On the Monday the fire-fighters in the US had rolled out the president. He made a public statement to say he was confident the financial markets were resilient enough to deal with the blows raining down. He was bluffing, of course, part of a concerted effort to shore up confidence. His Democratic rival, Barack Obama, pronounced it ‘the most serious financial crisis since the Great Depression’. Folk memories of the Great Crash swam into focus.
By Tuesday, 16 September, it was clear to me that the global fallout from the Lehman Brothers collapse was accelerating. HBOS was the biggest loser. Its business model was not so very different from Northern Rock’s. It needed to raise a lot of funds in the US, which it had managed to do earlier in the year, but was now struggling. In size, though, HBOS was in a different league. Now, the UK’s biggest mortgage lender saw 33 per cent of its value wiped out in one day. The hawk-like eyes of the financial analysts were watching, and there were strong suggestions that short-selling of its shares was driving the price down. This also appeared to be happening to banks across Europe and in the US. Short-selling is basically when someone sells stock they don’t own on the assumption that when they do acquire it in order to fulfil their obligation, they will pay a lot less for it than the selling price. We ran the risk that this would rapidly become a panic, so Callum McCarthy and the FSA placed a temporary ban on short-selling, which was followed up in Europe and America. This kind of interference in what is standard market practice in ordinary times had never happened before, and it exposed the extent of the concern that was being felt across the world. It was a month since I had warned that the UK faced its worst economic crisis for sixty years.
Back in London, I was also preparing my speech at the Labour Party conference in Manchester the coming weekend. Because of every-thing that had happened it had to be a good speech, and it was taking up a lot of time. I had also to deliver the annual Mais Lecture at the Cass Business School in London at the beginning of October. Most Chancellors will get to give this prestigious lecture once. It was a major piece of work, and I wanted to use it to explain why the fiscal rules that we had followed for the past ten years were redundant given the economic conditions we now faced. We were currently in the parliamentary recess, usually an ideal time to work on speeches and the like. However, the week was rapidly being taken over by the global banking crisis.
HBOS had the look of Northern Rock about it. There was a grave risk that we would end up having to take on another, much larger and more complex, wreck of a bank. I was increasingly concerned that if we ended up acquiring bank after bank without any grand plan, people would lose confidence in us. It was more and more evident that banks needed capital, but we were not ready yet to execute a plan, let alone reconcile ourselves to the costs we would face. Had HBOS been able to hold on for another few weeks we might have dealt with it differently, as we did with RBS. This would have meant even more public money being needed, possibly to acquire not just a majority shareholding but the whole of HBOS. RBS’s balance sheet was almost the same size as Britain’s gross domestic product. To have taken over HBOS would have added an even greater burden to our national finances. And there was no guarantee we could have kept it going.
As it was, Lloyds TSB, a fairly conservative but solid bank, had been talking to HBOS about a possible takeover. The Lloyds chief executive, an American called Eric Daniels, thought he saw an opportunity for his bank – which, I must say, was not obvious to me. Lloyds had considered a takeover before but knew that it would fall foul of the competition rules in the UK, because the two banks’ combined share of the mortgage market would be too great. Nevertheless, it looked as if they would now be ready to take over HBOS, thereby providing the bank with the much-needed capital to stay afloat. I discussed the takeover with Eric Daniels on 17 September. I told him that Lloyds would have to be satisfied that it knew what it was taking on. For our part, we would be prepared to consider amending the competition rules in these exceptional circumstances. Until very late in the day, we had two draft announcements ready: one dealing with a Lloyds takeover, the other with nationalization.
I talked about this with Gordon, who was as keen as I was to achieve a private sector solution, if it would work. After all, if we were stuck with HBOS we would have to wind it down, and competition in the mortgage market would be reduced anyway. The announcement of the takeover was made the following morning, 18 September. I did the inevitable media round, this time from the Treasury’s remote studio, along from my office. There was concern about competition, but generally the reception was better than expected. In Scotland and in Halifax, though, the announcement was met with considerable trepidation. Job losses were inevitable. All that could be said was that if the bank had collapsed, even more would have gone.
On the Friday, a photograph of Gordon and Sir Victor Blank, the Labour-supporting chairman of Lloyds TSB, appeared in the Financial Times. They had been at a cocktail party the day before the announcement and had been seen in close conversation. Someone thought it would be a good idea to brief that this was where the takeover had been conceived and urged on Lloyds by the government. The story was seized on by the Tories, who claimed that, rather than being a commercial decision reached by the two banks, it was a political deal. Anyone who had given this suggestion a moment’s thought would have realized that you cannot arrange a takeover of this magnitude over a glass of warm white wine and then announce it next day. The story backfired. It had taken weeks for the two sets of shareholders eventually to agree to the takeover; if they hadn’t approved of the deal, they could have voted it down.
6 Keep Calm and Carry On
On Saturday morning we set off for Manchester and the party conference. I had my speech, but I did not like it – which was a pity because many people had put a lot of work into it. I didn’t think it would meet the demands not just of the party faithful but of the world at large, which was now focusing on what I would have to say. Nonetheless, we were in better spirits than might have been expected.
There was a sense of crisis, but whereas the previous year with Northern Rock it had looked as if this was a British problem, now people knew it was a problem for every other major country in the world too. I think also that there was a belief that we were getting a grip. Gordon, Yvette Cooper, the Chief Secretary to the Treasury, and I did a question and answer session on the Saturday afternoon. It went down well. Gordon was in good form. The weekend was spent going from event to event, bumping into colleagues and friends.
What I had said to the Guardian was very much in the front of people’s minds. In a crowded hotel foyer I met an economic commentator whom I greatly respect, who had written an excoriating piece about my interview at the time. He bought me a cup of tea and said he was sorry. He now thought the situation was far worse than I had suggested. It was good of him. It is not an experience I’ve encountered often.
I duly delivered my speech on the Monday, just before lunch. It was a much better speech than the one I had arrived with, having been substantially rewritten the day before with the help of David Bradshaw, who had worked with Tony Blair. I am not a natural conference speaker, but when I was called to the rostrum, I was astonished at the warmth of my reception. It was my first – and, I expected, last – standing ovation. It helped me personally because the reaction of the conference was carefully noted by others in the hall who might not have had my best interests at heart. Once off the stage, I rushed off to another telephone conference with Hank Paulson and G7 finance ministers. Hank outlined the slow progress he was making with the TARP scheme, which he was struggling to get through Congress.
I went back to London two days later for a series of meetings on the banks and forthcoming legislation to toughen up their supervision, and to discuss the continuing turmoil in financial markets. We also had a meeting with the Bank of England, followed by a call with Christine Lagarde to talk about the deteriorating situation. She was very apprehensive. Like me, she thought the banks were in denial.
The
high point of the day was a surprise birthday party for my wife, organized by my private office at No. 11. For a couple of hours we shared a cake and the kind of black humour that sustained us all through the worst of times. I have always been lucky with the staff in the private offices where I’ve worked, but at the Treasury they probably saw rather more of me than they ever bargained for. It was little consolation, but we did try to keep them fed and watered around our kitchen table, which became an annexe to the Treasury. We were immensely touched that, even though they had been working flat out, around the clock, they had still taken the trouble to set up this small party.
The next boil ready for lancing was Bradford and Bingley. In the past year Bradford and Bingley’s shares had plunged by around 90 per cent. Investors believed the bank was in deep trouble. We had been watching it carefully as its share price dropped. By September it was nearing the end of the road. There was a Reuters screen outside my office in the Treasury and a Chancellor needs to know everything on it. Watching the Bradford and Bingley share price reminded me of the flat-lining heart monitor of a dying patient.
At this point there was a change at the FSA when chairman Callum McCarthy retired. He had previously told me that he wanted to leave his post at the end of his term of office in September 2008. I was sorry, as his calm and considered advice had been immensely helpful over the year we had worked together. His judgements were usually right, but to press him to stay would have been unfair, especially at this time. I could hardly hold out the prospect of the crisis ending a few weeks later. In his place I appointed Adair Turner. He had been Director General of the CBI, a director of a bank, and had done a great deal of work for the government, including carrying out a review of pensions policy where, inevitably, he clashed with Gordon. He was also chairman of the new Committee on Climate Change which we had set up to implement our commitment to cut carbon emissions. I wanted a strong, level-headed chairman to provide leadership within the FSA, but one who could also deal with the day-to-day tensions between the FSA and the Bank of England. He was a good choice. Although he wasn’t due to start the job until 1 October, he very sensibly decided to get his feet under the table before that. His first outing was Bradford and Bingley.
The three of us, Mervyn King, Adair Turner and I, were all agreed that the bank was finished and that we would either have to organize a sale or nationalize it. We had to be careful. Its shares were still trading and we had to tread carefully and be mindful of the shareholders’ interests. Legally, you can’t just take over a company, depriving shareholders of their property. What was different here, though, was that this particular investment was fast running out of money and its shares would soon be worthless. The risk was that if Bradford and Bingley simply collapsed, panic might spread to other small banks, and I wanted to avoid at all costs the spectacle of another run on a bank.
By now, Bradford and Bingley had drawn more than £3 billion from the Bank of England emergency fund. Mervyn King quite rightly said they could not borrow much more, because they could never repay it. The question in our minds was not ‘if’ but ‘when’ it would reach the stage at which the FSA would have to say it could no longer meet its financial obligations. This time we had legislation to allow us to deal with a failing bank, to protect savers and maintain financial stability. I had insisted when we nationalized Northern Rock in February that we took powers to enable us either to transfer a failing bank to another one or to nationalize it, which meant that once a bank had failed we could now resolve within hours all the issues that might have taken months under the old regime. This was the measure so bitterly opposed by the Tories when it was approved by the House of Commons six months earlier.
By 26 September 2008 everyone could see the game was up. The Bradford and Bingley management were not surprised when the FSA told them it would have to withdraw their licence to take new deposits, the death knell for any bank. In fact, I sensed they were almost relieved. Now we had forty-eight hours in which to find a solution, before the markets opened on Monday morning.
On Saturday morning, about 10 o’clock, I met Gordon downstairs in his office in No. 10. We were agreed about what needed to be done. He was relatively relaxed about Bradford and Bingley because we were in control of events. He was far from relaxed about what was happening more generally. He felt that world leaders had not grasped the enormity of what was happening. President Sarkozy, ever keen to grab a headline, was planning a meeting with Gordon, the German chancellor, Angela Merkel, and Italy’s Silvio Berlusconi to discuss the crisis at the end of the following week. Gordon said, quite rightly, that they couldn’t have a meeting without a plan to announce at the end of it. That would be worse than not meeting at all. So it transpired.
I went back to the Treasury. There were three options for Bradford and Bingley. If we did nothing, the bank would go into administration. That would still leave us with the risk of a run, and administration could go on for months, if not longer; and we would have to provide some funding for the administrator, over whom we would have little control. The second option was sale to another bank or building society, but I could not think who would want to buy it. We thought that the most likely scenario would be the sale of the branches, with the deposits in them, and possibly some of the sound mortgages. The other mortgages, where repayment might be harder, would have to be held in a separate entity, a so-called ‘bad bank’. The third option was to nationalize it, in part or as a whole. In the long term, this sort of situation can be managed. Most borrowers will manage to repay some or all of what they owe, and in time, provided the economy recovers, so will the price of their property.
Although I had no great expectation of being able to sell Bradford and Bingley as a whole, I wanted to try one last shot if only to remove any doubt that nationalization really was the only option. We might still persuade one of the major banks to buy it, perhaps backed by a consortium of the others. The advantage would be that we would not have to deal with the ‘bad bank’ element for years to come. The banks had always told us that they were concerned about nationalization: here was a chance for them to step up to the plate and help their own industry and the country. I was not optimistic, but it was worth a try.
Weekends are the only time when Treasury officials can do things that, were they to leak, might cause havoc on the stock market, especially at a time like this when the slightest hint that something was afoot could cause massive gyrations in share prices. So, effectively we had from 5 o’clock on Friday night until 7 o’clock on Monday morning to do what was needed. On Friday night we asked the chief executives of the big banks to come to the Treasury the next morning. We did not tell them why, although no doubt they could guess. We told them to come in by the back door, in case there were any lurking photographers with a nose for when something was up. On Saturday morning, just after 11 o’clock, they gathered in a meeting room down the corridor from my office. I told them that the lead option was to use the emergency legislation to nationalize Bradford and Bingley, but that we wanted to give them the alternative of taking it over in some sort of rescue plan.
Our advisers from Morgan Stanley took them through the numbers. We had to engage advisers from time to time; there was so much pressure on the Treasury that we simply did not have the capacity to do all the number crunching that was needed. We offered the option of one bank purchasing Bradford and Bingley for nothing, with the other banks standing behind them. They were not enthusiastic. Some doubted if they could get it past their shareholders. I left them to talk it over among themselves. It was a short discussion, though. No one wanted anything to do with it. They recognized that nationalization was the only way out, and perhaps it was a sign of the times that they were entirely happy with that. They were gone by lunchtime – but they would soon be back.
Most of Saturday, 27 September, was then spent trying to work out what we should do. The most likely option seemed to be that Santander would buy the more attractive parts of Bradford and Bingley. Santander wanted to e
xpand; they already owned Abbey, and had bought Alliance and Leicester in July. It turned out they were also interested in buying the good parts of Northern Rock. That seemed to me to add another layer of complexity. There was another bidder, though, again for the good parts of Bradford and Bingley. This was HBOS. They desperately needed cash. The branches, with their deposits, were tempting. But we were far from sure that HBOS was in any financial condition to take it on.
Most of the Treasury team had worked flat out since Friday night, grabbing a couple of hours’ sleep here and there. It was wearing, going over proposals and counter-proposals, line by line, number by number, but it is something that most officials thrive on. The Treasury is a place with many frustrations, but the scale and importance of the work, especially at times like this, can’t be matched. The officials looked worn out but were incredibly cheerful. The atmosphere was frenetic. Meeting rooms filled with lawyers and bankers brought in to handle some of the most detailed and complex negotiations. In other rooms were lawyers acting for Bradford and Bingley. It would have been easy to muddle them up. I spent the weekend between the Treasury and Downing Street, working on different versions of what I would say on Monday, depending on the outcome.
As I always did when stuck in the Treasury and No. 11 at the weekend, I took walks around the garden behind Downing Street. It was a place of solace, with a small but dedicated team of gardeners with whom I would discuss pruning or their latest design plans. Margaret thought I looked like the prisoner of Spandau, pacing the lawns behind high walls laced with barbed wire and watched by security cameras covering every centimetre of the garden.
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