The mood among the finance ministers at dinner that evening was grim. A lot of the anxiety had to do with confidence, or the lack of it. That is why we thought that a successful outcome to this meeting was psychologically so important. Our evening meal at the US Treasury was not a success. There were far too many people and it was a bit of a mêlée. Hank was very tired. He told me he was counting the days until he left office. In any event, he felt that the ball was now in the leaders’ court; any agreement would have to be reached at their dinner at the White House.
We finance ministers were pretty much united at that stage. We agreed on the need to support our economies now and that we had to reform the financial system. So we retired to bed, leaving our officials to work all night on a draft agreement and call to arms. I did take the opportunity for a long talk with Alexei Kudrin, the quietly spoken Russian finance minister. He is a very competent technocrat, rather than a politician, and did not come up through the ranks of the KGB. I always found him more thoughtful than many other Russian ministers I have dealt with. Although it was not central to what we were discussing, I was anxious that we try to rebuild relations between our two countries, which were under severe strain after the murder of the Russian dissident Alexander Litvinenko in London a year earlier. We have a great deal of trade with Russia and I was anxious to get across to Alexei that we needed to work together to give investors more confidence in investing in Russia.
The G20 meeting the next day was held in the National Building Museum, which in just a few weeks’ time would host an inaugural ball for the new president. Work was already under way as we met. Gordon and I arrived, this time together, and were formally greeted again by President Bush. There was a hiatus before the arrival of the next delegation so we chatted informally for some time about Barack Obama’s recent victory. President Bush was complimentary about the Obama campaign. He was equally very irritated by the Republicans’ decision to trash and disown his record. He said the election of the first black president was a very good thing for America and reflected a maturity on the part of the electorate that would not have existed even a decade before. Politics, I thought, is the same the world over.
It was the first time I had attended a meeting where around the table were the heads of government and finance ministers of twenty of the world’s most powerful economies. There was a strong sense of common purpose. President Bush opened by saying that he would not be around for much longer, but he wanted to make sure that we agreed to act in the face of a mounting problem. There was a powerful intervention from Australia’s new Prime Minister Kevin Rudd and his Finance Minister Wayne Swan. It was a real call to arms and a warning of what would befall economies across the world if we let depression take hold. Right around the table, from the Saudis to India, there was agreement that we needed to act together to reverse the economic slump. Equally, there was a commitment to boost growth and to seek reform of global financial markets. There were, though, far too many Europeans. President Sarkozy had, for domestic reasons, used his considerable guile to get the Spanish and Dutch under his wing, with the result that European ministers spoke one after another for more than an hour. This was not lost on the others, and my guess is that if the G20 is to continue as an effective organization its representation needs to be rebalanced.
I have been to many international meetings and very few of them can truly be said to be of any great significance. This G20 meeting, though, was crucial, not so much because of its specific conclusions but because it demonstrated that countries were prepared to act together. President Bush and Hank Paulson deserve a great deal of credit for that. So too does Gordon. It was his dogged pursuit that made that meeting happen. It was his determination that we should keep the presidency of the G20, and not cede it to Japan which desperately wanted it, that resulted in the highly successful meetings held the following year.
Rather than let the pre-Budget report stand, Gordon now wanted to make fresh announcements seemingly on a weekly basis, to show we were taking action to deal with the crisis. To the outside world, far from offering reassurance that we were on the case, it looked as if we were panicky, not in control. I remember one occasion when, as we were about to do a series of media interviews, Yvette Cooper and I found that we could not remember all of the things the government had announced, there were so many of them.
As part of his reshuffle in October, Gordon had established what was called a ‘national economic council’. He wanted to convey a sense of purpose, and the title was designed to make it sound more important than yet another Cabinet committee. Most of the Cabinet were on it, together with a large number of junior ministers, about thirty in total, making it unwieldy. On top of that, for some reason it met in the Cobra room, deep in a Whitehall basement. This windowless room is reserved for times of national emergency and civil unrest, and was presumably chosen to give the newly invented council some aura of urgency. In practice, it meant that we could not get so much as a cup of coffee, which was especially hard given Gordon’s preference for early morning meetings. Food and drink are, for some reason, banned from the bunker.
It was fine for me, I didn’t have far to walk to work; but there was no reason not to meet in the Cabinet Room upstairs: what we were discussing was hardly top secret. The council couldn’t tell the Treasury what to do, but Gordon used it to drive through various policy initiatives, such as help for home owners. I didn’t object to it when he first raised the idea when we met at my home in Edinburgh in August. I wanted to keep the peace. At the end of the day, the Treasury can always say no – no economic council or Cabinet committee can change that. I put up with it, although Gordon would never have agreed to it when he was Chancellor. No Cabinet sub-committee can tell the Chancellor what to do, but this was an attempt to bypass the Treasury and do just that. On the other hand, he never sought to undermine me in this committee, but he remained frustrated with the Treasury.
The pre-Budget report measures, despite the predictable response from the Conservative media, was necessary, and stopped far deeper damage being done to the economy. However, the deficit, then estimated at £118 billion, was becoming a huge problem, both economically and politically. Although we had entered the recession with a deficit of 3 per cent of our national income, which was not high by international standards, it had now risen to 8 per cent, the highest since records began in 1970. Even so, it was manageable. But it looked to some as though we were simply spending more money that we didn’t have. This gave the Tories the space they needed finally to abandon support for our spending plans, which they had maintained up until that point.
By the end of 2008 we had achieved more on the international stage than I would ever have thought possible. At home, the year closed in much the same way as it had opened. Our political stock was still low, and the increasingly fraught relationship between Nos. 10 and 11 was becoming ever more evident, not just in government but to the wider world. What could have been hailed as a great success in pulling the banking system back from the brink was being drowned out by the dissonance. We should have been able to capitalize on our deft response, to move on with the same clear purpose to deal with the economic consequences of the crash. After all, the Tories were all over the place. But in our disarray, with pointless political feuding and half-baked announcements, we allowed them the space to regroup, to leave us to it, and then to present themselves as something new two years later.
9 Global Success, Domestic Failure
We returned to London on the first Sunday of 2009. Christmas with our family and the annual Hogmanay supper with close friends had revived our spirits. It was a wrench to board the plane to London. The first few months of the year would be difficult. At a dinner with the Edinburgh Chamber of Commerce just before Christmas, everyone I spoke to had said the same thing: they were holding on, but business was slowing and bank lending was drying up.
The first Cabinet meeting of the year was held in Liverpool. This tradition of meeting in different parts of the co
untry was started by Gordon and proved very popular with the regional press – predictably less so with the national media. The night before we met, I had dinner with a group of businessmen and women in a restaurant at the top of a block of newly built luxury flats. The man who built them told me they were proving difficult to sell. And the bank, he complained, was being unaccountably difficult about lending him money to build more flats. Although I didn’t say so, I could rather see the bank’s point. When he told me his lender was one of the Irish banks, I could see in a nutshell why they had got into such difficulties with commercial loans.
Wherever I went, whether it was businesses in Edinburgh, in Liverpool or in London, the story was the same. Lending, or rather the lack of it, was the big problem. We would have to do more to improve lending to businesses and potential home owners. What’s more, the economic conditions had deteriorated sharply since the pre-Budget report in November. Then, we were talking about a short recession. Now, it was more ferocious, sharper and deeper. The massive uncertainties about what would happen to other countries and to the banks had increased. We were now talking about a recovery at the beginning of 2010. Ominously, Dave Ramsden, the Treasury’s chief economist, said that when the recovery came it would not feel like one. It would be long and slow. Worse still, he thought at this stage that there had been a loss of 4 to 5 per cent of our economic capacity – that is, the amount of income we are able to produce, particularly in the financial services sector – which would be permanent. Forecasting in this climate was incredibly difficult, and it was of no comfort that most forecasters were wrong. The IMF, which in October 2008 was forecasting world growth of 3 per cent for 2009, was now forecasting growth of close to zero. And in the last three months of 2008 the world economy had shrunk for the first time since 1945, with Japan, America, Germany and most of Europe, including the UK, now in recession.
The outlook was bleak, but there was one bright spot on the horizon. The election of Barack Obama would, we all hoped, give a new impetus to international action to help solve the economic crisis. Obama, like us, believed that governments can make a difference. Gordon and his team were in constant touch with the incoming Obama administration. His frustration was that Obama was not prepared to start taking decisions until his inauguration at the end of January. That fits with the American Constitution but was frustrating for us on this side of the Atlantic. We needed the Americans to be big players and their number one player was not going to take the stage for four weeks.
For my part, I didn’t get to meet Tim Geithner, the new Treasury Secretary, until the middle of February, at a meeting of G7 finance ministers in Rome. I had, of course, spoken to him several times on the telephone since his appointment in January. When we did meet, I was struck by how paralysed a new US administration is. In the UK, when the government loses power, it is usual for the new government to take office the day after. The civil service remains in post, moving seamlessly from supporting one government to the next. When I met Tim in his hotel room in Rome, he asked me if I would like a cup of coffee, which he proceeded to make himself. He explained that the last coffee maker had been a Republican and the replacement had yet to be confirmed by Congress: he was making a point – so many government appointments in the US are political. My relationship with Tim Geithner was as good as it had been with Hank Paulson. He was unpretentious and easy-going, and having run the New York Fed and been involved in the bail-outs the previous autumn, he knew exactly the landscape we faced. He also knew most of the finance ministers. His quiet style, self-deprecating and relaxed, belied a steely determination. He was a good colleague.
Meanwhile, the mood in Downing Street darkened by the day. It was evident that we needed to do something more to make the bank rescue stick. This was not because it hadn’t worked in the first instance, but because the situation in the wider economy, and within RBS and HBOS, had deteriorated very sharply. What action to take, and when to announce it, was a source of further tension between Nos. 10 and 11. It was not that we disagreed on what needed to be done on the economy, and in particular in relation to the growing problems with bank lending. It was more that I began to realize the extent of Gordon’s lack of confidence in my judgement, and that of the Treasury, and the Treasury’s ability to deliver what was required. Worse, as he became convinced that we weren’t seized with the urgency of the situation, endless meetings were called in those early days of January, frequently to cover the same ground. If Gordon and I had been in business, I suspect we would have agreed at this point that it was best to part company and to do it immediately; but it’s not that simple in government.
The recapitalization of the banks the previous October had been successful in stopping a meltdown. But the more the new management at RBS and Lloyds looked into what they had taken over, the worse the picture became. RBS was a particular problem. The acquisition by RBS of ABN AMRO was a major part of the trouble. It held a huge number of assets and shares that were worthless and would take years to recover their value – if they ever did. Some of their holdings seemed fantastic. They appeared to own a golf course in Florida that was seventy miles from the nearest road. They owned a cemetery in the Deep South, the value of which was questionable. They seemed to have taken over an incredible number of US trailer parks which were at the heart of the sub-prime crisis. The question was what to do about all this. Left alone, these liabilities would bring down RBS unless they could somehow be split off into a ‘bad bank’ and run down over many years. The alternative was for the government to insure or guarantee these assets, leaving the bank to run them down as best it could, again over many years. Whatever we did, it was increasingly apparent that RBS would need yet more capital to prop it up. It would have been impossible to discover all this over the frenetic weekend of the bank bail-out in October 2008. Even if we had known exactly what the bank owned, it would still have involved more capital than we put in at that time. Added to that, economic conditions were continuing to deteriorate, with the result that more good assets were rapidly turning bad as their value fell.
The problem faced by Lloyds over their acquisition of HBOS, which was finally voted through by Lloyds shareholders in January, was different. HBOS had made a large number of loans for commercial and residential property which were going to lose them billions of pounds. It was old-fashioned bad judgement calls made in Edinburgh. It had even carried on lending, particularly on commercial property, as its losses continued to mount. It had offered mortgage deals that made no sense. A bank that had once been a symbol of Scottish prudence had been brought to its knees.
Back in Edinburgh in late 2008 there had been a campaign to try and undo the takeover by Lloyds. It was fronted up by two prominent Scottish bankers. George Mathewson had been chief executive and then chairman of RBS. He had brought in Sir Fred Goodwin but had then left before disaster struck. Peter Burt had been chief executive, then chairman, of Bank of Scotland and had masterminded the merger with the Halifax building society. The Bank had tried to sell itself to a company run by TV evangelist Pat Robertson. That deal fell through, perhaps because it transpired that Mr Robertson believed that Scotland was ‘a dark land’ where ‘homosexuals ruled the roost’. I knew both Burt and Mathewson, and I could understand why they might want to salvage HBOS. I would have agreed with them but for the fact that I knew the bank was bust. Although there was a great deal of noise in the Scottish media in support of their campaign, no offer – or, indeed, solution – was ever put to the Treasury, despite repeated requests that they do so. What it boiled down to was that they would move in, take a look at the books and, if they needed more money, the government would have to provide it. The merger, or, more accurately, the takeover, by Lloyds did at least mean that there was money coming from the private sector, and I couldn’t see any justification for taking on another bank entirely at the state’s risk. In the event they did not pursue their plan.
The whole picture was further complicated by the fact that all of the banks were rapidly
reassessing who they would lend to. A good prospect two years before might look decidedly bad in January 2009. Further action was needed not just to shore up the banks but to try and get lending going again in every sector of the market. This involved an extraordinary amount of work. Gordon was understandably frustrated about bank lending. The bad publicity associated with continuing bonus payments was eroding support for what we had done just before Christmas. I was frustrated too, but I did not want to make an announcement that was not thought through and which might unravel. We needed time to get this right. My hesitation was, I think, seen as evidence, not of a recognition of the need for detailed planning, but rather of a reluctance to act.
Of course, the Treasury is institutionally against spending money if it can avoid it. But, along with the Bank of England and the FSA, we had been working up a complex scheme over the Christmas period. I was frustrated at the general reluctance and slow rate of progress within the Treasury and I expressed this to Nick Macpherson. I felt I was fighting on two fronts: one in the Treasury, to speed up the scheme; the other with an angry prime minister, whose lack of control over the Treasury made him suspicious that they were an instrument of opposition to his will. It was a view that some of his advisers in No. 10 seemed only too happy to foment.
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