At the end of August (2008), Alistair Darling (Chancellor of the Exchequer) gave a remarkably candid interview to The Guardian’s Decca Aitkenhead at his dynastic croft on Great Bernara, an island off the Isle of Lewis.
The chancellor said the economic times ‘are arguably the worst they’ve been in 60 years’. He also said: ‘And I think it’s going to be more profound and long-lasting than people thought.’ Darling’s gloomy assessment was accurate but it infuriated (Gordon) Brown. The prime minister was about to try to relaunch his premiership with a range of economic programmes and, on his return flight from the Beijing Olympics on 25 August, he told journalists he believed the UK economy would have recovered within six months! He also argued Britain was better able to withstand a global recession than other countries.
The fact that what I had said was true did not seem to enter their minds. No one wanted to acknowledge that we were heading for an extremely serious downturn. Alistair Darling
Though polite to Darling in person, Brown sent his media ‘attack dogs’, including his notorious special advisor Damian McBride, to rubbish his chancellor’s views. The whole Westminster village went into a collective swoon. In his book Power Trip, McBride said: ‘[Darling] was either catastrophically inept or misguided when it came to his public interventions with the press . . . If relationships and trust between the Brown and Darling teams were already fairly strained before that day, they were pretty much broken thereafter.’ Writing in Back from Brink, Darling said: ‘The fact that what I had said was true did not seem to enter their minds. No one wanted to acknowledge that we were heading for an extremely serious downturn.’
Lehmans crash but Barclays saved from disaster
Two weeks later, it was clear that it was Darling, not Brown, who was right. On the weekend of 13 and 14 September, Lehman Brothers, the New York-based investment bank whose London office Brown had opened four years earlier, went bankrupt. When the bank declared a quarterly loss of $3.9 billion on 10 September, its shares went into freefall. The previous week, the government of President George W. Bush had been widely accused of ‘turning Communist’ after fully nationalising the mortgage giants Fannie Mae and Freddie Mac, so it had little appetite for further nationalisations. Bush also feared that rescuing Wall Street firms from the consequences of their own recklessness and greed would not look good politically.
Over that weekend , it looked as if either Bank of America or Barclays might mount a rescue takeover. Barclays was only stopped by FSA chairman Sir Callum McCarthy and Darling after it emerged that, unlike with Bear Stearns, the US government was not prepared to guarantee Lehman’s $60bn of toxic assets. For once, the UK authorities made a good call about finance. Bank of America and Barclays both slunk away – the voracious BofA was anyway preoccupied with an opportunistic takeover of the crippled Merrill Lynch – which meant it was curtains for Lehman. On Sunday, 14 September , the 10 o’clock news bulletins on both BBC and ITV carried the news that Lehman Brothers had been ‘allowed to fail’.
Later on Sunday, Bank of America secured its takeover of Merrill Lynch but AIG, the giant insurer whose health was pivotal to the structured credit markets and therefore to RBS’s survival, also seemed to be teetering on the brink of collapse. After playing hardball with Lehman, the US government went soft on the insurer and handed it a $182bn bailout. Surviving investment banks Goldman Sachs and Morgan Stanley changed their status to ‘bank holding companies’ in order to save their skins, at the same time as seeking infusions of capital from Warren Buffett’s Berkshire Hathaway and Tokyo-based Mitsubishi UFJ Financial Group.
Assault on ‘twin towers of greed and capitalism’
Lehman Brothers’ failure, which saw 5,000 bewildered London staff turfed out on to the streets of Canary Wharf carrying their possessions in cardboard boxes, gave rise to fears that other over-leveraged and reckless banks would also be pushed into insolvency. As Rachel Johnson put it in the Sunday Times:
There’s no doubt. For those who work in the City, last week was their 9/11. The assault on the twin towers of greed and capitalism looks like felling hundreds of thousands of workers in the months ahead, in a Trollopian saga that gets twistier and blacker by the day. Notting Hill . . . is in the eye of the money storm for it’s right here, in these storeyed terraces and crescents, and in these stuccoed mansions, that the big swinging dicks brought their millions in bonuses and – bankers went the neighbourhood.
At executive director level, the mood inside RBS turned from one of detachment to black humour. The collapse of Lehman and a downgrade in AIG’s credit rating sent shares in both RBS and HBOS into freefall on Monday 15 and Tuesday 16 September. On the Tuesday, RBS shares slid a further 16 per cent to 177.6p. HBOS’s plummeted 40 per cent to 139.4p. Credit Writedowns’ Edward Harrison commented:
With the equity and capital raising markets closed, RBS’s options are effectively limited . . . Whether HBOS and RBS remain going concerns depends heavily on the measures they and the UK monetary and regulatory authorities take to bolster a jittery market.
Gallows humour on RBS top floor
On Tuesday 16 September, senior members of the Edinburgh fund-management community congregated at RBS’s Gogarburn headquarters for a scheduled get-together with RBS’s executive directors. One investor says he was struck by the ‘demeanour, body language and use of gallows humour of the executive directors’. Those present included Goodwin, (Johnny) Cameron, (Mark) Fisher and (Guy) Whittaker. The directors sought to divert the fund managers’ attention by speculating about what might happen to the doomed HBOS and AIG. ‘You could sense they knew the game was up,’ said one investor who was present.
Meanwhile, treasurers at rival banks, unsettled by RBS’s widening overnight borrowing requirement, were pulling billions out of the bank. Unable to persuade anyone to lend it money for more than24 hours, RBS had become dependent on overnight funding to fill the hole. And, according to Libor numbers, the rate at which banks were borrowing overnight funds had risen to 7.5 per cent, possibly higher for RBS. ‘We had a meeting internally about pulling back our risk limits on RBS because there was clearly something going horribly wrong,’ said the head of treasury at a major UK bank.’
Tidy up – Sir Fred is coming
Despite the unprecedented ‘silent’ bank run on RBS, Goodwin still found time to appoint another ‘global ambassador’ on a package of around £3m a year. This time it was the Indian cricketer Sachin Tendulkar, known as the ‘Little Master’. Goodwin also paid a visit to ABN AMRO’s office at 250 Bishopsgate, which had been rebranded in RBS colours nine months earlier. Ahead of his state visit on Friday 19 September, there was a flurry of memos notifying traders they must tidy up their desks before the arrival of King Fred and insisting that all ABN-branded research reports had to be binned or hidden. One memo heralding the visit said:
Dear All, Sir Fred will be visiting 250 Bishopsgate on Friday between the hours of 2pm until 4.30pm. I cannot stress how important it is that your floors/areas are tidy and clutter free . . . Please get rid of your newspapers, put away mugs and plates, tidy up paper piles.
On 23 September, eight days after Lehman Brothers collapsed, Stephen Hester attended his first RBS board meeting as a non-executive director. He says the board was more preoccupied with what had gone wrong with RBS’s ABN AMRO acquisition than the implications of the Lehman collapse. ‘Nothing was thought to be life-threatening,’ Hester told The Guardian. Two days later, on 25 September, Goodwin put in another call in to the chancellor.
[Goodwin] told Alistair Darling that conditions were very bad and that RBS had been considering whether to stop lending to customers. Darling asked Goodwin what would resolve the situation and Goodwin said ‘long-term funding’.
Ireland – basket case becomes safe deposit
Goodwin did not have his troubles to seek. On 30 September, the Irish government, nervous about a run on the country’s über-reckless banking sector, said it was providing a 100 per cent guarantee to depositors and other creditors of Irish-owned banks. The move, which the Irish rushed through without consulting Jean-Claude Trichet, president of the European Central Bank, infuriated other European leaders.
It meant Ireland was effectively underwriting its banking sector to an extent no other country had done. It sparked an unprecedented capital flight in Europe, as depositors in banks whose governments were not providing such a safety blanket – like the UK – withdrew billions of euros and transferred the funds to the suddenly ‘safer’ banks of Ireland.
Goodwin was doubly furious since foreign-owned banks – even those with a significant presence in Ireland, like Ulster Bank – were ineligible for the guarantee. Over the course of the next four days, £732m was removed from Ulster Bank. Goodwin decided it was time for some serious string-pulling. He made ‘two dramatic protests’ – first to Brown and then to heir to the British throne, Prince Charles. He also spoke to Darling. He demanded they telephone the Irish Taoiseach Brian Cowen and order him to extend the guarantees to the subsidiaries of foreign banks in Ireland. Eventually, on 9 October, the Irish government obliged but, by then, it was too late.
Main image via PoliticsHome.com
This is the second extract from The Crash, Chapter 28 of Ian Fraser’s best-selling book Shredded: Inside RBS, the Bank that Broke Britain. The series continues next week with extracts from the final chapter, The Guilty Men.
Follow Ian Fraser on Twitter @Ian_Fraser