Back from the Brink

by Alistair Darling

  I got a call to say Gordon wanted to do a news conference in No. 10. I was not particularly keen. Everything that needed to be said had been covered, I thought, in my press interviews. However, as I knew the detail I agreed to join him. By 9 a.m. I was back in the flat. There was just time to grab a round of bacon rolls from the basement cafeteria and cast a quick eye over the morning newspapers, which were by now well behind the news curve. As the world’s media began to assemble two floors down in No. 10, I took a call from my office in the Treasury. As I had suspected, the Icelandic government would not be compensating the losers in its failed banks. We would have to move quickly to protect UK savers’ money. My focus had to be on making sure UK deposits did not disappear into a black hole in Iceland.

  Connie, who looked after the flat, arriving through the door as I was rushing out, gave me a wide smile and a quick up-and-down glance. She took great pride in making sure I was well turned out. Downstairs, the atmosphere in the lofty state dining room, packed with journalists and television cameras, was, I thought, muted. I sensed the assembled journalists were a bit taken aback by the sheer scale of the rescue package. There had been a lot of speculation about our plans, but the enormity of the measures had not, perhaps, been anticipated. Gordon hailed the plan as innovative, comprehensive and ground-breaking. I agreed it was huge and, yes, historic and a response to extraordinary times. As we took questions, I was itching to get back to the Treasury. There was a lot to do.

  Back at my desk, Kevin kindly brought me a cup of his remarkable coffee. He has served Chancellors as far back as Nigel Lawson and by some strange anomaly gets paid for every cup of tea or coffee he makes. I checked on arrangements with Marilyne, my diary secretary, for a planned trip to Washington the next day, Friday, 10 October, for meetings of the G7 finance ministers and then of the IMF, before sitting down to work on my statement to Parliament in a couple of hours’ time. Statements to the House involve a lot of time and preparation; it is like doing an exam. When Paul Myners first went to the House of Lords he was astonished at the depth of detail a statement demanded. It was not like being in business, he said, where you do not always need to know what is going on right down on the shop floor. In Parliament you must master your brief.

  My statement coincided with the news that at 12 noon, the Bank of England, in a coordinated move with other leading central banks, had cut interest rates by a half of one per cent. The disruption in financial markets around the world had intensified, but we were ready to bring stability to the banking system. The rescue package would protect depositors, safeguard taxpayers, and play an important part in the international response to the crisis. It was designed to help families and businesses, as well as to support our economy. Essentially, the package involved £50 billion to get more capital into UK banks, which they could borrow from the government, and £100 billion of extra money available in short-term loans from the Bank of England, on top of the existing loan facility of £100 billion. To free up the banking system, up to £250 billion in loan guarantees would be available at commercial rates to encourage the banks to start lending to each other again.

  There was grudging acceptance of the scheme by the Conservatives. The Liberal Democrats’ soothsayer, Vincent Cable, did as he always used to do and supported us. Back at the Treasury in the afternoon, I looked at the trading screens on Dan’s desk. The markets around the world remained uncertain. Concerted and coordinated action was needed now to calm the storm and restore confidence. It would be vital that governments did not just talk about what had to be done but got on and did it. The meetings would have to conclude with more than a diplomatic fudge this time. The IMF launched a facility to speed up the approval of loans to countries in need of financial support, ahead of the weekend talks in Washington. While I was there, Gordon would spend the weekend talking to other world leaders from the UK. His knowledge and wide range of contacts proved invaluable, as did his single-minded concentration on what needed to be done.

  Before heading for Washington on the Friday, there was one more difficulty to deal with: Iceland. I had spoken to the prime minister on the previous Thursday morning to tell him a letter outlining our plans to save UK depositors’ money was on its way. We would need to work together, I told him, and I offered to send a Treasury team to Iceland to see if matters could be resolved and something salvaged from the wreckage. He would issue a statement, he said, putting on record his appreciation of the help the UK government was giving depositors – as well he might.

  His gratitude had been short-lived. Landsbanki, with its UK subsidiary, and Kaupthing, would be put into liquidation later in the day. We were going to use the Northern Rock legislation to transfer Kaupthing’s UK subsidiary operations to the Dutch bank ING. But I saw no alternative to freezing the assets of Landsbanki, or Icesave as it was known here. Frankly, I no longer believed anything I was being told by the Icelandic authorities, who seemed to be in complete denial. Freezing another country’s assets is a major step, and I had sought advice from lawyers and Treasury officials to see how we could do it. Fortunately, it turned out that I did have power to freeze the assets if I believed the action taken by Landsbanki and the Icelandic authorities was likely to be to the detriment of the UK economy. I did think that the Icelandic action, which could mean a loss of £4.5 billion for British savers, was indeed detrimental. Unfortunately, this legislation was contained in an anti-terrorism measure passed in 2001. Because of that, our action was open to the mistaken impression that we regarded Landsbanki – or, even worse, Iceland – as a terrorist organization.

  Not surprisingly, a new Icelandic government decided to conduct a root and branch inquiry into how their country had been brought to its knees by such reckless gambling on the part of their banks, their businesses and some of their politicians. The special investigation committee reported in the middle of Britain’s general election campaign in 2010. It found significant evidence of negligence and of behaviour that pointed towards possible criminality. They left no stone unturned and found both the former prime minister and the governor of the central bank to have been negligent. Proceedings have been brought against the former prime minister. Criminal investigations are still ongoing in 2011.

  We caught the Virgin Atlantic flight to Washington on Friday morning. Newspapers were reporting that the world was ‘stunned’ by the rescue scheme’s boldness, which was good. What wasn’t so good was that traders in the UK were panic-selling everything but their shirts, offloading shares at such a rate that it would lead to the biggest one-day fall in the FTSE 100 index for more than twenty years. I was looking forward to the flight. It would give me eight hours in which to take stock of the last few days and to prepare for the G7 meeting that afternoon, as well as to go over the plans we needed to have in place for the coming Monday morning when the detail of how much capital each bank would need to raise would be announced. On top of that, I had the inevitable backlog of papers that is the stuff of ministerial red boxes. The past few days had meant that I had not been able to deal with my nightly homework. Ministers can, if they want, see an extraordinary amount of the paperwork that passes through any government department. The trick is to decide what is important and what is not. It is very often the piece of paper at the bottom of the box, which does not seem important at the time, that can come back to haunt you. In my experience, it is worth ministers reading everything that is put in front of them. Of course, it is the job of a decent private secretary to decide what the minister needs to see. The relationship between a minister and his private secretaries is critical: I was never let down.

  I also wanted to think about how we should deal with the G7 meeting. This could not be a routine meeting followed by the ritual communiqué. I spoke to Hank Paulson on arriving at the US Treasury. We were both determined, along with Christine Lagarde, that it would be far better to concentrate on five or six key decisions, and that the communiqué should not run to more than one page of A4. That would concentrate people’s minds. By this
time there was unanimity that banks needed more capital. I spoke to many finance ministers from around the world that day, both in the G7 and those gathering in Washington to attend the IMF meeting on the Saturday. All had come to the view that taking shareholdings in the banks, together with the other measures, would provide the confidence that the banking system needed. There seemed to be an extraordinary amount of interest in what we were trying to do in the UK, and a sense that at last something had broken the logjam.

  The G7 meeting was short and to the point. Here was an example where a dozen people could talk about what needed to be done, in relation to their banks and their economies, and agree to do it. Just three days later, both the US and Europe were able to announce a bank bail-out along the same lines as our own. I managed to have a private word with Hank Paulson on the Saturday morning before the meetings began. He was exhausted after two weeks’ wrangling with congressional leaders. He had followed what we were doing in great detail and believed that it would work. Now he wanted to do something similar in the US.

  Throughout the day, my thoughts were never far away from what was happening more than three thousand miles away, back in the Treasury. My officials were again working around the clock to convert the general plan I had announced on Wednesday into quite specific and detailed plans for each bank, ready to be announced at 7 a.m. on Monday morning. Not for the first time, though, the fractious relationship between Nos. 10 and 11 took an inordinate amount of time to resolve. Midway through the IMF meeting I was called out, yet again, to talk to Yvette Cooper, the Chief Secretary, who was hard at work in the Treasury to ensure that what we wanted was delivered. She is intelligent and hardworking, and was focused on the fact that we had less than thirty-six hours to sort out numerous apparently intractable difficulties. But she was on the phone for another reason. Shriti Vadera was demanding to be let in to a meeting Yvette was holding to take stock of where we were. I have to confess this was my fault. Increasingly irritated at the querulous calls from No. 10 staff to my office, all of which hinted that we were not up to the job, I had said that Shriti was to be kept informed, but not to be let in to meetings, which she tended to take over. Like many investment bankers I have met, she appears to believe that unless there is blood on the carpet, preferably that of her own colleagues, then she has not done her job. For the sake of peace, I told Yvette to allow her into the meeting. The last thing we needed was another battle between Nos. 10 and 11.

  An already strained relationship between Gordon and myself was, I think, often exacerbated by the behaviour of the people around him, who believed they were doing the right thing by him, and often vying to prove their own importance within his court. It did not help that he was constantly encouraged to believe that the Treasury, and consequently myself, was his enemy. The Treasury has always had a high self-regard. It sees itself as the big beast of Whitehall, patrolling the corridors of governments of whatever political hue, fiercely guarding the economic stability of the country. Historically, down the centuries, this has created tensions, and power play, between the inhabitants of Nos. 10 and 11. My own experience was that, under clear and direct control, the Treasury became a crucial tool for government, not a weapon intent on destroying it.

  I was intrigued to find that Tony and Gordon, who are both strong-willed and determined men, became unbelievably insecure in Downing Street. It is not hard to see how a bunker mentality can develop. Unlike most countries, the British Prime Minister has a very small staff. The Cabinet Office, despite its name, is there to service Whitehall rather than the prime minister. In my experience, it is a mixed bag, an amalgam of various functions that can’t be fitted into other government departments. The Prime Minister therefore depends heavily on individual special advisers. Their value to him depends, in turn, on what they know – or what they think they know. It also lies in their being able to get on sufficiently well with the department they cover to get the information they need, and then having the intellect to challenge what they are being told.

  For government to work effectively, the Secretary of State of a particular department and the Prime Minister have to be able to work as close colleagues, sorting out differences and then issuing clear instructions to the civil service about what they have agreed. Once this relationship becomes dysfunctional, the whole system breaks down. By the end of that long Saturday in Washington, I had heard enough from London to know that the constant jarring was going to lead to another difficult day when I got back. Perhaps it was my fault, perhaps I should have been more accommodating, but by this stage I was certain that unless I stamped my authority on what was happening we would never reach an agreement. After the debacle of the pre-Budget report in 2007, and the less than satisfactory Budget earlier in 2008, I wanted to be completely happy with Monday’s announcement on the rescue. I had managed to run three major Whitehall departments and I was confident that I could run this one. The difference here, of course, was that this was the first time that my predecessor was now the Prime Minister.

  I arrived back in London early on Sunday morning, tired and in need of a good sleep. Unfortunately for me, the pilot had found a quick route back across the Atlantic. There was nothing I could usefully do in the Treasury until the lawyers had finished their work, so I went to bed for a few hours. Another long night loomed. When I got to the Treasury, shortly after lunchtime, I found the place unusually cheerful. The tantrums of the day before appeared to have been forgotten and good progress was being made. I spent the next few hours working on my statement for the Commons the next day and mastering all the detail I would need for the media round in the morning. We also had to manage as best we could the expectations of journalists writing for the papers. You can’t tell them everything, but if you don’t point them in the right direction and they write something that is wrong you soon find out it is your fault, not theirs.

  Throughout the day I held frequent meetings to take stock of where we were, but largely we were on track. The banks had, in the main, accepted what we were doing. The big problem was, of course, RBS, which needed about £15 billion of public money to put it on a stable footing, meaning that the British taxpayer would own more than 70 per cent of its shares. The government would be the bank’s major shareholder and with that would come a whole raft of difficult decisions. First, there was no question that the top management, the chairman and chief executive, had to go. I regarded the departure of Fred Goodwin and Tom McKillop as not negotiable, so there was no point in discussing it with them. I had made it clear to John Kingman, who was more than capable of dealing with such matters, that both had to go, and to go immediately. John, an urbane, laid-back Treasury official, became the point man during the banking crisis. He had been brought back to this part of the Treasury because of his ability to find solutions to problems and to motivate what was proving to be a highly skilled and dedicated core of staff. He was of immense support to me and I was sorry when, a year later, he returned to the private sector.

  Sir Fred Goodwin accepted his fate, but his chairman, Sir Tom McKillop, saw no reason to go until the next year’s annual general meeting. The bank’s board appeared to be behind him. They seemed to have no sense of responsibility for what had happened to RBS and were more concerned about saving face. We would not budge. In the end, Sir Tom went and the others followed him a few weeks later. We had lined up Stephen Hester, who had recently left British Land and had considerable banking experience, to replace Sir Fred. Finding a chairman would be more difficult, because the pool is a lot smaller than people might think. In the end, we secured Philip Hampton, who was chairman of Sainsbury’s and who had a lot of City experience. He and Stephen subsequently did a great deal to salvage what was a wreck of a bank.

  Throughout this period I was intent on stopping the banking system from collapsing, and less focused on the politics. Gordon, however, understood the need to extract something from the banks in return for bailing them out. Subsequent to the bail-out, many have argued that we should have extracted
legally binding undertakings on lending and bonuses. As subsequent events proved, trying to get an agreement on levels of bank lending that will stick is well-nigh impossible. It is simply not possible to force a bank to lend to a particular borrower. Then there was the question of pay. Whatever we decided to pay Stephen Hester, people would regard it as too much. Like it or not, bankers are paid a great deal of money, and if we were to salvage anything from RBS, I needed to get the best possible candidate and to pay him what was needed to do so. As it happens, I think he was the right choice.

  More problematic was what to do about Fred Goodwin’s departure. Paul Myners had done much of the hand-to-hand fighting and negotiating with all the banks, RBS included. Now he was trying to persuade Sir Fred that he had to follow HBOS chief executive Andy Hornby in not taking a redundancy payment. I too spoke to Sir Fred about for-going his redundancy. It was a terse conversation, and neither of us wanted to prolong it. His pension was another matter. Initially, we were told that his pension was £400,000 per year. It subsequently emerged that it was double that. It proved extraordinarily difficult to find out how on earth he could have acquired such a massive entitlement, but the deal was apparently reached when he was recruited by the then RBS top management, who, of course, were nowhere to be seen when it became public. Not surprisingly, it was a major political problem for us. I cannot understand why Fred Goodwin did not settle for £400,000 a year. Most people could struggle by on that. To insist on even more cost him dearly. He could have walked away and spared himself and, more importantly, his family months, years, of trauma. He could have withdrawn from public life and re-emerged somewhere else later on. That’s what most of the RBS directors did. It was not until the following June that Sir Fred saw some sense and accepted that the price of insisting on his full contractual rights was not worth paying. It was too late by then. His taciturn stubbornness ensured that he became the pariah of British bankers and the focus of huge public anger. To the end, he just did not get it.