My Life, Our Times

by Gordon Brown

  If Barclays found money elsewhere in a legitimate way there could be no objection, but I was always suspicious of the bank’s lack of openness with their shareholders – and the public – about the deal it did with the Gulf states. And I was always unhappy that Barclays chose to use their deal to make a political statement: denouncing our state recapitalisation of the banks. The fact that it was state money – from Qatar and UAE – that bailed them out did not discourage them from trying to score cheap political points and build a myth about the awfulness of state interventions. In doing so, they made it far more difficult to explain to the British public that this was a widespread banking crisis and not just an emergency faced by one or two banks and, by not telling the full truth, they hampered our ability to persuade legislators around the world of the need for far-reaching reform.

  Their unwillingness to be open about their own problems was brought home when, during our recapitalisation negotiations, Barclays asked if they could buy RBS. If we had allowed that – and no doubt some other governments in the same position might have tried to promote this – then an even larger part of the British banking system would have collapsed.

  Now we had acted, the question was what would the rest of the world do. During that flight back to London from the USA, I remember asking, ‘If we go out on our own, how does that solve it?’ and then answering my own question with another: ‘But do we really have a choice?’ If the alternative was a succession of bank collapses that triggered a depression, we had to act. But still there were risks from acting alone: a Britain-only recapitalisation might not be enough to gain the confidence of the markets and it might put even the UK’s own credit worthiness at risk. Although the Americans were still focused on buying up their banks’ diseased assets, there was still a chance of persuading the rest of Europe that they had to recapitalise the banks as well.

  While Alistair attended the annual meetings of the World Bank and IMF, on Sunday 12 October I made my second trip to Paris in the space of a week. I had been asked by President Sarkozy to attend an extraordinary meeting of the Eurogroup. The meeting was special for two reasons: first, the Eurogroup was properly a meeting only of Eurozone finance ministers, who jealously guarded their control over policy for the euro member countries. This was the first time since the birth of the euro nine years previously that policy would be discussed at the level of heads of government. The second reason was that Britain was not, of course, a member of the Eurozone. I know that some of President Sarkozy’s colleagues complained bitterly about the British presence. He took a personal risk in forcing my involvement on them. We both believed that the urgency of the task meant we had to dispense with protocol.

  Prior to the larger euro meeting I met privately with Sarkozy, President Barroso, Chairman Jean-Claude Trichet of the European Central Bank, and Prime Minister Juncker of Luxembourg. I told them I now believed European banks held around $2 trillion of US-originated assets, of which around $400 billion were toxic – with probably a similar amount in the shadow banking system. I repeated that European banks were now more highly leveraged than American banks. When the full Eurogroup met, I presented these same figures again to show why the problem was lack of capital, and why Europe should not confuse the origins of the crisis – which came out of America – with its severity and its still-multiplying consequences. It was now undeniably a European crisis as well.

  Since I was not a member, I left the meeting once I had spoken, but I was to find that my words did have an effect: in the next few days, one by one, countries in the Eurozone decided to recapitalise their banks, and they would design common European rules for a credit-guarantee scheme like ours. But as I had told the Europeans, the world would be safe only if America acted too.

  By this stage, the Bush administration had finally won congressional approval for TARP. By Hank Paulson’s own account, the administration had now also come to accept that buying up toxic assets would not in itself resolve the crisis. ‘Here we were,’ he wrote in his diary, ‘worse off than ever.’ And, as I had already sensed from my meeting over a fortnight before with Tim Geithner, the Americans were moving towards recapitalisation. Hank and President Bush had had a telephone call to prepare for the G7 and G20 meetings that weekend in which they talked about recapitalisation. As Paulson records, ‘He [the president] pressed me about the capital program and asked, “Is this what it’s going to take to end this thing?” “I don’t know, sir,” I admitted, “but I hope it’s the dynamite we’ve been looking for.”’

  As chairman of the Fed, Alan Greenspan had been quick to understand the impact on our lives of new technology, of the changes in the energy markets, and of globalisation. It is to his credit that he now spoke openly about mistakes made and the failings of the US financial system. That weekend he spoke out about the inadequacy of the banks’ capital and explained that the capital-requirement models of the banks were deficient. ‘Had the models instead been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in a far better shape today in my judgement.’ It was exactly what we had been saying in Britain. The United States was at last changing tack.

  By Friday, Hank was offering us more hope that there could be a coordinated approach. He had already approved a paper for the G7 hinting at recapitalisation and he now went further: as long as it did not mean nationalisation, he would support capitalisation. Thanks to Alistair’s deft handling, the final G7 agreement did not rule out public stakes in our banks. It spoke of the need for ‘capital from public as well as private sources’.

  That weekend US officials worked to get a US capitalisation plan into shape. On Sunday 12 October and in great secrecy Paulson, Bernanke and Geithner agreed its terms. As we now know from his account, Hank then personally called all the major bank executives and asked them to meet him in the Treasury at 3 p.m. On that Sunday evening, as I returned from the Paris meeting, President Bush phoned to tell me that they would formally announce on Tuesday that TARP funds would be used for recapitalisation of their banks.

  While America prepared to announce its decision in principle, we had to move forward on the practical detail of our own and announce it before the markets opened the following morning, but with our figures being revised and reviewed every hour, this was proving difficult. Having travelled back from Paris, I had got to bed at 1 a.m. At 5 a.m. I was suddenly woken by a noise at the door of our bedroom. I thought it was our young son, John, who often woke up and came through to our room, and I heard Sarah say, ‘John, seriously, not tonight, you need to go back to bed and let Dad sleep.’ The reply was a whispered, ‘Sorry, Sarah, it’s Shriti.’ And then she added something that jolted me fully awake: ‘The Treasury have come up with new numbers which Alistair wants Gordon to see.’

  Overnight the Treasury had agreed the final offers we would make to the banks. That had led them to important conclusions which Alistair wanted me to approve: RBS’s needs were so extensive that to make recapitalisation work we would own a majority of RBS shares. While Lloyds and HBOS would merge, we would initially also have a majority stake in HBOS. I had been well prepared by Shriti for that probability. Before the markets opened we announced a £37 billion recapitalisation of RBS, Lloyds and HBOS resulting in a 57 per cent stake in RBS (later to rise with a further capital injection above 70 per cent) and a 58 per cent stake in HBOS, with a percentage stake in Lloyds subject to their mergers. Other banks would increase their capital from private sources. To get lending to business and homeowners moving again, the recapitalisation was matched by the biggest credit-guarantee scheme Britain had ever announced: £250 billion.

  Throughout the crisis I had felt that we were dealing with more than a financial failure: this was the fallout from years of greed. Andrew Haldane, who would later become the chief economist of the Bank of England, has calculated that if dividend payments had been reduced by a third during the period 2000–7 then £20 billion of extra capital would have been
available to the banks. If the banks had restricted dividends in years when they made annual losses, £15 billion more would have been available. And if they had paid themselves just one-tenth less, then another £50 billion could have been used to bolster the banks’ positions. As he puts it: ‘Three modest changes in payout behaviour would have generated more capital than was supplied by the UK government during the crisis.’ So, for me, an indispensable part of our announcement of recapitalisation was that there would now be tight conditions attached to bonuses and pay: remuneration was cut back, dividends were cancelled, the chief executive and the chair of RBS both tendered their resignations, and the CEO of HBOS would also leave.

  On 13 October, Germany announced €400 billion in guarantees and €100 billion in capitalisation; France €320 billion in guarantees of medium-term debt and €40 billion for capitalisation; Italy €40 billion in capitalisation and ‘as much as necessary’ in guarantees; the Netherlands added €200 billion in guarantees; and Spain and Austria €100 billion each. Our diagnosis – that banks were dangerously low on capital – had prevailed, despite being the opposite of what most bankers had been saying for much of the last year. That day also saw a 10 per cent rise in the European stock exchange – its biggest rise ever.

  At no point in history have governments injected so much money into buying up assets in the banking system and guarantees. In the coming year, governments around the world would provide a total of $15 trillion in bailouts, guarantees of bank liabilities and special central-bank liquidity. When officials gave me a list of all the countries that had followed Britain’s lead – Germany, France, Spain, Denmark, Portugal, the Netherlands, Austria, Switzerland and America – I knew that the world was finding our way forward. The patient was out of the emergency room and into intensive care. The banks had been saved; now could we prevent a global recession becoming a depression?

  CHAPTER 16

  PREVENTING A GREAT DEPRESSION

  ‘$1 trillion?’

  Shriti Vadera left this note on my desk on Monday 30 March 2009, three days before the G20 summit that would be held in London later that week. It was her estimate of how much the G20 could make available through all of its various instruments – trade credits, International Monetary Fund and World Bank crisis support, extra development aid – as part of a global recovery plan. Earlier figures had come to $850 million, but by Thursday 2 April, the day of the summit, Shriti had filled in the blanks, confirming that the total figure for stimulus, having added in further trade credits and more generous development aid, would in fact be $1.1 trillion. This made it the largest publicly funded injection of resources the world had ever promised.

  It was a repudiation of the do-nothing response to the economic crash of 1929, which had brought the long Global Depression of the 1930s, and contributed to the failure in international cooperation when the London Monetary and Economic Conference of 1933, organised by the League of Nations, had collapsed without agreement.

  Needless to say the significance of the 2009 package came more from the confidence it generated than the money it offered – and indeed much of the money was never called upon. In the three months that followed the G20 summit, the world economy recovered fast as a result of it. So, how did we secure such an unprecedented degree of international cooperation? And why did this cooperation dissipate quickly when it came to dealing with climate change, global banking reform and weak economic growth?

  The international community had never been good at preventing or dealing with financial crises. Since the onset of the latest wave of globalisation in the 1980s, banking crises – a hundred in all – have been twice as common as at the turn of the last century. But none of these more limited, mainly national, crashes prepared us for the first truly global crisis of the modern era. All countries were slow to see the looming storm and to understand the need for major reforms in the world financial system.

  While I had talked to European leaders about a global leaders’ economic forum since January 2008, it was not until the UN meetings in New York in September that I laid down a concrete plan for what would become the leaders’ G20 economic summit. This I did at the impromptu gathering I had convened of the main heads of government who were still in New York for the UN General Assembly.

  We met in an out-of-the-way, poorly furnished room at the UN – chosen because it was far from the places where the press were lying in wait. It was almost certainly the dingiest room ever chosen for a historic meeting attended by such distinguished company. Going around the table in New York, President Lula of Brazil – who held the chair of the finance ministers’ G20 at that time – was the first to say he was on board. He was seconded by José Manuel Barroso, president of the European Commission, and prime ministers Zapatero, Socrates, Balkenende, Rasmussen, Stoltenberg and Rudd from Spain, Portugal, the Netherlands, Denmark, Norway and Australia respectively. I had invited President Jakaya Kikwete of Tanzania, the retiring president of the African Union, to our meeting – and he was enthusiastic about the proposal. When Prime Minister Meles Zenawi of Ethiopia arrived in New York, he joined the consensus.

  As we concluded, President Lula made a magnanimous offer: to pass the chairmanship of the finance ministers’ G20 from Brazil to Britain with immediate effect, three and a half months ahead of the scheduled date. With general agreement that Britain was now at the helm, I contacted Chancellor Merkel of Germany, Premier Wen Jiabao of China, and Prime Minister Manmohan Singh of India. They too were supportive.

  The next day, addressing first the United Nations and then the Clinton Global Initiative, I laid out publicly for the first time the arguments for a common approach to the crisis. In both speeches, I recalled that the institutions of the global economy had been created for a different world – of sheltered and separate economies – and had to be adapted to a new era. All through the day I was still going over the previous night’s conversation in my mind. I knew that the consensus we had reached was useful; but I also knew that without American buy-in it would be difficult to get it off the ground.

  It had been agreed the night before in New York that I would pitch the idea at my meeting with the president in Washington the following day, and that Nicolas Sarkozy would follow up. When I sat down with George Bush in the Oval Office, as well as discussing the matter of the banks I also raised with him for the first time the possibility of a leaders’ meeting, and told him that if he supported the idea I would take responsibility for knocking heads together to secure an agreed agenda and communiqué. He agreed in principle to a meeting while still wanting to consult over its composition, but he had one other stipulation: during the final weeks of the presidential election and ensuing handover, he would not travel abroad, so if any meeting was to take place before the end of the year it would have to be in Washington.

  It was not just monetary and fiscal coordination that the world economy now needed, I said to him, but also a new World Trade Agreement that would halt the growing resort to protectionism, which had killed hopes of a strong world recovery in the 1930s. The lengthy round of trade negotiations that had begun in 2001 – the so-called Doha Round – were currently stalled all these years later because of a disagreement between America and India. I informed him of assurances I had sought and received from Prime Minister Singh: India was prepared to move from its entrenched position that it would cut off food imports if they rose unacceptably high. But when the president called his trade adviser into the meeting it became clear to me that even if we could do a deal with India, America was still reluctant to move forward. His adviser was more worried about jobs lost because of cotton imports to America than jobs gained from food exports to India.

  From then on, getting the leaders’ forum up and running became a central preoccupation. There ensued a period of telephone diplomacy – of almost daily calls, backwards and forwards, between the Americans and others, in order to agree both the date of the first meeting – it was to be 14 and 15 November – and what kind of membership this grou
p of government leaders would have. But by the time we had agreed on that date, the time available to plan and prepare the meeting was so attenuated that when we met as a group we did little more than agree to fight protectionism and coordinate our domestic responses. The meeting’s main decision was to hold another meeting. But where? There we faced a battle too. The Japanese were keen that the leaders come to Tokyo. The Australians proposed that we travel down under. But in the end, everyone came round to London as the right venue and 2 April 2009 as the right date.

  In sorting out the London attendees, we had two problems. The Netherlands and Spain were not part of the G20 of finance ministers but their economies were important and their prime ministers were anxious to be a part of the new forum. We found a compromise. President Sarkozy would vacate his seat as president of the EU and attend as president as France. The prime minister of Spain would take Sarkozy’s seat, and the prime minister of the Netherlands would sit beside him as if his adviser. The G20 was already in practice the G22.