On the Tuesday evening, 30 September, I held the first of what was to become a series of crisis meetings with the biggest banks’ chief executives. My reluctance to do this before now had been due to the fact that even the news that such a meeting had been convened could have provoked further panic, such was the febrile environment. As a politician I am well aware that, very often, once you have a meeting with more than one other person present, you might just as well call a news conference. Even hustling the chief executives in through the back door was problematic, since most of them use the kind of cars that would catch the attention of any nearby reporter.
We assembled in my room at the Treasury shortly after 6 o’clock in the evening. Present were the Mervyn King and Adair Turner. With me was Paul Myners, my Treasury minister. Paul had considerable experience as a banker and in the City but he was not the usual suspect: he took no prisoners and was not in thrall to the bankers. Nick Macpherson and John Kingman and other Treasury officials were there, along with one of my special advisers, Geoffrey Spence. Geoffrey was no orthodox special adviser, he was a specialist, with years of banking knowledge, and had also worked in the Treasury some years previously. Even better, he was resolutely calm in the face of the bankers’ finger-waving.
On the other side of the table sat Britain’s top bankers. Sir Fred Goodwin, who appeared to be leading the delegation that day, sat in the middle. At that time, hanging on the wall in my room was a huge canvas painted by the Scottish artist John Bellany. Its title was Death’s Head and its deathly centrepiece was right above the middle seat at the conference table. I am sure it was simply coincidence that Sir Fred chose to sit there. Over the next seven days, other chief executives and their chairmen would take it in turns to sit on that seat, entirely by chance, I’m sure. Curiously, not one of them survived the crisis.
Next to Sir Fred was John Varley of Barclays, who was one of comparatively few bankers who could see the bigger picture. He was measured, and invariably helpful. Also present was Eric Daniels of Lloyds TSB and HBOS, who had presumably by now had the opportunity to open the books to the horrors of what he had bought. António Horta Osório, then of Santander, was there too, always helpful but taking care to sit well away from the centre of the table. Santander, he knew, was not in the firing line. Dyfrig John was there for HSBC, and Peter Sands from Standard Chartered. These last two banks had substantial business in the Far East and comparatively limited activities here and so were not affected in quite the same way as some of the others; but HSBC in particular, under the chairmanship of Stephen Green, knew that it had a definite interest in the health of the banking system. Last but not least was Graham Beale from the Nationwide building society. The Nationwide is, in effect, the lender of last resort for all of Britain’s building societies because of its sheer size and influence. Graham was thoughtful and helpful throughout.
The Irish announcement earlier that morning had clearly spooked the banks; it caused particular consternation for RBS and HBOS, which both had branches there. I told them there had been no warning, but that seemed to add to their view that governments were not working together. I reinforced the fact that we were working flat out on a series of plans, but, I said, I did not want to announce them until they were complete, pointing to the confusion in the US where a less than fully worked-out plan had fallen apart. I explained that I was not attracted to the US proposal because it was my belief that it would not work in Britain.
Sir Fred said what we already knew: the banks were dependent on being able to raise money overnight to keep going. They needed to know that the facilities would be there. Despite Mervyn King’s protestations that there was money available if they needed it, he and his colleagues wanted the Bank of England to do more. The Governor made the point that a breakdown in lending between banks was part of the problem, but that there was an urgent need for capital against the losses that were mounting up. The arguments were circular. Some, like António Horta Osório, wanted more guarantees to boost confidence. Others wanted more international action.
What became clear was that, even at this stage, there was nothing close to a consensus that more capital was needed. Each bank wanted something different. We would have to put a plan to them. Fortunately, our preparations for that were well advanced, but I was determined not to put a plan forward until it was fully thought through. There was also frustration on the banks’ side in that they thought we were not doing enough, even if they weren’t sure exactly what they wanted us to do. As they trooped out of the room, my thought was that this had been a less than satisfactory meeting. The meeting that Tuesday night lasted just over an hour. After they had left, it took about fifteen minutes for the first calls to come in from the press.
Meanwhile, the situation in Iceland was deteriorating. The FSA told me that undertakings given by the Icelandic authorities that sufficient money would be put into Landsbanki had not been honoured. It had been agreed that Gordon would speak to the prime minister, Geir Haarde, but he had to go to Paris to meet President Sarkozy, Chancellor Merkel and Silvio Berlusconi, so I was deputized to make the call instead. The Treasury and the FSA had already concluded that it would not be long before Landsbanki and Kaupthing failed. We were ready, if necessary, to use the new powers we had acquired at the time of Northern Rock to transfer their UK undertakings to another bank.
Kaupthing marketed a product called Edge, an internet bank with 150,000 depositors and nearly £3 billion in savings. Landsbanki marketed itself as Icesave and had 300,000 accounts with deposits of over £4 billion. Although these were foreign banks, I decided, against the advice of Nick Macpherson, that we would have to guarantee savers’ money if the banks failed. So far, we had been able to say that no saver had lost money. I believed that reassurance was essential.
I told the Icelandic prime minister that it appeared that large sums of money had been taken out of the UK from the Kaupthing branches, which was a serious breach of FSA regulations. The FSA had to find out by the end of the afternoon whether or not that breach had taken place. If it had, they would close the bank. He asked whether the money was needed today and how much it was. I said it was about £600 million, small beer for us but a huge amount for him. It was urgent, I said, that he look into it immediately. His response rang alarm bells. He asked if there was any chance that the amount could be negotiated down. I said there was no chance and that the money had to be returned before the end of the weekend. I suspected we would end up having to close the banks the following week.
On Friday night I flew to Edinburgh, hoping to go to a music festival in my constituency the following day. I had promised to go months before and didn’t want to disappoint them. Parliament was due to return after its long summer recess the following week. The Sunday political programmes were cranking up, and I agreed to do an interview with Andrew Marr’s Sunday show on the BBC, which frequently set the agenda for the following day’s news bulletins. Normally, I like to do these set-piece interviews in the studio in London. When it was arranged, because I was determined to fulfil my promises in Edinburgh, I said I could be filmed live from my home. I had to fly back to London on Sunday afternoon, but at least this way I would get Saturday night in my own bed. The producers arranged to interview George Osborne for the Conservatives and Vince Cable for the Liberal Democrats. They were to be together in the studio just before my interview. My intention was to try to reassure people that we were on the case and to prepare the way for a major intervention. The emergency rescue package was close to completion, but I did not want to announce it from my sitting room in Edinburgh.
I listened to the interview with George Osborne with growing incredulity. He referred to a discussion on banking legislation that he’d had with me the previous week, and a subsequent meeting that I’d authorized with Treasury civil servants on banking reforms. He then went on to refer to a discussion he’d had with the Governor, and the possibility of recapitalizing banks. I was dismayed. There was enough there to point people in the right d
irection. Two thoughts went through my mind. The first was that he had said enough to suggest that he knew of our plans. The second was that if he did know, he must have known he was playing with fire. Clearly his objective, as it had been for the past year, was to claim that he had a cunning plan, so that when we announced ours it would seem as if we were following him. He was letting political advantage override the need not to spook the markets.
When it came to my interview, I was determined not to reveal our thinking. On the other hand, I was not going to let Osborne play the game he had embarked on without a challenge. I could not entirely ignore the politics. I said that we were looking at options and the question of whether there was sufficient capital in banks had to be addressed. There was enough there to point the media in the right direction. We managed to contain the story for at least the next twenty-four hours. What finally burst the dam, came, I believe, from the banks themselves.
I flew to London that Sunday afternoon and was back in the Treasury by 4 o’clock. I still had several hours’ work to do on a statement for the Commons the next day as Parliament returned from its summer recess. I was always anxious to keep the Commons informed. The trouble was that there was now a feeding frenzy, an expectation that something big would be announced, which was not going to happen. I simply reported back, broadly, on the summer’s work. I did not expect plaudits, but the following day’s damning criticisms were hard to take. There was now great expectation that we could not fullfill. Had we been able to, the rescue plan, almost complete, could have been announced in calmer conditions. It was designed to restore confidence in the banking system and to stave off collapse. As it was, we had to make the announcement later that week in the teeth of a raging storm. Who leaked the plan to him, I don’t know. I do know that he had been briefed, entirely properly, by Mervyn King the previous Friday. The Governor meets the Shadow Chancellor from time to time. I was told of that meeting in the normal way, but not of what exactly was said. A discussion of government policy is not allowed, but the Governor can of course muse on his own thoughts. I can see what might have happened, but to play politics at that particular time, when the world was teetering on the brink of financial disaster, was not just foolish but dangerous.
On Monday evening, 6 October, I held another meeting with the banking chiefs, who wanted me to give them full details of our specific rescue proposals. I was determined not to do so until they were finalized because, as I rightly predicted, whatever I said at this meeting would be fed to the press. The men in front of me, for the most part, I trusted to keep the talks confidential. But I knew that once back in the office people would talk, and there was now an armada of journalists anxious to break a story regardless of the consequences.
There were other issues in addition to capital. We discussed the difficulty of banks having sufficient confidence in each other to settle the numerous trades they made each day. It was that stark: the banks didn’t trust one another any more. They wanted some form of credit guarantee. I said nothing about that, because it was one of the issues we were actively working on. We talked about what more the Bank of England could do on liquidity. I said that when I announced the rescue plan it would be a once-and-for-all solution. If they had other issues, they had better raise them now. Above all, I said, I wanted to keep lines of communication with them open, but that required absolute confidentiality. I added that we would meet again very shortly.
As the bankers left that Monday night, I told my officials that we had to be ready to go in the next thirty-six hours. I knew there was an enormous amount of work still to be done, but we could not delay. In an ideal world, with no politics and no banking crisis and no rolling 24-hour news, we might have taken our time to devise an excellent solution. We did not have that luxury, but the solution still had to be excellent. There would be no second chance. I got back to the flat in Downing Street in time for the 10 o’clock news. Sure enough, someone had given the BBC an incomplete account of our meeting earlier that evening, which was bound to cause panic.
It was already clear that some banks needed more capital. Inevitably, many people had reached the conclusion that this could only now come from the government, and it followed that any bank needing substantial capital would have to take a big government shareholding. Not surprisingly, investors in banks in the firing line knew that the value of their shareholdings would plummet. So, when the markets opened the next morning, first in the Far East and then in London, RBS shares collapsed. Little wonder vulnerable banks were tempted to claim that all the banks represented around the table had asked for more money. That wasn’t the case.
A week earlier, as we began working up the rescue plans, I had asked Nick Macpherson to go round the bank chief executives and chairmen and sound them out about various propositions, including the government taking shareholdings in return for desperately needed capital. The chairman of one of the banks had actually said that to make banks take capital from the state would amount to what he called ‘expropriation’, and would be nothing less than a return to the 1970s – or worse, the 1940s. This, just a week before we announced the bank rescue package. There had been two banks at the table in the Treasury that night that knew the game was up for them: RBS and HBOS.
Sitting in the kitchen of the flat later, going through my homework in the red box, reading up on submissions from Treasury officials, I knew that tomorrow would not be a good day. The last place I wanted to be was in Luxembourg at yet another meeting of European finance ministers. Getting to Luxembourg is a nightmare at the best of times. There are few scheduled flights and none that get you there in time for the traditional working breakfast – a misnomer if ever there was one. There is no food, just coffee, and for some years ministers met in a building that resembles a warehouse on an industrial estate well outside the picturesque capital city.
I needed to be in London to manage the inevitable crisis that day. The dilemma was that my absence would alert the world to the fact that something was very, very wrong with our banks. Normally, unlike our counterparts, British ministers are scrupulous about taking scheduled flights to and from meetings abroad. I was often struck by the ranks of private jets sitting at the airports at international gatherings and I noted that the smaller the country, the bigger the jet. On this particular day I decided that chartering a flight was justified, since a hasty exit was on the cards. As we touched down, Geoffrey Spence, my special adviser, pointed out two Icelandic jumbo jets parked on the runway. We taxied alongside them in our Spitfire-sized plane.
My intention was to sit through the meeting, which was to be dominated that day by yet another discussion of the solvency requirements of the insurance industry. Arcane it may sound, but given the UK’s global importance in the sector, I had to be there. As I left Downing Street before dawn, arrangements were being made not only to monitor what happened when the markets opened but to keep a close eye on what was going on in Iceland. We knew we were not being told the whole story there and it was inevitable that difficult decisions, which might wrongly be interpreted as hostile acts by the Icelandic government, would have to be taken in the next day or so.
I took my seat in the session minutes after the London stock exchange opened. We agreed I would watch for a signal from Geoffrey if there was news. I did not want a huddle of officials causing a commotion around me, surrounded as we were by ministers from other countries. Within minutes, he signalled me out of the chamber. The RBS share price had collapsed. Never a man for overstatement, he said it looked bad. He was monitoring the figures on a screen upstairs. I went back to my seat, hoping to appear normal. I had hardly been in the chamber ten minutes when Christine Lagarde came over and asked, ‘What’s wrong?’ I said nothing, really, and ducked back out of the meeting as Geoffrey was waving from the doorway. Not only had the RBS share price collapsed but dealing in the shares had been suspended, not once but twice.
‘That’s it. It’s over,’ Geoffrey said. We went up to the delegation room and he went in ahead, sa
ying, ‘Clear the room.’ Kim Darroch, the UK’s senior diplomat at the EU, slowly closed his laptop, stood up and walked out.
When dealings in bank shares are suspended it is all over. I knew the bank was finished, in the most spectacular way possible. The game was up. If the markets could give up on RBS, one of the largest banks in the world, all bets on Britain’s and the world’s financial system were off.
Back at the Treasury, my officials were in frantic discussion with the Bank of England. There was panic in RBS itself. To maintain a calm face, I had to take my place at the conference table once more, along with my European colleagues. All looked at me intently, no doubt having been told of what was happening across the Channel. Britain was in the dock again, and they knew it.
Christine Lagarde, ever solicitous and sharp as a tack, appeared at my shoulder, ‘It looks bad, doesn’t it. What are you going to do?’
I said, simply, ‘We will deal with it. You won’t mind if we leave early?’
I kept leaving the meeting to be updated. An hour later, I came out to take a call from the RBS chairman, Tom McKillop. He sounded shell-shocked. I asked him how long the bank could keep going. His answer was chilling: ‘A couple of hours, maybe.’
At the end of the brief call, I put down the phone and told my officials: ‘It’s going bust this afternoon.’ I felt a deep chill in my stomach. If we didn’t act immediately, the bank’s doors would close, cash machines would be switched off, cheques would not be honoured, people would not be paid. I remember thinking that this was once the small, conservative Scottish bank where I had opened my first bank account in Edinburgh forty years earlier. It was now on its knees.
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