. For quite some time there had been concern about the possibilities of manipulation. ‘The LIBOR rates are a bit of a fiction,’ the treasurer of a large UK bank told the Financial Times in September 2007; the following spring a Treasury Committee question to King referred to ‘the criticisms of the accuracy and credibility of LIBOR that have been raised by the Association of British Bankers’; and that May, RBS’s chief treasurer emailed Tucker as well as fellow-treasurers to suggest how the process could be reformed in order to prevent traders and managers from inputting artificially low or high figures in order to improve profits or give a misleading impression of their bank’s financial strength. Tucker himself, as head of markets, was in almost daily communication with the City’s CEOs; and on the announcement in late 2008 that he would be succeeding Gieve as next deputy governor for financial stability, the Financial Times noted that ‘he has been at the forefront of Bank efforts to ease the strains in the banking system as financial conditions deteriorated this year, repeatedly modifying the Bank’s money-market operations’.

  He was still deputy governor when in summer 2012 a sudden storm broke above his head, prompted by the disclosure by Barclays – which had just been fined huge amounts for systematic misconduct relating to LIBOR – of an email sent on 29 October 2008 from its chief executive, Bob Diamond, to other senior officials at that bank. It read in part:

  Further to our last call, Mr Tucker reiterated that he had received calls from a number of senior figures within Whitehall to question why Barclays was always toward the top end of the LIBOR pricing. His response ‘you have to pay what you have to pay’. I asked if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions, his response ‘oh, that would be worse’ …

  Mr Tucker stated the level of calls he has received from Whitehall were ‘senior’ and that, while he was certain we did not need advice, it did not always need to be the case that we appeared as high as we have recently.

  In July 2012, Tucker appeared twice in quick succession before a Treasury Committee investigation into what had become the LIBOR scandal. He stated that the email’s final sentence gave ‘the wrong impression’ (‘It should have said something along the lines of, “Are you ensuring that you, the senior management of Barclays, are following the day-to-day operations of your money market desk, your treasury? Are you ensuring that they don’t march you over the cliff inadvertently by giving signals that you need to pay up for funds?”’); he acknowledged that he and his colleagues at the Bank were anxious that October about the strength of Barclays, which had controversially refused to take capital support from the government, but he denied categorically that any minister or civil servant had asked him to get Barclays to lower their LIBOR submissions or that he had personally issued any such instruction; and after observing that the key message he wished to convey to Diamond was to make ‘sure that the senior management of Barclays was overseeing the day-to-day money-market operations and treasury operations and funding operations of Barclays so that Barclays’ money desk did not inadvertently send distress signals’, he explained: ‘In actual paying up for money in terms of what you borrow, you do not need to be at the top of the market all of the time. It is very important not to come across as desperate.’ It did not help Tucker’s cause that coinciding with his second tranche of evidence was the revelation of a warm email sent to him by Diamond in December 2008, the day after his appointment to the deputy governorship – a warmth at least partly explained by the fact that Diamond had been one of his two referees for the position.

  The Treasury Committee reported in August 2012. ‘We will never know the details of the discussion between Mr Tucker and Mr Diamond,’ it noted. ‘What we do know is that Mr Tucker denied ever having issued an instruction to Barclays whilst Mr Diamond denied having received an instruction from Mr Tucker.’ And after regretting that Tucker had ‘failed to make a contemporaneous note of the conversation’ – an omission ‘explicable’ given the ‘unprecedented pressure on senior Bank of England staff at this time’ – the report concluded: ‘If Mr Tucker, Mr Diamond and Mr del Missier [Jerry del Missier, then president of Barclays Capital] are to be believed, an extraordinary, but conceivably plausible, series of misunderstandings and miscommunications occurred. The evidence that they separately gave describes a combination of circumstances which would excuse all the participants from the charge of deliberate wrongdoing.’25

  Back in the autumn of 2008, it became indisputably clear during October that the UK economy was moving into extremely choppy waters. On 6 November the MPC unanimously voted for a 1.5 per cent cut to interest rates – the biggest cut since 1981, and taking them to 3 per cent. ‘Some MPC members were somewhat uncomfortable about their earlier judgements,’ the new chief economist, Spencer Dale, told NedCo the following week, though adding that ‘it was certainly not the case that a small reduction in Bank Rate over the summer would have prevented the financial crisis and its impact on the wider economy’. The new rate of 3 per cent was the lowest since the mid-1950s, but early December saw a further cut to 2 per cent, following a sharp deterioration in the global economy. ‘A nasty recession looks increasingly inevitable,’ observed The Times’s David Wighton. ‘Perhaps we will look back at yesterday’s cut as the beginning of the end of the downturn. More likely, it is the end of the beginning.’ He was correct. Output plunged during the first quarter of 2009, as the UK economy entered a deep recession; and in response, three successive cuts by the MPC took rates by 5 March to a record low of 0.5 per cent, amid general praise for the rapidity and decisiveness of its action. Yet during these unprecedented times – certainly in the working lifetime of anyone at the Bank – the need was palpable for unconventional (or at least apparently unconventional) as well as orthodox instruments of monetary policy.

  ‘Bank could inject cash directly into economy’ was the Daily Telegraph’s headline in December 2008, reporting that the Bank was considering ‘engaging in so-called “quantitative easing”’; and the following month the government paved the way for QE by announcing the Asset Purchase Facility, not only authorising the Bank to buy up to £50 billion of private sector assets in an attempt to unblock the supply of corporate credit, but also giving the MPC the option to extend the scheme at a later date and pay for assets not with Treasury bills but with newly created money. ‘In contrast to much of the post-war period when the need had been invariably to reduce the supply of money to bring inflation down,’ the governor explained at NedCo’s next meeting, ‘the problem was now a need to increase the money supply and nominal spending. The APF provided a framework to do that.’ That was on 12 February, and a fortnight later he told the Treasury Committee that he had formally asked the chancellor ‘for powers to engage in asset purchases in order to increase the amount of money in the economy’, while emphasising to the MPs that ‘we are not going to allow a great inflationary surge’. Decision day was 5 March 2009, when the MPC unanimously pressed the anti-deflationary QE button as well as making the historic interest rate cut. ‘Quantitative easing is new territory,’ noted the Economist later that week. ‘The Bank of England will buy gilt-edged government securities as well as private assets to the tune of £75 billion, and, crucially, will pay for this with its own money. That alarms many people, who fear that the border being crossed may be an inflationary rubicon. For though the Bank of England will pay for the purchases by crediting the accounts of commercial banks, it is creating money just as surely as if it were printing notes.’

  ‘New-fangled’ was a favourite term used by commentators to describe QE, but perhaps they exaggerated. ‘Open-market operations to exchange money for government securities have long been a traditional tool of central banks,’ King would point out in 2016, ‘and were used regularly in the UK during the 1980s, when they were given the de
scriptions “overfunding” and “underfunding”. What was new in the crisis was the sheer scale of the bond purchases …’ Would it work? Dale publicly admitted later in March to ‘considerable uncertainty over the timing of the impact of the monetary expansion on nominal spending’, while Vince Heaney offered in Financial World a sceptical analysis of the efficacy of creating new electronic money. The Japanese precedent, he argued, was far from conclusive evidence for this otherwise ‘untested policy tool, which some fear at its logical extreme could unleash Zimbabwe-style hyperinflation’; moreover, ‘nobody knows how much quantitative easing is required’, given that ‘increasing money supply in the hope of boosting nominal demand can only succeed if the rate at which money circulates (velocity) does not fall’; there was also the possibility that ‘banks looking to shrink their balance sheets might hoard a lot of the new money, rendering much of the potential stimulus ineffective’; ‘the impact on long-term borrowing rates is not clear-cut either’; and in short, concluded Heaney, ‘QE is no panacea and it will not ensure a return to growth at anything like the pace the Bank is hoping for.’ Among the cheerleaders, however, was Congdon, who as a veteran monetarist was pleased to see money back in the centre of the policy picture, albeit concluding that QE should have begun the previous autumn – instead of recapitalisation. ‘Although the cash injected into the economy by the Bank of England’s quantitative easing may in the first instance be held by pension funds, insurance companies and other financial institutions,’ he wrote in optimistic mood two months or so after QE was under way, ‘it soon passes to profitable companies with strong balance sheets and then to marginal businesses with weak balance sheets, and so on. The cash strains throughout the economy are eliminated, asset prices recover, and demand, output and employment all revive.’26

  The financial-cum-banking crisis as such, which had started with the credit crunch and Northern Rock in August–September 2007, ended in spring 2009 when the dangerously exposed Dunfermline Building Society – Scotland’s largest – underwent a forced sale of much of its business to Nationwide, with the Bank deploying its recently granted Special Resolution Regime powers. Over the next few years, the question became increasingly insistent – especially from the Treasury Committee’s chairman, Andrew Tyrie – of whether the Bank would undertake a full-scale inquiry into how it had performed during the whole crisis, including the lead-up to it, while Tyrie also pressed for the Bank to reveal to him and his fellow-MPs the minutes of the Court between 2007 and 2009. In both cases the Bank declined to play ball, but it did in May 2012 announce that it was commissioning three reviews into specific aspects of the Bank and the crisis: by Ian Plenderleith (who had retired ten years earlier) into the Emergency Liquidity Assistance; by the banker Bill Winters into how the Bank’s money market operations had functioned; and by David Stockton, a former chief economist at the Fed, into the Bank’s record of forecasting inflation and growth. ‘The Court of the Bank of England believes it is important for the Bank,’ declared the Court’s chairman, Sir David Lees, ‘to learn practical lessons from past experience in order to improve the way it operates in the future.’ That threefold move failed to mollify Tyrie: ‘What is needed is a comprehensive review by the Bank of its performance through the course of the crisis from which we can all draw lessons. That review should have been done much earlier …’ Lord Myners, former City minister and once on the Court himself, agreed: ‘I would say there is a feeling of teeth being drawn and the governor selecting which teeth he’s allowing to be removed.’27 The trio of reviews duly appeared in October 2012; and for all their competence, they undoubtedly did not add up to a 360-degree conspectus of the Bank during the crisis years. As for Court minutes during that period, the Bank did eventually in January 2015 release them (online, in somewhat redacted form); but inevitably, in the absence of the record of the key meetings held between the key executives, and of day-to-day exchanges of views and information, their contribution is relatively marginal to our understanding of how it all unfolded in Threadneedle Street. For the moment, the rest is silence.

  The financial crisis could not but have a raft of consequences, not least in relation to regulation and supervision. In early 2009 the shadow chancellor, George Osborne, commissioned the Sassoon report into the tripartite system that the current prime minister, Gordon Brown, had established in 1997. Sassoon’s verdict, delivered in March 2009, was as damning as perhaps Osborne had hoped for: poorly defined powers and responsibilities in terms of taking pre-emptive action; the absence of appropriate instruments to mitigate risks; inadequate enforcement of existing prudential regulation; and a glaring lack of co-ordination. His main proposal was that the Bank should have ‘the primary responsibility for evaluating systemic threats to financial stability’. Three months later, the City veteran Sir Martin Jacomb produced for the Centre for Policy Studies a report boldly entitled ‘Re-empower the Bank of England’ – calling tripartism ‘a disaster’ and arguing that ‘the central flaw in the restructuring was the removal of the Bank of England’s role in supervising individual banks’ – while in July the Tories published a ‘White Paper’ that declared the party’s intention to abolish the FSA and to give enhanced powers to the Bank, including the establishment there of a Financial Policy Committee (FPC) that would complement the existing MPC. The general election of May 2010 brought the Tories to power as the dominant coalition partner, and the following month the new chancellor used his Mansion House speech to confirm the abolition of the FSA and to explain that prudential regulation would return to the Bank (in the form of a subsidiary organisation), feeding intelligence back to the new FPC, which in turn would be given tools to halt a dangerous build-up of credit or asset bubbles. ‘Only independent central banks,’ declared Osborne, ‘have the broad macro-economic understanding, the authority and the knowledge required to make the kind of macro-prudential judgements that are required now and in the future.’

  For all Bank-watchers, it was a dramatic turn of events. ‘Does the Bank of England Deserve More Power?’ asked Richard Northedge in the Spectator as early as June 2009 – a question he answered only marginally in the affirmative, while soon afterwards the Evening Standard’s Anthony Hilton responded to the ersatz ‘White Paper’ by not only itemising the Bank’s pre-1997 ‘disasters’ (secondary banking crisis, Johnson Matthey, BCCI, Barings) but also asking the pointed question of his own, ‘What Bank will jack up interest rates for the good of the economy if it thinks such an action will bust half the banks it is supposed to be supervising?’ The commentariat also offered a degree of scepticism after Osborne’s Mansion House speech, typified by Chris Blackhurst in the same paper. The Tory abolition of the FSA was, he surmised, ‘politically motivated’, with ‘Brown’s creation always going to be in their sights’; the Bank had done no better than the FSA in anticipating the banking meltdown, with the governor ‘appearing just as startled as anyone else by the swiftness of events, both here and in the US’; and altogether, ‘the nagging worry about the Osborne model is that it won’t change very much’. A month after Osborne’s speech, the Treasury produced a consultation paper. ‘The Bank will be pretty much in charge of everything,’ commented the Independent’s Sean O’Grady. ‘Indeed, this is much more than a return to the pre-1997 position, when the Bank was solely in charge of banks’ supervision. It now has insurance firms, hedge funds and who knows what else under its wing, bodies that were under an alphabet soup of “self-regulation” agencies in the old days.’ A last word at this point went to Charles Goodhart, by now a professor at the LSE. ‘There is a danger,’ he told the press in September 2010, ‘when you are putting so much power in one institution.’28

  What part if any had the Bank played in the death sentence for the FSA and the return of supervision? The simple answer is that we will not know until the full records become available – and that assumptions of turf wars, power grabs and party-political manoeuvring may well be far from the whole truth. Indeed, the run of records we do have, primarily the
NedCo minutes during the crisis, suggests a significant division of opinion at the Bank, at least at one stage. Those minutes for April 2008 reveal the non-executive directors ‘agreed that there was a powerful case for the Bank to take a greater role in prudential supervision’, but that ‘that was not supported by the executive management’. The latter, with King almost certainly to the fore, spelled out their case:

  The potential reputational damage to monetary policy from a central bank having responsibility for supervising financial institutions was one of the main motivations behind the current UK regime. Although related, there were important differences between monetary and financial stability. In a fundamental sense, it was possible to achieve the former but not the latter. No regulatory regime could ensure that there would not be another financial crisis or bank failure. It was possible to limit the impact and improve regulation, but financial crises were endemic. A second argument was that it would be difficult to identify a set of institutions that the central bank could plausibly regulate on a day by day basis, while maintaining the focus of the senior team on monetary policy. It will always be likely that, in retrospect, the criteria were judged to be wrong …