At the Treasury, the team were watching the minutes ticking away until the announcement to the markets at 7 a.m. They were steeling themselves for the acid test of all the work of the last few days – the market reaction. Brown was less concerned about the reaction at Westminster than how the intervention would be seen internationally, hence his desire to make contact with his counterparts in other leading economies. But the Prime Minister was also worried that people at home would not get what was happening and would have no comprehension why the government was acting in this way. Mervyn King later used language which no voter would have trouble understanding: ‘We are not trying to save the banks, we are trying to save the economy.’
On the Wednesday morning, markets opened and the announcement was made through the Stock Exchange’s regulated news feed. To the immense relief of all Treasury insiders and their guests camped out there, the reaction was positive. Share prices were up a little at the start before moving slowly lower. Wholesale funding and credit markets were calm. It appeared that the £250 billion credit guarantee scheme had provided the most reassurance. This lifeline gave investors the comfort of knowing that struggling banks would be able to borrow short term and meet their financing needs. City bankers later professed their admiration for the Treasury civil servants who had put the guarantee scheme together in a matter of days.
Alistair Darling, fortified by a few hours’ sleep, went on BBC Radio 4’s Today programme to set out the terms of the deal. His reassuring style and demeanour gave the feeling of a government in control of events, a contrast to the terrifying market gyrations which had dominated news bulletins the previous day. Shortly afterwards, Darling made his way to Number 10 Downing Street for a joint news conference with Gordon Brown. The Prime Minister had been working the phones for much of the time since the announcement. Worried about the UK going it alone, he wanted to bring other leaders on board. He was anxious to ensure the Europeans took their cue from Britain and followed through with a co-ordinated plan. He went through the details carefully with Sarkozy and Merkel, suggesting how it could be made ‘Europe-wide’.
Gordon Brown speaking later to the BBC for “The Love of Money” series (2009) recalled his anxiety at how exposed the UK was that day, having unveiled such a dramatic support programme for the banks:
‘Nobody had ever done that before, nobody had ever talked in these sort of figures before. It could have been an initiative that went entirely wrong because no other country was prepared to support us and I did not have any assurances from the other countries that they would do so.’
Vadera, meanwhile, returned to her own Whitehall office. She had not been there for days and wanted to check on any work building up in her in-tray. She lay on a sofa exhausted, hoping for a brief snooze. But she was awoken by her mobile phone ringing. It was Sir Fred Goodwin. He reminded her that the previous night he had stated forcefully that RBS did not need capital and that liquidity was his problem. Now, said Goodwin, he had reflected on the matter and decided that he was going to ask for capital. The RBS chief told Vadera that he had not discussed the matter at that stage with his board and wanted the conversation to remain confidential. This surprised Vadera, who had been led to believe on good authority that the RBS board had already been pushing for an injection of funding. She asked Goodwin how much he thought he needed. About £5 billion was his answer. Vadera told him that wasn’t enough.
A couple of hours after the first announcement, a lower-key press conference was convened. With no sleep between them, Myners, Tom Scholar and John Kingman appeared at a platform in front of media representatives. It was a non-attributable briefing. There was a feeling that whatever his considerable financial expertise, Paul Myners could not be expected to head an ‘on the record’ press conference with big political questions coming at him. Most journalists present, including the author, were impressed with the level of detail being set out before them. But after the formal question-and-answer session, a huddle gathered around Myners pressing and probing for more information. There was no suspicion, however, that the government plan was incomplete at that stage and that the markets could yet derail the package of measures.
Many of the questions that morning focussed on another major headache for the government. On the Monday evening, the Icelandic Prime Minister Geir Haarde had warned his people that their nation was facing bankruptcy. Iceland’s banking industry had grown to several times the size of the economy. With ready access to cheap global funding, the banks had gone on a lending spree that included the UK, where some well-known retail assets were acquired. Iceland’s banks, like many others, were caught in the headlights of the credit crunch juggernaut. Their sources of wholesale funding dried up. The Icelandic government decided to nationalise one of the larger banks, Landsbanki, and sought emergency loans from the Russian government.
British savers might have wondered how events in Reykjavik and the plight of an Icelandic bank would affect them. But one well-known player in the online savings market, Icesave, was part of Landsbanki, as was another UK-based bank, Heritable. The Icelandic bank Kaupthing, which had a presence in the UK and an online offshoot, Edge, was also being taken over by the Icelandic government as part of the desperate measures to stem the crisis. Savings in these banks were covered by the Icelandic rather than British compensation scheme. So British depositors would have to apply to Reykjavik rather than the London authorities for any form of redress. And even if the Icelandic government had been able to afford to reimburse savers, its compensation scheme was less generous than the UK’s.
Darling decided to intervene immediately. He used special powers on the statute book as anti-terrorism measures to seize Icelandic bank assets in the UK. Heritable and Kaupthing deposits were transferred to the Dutch bank ING. Icesave customers were to be protected by a freeze on Landsbanki’s business in the UK. The Dutch government took similar action, leaving the Netherlands and British authorities having to reimburse 400,000 savers a total of £3.5 billion. The Chancellor’s actions prevented losses for British depositors but triggered a lengthy and acrimonious international court case as the UK government sought to retrieve the money from Reykjavik. Regulators were confronted with complex legal obligations to ensure a smooth transition for UK savers. Late in the evening, the Financial Services Authority realised it had to deliver legal papers to Scotland, where Heritable was registered, in time for a court case the following morning. All courier delivery firms had stopped for the night, so an FSA official jumped into his own car with the paperwork and drove through the night to Edinburgh.
The response to the Icelandic debacle formed part of Alistair Darling’s statement to the House of Commons that Wednesday afternoon. The brand names Icesave and Kaupthing Edge were well known to most MPs as they regularly featured highly in tables of best savings products. The fate of these banking operations and the implications for UK savers and constituents would have worried many parliamentarians more than the complexities of the banking bailout plan. Those members on both sides of the House who were focussed on the government’s response to the wider crisis heard Darling explain that banks had agreed to raise £25 billion in new capital, with access to government investment if they wished. Another £25 billion of state funding would be available if required. This conveniently broke the £50 billion rescue war chest down into two more digestible chunks. In the early hours of the morning it had been decided that announcing a ‘£50 billion bailout package’ would create more fear than reassurance about the stability of the system.
If the markets still needed any convincing that policymakers were serious in the steps they were prepared to take to avoid an economic catastrophe, action by the Bank of England should have done the job. In an unprecedented, co-ordinated move with the European Central Bank, the US Federal Reserve, and the Canadian and Swedish central banks, the Bank cut interest rates by half of one percentage point to 4.5 per cent. The Swiss and Chinese authorities took similar action. It was a huge display of firepower by the global economy’s guardians. The US Fed had never before co-ordinated a rate cut with other central banks. ‘We are now looking at the first page of the global-depression playbook,’ was the verdict of the leading US commentator Carl Weinberg of economics consultancy High Frequency Economics.
By the Wednesday evening it was apparent that the recapitalisation, credit guarantee and liquidity package had steadied nerves in the City and at Westminster. To that extent, the move had worked. But it soon became clear that it had only bought time. The FTSE 100 index fell more than 5 per cent over the day. The colour of the government’s money was not visible; at this stage there were more words than action. As one observer put it, ‘if we thought we had a week or ten days to give precise shape to proposals, it became clear we didn’t’. Well-intentioned announcements by the Prime Minister and Chancellor might have impressed players in British financial markets but much less so internationally. Asian and American fund managers took the hard-headed view that where there was still uncertainty, there was an unattractive place to make large cash deposits. There were plenty of safer havens to leave money. All British banks, including the well-financed Standard Chartered, were lumped together in the eyes of the markets. For Myners, Vadera and the exhausted officials at the Treasury, the sobering reality was that the detailed mechanics of recapitalisation had to be worked up in days.
Reinforcements were needed on the advisory front. UBS could not continue with any role on the Treasury side of the deal as the bank represented Lloyds and RBS. So Soanes and Budenberg, after intense activity over previous days at the Treasury, ended their formal involvement. Both would stay in touch and use their network of City contacts when required. Calls were made to other investment banks late on the Wednesday afternoon with the key demand being that there must not be conflicts of interest because of their client list. Rapidly assembled pitches were made and by 6 p.m., Credit Suisse had been hired to act for HM Treasury on working up the detail of the bailout package. The son of a former Governor of the Bank of England now found himself at the centre of the drama.
James Leigh-Pemberton was a City dealmaker to his bootstraps. His father was Robin Leigh-Pemberton, Baron Kingsdown, who had been Bank of England Governor from 1983 to 1993, and he was official financial adviser to the Duchy of Cornwall based on an historic family connection with the Prince of Wales’ estates. But those who observed James Leigh-Pemberton’s career said he never traded on his name or connections. He had learned the business at Warburg in the early 1980s before joining Credit Suisse and playing a part in some of the largest corporate transactions of the following decades. He had become chief executive of Credit Suisse’s UK businesses in July 2008.
That Wednesday evening, 8 October, Leigh-Pemberton and a team of Credit Suisse colleagues (which would later swell to a total of nearly 60) arrived at the Treasury. In making a pitch for the Treasury mandate they had to come up with an estimate of the size of the capital hole at the banks. They discovered that their initial forecast had not been too wide of the mark. But what struck the Credit Suisse team, who had not been privy to the discussions earlier that week, was the escalating pace of events and the growing assumption that a fully worked-up package would be needed quickly. The need for capital was not a surprise but the deterioration of the liquidity position was unexpected. RBS, for example, was close to running out of assets to put up as collateral in return for financing, hence the need for emergency credit lines from the Bank of England.
The brief for Credit Suisse was to come up with a plan which would secure financial stability but also ensure value for money for the taxpayer. The intervention had to be definitive and be seen as a lasting solution to the banking crisis. Another key question was what form the capital should take, the size of the injections and the price paid by the government. Leigh-Pemberton dispatched members of his team to RBS and Lloyds to start the task of due diligence, working out the requirements of each bank.
He based himself at his bank’s office in Pall Mall, a small and discreet building in London’s ‘clubland’, more commonly used to host private client meetings because it was more centrally based than the Canary Wharf headquarters. The West End office was to become the nerve centre for the Credit Suisse work over the ensuing days. Here reports and detailed analysis provided by members of the team at RBS and Lloyds were analysed and collated. Briefing papers for ministers were drawn up and it was but a short walk to the Treasury along the edge of St Jame’s Park and Horse Guards Parade to deliver them.
By this time, the banks were being asked to report their funding positions three times a day to the Treasury and the Bank of England. Their bosses had realised that they had to work with the government and there was no point withholding information. The time for reluctance about disclosure had gone: they knew they needed the Whitehall lifeline. On the Thursday the banks’ staff were told they were required over the weekend and would have to be in position to call board meetings. The chairmen and chief executives were instructed to be in London that Saturday and Sunday to be in a position to get to the Treasury at very short notice. Ministers did not want to find that key players were in Edinburgh or at their country homes. RBS and HBOS were also asked to ensure that their senior non-executive directors were in London. They would be needed to approve the leadership changes that Myners knew would be required as the price for billions of pounds of government support. They would have to be present to put their hands in the blood.
Ministers and regulators, meanwhile, were working furiously on the sums. With the FSA and the Bank of England, the Treasury had to work out how to divide up the multi-billion pound cheque that would be written out by the taxpayer. HSBC and Nationwide had already signalled their intentions for raising new capital. The main focus would be on Lloyds, HBOS, RBS and Barclays. Myners continued consulting his own informal group advisers – friends and colleagues with shared experience honed over decades of takeover and other corporate activity. David Mayhew of Cazenove and Charles Randall, a colleague of Nigel Boardman of the law firm Slaughter and May, were among them. They were not under contract. Their involvement was private, and deniable.
By Thursday, pressure in the markets was beginning to build again. It had not taken them long to work out that of the £50 billion of total potential capital raising unveiled by the Chancellor the previous day, only a small proportion was accounted for by the healthier banks. Through their own announcements, HSBC, Nationwide and Santander had stated intentions to raise a total of more than £2 billion from their own investors. Even after stripping out assumptions about what Barclays might need, most market players were realising that the vast outstanding amount was due for HBOS and RBS. And in the words of one observer: ‘The market didn’t like the look of that and RBS started to sink again.’ With regard to HBOS, the markets were prepared at this stage to give the benefit of the doubt to the bank, as it was supported by the Lloyds merger deal. But with RBS there was no such charity.
As the financial markets began to grasp the outstanding and unanswered questions still hovering over RBS, there was a change of attitude inside the Financial Services Authority. This was clear not only to insiders but also extremely obvious to those who had been part of the round of meetings taking place since early on the Monday. At the start of the week, the FSA representatives had been arguing that the capital ‘hole’ was nothing like as big as the number which was central to the Standard-Chartered generated paper. By the end of the week, they were talking much larger figures. The Treasury’s view had been that the FSA was too relaxed about the capital inadequacies at the leading banks. One witness to events over those days said later of the FSA: ‘During that week they changed their tune pretty fast almost day by day, so by end of that week it was much more significant.’ Another believed that the FSA ‘went from Monday of that week calling for £20 billion for the leading banks to £20 billion for just RBS by the close of the week’. That conversion mirrored the view inside RBS itself – on the Monday the directors had dismissed the government view that more capital was needed, as opposed to liquidity, as outrageous. But the world as seen from the RBS boardroom had been turned upside down in a matter of days. Sir Fred Goodwin’s colleagues had woken up to the idea that an injection of funding to plug gaps in the balance sheet was urgently needed.
On Friday 10 October, markets slumped around the world. From the opening in London, share prices plunged across the board. The falls appeared relentless and irreversible. There was no sign of a rally. Confidence was shattered. The cautious optimism of two days previously in London had vanished. The capacity of governments to staunch the wounds was under question as never before. Finance ministers of leading industrialised nations (G7) were gathering in Washington for the autumn meetings of the IMF and World Bank. Those events seemed almost marginal but global policymakers were at least in the same place at the same time. None had come up with tangible plans to tackle the contagion gripping their banking markets. The Americans had their TARP but it had not so far achieved results. Alistair Darling at least had a plan, unfinished though it may have been.
The Chancellor might have preferred to stay at the helm in the Treasury as work on the recapitalisations continued, but staying away from the Washington meetings would have created a bigger sense of crisis. Darling was able to hold bilateral talks with the key finance ministers in the crisis – American, French, German and Japanese. They agreed on the need for a clear communiqué aimed principally at reassuring markets. US Treasury Secretary Hank Paulson later praised Mervyn King for his contribution in helping focus the minds of the assembled ministers and central bankers. Expectations that their gathering would come up with a ‘magic bullet’-style solution had begun to gather momentum. The last thing ministers and their governments wanted was for disappointment to follow unrealistic expectations. They aimed for a one-page solution and settled for one and a half, rather than the usual ten pages or more which traditionally came out of these meetings. An early morning meeting with President Bush at the White House was an unscheduled addition to the programme for G7 ministers and central banks. The President told them ‘this problem started in America and we need to fix it’. Darling also remembered the President mangling his words, to the quiet amusement of his audience: ‘“Hank’s got a real handle on this liquidity thing – we’re going to make sure it dries up.” I said “I hope not!”
For Darling and his officials there was one delegation they did not want to meet. The Icelandic finance minister had asked to speak with the Chancellor and the Dutch finance minister to voice his nation’s anger at having assets seized to cover deposits in Landsbanki and Kaupthing. There was a moment in the IMF meeting room when the Icelandic minister approached Darling and officials had to steer the two apart. In Luxembourg, on the Tuesday (October 7th), Darling had received a call from the Icelandic Prime Minister from Reykjavik just as he was trying to deal with the RBS chairman – the call was recorded and a transcript was subsequently produced as part of the Icelandic campaign to gain redress from the UK.
Support for the idea of bank recapitalisations had gained increasing momentum amongst the ministers taking part. Darling sensed a lot of interest in what was happening in the UK. He later recalled his conversation with Hank Paulson: ‘He said to me “You guys have done the right thing – we will adapt TARP to do the same thing”.’ The US administration had enough leeway in the TARP legislation to make capital injections into American banks without going back to Congress. Paulson said subsequently in his book On the Brink that he had first asked officials to start looking at the possibility of providing capital for banks the previous weekend. But at the time of the G7 meeting, nothing had been said along those lines in public by the US administration. The UK’s template was something for other leading economies to clutch hold of.
While Darling handled the negotiations, there was no shortage of calls from Gordon Brown. The Prime Minister was determined to get the G7 finance ministers to endorse the idea of recapitalisation – he badly needed international cover and blessing for the UK’s direction of travel. He was worried about the possibility of the US and UK moving in different directions and he still harboured hopes the President would come round to his way of thinking. Darling, meanwhile, felt he was in control of the talks and, while he would update the Prime Minister as much as possible, the focus of US–UK financial diplomacy should that weekend be through the G7 meeting. Brown, of course, had his own retinue of advisers with strong views, including Heywood and Vadera. One Whitehall source detected signs of tension: ‘Alistair and Gordon worked very well together during the economic crisis – that was still a positive and the relationship was working – it was that weekend when you started to see some of the cracks appear.’
The final brief G7 communiqué provided everything the British government wanted. All the words were seen to be useful and fit for the purpose of trying to restore confidence. But, given Brown and Darling’s key objective, there was no doubt which were the most important lines on the G7 members’ aims: ‘Ensure that our banks . . . can raise capital from public and well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.’
Gordon Brown, meanwhile, was invited to address a meeting of Eurozone leaders on the Sunday evening, October 12th. Neither Germany nor France had come up with coherent plans to tackle their banking problems. President Sarkozy had asked the British Prime Minister to attend, mindful of the progress the UK authorities had already made on bank bailouts and the fact that Brown of all the leaders appeared to have the best grasp and understanding of the financial kaleidoscope. After a smaller gathering with Sarkozy and Merkel, one source remembers Sarkozy taking Brown by the arm and marching him into the main meeting: ‘He was incredibly flattering and said the most amazing things.’ Darling later reflected on the significance of the Eurozone gathering: ‘Britain would normally go nowhere near that, nor would they have us for that matter – that weekend was terribly important to have a global response.’ Brown gathered that some of the other leaders present ‘complained bitterly about my presence’. Undeterred, he told his counterparts that the problem for Europe and the United States alike was lack of capital in leading banks. He warned them not to see this as an Anglo-Saxon crisis simply because it had its origins in the excesses of the US housing market – it was by now just as much a European crisis. In contrast to the previous weekend, Brown could now set out the full thinking behind the British response and how it might now be applied as a pan-European solution.
While Darling and Brown flew the flag at international meetings and impressive sounding statements were drawn up, there was urgent unfinished business back in London. Myners, Vadera and the team at the Treasury had realised that a fully worked-up plan would have to be unveiled to the markets on the following Monday morning. Any further delay could be disastrous. One banking source summed up the mood on that Saturday morning: ‘I think the supposition was that if it was not ready by Monday morning, the insolvency crisis will mean one or both banks will become wholly illiquid, which will mean they will have to shut.’ A new Bank of England liquidity initiative was in place and the credit guarantee scheme was almost ready. Those were important pillars of the rescue plan, but the crucial one was an agreed recapitalisation of leading banks and that was not in any state of readiness. A weekend of intense activity was in prospect.
The weekend of 11 and 12 October 2008 was the most momentous in the government’s response to a banking crisis that was threatening to envelop the nation’s financial infrastructure. While Darling did his duty in Washington around a table with fellow finance ministers, the small group back at the Treasury had to take on the banks in a poker game with the highest possible stakes. They had to be told what level of capital was required, whether HM Government was to appear on the shareholder register and which of their chiefs were to be ditched. All the struggling banks’ top executives were asked to report to the Treasury on the Saturday morning. They had to be allocated different rooms on different floors. Each had a small Treasury team allocated to them, which presented the official analysis of how much new funding was needed. It was an episode unprecedented in any arm of the British government.
The Credit Suisse initial analysis on what the banks might need was complete. But what still had to happen was full acceptance of the numbers by each bank’s directors including authorising the issue of new shares and confirmation of the terms of the share issue. And the directors had to accept that heads would roll. This was to prove especially difficult with some of the bank chiefs, who still felt the government was imposing unnecessary demands. At the start of that weekend they regarded the prospective taxpayer stakes as an inconvenience. Their intention was to hold on to their jobs, keeping the Treasury and ministers at arm’s length. But the government’s advisers were clear about the standard, if brutal, process which had to be played out. One noted that the terms and conditions for putting new equity into a company were simple: ‘If a company has been driven into the ground and needs to be recapitalised, normally you need new management to be the steward of the new capital you have put in – it happens the whole time in the normal commercial world and there is nothing particularly unusual or governmental about it, these are commercial facts of life.’
Brown and Darling knew that bank bailouts on the scale being proposed would be unacceptable to the taxpaying public if there were not sweeping changes in the boardroom. Paul Myners had been instructed to insist that some bank head honchos should head for the exit. That would mean dealing with Sir Fred Goodwin and Sir Tom McKillop at RBS and the top brass at HBOS. Another of the government’s conditions was that executive pay should be curbed and that dividend payouts should be scrapped until the share price had recovered.
One bank did not take up the Treasury’s invitation, however, bosses from Barclays stayed away. The chief executive John Varley was dead set on raising capital from sources well beyond Whitehall. And he was determined to avoid being seen by photographers walking into the Treasury. Any sniff of government ownership was, in his view, to be avoided at all cost. He agreed to be in contact with the Treasury, but only by teleconferencing. The significance of Varley remaining at his head office in Canary Wharf rather than heading over to Whitehall was more than symbolic. He avoided the risk of a ministerial ambush which could have seen him being pressurised into accepting state influence on his bank. In the end, Barclays concurred with the government’s view of how much capital it needed. And it agreed to reach the target figure in part by selling assets outside the UK and not by cutting back lending to British households and businesses.
Whether the decision by Varley and his Barclays board colleagues was a good one for their shareholders is a moot point. Their stakes were heavily diluted because of the terms offered to the new shareholders from Qatar and Abu Dhabi who would acquire a joint holding in Barclays on top of what they already owned, taking the total to almost 32 per cent. There is a view, hotly contested by Barclays, that the deal offered by the government would have been more sensible for the bank’s shareholders. Barclays, arguably, paid a very high price for its private sector financial solution which brought in £7.2 billion. Five years later, Barclays were being investigated by City regulators and the Serious Fraud Office over some aspects of the Qatari transactions. But it did escape the stigma of a state bailout.
One of the trickiest issues for the Treasury that weekend was what to do about Lloyds and HBOS. Officials had worked out an estimate for the funding needed by each bank as a separate entity and what they would need as a combined new group. The latter figure was lower because of risk diversification. But ministers and their advisers were privately ready for Lloyds to announce that they were pulling out of the deal, even after the chief executive Eric Daniels had indicated on Tuesday evening that he wished to push on with it. So much had changed in the markets since the takeover was first announced in mid-September. The banking world had been turned upside down in the previous few days. It would be hugely preferable for the taxpayer if the merger were completed, but it would be understandable if the Lloyds board felt that pursuing the deal had become a bad option for shareholders. And Downing Street could not force Lloyds to push on and consummate the marriage.
Lloyds clearly knew the original deal was not binding because Daniels, mindful of the deterioration of market conditions, had renegotiated the terms over that weekend. The proportion of Lloyds shares that was to be used to acquire HBOS was reduced. This was acceptable to ministers, as they had to act in the interests of the taxpayer whose money was being ploughed into Lloyds. But if Daniels had set out to pick apart aspects of the original agreement with HBOS, some have argued that he could have been more aggressive and demanded a better deal for his shareholders. The fact that he pressed on even though he could well have dropped the whole deal seemed puzzling to many observers of the banking crisis.
The dire state of the HBOS loan book was not known at the time and it turned out to be far worse than the market assumed. Daniels insisted that he had done his homework. Speaking in 2013 to the Parliamentary Banking Standards Commission, he said: ‘We did a very thorough job in terms of our diligence. We understood what we thought were the strengths and weaknesses of HBOS at the time. We also thought that, despite this being a difficult deal, it would serve the shareholders well over time.’ But Daniels also acknowledged that the economy was in worse shape than he and his board colleagues realised at the time. A dramatic set of horror stories on the HBOS balance sheet emerged subsequently. Lloyds shareholders were to suffer grievously in the short term from the consequences of acquiring HBOS and its baggage – the share price plunged in late 2008 and early 2009.
Daniels, it seems, went into the Treasury that weekend assuming that every bank would participate in recapitalisation on the same basis, with the government taking a stake in each. His thinking appears to have been that HSBC, Standard Chartered and Barclays would be on board even if they did not need state funding. In effect it would be ‘all for one, one for all’ with Lloyds in good company with the taxpayer investing in all the leading banks. The realisation that there were to be two classes of banks – those obliged to take government bailout money and those who were raising money from their own investors – was a bitter pill to swallow. One observer present that weekend remembers Daniels being ‘obsessed with Barclays’. For months afterwards he complained that Barclays had been allowed to escape the stigma of state funding that his bank had been subjected to. The Treasury’s insistence on Lloyds as well as HBOS taking state funding as well also fuelled Daniels’ anger.
Nearly two years later in August 2010, and speaking in measured tones to The Daily Telegraph, Daniels said: ‘At the time we understood that several banks would be in the government programme. We were given this assurance and given an assurance that the state aid requirements would not be onerous. This had been very clear. But it turned out not to be the case. There weren’t several banks and state aid turned out to be more onerous.’ Friends of Daniels see the sequence of events that weekend more dramatically, as a betrayal of Lloyds by the government. They claim that he was promised that the EU state aid issue would not be a problem, yet that was far from the case and European regulators later forced the sale of 600 branches. They argue that he could have played hardball and demanded better terms. One summed it up: ‘In retrospect the way the government treated him was appalling, given the favour he had done for them over HBOS – and he never forgave them. He could have pulled out of HBOS and also then extracted a deal and he didn’t, he trusted them, and they really f*cked him.’
Others in the Lloyds camp dispute the idea that the Treasury was ready for them to pull out. They remember a weekend of pressure on the bank, close to arm-twisting, from ministers and officials, all desperate for the deal to go through. Lloyds directors were angry that having been told by the FSA on the Friday that the bank needed £3 billion of extra capital, the figure was hiked to £7 billion on the Sunday. This, they suspected, was a deliberate ploy to deter Lloyds from trying to go it alone. Raising £3 billion from private investors might have been possible but finding £7 billion would probably have needed government money. Lloyds insiders sensed a mood of fear in Whitehall at the very thought of HBOS having to be nationalised. They believed government advisers had realised that the market reaction to HBOS being moved on to the state’s books along with a majority of RBS could have been disastrous. Such a possibility might have left ministers no option but to close down the entire banking system for a couple of days.
Lloyds’ directors believed that even after the turmoil of that week they still had a worthwhile deal. They reasoned that they had paid £14 billion to acquire a business with £30 billion of net assets. Pulling out of the HBOS takeover, they reckoned, would create even greater chaos in the markets and that would severely damage a Lloyds bank trying to move forward on its own. They clung to the argument that however much of a caning their shareholders took because of the HBOS acquisition, things would have been even worse without it. Economic recovery, they hoped, would reap attractive profits for the combined group. The problem was that five years would elapse before what looked like a sustainable recovery had gained traction.
It was still possible for regulators to pull the plug on the Lloyds takeover of HBOS, citing concerns the merger of the two banks might have on overall stability. In simple terms, regulators could have intervened to save the former from what would have been depicted as the consequences of its own mistaken judgements. There was an argument for keeping Lloyds ‘clean’ and leaving HBOS to its fate as a state-owned entity. The Bank of England had signed a waiver document approving the suspension of competition rules which would otherwise have stopped the bid. But subsequently there were discussions inside the Bank about blocking the deal. It was understood that there were reservations too at high levels inside the Financial Services Authority. Senior players in both institutions decided not to intervene to unpick the deal, however, given the fragile state of confidence across financial markets.
Myners met Lord (Dennis) Stevenson, chairman of HBOS on the Saturday. Stevenson told the minister that if the government became a shareholder he would not tolerate any interference in the running of the bank. It had to be broken to him that his departure was a condition of the government investment. It was inconceivable to put taxpayers’ money into banks which then continued with the same people in charge. The Parliamentary Commission on Banking Standards later described Lord Stevenson as ‘delusional’. One observer felt that the description was apt at that stage of the banking crisis.
The meetings continued in different corners and rooms around the Treasury. Myners, Vadera, Scholar and Kingman shuttled from bank team to bank team. In the absence of Alistair Darling in Washington, the Treasury Chief Secretary Yvette Cooper was the senior minister present. Calls went to and fro across the Atlantic. At one stage a key meeting was held up because of a dispute over whether Vadera, a non-Treasury minister, should be allowed to take part. Darling needed some persuasion but gave his consent. Often the bankers had to be left on their own for an hour or more, staring at the walls and contemplating their future. Elaborate attempts were made to ensure that people did not bump into each other. Myners subsequently reflected that he had been involved in some complex deals and transactions in his career, but never four or five simultaneously. As one observer recalled, it was like Chinese entertainers spinning ever more plates on bamboo sticks and hoping none would topple. However badly the tripartite structure had functioned during Northern Rock, it seemed to those present that this was its finest hour. Bank of England executives Andrew Bailey and Andrew Haldane, together with Deputy Governor Sir John Gieve, worked throughout that weekend alongside the Treasury staff and FSA chief Hector Sants. For 36 hours non-stop they toiled without sleep. The Monday morning deadline concentrated minds.
The question of the future of Sir Fred Goodwin loomed throughout the Saturday. The handling of this issue proved to be one of the most controversial of the whole banking crisis, with heavy political flak later aimed at Myners. Goodwin and his RBS colleagues occupied a room on the third floor of the Treasury, in the southwest corner overlooking Birdcage Walk. Myners arrived and told the chairman Sir Tom McKillop and the senior non-executive director Bob Scott they needed to accompany him to a different room. Myners was in turn accompanied by the lawyer Charles Randall. Myners told the RBS directors that Goodwin had to go. McKillop replied that there was no need to worry, Sir Fred had been told of his fate earlier in the day. Myners said that his requirements were simple – the departure must be swift and clean, there must be no rewards for failure and RBS would not be expected to abrogate any legal agreements. Compensation should be kept to a minimum. Scott and McKillop insisted that all these criteria would be met.
Myners accepted these assurances at face value. He had little time for detailed discussions and was obliged to move on to pressing meetings with other banks and catch up with progress at the Financial Services Authority. But he was later criticised by the Commons Treasury Select Committee for being naïve and placing too much trust in the RBS board.
With hindsight, he acknowledges that he could have asked many more questions. It transpired that McKillop and Scott had exercised the discretion which had become customary at RBS. Executives were traditionally allowed an entitlement to a full pension even if they retired early and in their 50s. McKillop and Scott believed that giving Sir Fred the same treatment was in line with contractual requirements, hence the assurance given to Lord Myners. Crucially, Sir Fred was asked to retire rather than be dismissed so that he would qualify for a full pension. It was a sequence of events which generated a firestorm of criticism when news of his £555,000 pension emerged the following year. Goodwin later agreed to accept a lower pension of £342,000. Myners subsequently admitted he had made a mistake but always maintained that the RBS directors had been less than straightforward. Dealing with McKillop himself was problematic. Eventually a compromise was reached under which he stayed on as chairman until a replacement could be recruited.
All through Sunday, the banking advisers and Treasury officials toiled over the official documentation for the injections of government money into RBS, Lloyds and HBOS. Details on issues such as the dividend access share (a mechanism to block dividend payments to private shareholders by giving the government priority over dividends), B shares and preference shares had to be ground through, checked and then signed off by the lawyers. Only then could they be presented to the bank boards who in turn had to consult advisers before signing off on the content. The tortuous process had to be completed by the Monday morning in time for a 7 a.m. announcement and everything worked backwards from that. Members of the team on the Treasury side of the talks were so immersed in the detail that they had little time to think what was at stake for the banking sector and the economy. As the clock ticked on, the focus was only on completing the task ahead of that early Monday deadline.
Some did reflect at the time on the vast sums of money which were being committed. Usually the Treasury and government departments have time to plan for contingencies and overspending, shuffling a few billion pounds here or there from the reserves. But in this case, according to one of those present that weekend, ‘suddenly a set of circumstances come up and you are £45 billion pounds wrong – in terms of the management of the country’s finances that is an enormous variation on the originally agreed plan – and that was very apparent as it became clear how much money was needed to solve the problem – that’s a lot of hospitals’. There were parallels with the Second World War when government borrowing shot up to cope with a national emergency, but that was over a longer period of time and the American government could be approached for loans.
It was inevitable that despite the pressure of the timetable, and the voluminous amount of paperwork that had to be prepared, ministers would occasionally take a step back and ponder the consequences of what was being planned. At one meeting a minister asked the gathering of officials and advisers whether this was the right thing to be doing and whether a lot of money might be lost. The financial market experts were asked to continually check progress and likely outcomes. The conclusion they passed back to the political leaders at the Treasury was that, unless the estimates for the amount of capital required to stabilise the banks were wrong, the bad assets would at some stage be written off or sold and there would be a recovery in the underlying health of the institutions. Ministers were assured they were investing close to the share price lows. As one adviser reflected later, ‘that wasn’t right but it wasn’t wrong either.’
By late on Sunday night agreements on how much money was required by each bank had been hammered out. Alistair Darling had returned from Washington – one Treasury insider felt relieved to see the Chancellor’s reassuring presence after two days away from the home front. RBS and Lloyds had been told they would have £37 billion in total injected by the state in return for controlling stakes in the name of the taxpayer. The banks’ bargaining positions had melted away. Sir Fred later likened it to a ‘drive-by shooting’. But the final paperwork was not complete as Alistair Darling finally retired to his bed. He knew he would have to make a statement to the House of Commons the next day. He needed as much sleep as he could get. Even a few hours later, some of the key papers were still blank. There were spelling mistakes and gaps in the clauses. Anyone challenging this unprecedented intervention, with tens of billions of pounds of government money on the line, might have been able to put together a legal case. But the documents served their purpose. They established in the eyes of the financial markets that real capital was being injected into the banks, backed by serious amounts of money.
The Treasury team could only wait until the 7 a.m. market opening on Monday and the unveiling of the announcement. They had to hope that it would underpin confidence. A plan to make that Monday a Bank Holiday had been discussed but then dismissed. Whether banks were open or left shut would not have any effect on international confidence – the outward flow of corporate deposits was likely to continue. On the face of it, the plan looked robust. It was a demonstration of the remarkable powers at the disposal of a government when a crisis erupts. The Treasury had within its mandate the ability to commit billions of pounds of taxpayers’ money without specific parliamentary approval. This was in marked contrast to the US Treasury and its battles with Congress over TARP.
But the final hours threw up unexpected obstacles which might have derailed the entire plan. At 4 a.m., Lloyds made a last-minute attempt to change the terms of the deal. The bank wanted to renegotiate the amount of new shares which were being created in a bid to reduce the dilution of the interests of the existing shareholders. Lloyds advisers had contacted Treasury staff demanding a rethink. James Leigh-Pemberton had just got back to his flat close to the Treasury, hoping for a few hours’ sleep. His phone rang and it was the Treasury asking him to return immediately to decide on the response to Lloyds. Leigh-Pemberton quickly returned, pacing briskly through the deserted streets around Westminster Abbey as he pondered how to tackle the problem. He advised the Treasury top brass to stick to the plan and he would deal with Lloyds. So as the 7 a.m. deadline approached, an important section of the package was not in place. A series of phone calls followed between Treasury advisers and their opposite numbers at Lloyds. Only robust and carefully constructed arguments managed to persuade the Black Horse bank to shy away from the brink and for the Treasury to press on towards the formal announcement.
It was the task of Paul Myners and Shriti Vadera to tell the Prime Minister and Chancellor what they were signing up for. Brown and Darling were extremely reluctant to nationalise the stricken banks, given all the baggage for the Labour Party associated with state ownership. In the early discussions about how to deal with RBS there had been a desire to cap the state shareholding at less than 50 per cent. All involved agreed that the best outcome would involve a bank which had majority private sector ownership. But as the full horrors of the RBS balance sheet had become apparent and the big numbers on capital needs had been calculated, it had become increasingly clear that the government would end up as the dominant shareholder.
At about 5 a.m. on Monday, the inner circle of Treasury advisers were gathered in the study at 11 Downing Street. They were briefing Darling on the final outlines of the deal and the essential points to make in his Commons speech later that day. The Chancellor spotted from the documents that the government stake in RBS would be above the 50 per cent threshold. He made clear he could not make that decision without consulting the Prime Minister. Officials pointed out that there was no alternative and the arithmetic could not be altered. The Prime Minister, they said, had returned very late from the Euro Group meeting and would not be pleased to be woken so early. Brown, it was suggested, already knew of the planned outcome for RBS. But Darling insisted – he needed to be certain that Brown was in agreement over this aspect of the RBS bailout.
With fewer than two hours to go before the momentous announcement on the bank recapitalisations, a farcical scene played out behind the curtains of 11 Downing Street. The Browns occupied the flat there, just as the Blairs had when Brown was Chancellor – it was larger and better for families with younger children. Vadera was dispatched to get the message to Brown. She spoke to the duty clerk, part of the 24-hour staff cover in Downing Street, and asked her to wake the Prime Minister. The clerk refused, pointing out Brown had been in bed for only three hours. Despite protestations that the Chancellor wished to speak urgently to the Prime Minister, the clerk held her ground. So Vadera found herself creeping up the stairs and letting herself into the flat.
She was on familiar territory on the lower floor as she had been to dinners there. But she realised she had no idea where the family’s sleeping quarters were. Fumbling around for light switches, she made her way up to the top floor. Still in darkness she kicked over a tricycle belonging to one of the Browns’ sons. She then heard Sarah Brown’s voice, ‘John, go back to bed’. Sheepishly, Vadera had to ask Sarah to wake her husband. Standing at the doorway of the Brown bedroom Vadera briefly and apologetically explained that the Chancellor needed to talk to him. The Prime Minister was alarmed. Vadera reassured him that there was no disaster and the deal had not collapsed, the issue was over the government stake in RBS. Brown barked back that Vadera should tell Darling that this was fine and he knew the figures already. But Vadera persisted and pleaded with him to come down to talk to the Chancellor.
Grumpily, Brown appeared in the study half an hour later. He dismissed the RBS issue quickly and then continued with a discussion about the rest of the package with Darling and his officials. Not much more than an hour after Vadera’s nocturnal wanderings, markets were absorbing the news that all leading British banks would be raising new funding as buffers against future losses. The government had made clear it would stand behind RBS, providing whatever capital was needed to shore up the defences. As one observer put it: ‘You need to say that capitalisation is so strong that however bad the weather might become, this ship is not going to sink.’ This was above all a capital issue, not a liquidity issue. By reassuring the markets that banks had enough capital to absorb future write-downs, the Treasury ensured that liquidity would start flowing between banks again. In other words, if investors believed that banks had been made secure, they would resume lending to them. And that, for a little while at least, was what happened as bank funding re-established itself.
The details of the plan showed that RBS would receive an investment of £20 billion of taxpayers’ money. A further £17 billion was to be put into the combined HBOS and Lloyds. In return, the government would take a 60 per cent stake in RBS and just over 40 per cent of the merged Lloyds and HBOS. Barclays said it intended to raise £6.5 billion from private investors without government help.
The Monday statement was seen as being comprehensive and markets were cautiously impressed. The FTSE 100 index had one of its best ever days, leaping more than 8 per cent by the close. One of the Treasury’s advisers was pleasantly surprised by the reaction: ‘Brill, great, couldn’t have been better.’ The fact that Barclays had come up with an alternative solution was a particular source of reassurance as it gave people confidence that parts of the banking market were functioning normally. The markets realised that the government had intervened heavily but had not extracted all the value so shareholders were left with something. It was noted that RBS had not been fully nationalised. If it had been taken under state control, according to one City expert, ‘there would have been the mother of all runs against other banks – why keep money in a bank which is not government owned in that environment?’ A lot more capital was being raised under the plan by all the banks than the financial markets had expected, another source of comfort.
A source of satisfaction for Brown and Darling was that 24 hours later, the American authorities announced their own bank recapitalisation scheme. Hank Paulson called in executives from the leading US banks and informed them the government would take share stakes in all of them. Germany, France, and Italy meanwhile all unveiled plans to inject capital into their banks and to guarantee inter-bank lending. Brown was pleased that after Britain had stepped alone into the unknown other leading economies had done the same. He had taken a lead on the world stage. As the German news group Spiegel Online commented: ‘Before the financial crisis, UK Prime Minister Gordon Brown had been all but written off. Now the whole world is copying his bank bailout plan.’
The British Prime Minister would have been particularly pleased with the words of the recently announced winner of the 2008 Nobel Prize in economics: ‘Has Gordon Brown, the British Prime Minister, saved the world financial system?’ asked Paul Krugman of Princeton University: ‘Mr Brown and Alistair Darling, the Chancellor of the Exchequer . . . have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up.’ Closer to home a Treasury staffer who had witnessed the weeks of frenetic activity and ferocious pressure leading up to the day of the announcement had this judgement on Darling: ‘He was so calm throughout and, by and large, he saw things for what they were and didn’t react emotionally.’
But Brown could not have delivered on his rhetoric and vision, and Darling could not have announced his rescue plans in time to save the system from collapse, without their junior ministers and the small team of advisers. The preparatory work by Vadera, Scholar and Kingman and their banking advisers, combined with the no-nonsense effort of Myners had paid dividends. In the economy’s hours of need, there was a plan. At the height of the storm, there was a chart available for those on the bridge, Brown and Darling, to steer the UK away from the rocks. Reflecting on the events of that week a few years later, Robin Budenberg was clear that a global disaster was averted. He believes that if RBS had collapsed, there would have been serious consequences in other global markets because the government would have been seen as powerless in the face of the crisis – all eyes were on the UK authorities who were seen to be in the first line of defence in an immense assault: ‘If we hadn’t had a cohesive plan on Tuesday night, things would have been far worse and far worse around the globe – if our system had disintegrated then the plan we put in place would not have worked in other countries.’
Budenberg likened the financial forces facing governments during those weeks to a flood. If a dam is built before the flow gets too strong, it does not need to be too big – lower down the river, the force is greater so a larger dam is required. He believes that the UK action in the week of 5–12 October 2008 was like building a dam near the source of the river and that saved other economies from being overwhelmed by a bigger torrent: ‘To my mind if we hadn’t blocked our stream, all other streams around the world would have got much more deeper and stronger – and it would have taken a hell of a lot more than it actually did not to have a real global crash.’
Gordon Brown and Alistair Darling had stopped up the British stream early on so that others were able to use the same tools to do the same for their defences. Failure to stem the tide in the UK would have resulted in bigger and uncontrollable disasters both in Britain and other economies. And, says Budenberg, that would have triggered global meltdown. By the evening of Monday 13 October 2008, though they may not have realised it at the time, the UK authorities had successfully saved their financial infrastructure from being submerged. A desperate battle had been won. But the war was not over. And the measures taken had a long-run cost, again not obvious at the time, which would have profound implications for the British economy.