Back from the Brink

by Alistair Darling

  My initial reaction must have been a bit like that of the captain of the Titanic when he was told by the ship’s architect that it would sink in a couple of hours. There were not enough lifeboats for all the passengers. Sir Tom had concluded by saying that we had to do something, and what were we going to do? Like a reassuring parent, I had said we would do whatever was needed to keep the bank afloat until the end of the day, when we would be in a position to announce the emergency rescue plan, not just for RBS but for all the banks. I rang Nick Macpherson at the Treasury and told him his hour had come. He was to tell Mervyn King to put as much money into RBS as was necessary to keep it afloat that day. We would stand behind the Bank, even if it meant using every last penny we had. If RBS closed its doors, the banking system would freeze, not just in the UK but around the globe.

  I had seen what happened when a comparatively small bank like Northern Rock failed. I had seen what happened when Lehman Brothers collapsed. This was our biggest test. There was no alternative but to keep the bank going and then to do what was needed to stop the firestorm. I spoke to Gordon back in No. 10. There was no disagreement. I thought I should just check that he knew we had bet the Bank on our ability to stop much worse. I was desperate now to get out of Luxembourg, but had to take a call first from a minister in Iceland. I wanted an assurance that they would compensate British investors in Icelandic banks. He said, yes, they would. I came off the call and told my officials, ‘They won’t stand behind it.’

  I returned to the conference hall to discuss the finer points of the insurance directive for a few interminable minutes before making our exit in a way that we hoped did not look entirely unplanned. Inevitably, we were spotted by a passing film crew from Brussels, providing footage for the lunchtime news bulletins. I was muttering under my breath that old British refrain: Keep calm and carry on.

  7 Back from the Brink

  I got back to the Treasury at about 3 o’clock on Tuesday, 7 October. Officials had been working flat out on the emergency rescue plan for the past ten days, overseen by newly appointed minister Paul Myners, whose expertise and experience were invaluable. The news was not encouraging. Most bank shares were in free fall; RBS shares had plummeted by a third. We had to have a convincing plan ready by the time the markets opened the next morning. Mervyn King had ensured that RBS was kept going during the day by providing funding. The main problem by mid-afternoon was to ensure it had enough US dollars. However, we thought it might make it until the end of the day in the US too.

  There were to be three elements to our plan. First, there had to be sufficient funding, or liquidity, to get the banks through the next few months. This had been the main problem we faced earlier in the year and it remained an important element of what we needed to do. So we were going to increase the availability of funding under the special liquidity scheme – in effect, a loan – to about £200 billion. Secondly, we needed to address the problem caused by the fact that the banks no longer trusted one another to repay their borrowing. The only way we could do this was for the government to guarantee that borrowing through a ‘credit guarantee scheme’. This was important because, unless banks lent to each other, it would cut down the amount of lending available for businesses and for mortgages. Again, it was a massive liability, amounting to another £250 billion if the guarantees needed to be called in. Finally, in many ways the most important element was to provide capital to those banks that needed it. We thought at this stage that this would amount to a further £50 to £75 billion.

  On any view, these were eye-watering sums of money, but if we were to stop the panic and loss of confidence, to avert what even the least excitable commentators were calling economic Armageddon, we had to do whatever it took. The alternative would have been a financial and economic meltdown, not just in the UK but right across the world. I had learned from my experience with Northern Rock a year before. If we got this wrong, the livelihoods of millions of people would be at stake. We had crossed a Rubicon with Northern Rock by not only pledging our credit to stop the bank collapsing but also nationalizing it. Those images of queues of panicked people waiting to get their money out of a small provincial bank were seared in my memory. It would be merely a rehearsal for the panic if RBS were to close its doors and the run spread to every other bank.

  What’s more, I knew that if the plan worked, the guarantees would not be called in, the liquidity provided would be paid back, and one day the bank shares owned by the government would be sold, perhaps at a profit. Three years on, I was right about the first two points and I see no reason why the shares won’t be sold at a profit. However, none of this was obvious that afternoon.

  I knew we had to announce our plan the following morning, but there was no way we would be able to spell out how the measures would be applied to each individual bank. That would take days to work up. So the plan would have to be announced in two stages: the first outlining the general level of support; the second, the following week, spelling out exactly how much money each bank had to raise. But the most important thing was to get tomorrow’s announcement precisely right: it would make or break us.

  At 5 o’clock, Mervyn King and Adair Turner arrived at the Treasury to talk through the plan. Staff at the Bank, the FSA and the Treasury had collaborated closely. Whatever the differences in our approaches in the past, we were at one on this. At about 6 o’clock I went over to Downing Street and met Gordon in the Cabinet Room to discuss the plan. He was aware of the high stakes but had no doubt that if the plan was to work we needed to throw everything at it. He was also keen to alert world leaders to what we were doing. We needed other countries to do the same as we were proposing. It wouldn’t be enough to shore up the banking system in one country alone. This was therefore an important step, and Gordon’s long international experience and contacts were to prove invaluable. We agreed he should make the calls the following morning, as soon as we had made the announcement public.

  There was a long night ahead of us. We would have to meet the bank chiefs again. I also knew we would have to deal with the Icelandic banks the next day. They were likely to go into liquidation and there were many worried savers in the UK, to say nothing of local councils, many of which had a lot of public money deposited in Icelandic banks. A large number of charities also had money in Icelandic accounts, likewise attracted by the high returns. There was another Commons statement to prepare, and one small matter of housekeeping: I was due to deliver my Mais Lecture the following evening. If we were to forewarn them that it would be cancelled, they would know there was a big announcement coming, so I asked my office to call at 7 a.m. the following morning. As it was to be given at the Cass Business School, they would understand the situation.

  Back at the Treasury there were teams of officials working all round the building, so we would be ready to tell the banks what we planned to do. This time there was no need to conceal the fact we were meeting the eight chief executives; the whole world knew they were coming. Shortly after 7.30 p.m. they came back into my room on the second floor of the Treasury. As I sat down, I thought, just for a moment, that they might be grateful to the British government for being ready to step in and save them all from ruin. But, even at this late stage there was a reluctance to accept that the problem was now fundamentally a lack of capital.

  They did have a lot of questions and they wanted to understand the fine detail. It was obvious that they wanted the government guarantee to underpin their lending and to expand the special liquidity scheme, but they were less keen on raising capital. I said that they could not have the one without the other. I said, we proposed to make available £50 billion. The FSA would decide how much each bank needed to raise. They would then have a choice: they could raise it themselves on the markets, or, if they couldn’t, we would provide it in return for a shareholding. I told them that to meet their concern about lack of day-to-day funds the Bank would extend the special liquidity scheme from £100 billion to £200 billion. We would also provide credit guarantees to
the larger banks to ensure they had sufficient confidence in each other.

  To my lawyer’s rational mind, I thought they might say thank you very much for saving us from ourselves – let’s work on the detail. And the politician in me told me that they had no alternative. The people who had enjoyed telling us what to do over the past decade had now reached the end of the road. It was a genuine case of take it or leave it. Nevertheless, I was taken aback by their reaction. When we had met two days earlier, they had seemed to be seized by the urgency of the situation. Tonight, they were approaching the whole thing as if they had weeks to seal the deal. True, we had not previously discussed taking shareholdings, but the news that capital had to be raised was hardly new to them. The other measures to make credit more readily available were more or less what they had asked for.

  Fred Goodwin again insisted that he was facing a funding problem rather than one of lack of capital. If we announced that the banks needed £50 billion, people would think that the situation was far worse than it was, he said. He did not need anything like that much. There was more quibbling about the credit guarantees and nitpicking over details and just about every possible difficulty was raised. Time was marching on. For the first time, I began to feel worried. It crossed my mind not only that the banks had failed to appreciate that there could be no negotiation, but also that they might be daft enough to take up the option of suicide – and I simply couldn’t afford a row of dead banks in the morning. As we broke up to allow further discussions to take place between our officials and the chief executives, one of the bankers – I can’t recall which – asked me what would happen if we couldn’t reach an agreement. I said, ‘We either do something or we don’t. If we don’t, and I have nothing else, then God help all of us.’ With that, the big beast of the financial services industry got up and left the room. Sir Fred, ever cool, strolled out as if he were off for a game of golf. John Varley, the smooth, urbane spokesman for the upper end of the bankers’ market, always good at focusing on what was needed, was the only one in shirtsleeves. Andy Hornby of HBOS, on the other hand, wore his heart on his sleeve: he looked as if he might explode. The slight air of disdain I had come to recognize in the bearing of some senior bankers followed them out.

  Every nook and cranny of the Treasury was filled with huddles of my officials, bankers, lawyers, advisers, fighting and arguing over every last detail, gathered around desks, sitting in corners, on the floor, in open-plan offices. People paced up and down the corridors, mobiles welded to their ears, weaving around each other, like rush hour in the City. It was an extraordinary sight. I retreated to my office with my private team. I was not going to engage in the hand-to-hand fighting that was happening all over the building. My only interest was in the outcome. The chief executives congregated gloomily a few doors away, in the small office of Paul Myners. Paul and Shriti Vadera kept them company in their gloom. Both did excellent hard work persuading the bankers that while we could debate the detail, the main deal was not open to negotiation.

  The atmosphere in my room was quite relaxed. At the end of the day, or at least of a very long night, I thought they would have to cave in. My concern was that some might be so stupid that they would bring everyone down with them. I hadn’t eaten since the night before, so, fed up with the traditional Treasury crisis diet of pizza, we sent out for a takeaway. We agreed we should order it from Gandhi’s in Kennington, a curry house close to my old flat. Their kitchen rose magnificently to the emergency. Soon the table at the end of the private office was piled high with chapattis and foil containers filled with curries. It was later called the night of the ‘balti bail-out’, but that was only partly true. I tucked into my usual chicken tandoori, and a stream of civil servants trooped in to sustain themselves for the long night ahead. The bank chiefs and their advisers were invited to help themselves but declined. One came into the room, looked at the table and turned away, as if to say, has it come to this? Perhaps he had just lost his appetite. Whenever the bankers came for breakfast meetings they ate little. We were never sure whether this was due to nervousness or if they had already eaten at a pre-meeting.

  The night wore on with the grind of hard negotiations going on all over the building. The streams of advisers pacing the corridors with phones to their ears swelled. We wondered if they were talking to journalists, and someone suggested telling them their calls were being monitored by GCHQ. We didn’t, because it wasn’t true, but it was tempting.

  The negotiators for the banks, I was told, were looking increasingly frantic. The bankers themselves were not. The civil servants remained calm because they had a better overall picture. Most of the negotiators for the individual banks knew only what was happening on their own patch. Panic was setting in as they felt they could not get a deal they could live with. At about 11 o’clock it was apparent that some of the chief executives were putting up a last-stand fight. I called them back into my room and said that of course we could talk about the detail, but tonight they had to accept the key proposals. I realized that as long as I was there they would think we were open to negotiation, so I said I was going to bed at 1 o’clock and wasn’t going to be called before 5 a.m. – and then only if it was to approve the announcement. Leaving the Treasury building to head back to No. 11, I told my private secretaries they would probably give in once I had gone, and said goodnight.

  In the years since this rescue it has become fashionable, and perhaps understandable, to bash bankers. For the record, the support of Stephen Green, John Varley, Peter Sands and António Horta Osório was invaluable. They did not need to be at the table, but they could see that everything depended on their being an active part of the plan. But I am not sure their boards or all of their senior colleagues did.

  I spoke to Gordon to make sure that he was up to date with all the latest developments. This had been probably the best period of our working together while I was Chancellor. We were of the same mind and in complete agreement. We met frequently and his support, self-confidence and persistence were very helpful. Back in the Downing Street flat, I felt tired but not exhausted. The next day would be the most difficult of my political life. Sleep always restores me, and I did sleep soundly. The phone rang at 5 a.m. It was my private secretary, Dan Rosenfield, who had been up all night. There remained one big stumbling block, he said. He told me that the chief executives had for the most part gone home just after I did. It was clear then that the deal was done. The one remaining problem was whether announcing that the banks needed £50 billion would destabilize the sounder banks. There was a way through, though: it might be better to promise £25 billion now, with a further £25 billion readily available. I was prepared to agree to this presentational compromise so long as all the banks signed up.

  I pulled on trousers and a shirt and went down in the lift to meet my Treasury officials in the sitting room of No. 11. It was not yet daybreak. There was a thirty-page submission to scrutinize, details to be read and digested, by the dim light of a table lamp. I asked someone to wake Gordon so he could agree to the final plan, with this one minor change. I was sure he would, but he needed to know. The stakes were high for him. It was a huge political gamble, as well as a financial one. A few minutes later, he came downstairs, to be greeted by a group of ghostly faces, perched on worn-out chairs and sofas in the half-light of dawn.

  Gordon was attracted, as was Mervyn King, to the bigger package, but he could see the presentational argument. He could also see the overwhelming need to announce this in an hour and a half’s time. Finally, at 5.28 a.m. on Wednesday, 8 October, we signed off the deal which was to be split – £25 billion now, with the balance of £25 billion to be available if needed.

  Downing Street never sleeps, and the custodians of the front door bade us a cheerful good morning as the Treasury team headed back to the office to sort out the final paperwork. I went back upstairs to wash and shave and to get ready for what was to be another very long day. Just after 6 a.m. I was back at the Treasury. I had a statement on th
e rescue to prepare for the House of Commons, to be delivered at lunchtime. Lawyers were still quibbling over final details and there were sheaves of papers to be read through and approved. The devil really is in the detail.

  Because of the momentous nature of the announcement, I was keen, if at all possible, to try and carry the opposition parties with us. Unusually, I phoned George Osborne and Vince Cable and took them through the plan. Both were supportive, although I was sure by the time I made my statement in the House later in the day, they would have had time to find a few political quips. The announcement of the rescue package had to be ready for the markets opening at 7 o’clock. As the minutes ticked by, I was told that the lawyers were still quibbling over the official market notice which had to be published on the stock exchange before I could go out and make the announcement. Because it would have a profound impact on shares all over the world, I had to observe this formality. By 7 o’clock it had still not arrived. I knew my failure to appear on the airwaves would lead to damaging speculation that something had gone wrong. What a farce it would be if our carefully designed plans were derailed by lawyers quarrelling over the dots and commas of the statement.

  It finally appeared, a few minutes after seven. When it was published, the world could see for the first time what a huge step the British government had just taken. I drove off to the inevitable round of interviews for television and radio and newspapers. I was as sure as I could be that the policy was right. My trepidation was whether this enormous step would be enough to quell panic and avert catastrophe.