I had a great deal of sympathy with what Fred Goodwin was saying, but I asked the question: why were the markets singling out RBS for particular concern? His answer was that they felt that RBS didn’t have sufficient capital. I asked whether he was comfortable that RBS did have sufficient capital, and his response was that he felt that it did. And yet I was worried. It occurred to me that Sir Fred had not come just as a shop steward for his colleagues. He would not admit it, but I sensed that RBS, which until that time had seemed invincible, its directors and senior staff exuding confidence verging on arrogance, was in more trouble than we had thought.
Our conversation was further evidence to me of just how poor was the relationship between the Bank of England and Britain’s largest banks. Part of the problem was that in the ten years since we had given the Bank its independence, the Governor’s contacts with the chief executives and chairmen of the London banks had become less frequent and somewhat distant. The essential day-to-day contact, to feel the pulse and sense the ever-changing mood of these unwieldy corporate entities, was just not there. It is an essential part of the Governor’s role to understand what is going on, but it is not something that can be written into legislation, and I suspect that the Bank considered it to be the job of the FSA. In particular, by the autumn of 2007, I was being told time and again by bank chief executives that the Bank simply did not understand the nature of the problem they were facing, which was lack of liquidity.
Things had been different in the days when Sir Eddie George was Governor of the Bank. He was a man who knew the markets intimately. When I first met him, in the late 1980s, he was sitting at a desk surrounded by screens showing every blip of global share movements, which you could just about make out through a fug of cigarette smoke. I liked Eddie. We worked closely in the summer of 1997, drawing up the legislation to give the Bank operational independence. Relations between Eddie and Gordon had become somewhat strained when Eddie discovered that the Bank was no longer to have responsibility for day-to-day supervision of the banks, which would fall within the remit of the FSA. It suited both of them to let me deal with the mass of detail to get the new legislation on to the statute book. I last saw Eddie at a City dinner about a year before he died. Since then, I have often wondered how he would have handled the banking crisis had he still been Governor. Relationships matter in all walks of life, and the lack of relationship between Mervyn King and the bankers had become a real problem. I guessed that was what had brought Sir Fred to my door.
Seven years earlier, when RBS acquired its much larger rival, NatWest, this latest and largest of mergers reduced the number of British super-banks to four. There was much celebration within RBS, since not only had it seen off its rival, Bank of Scotland, but it had acquired a giant of the British banking scene. RBS, dazzled by its new prestige and power in the banking world, moved in for the next big acquisition. It was this that was to prove fatal. The deal to buy the Dutch bank ABN AMRO had been closed earlier in 2007. Initially, Barclays had gone after it. Just as they had done seven years earlier, when Bank of Scotland went after NatWest, RBS then joined the chase. Barclays pulled out after several weeks of intense bidding and counter-bidding and RBS, along with a consortium of foreign banks, bought large parts of the Dutch bank.
Now, as we sat talking, I asked Sir Fred why RBS had continued to pursue ABN AMRO when the general sentiment had been that it was not worth anything like what they had paid for it. He outlined what he believed to be the advantages to RBS of having an even greater global reach. He accepted that in any takeover there would be bad as well as good once you opened the books. I remember thinking that it was rather like a car-boot sale. You see a box with some goodies at the top and you accept that beneath them there will be some absolute junk. As it turned out, ABN AMRO was stuffed full of junk. There had been no opportunity to carry out a thorough examination of its assets, good or bad. It is quite common when you get a contested takeover with two or more bidders that there is an element of blind bidding. But once Barclays had withdrawn and RBS was the only bidder left there had still seemed to have been no full examination of the books.
I asked Sir Fred again why the markets were so unhappy. Once more, he stressed that they did not believe RBS had enough capital. He went on to repeat that he did not believe this to be the case. But I wondered: markets can be irrational, but they can also be right. At that stage, none of the authorities believed that RBS was in a precarious position. It seemed that they were simply experiencing the same turbulence as everyone else. I was concerned, however. This was no casual conversation. After Sir Fred had set off back into the cold winter air, I rang my private secretary and told him that we should start worrying seriously about RBS and the other big banks. I had no specific inside information but the conversation had left me feeling deeply uneasy. If RBS, the largest bank in the world, could be in trouble, what about the others?
In early January, when I got back to Downing Street on a Sunday night, I went round to Gordon’s flat to discuss what we should do about Northern Rock. We were concerned about the urgent need to regain the political initiative that had been so badly lost in the autumn. Neither Gordon nor I wanted to end up owning the bank. It was not just the political difficulty of a Labour government nationalizing a bank, there was also a practical problem. Public ownership would mean that we, the owners of the bank, would be held responsible for everything it did. A decision to refuse a loan could all too easily become a ministerial decision. We had already spent a great deal of public money on Northern Rock and we were anxious to get it back as soon as we could. We were also conscious that Northern Rock shareholders would be ready to cry foul if we nationalized the bank without having established beyond doubt that there was no market solution.
All the prospective purchasers wanted the government to take too much of the risk if things went wrong. Lloyds, back on the scene, wanted the government to nationalize Northern Rock and then sell it on to them on the same day. That would have left the government with all the liabilities, and the risk of litigation from shareholders, while Lloyds received the value of the asset. Ironically, Bradford and Bingley, which was to collapse nine months later, looked the most promising bidder. But the FSA ruled it out because there were worries – correctly, as it turned out – that they did not have enough capital. HBOS wanted to buy the deposits but it did not want the branches. It wanted the cash because it was increasingly desperate – it too would soon be on the ropes. But if we had allowed that to happen we would have had to make thousands of people redundant at Northern Rock. There was also an idea the Treasury came up with: to provide, effectively, backstop insurance to a prospective buyer so that if conditions deteriorated further they would have some cover. In short, we had continued to look carefully at every possibility while still leaving nationalization on the table.
When I went across to see Gordon in the flat that evening, I told him that nationalization was looking increasingly likely. The other options were fraught with difficulties which I thought would be impossible to resolve. We were committed to exploring them, but I was not optimistic. Gordon said he could see the force of the argument but, like me, could also see the political watershed we faced. It would hark back to the wilderness years, when Labour appeared unelectable. Often now overlooked, in the narrow vision of instant history, is the fact that it was Gordon, alongside Tony, who in the early 1990s devised the fresh economic policies for a new political age. Would it be seen as the death of New Labour? We were both in a very bleak frame of mind, that early January. Although at that stage there was no sign of recession, it was clear that the economy was slowing very rapidly and all the problems that would bring were on the horizon.
We had several more meetings that month. We wanted to get a private sector solution if we could, but I was anxious that we should have a plan in place if we could not. It was increasingly clear that the price demanded by the private sector would be too high. Their attitude was hardly surprising: in January 2008, buying a bank wit
hout any subsidy or indemnity looked increasingly like an act of madness, and by the end of the month it was evident that there would be no bid that did not leave the taxpayer with all the downside risks and precious little on the upside. I was in no doubt about just how difficult the politics of nationalization would be; it would be only too easy for the Tories to say that this was evidence of the fact that we hadn’t changed from the days of Clause 4 of the Labour Party constitution which committed us to public ownership of key sectors of the economy. Gordon was probably more reluctant than I was to call it a day. But he could see that the private sector solution did not stack up. Nationalization was the only answer.
This time we were careful to put in place a proper plan and it was two weeks before we could sign it off. Once it was signed off, for legal reasons it had to be done very quickly and announced to the public. This was, after all, a public company with traded shares. We decided that we would announce the nationalization on Sunday, 13 February. We chose a Sunday because we wanted the news to sink in when the markets were closed and the branch doors shut. Staff would have to be told that they should turn up for work the next day, and that they would be paid. We did not want scare stories on television which might lead to queues forming again. It also helped that we had put together over the previous few weeks a first-class management team, led by Ron Sandler, who had successfully turned around Lloyds of London, one of the oldest and most famous names in the insurance world, when it was in turmoil in the 1980s. All of this planning meant that we could stress that it would be business as usual on Monday morning.
I spent all of Saturday in the Treasury, drafting a statement for the following day’s news conference. Preparing such statements takes hours, as each word and sentence is analysed again and again. Detail matters: how I looked at the news conference, my demeanour, what the backdrop should be – irritating maybe, but appearance is key. The Treasury still has pictures of Norman Lamont doing a hastily arranged press conference at the end of Black Wednesday in 1992. He was standing beside two very large dustbins.
The news conference went well, all things considered. Perhaps it was helped by the calming background set, in which I stood bathed in soothing, soft, lavender light. The market reaction the next morning was far more positive than we could have dared to hope. My statement to the House of Commons on the Monday afternoon was also well received. Making a statement to the House remains a vital part of our political process. The detailed preparation involves mastering every minor detail and takes a lot of time. Only a fool would wing it. It’s true to say that during my time as Chancellor I had to make more than my fair share of Commons statements.
After the pre-Budget report of the previous autumn, my statement on the missing tax discs, and numerous emergency statements on Northern Rock, I felt that this time we were on the front foot. It worked because we were decisive and in control. For me, it was a turning point. For the first time since the financial crisis had erupted, I felt confident and in command of events. It also seemed to mark a turning point in the party’s political fortunes, though sadly that was short-lived.
Hindsight is a wonderful thing and looking back we should perhaps have made the decision earlier, before Christmas; but we were operating in uncharted waters. We had shareholders to deal with who were ready to sue if we got anything wrong. And when we did finally announce the nationalization, far from confidence collapsing there was a palpable sense of relief. If we had done it in the autumn of 2007, it would have been hugely controversial with the public in general and in the City; now only the Conservative Party remained against it. Their response was ludicrous: ‘We will vote against nationalization but will not use every procedural parliamentary device to obstruct it,’ George Osborne declared at an emergency news conference with David Cameron. He went on to complain that we were planning to take powers that would allow ministers to nationalize any financial institution at any time. It is just as well we did. Without those powers we would never have been able to deal with Bradford and Bingley later that year. Nor with the Dunfermline Building Society the year after.
The legislation had to be rushed through Parliament over the next three days. Our MPs were in good spirits despite the late-night sittings. So too were our members in the House of Lords. I was grabbing a bite to eat in the Commons dining room late one night when a very elderly Labour lord came over to the table. He had been an MP when Clement Attlee was Prime Minister in 1945, and he said I had just made his day. He had waited all his life to nationalize a bank and now he was doing it.
Northern Rock was about to embark on a long, slow process of recovery. Two years later, in the spring of 2009, I visited its headquarters in Newcastle. Talking to the staff at all levels, I was struck by the pride they still felt in the bank. Talk to anyone in the north-east of England and there is a sense that Northern Rock is their bank. It is a region where the private sector is hugely under-represented, and I believe that saving Northern Rock made a positive contribution to the north-east’s economy. Three years later, it is now being prepared for sale. At the time, our critics said we might be stuck with it for years. The nationalization worked.
There was another big decision to be made early in 2008. Mervyn King’s first term as Governor of the Bank of England was due to expire in June. Governors can serve two five-year terms. The thinking is that this gives them long enough to make decisions independent of government interference, but avoids the problem that occurred in the 1920s and 1930s when Governors seemed to go on and on, to the chagrin of Chancellors of whatever political hue. Not to appoint a Governor to a second term would be seen as remarkable, since the assumption is that he or she will serve two terms. I wanted to avoid leaving the decision to the last minute, as that would reflect badly on us as a government and would undermine the Governor as speculation grew. Normally, there would have been no doubt in my mind. But the strains between myself and Mervyn over Northern Rock and over how we should deal with the difficulties in the banking system worried me deeply. Once a Governor has been appointed for a second and final term he or she is in a much stronger position, more or less untouchable. Above all, I was still concerned that Mervyn had no relationship with the people he needed most to talk to: the bankers.
Mervyn’s track record on the monetary side of the Bank was thought to be good, bringing intellectual rigour to the Monetary Policy Committee, although some believed it had been too slow to raise interest rates as the economy began to overheat, and too slow to cut them in 2007 when the downturn came. For me, the test was straightforward. Was there a better candidate? The short answer: no, there wasn’t. Despite our ups and downs, I felt I could work with Mervyn, although there were times over the next couple of years when he could see that the political sands were shifting and felt able to make pronouncements that I thought came far too close to criticizing government policy and appearing to side with the Tories. This became a real problem in the run-up to the general election of 2010 and, indeed, in the months that followed.
I told Gordon my view, that Mervyn should stay, and with some reluctance he acquiesced. I don’t think that he and Mervyn ever got on. Certainly the next two and a half years saw a growing antipathy between them. This really came to a head during the Treasury select committee hearings in 2009, when Mervyn appeared unilaterally to announce that there was no more money available for fiscal stimulus. Gordon quite rightly felt that this was crossing a line, that he was addressing fiscal policy, which was the remit of government. Certainly Mervyn would have been furious if Gordon or I had expressed an opinion on what the Bank ought to be doing over monetary policy. Gordon was very angry and tried to phone me during the committee session, which I was watching from the Treasury. He asked me what I was going to do about it and suggested I should go in and stop him there and then. It was tempting, but not practical.
Mervyn and I met and I told him that we proposed to reappoint him, but I emphasized the need for us to understand better what was going on in the banking system. It wasn’t tha
t the bankers were right, far from it. It was that we needed a far tighter grip on what they were up to. He agreed that there was a need to do this, and that perhaps he had neglected that area in the past. There were some good people in the Bank – Paul Tucker, for instance, who subsequently became a Deputy Governor – and I felt that they should be given their head more often. The core problem with the Bank is the way it is run as an autocratic fiefdom of the Governor, which is anachronistic. This was a problem I would return to time and again, as we developed proposals to reform Bank governance and accommodate a far wider range of views in the decision-making process. Was reappointing Mervyn King the right decision? Yes. I would have needed a lot of convincing that he should be denied a second term.
Meanwhile, I had somehow to shave off time in my diary to work on the 2008 Budget: not an easy feat, because it was crammed full of meetings, briefings and events from breakfast through to bedtime. Although all my senses told me things were getting worse, the Treasury figures were still better than I expected. There was a tremendous fear of a downturn, but it was not yet manifest. Preparing a Budget is a laborious process stretching over several months. Trying to do it against a deteriorating economic background makes it all the more fraught. After the mess that was the pre-Budget report, I wanted my first Budget to reflect more of my nature and judgement. That didn’t quite happen.
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