There was another factor too. Northern Rock had only seventy-six branches, of which just four were in London. They were mostly small and had few members of staff. They were used to dealing with customers in ones and twos, not several hundred at a time, all clamouring for their money. It was inevitable that when customers, many of them elderly, arrived at the branches, the staff would try to reassure them. This took time, and as a result the queues began to grow. Twenty years ago this would have been reported on the 9 o’clock news or in the newspapers the following morning, with a natural break between the events as they were reported. But now, rolling 24-hour news coverage meant that images of people queuing outside branches appeared on television in a never-ending loop. Each report fed off another, ratcheting up the tension. Unsurprisingly, more and more people felt they should join the queues to take out their money, just in case. To cap it all, it was a lovely sunny autumn day, so the weather was no deterrent. It was striking how relaxed and yet determined everyone was.
By contrast, a few months later, when there was a mini-run on one Northern Rock branch, the staff had been instructed to pay out to anyone who wanted their money, without question, argument or reassurance. Managers were told that customers were to be brought inside the branch, not left out in the street. It was also pouring a cold November rain. There were no queues and no panic.
But that September weekend, the queues formed on Friday and lengthened on Saturday. I’d raced back from Portugal and then had to fly to Edinburgh for a constituency event. I arrived home to the phone ringing. It was Gordon, asking me to come back. He said, you must reassure people that their money is safe. I said I was not so sure they would believe that: there was something happening here that was all too reminiscent of the fuel crisis of 2000. At that time, because of a strike at oil refineries, people believed that the fuel pumps were about to run dry and huge queues formed. Then word spread that supermarkets might run out of food. We saw panic-buying, supermarket shelves stripped, as people came to believe that if they did not buy now they might starve. For a few days the government seemed to have lost control. We were not yet at that stage with Northern Rock, but there was a mood in those queues that I recognized. It was going to take time to work this through before people would go home, certain that their money was safe.
Gordon was right, though, that I needed to be in London to begin the process of reassurance if the following week was not to end in chaos. That evening I recorded rounds of interviews for all the television channels from the study at No. 11 Downing Street, with all the authority that address implies. It did not reassure. What’s more, it was clear that the run on the bank would carry on into the Monday if we did not do something more drastic than offer words of comfort.
That Saturday evening marked a turning point for me and for the Treasury. It was clear that we had to up our game. The more I looked at it, the more I felt we had drifted into a situation in which we appeared to have lost control of events. If Gordon and I did not get a grip, Northern Rock would be finished and so would we.
Part of the problem lay with the Treasury, which was simply not tooled up to deal with the job. There were not enough people with the necessary experience. I talked to Nick Macpherson, the Permanent Secretary, about this and we agreed we would have to take the brightest and the best away from whatever they were doing and put them on to sorting out Northern Rock. There was the additional problem of the usual hectic business of the Treasury: we were preparing for the government spending review and the pre-Budget report, both of which I had to present when Parliament returned in less than a month.
Governments right across the world frequently boast about cutting civil service numbers. The Treasury had lost many of its staff over the preceding ten years, and the strains were now evident. So, that Saturday night, after the television interviews, I sat down with some of the best people in the Treasury to decide what we should do with a bust bank. For it was abundantly clear that that was what Northern Rock now was.
The first question we had to answer was, how to stop the queues. You cannot resolve a problem until you quell the sense of crisis. You need time to work out the best solution in a calm atmosphere. I had learned this first when I was Secretary of State for Transport, dealing with huge problems on the railways. Now we had to get these queues off the streets, and the only way to do that was to find a way of assuring savers not only that their money was safe but that we had a convincing resolution to the story, ideally one that involved selling Northern Rock to someone else.
At our meeting, downstairs in the study of No. 11, we agreed that we had to try to find a buyer for Northern Rock. Before that, we had to provide a guarantee that every penny of savers’ money was safe. That meant a government guarantee, with no qualification. This was a huge step and I was reluctant to use the government’s credit in this way, guaranteeing a bank whose own reckless behaviour had brought it to its knees. I was also very conscious that it might not stop with Northern Rock; that we might end up guaranteeing every bank in Britain, which I did not want to do. That is exactly what happened in Ireland a year later, when its banks’ debts became Ireland’s debts and eventually the country had to go to the International Monetary Fund (IMF).
Although Northern Rock was manageable, others would be less so if we had to repeat the exercise. RBS, for example, had a value at that time of a little less than our total national income. And there was an extra problem. A guarantee on its own might stem the immediate panic, but people would soon be asking what was the government’s plan for fixing this broken bank? The plan had to be credible and it had to represent a resolution to the problem.
The next day, Sunday, Lloyds renewed their interest, but they still wanted a guarantee of Bank of England support for two years. The Bank baulked at this. It would be guaranteeing funds for Lloyds, then a healthy bank. I could see the problem with this, but I wanted the Bank to consider what it could do. I had concluded that we would have to offer a guarantee to savers in Northern Rock, but if we could link it to a purchase by Lloyds, thus providing a solution to Northern Rock’s problems, that might do the trick. I was reluctant to provide an open-ended guarantee to depositors without being able to say that the bank had been purchased and thus ending the immediate crisis.
Monday morning saw the queues resume, with Northern Rock haemorrhaging money every hour. By now I was sceptical that Lloyds would see anything through. Nick Macpherson had also sounded out the other big banks about the possibility of their jointly buying Northern Rock. Their attitude was illuminating. They didn’t at that stage see Northern Rock as being part of a larger problem. They did not want to help. They didn’t want us to nationalize it, but neither were they ready to come up with a private sector solution.
That Monday, Gordon and I met two or three times at No. 10. We agreed that the guarantee linked to a sale might work. Like myself, he was reluctant to pledge the government’s money, but there was no alternative. One billion pounds had been withdrawn by customers the previous Friday. By Saturday the figure had risen to £1.5 billion.
I had decided that it would be better to make the announcement of the guarantee at close of business on the Monday afternoon, to allow people to see it on the television news that evening. That would provide a natural break, for the risk of making such an announcement in the middle of the day was that it would simply become lost among endless pictures of people forming queues and telling reporters they did not believe anyone and just wanted their money out.
Gordon and I were due to meet the US Treasury Secretary, Hank Paulson, who had unfortunately chosen that day to pay us a courtesy visit. Gordon and Hank were close, having worked together when Gordon was Chancellor, and I was keen to meet him, but we could not have picked a worse day for it. During the afternoon, Lloyds, predictably, pulled out. There would be no sale. I went round to No. 10 as I had to get Gordon to agree to a guarantee with no sale. What’s more, during the afternoon, I had concluded that guaranteeing savers’ money would not be enough. We w
ould also have to guarantee the money deposited with Northern Rock by local councils and commercial bodies, since if those entities thought that it was only individual savers who were safe, they would pull their money out immediately. This was a huge commitment, although, since the money was there in the bank, I wasn’t too worried about it – if only we could stop the panic.
As was to happen time and again over the next few months, I found myself having to make a statement at short notice. I had to reassure the public in a way that would stop the panic escalating further. It was a critical moment and I knew we had only one chance. If it failed, the panic might spread to other banks. I did think that this explicit guarantee would work, but it was very much in the balance. More embarrassingly, I had to announce it at a joint news conference with the US Treasury Secretary.
I warmed to Hank, a bluff, amiable man, who was open and direct. He had worked in a junior role for the Republicans in the Nixon administration, then spent most of his career with Goldman Sachs, the US investment bank. He had reluctantly agreed to serve George W. Bush as Treasury Secretary just over a year earlier. His great strength was that he understood how the markets worked. The two of us remained in close touch over the next two fraught years until he left office.
A good working relationship at this level was essential. Even during what were difficult times for both of us at the height of the crisis in 2008, we respected each other’s positions and were able to work closely. Fortunately, Hank has a sense of humour. The news conference after our meeting in the sitting room at No. 10 was meant to report on our discussions. The talks had largely centred on the Americans’ perception that the Bank of England was not taking the unfolding drama seriously enough. As Hank said: ‘Your guy Mervyn has a high pain threshold. I hope you have too.’
The news conference had been arranged so that the media could speak to both Hank and myself. By the time we faced the press in Downing Street, however, we knew that the British press would only be interested in one question: Northern Rock. Hank duly read out his statement and then had to watch me for the next twenty minutes. The questioning was rough but justified; yet to my American visitor the journalists appeared hostile. Three years later he told me how bad he had felt at not being able to share some of the pain. Certainly, in my experience, the American media is much more deferential.
So I announced the guarantee and, to my immense relief, it worked. The next day the queues, with few exceptions, had vanished. We now had a bit of breathing space, but we had to continue looking for a buyer or we would end up owning Northern Rock ourselves. That was not a prospect that Gordon or I relished. We had stopped the queues but there is no doubt that we had been severely battered. Images of the first run on a bank in more than a century had flashed around the world. Northern Rock was now internationally a byword for disaster – ‘Northern Crock’, it was nicknamed. As Chancellor, I had to take responsibility. The only good thing to be said about the entire episode was that it was valuable preparation for what was to come a year later. I was determined that the mistakes made in August and September 2007 would not be repeated.
2 The Election that Never Was
In September 2007 Margaret and I caught an early morning train down to Bournemouth. British political parties traditionally choose to hold their annual conferences at seaside resorts. This year, it was the turn of that sedate south-coast town. I was due to give my first conference speech as Chancellor that afternoon. The previous two days had been spent writing it. These speeches take an enormous amount of work and are usually forgotten the day after they are delivered. I knew that the only thing that anyone would be interested in was what I said about Northern Rock, and so it proved.
We and our fellow passengers heading to the conference were in good spirits: despite Northern Rock, Labour was ahead in the polls and Gordon Brown had made a good start as prime minister. Four days into his premiership a blazing Jeep had been driven into Glasgow airport and the UK was braced for a fresh wave of terrorist attacks. It was the most dangerous situation facing the UK since the attacks in London of 2005. With Jacqui Smith, Britain’s first woman Home Secretary, Gordon had handled the aftermath with gravity and poise, summoning intelligence chiefs and ministers to a Cobra committee meeting in Whitehall and raising the threat level to the highest degree.
He had also handled the re-emergence of foot-and-mouth disease – which had cost beleaguered farmers dear as their livestock had to be slaughtered – extremely well. We were mindful in government of the loss of confidence and public support during the earlier outbreak in 2001. Gordon had responded effectively, too, to the unusually bad flooding in England that summer. The Conservative opposition had found it difficult to make headway. They had said little about the Northern Rock crisis, and when they did it was frequently contradictory and confused.
On the surface, things were moving our way, so inevitably there was an argument for us seeking a new mandate from the country under a new prime minister, thereby strengthening his personal authority. Whether to call a general election is one of the biggest decisions a prime minister can make. It is his or hers alone. Get it right and you’re a hero; get it wrong and you’re out. I had recently discovered that the arguments for and against calling an election had been raging all summer among Gordon’s key people. Ed Balls and Ed Miliband had been his special advisers when he was at the Treasury and were now ministers themselves, Ed Balls as Education Secretary and Ed Miliband in the Cabinet Office. Gordon was heavily dependent on the economic know-how of Ed Balls, who had been with him at the Treasury for fifteen years. Douglas Alexander was another trusted confidant, now responsible for international development; and Spencer Livermore, the Prime Minister’s Director of Strategy, also played a crucial role in these discussions.
I wasn’t part of the discussions until late on, in early September. Even then, my involvement was fairly casual and would only occur if I happened to be with Gordon when one or another of his team would wander in and begin rehearsing the arguments for or against. It felt uncomfortable at times, as if I were eavesdropping, since I hadn’t been invited to take part; it was just the geography of Downing Street that made me an accidental participant.
Nos. 10 and 11 Downing Street are really one big rambling house, with myriad corridors and rooms running into each other. It is not always clear what is private space and what is not. If I wanted to talk to Gordon, we could arrange to do it through the civil service machine, or, certainly in the early months, when relations between us were still good, we would meet informally since it was easy enough to seek one another out in a downstairs room.
That my involvement in the discussions around a possible general election was so peripheral was a portent of what was to come. I knew that Gordon took advice from a wide range of people; he has always done so and there is nothing wrong in it. The trouble was that only on very few occasions did these people all come together in a meeting, Cabinet or otherwise, so that the arguments on a particular issue could be thrashed out and a decision reached. All too often I would come out of a meeting with Gordon believing that a decision had been reached, only for it to transpire that he had spoken to someone else with a different opinion and changed his mind. That is the way Gordon worked. He liked to canvass a wide range of opinion before making up his mind about what to do – often at the last moment. Far too often, individuals consulted on an issue did not know that he was speaking to others and weren’t aware of the competing arguments. A meeting with Gordon involved many elephants in the room.
Gordon always had the ability to gather people with good minds around him. He also attracted – and expected – fierce loyalty. His style of operating was like an old-fashioned court: he was the centre around which trusted courtiers moved. He had worked like this throughout his career, since his earliest years as a student politician at Edinburgh University. Losing his most trusted confidants – Balls, Miliband and Alexander – when he entered No. 10 left him, I think, slightly bereft.
Now, on the ev
e of conference, I was aware that something else had changed since the summer. This was my relationship with Gordon’s inner circle. I had known most of them since they started working for Gordon in opposition in the early 1990s. We had a good working relationship, which carried on into government during my first year as Chief Secretary to the Treasury. Ed Balls and Ed Miliband were always helpful at that time and I valued their thoughts. Douglas Alexander, then in charge of election planning, I had known for many years as a young politician with acuity and strong values. I often called in to see Gordon at the Treasury in his time there and took part in discussions on policy. I was never one of the magic circle; I was one of the many whom Gordon would consult from time to time. We respected and trusted each other. But something changed after he became Prime Minister and suddenly I was definitely outside the tent.
Here I was at the heart of government, appointed by Gordon to a key post, and yet I wasn’t privy to thinking or discussion on policy issues within his close team. In a way, it was not personal. I had seen it happen with Gordon time and again over the years. People would be welcomed into his confidence but then find themselves shut out, for reasons that were difficult to fathom.
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