Bailouts: One Year Later
The FT today has an excellent (and long) article on Britain’s bank bailout last year. It’s easy to forget how bad things nearly became one year, I spent a good half hour going through my emails from last September/October yesterday. Worrying times. I’m quite pleased though, in a professional sense at least, that whilst the Dow was still above 11,000 in early September I called a bottom of around 7,000. People responded that I was pessimist (possibly true). That it was already down 21% since September 2007 and wasn’t going to fall a further 35%!
It actually bottomed at 6,547.
The key take away is that Brown grasped that capital was the issue well before other leaders. Anyway, highlights of the article (all my emphasis):
September 15 2008: The collapse of Lehman Brothers in the US brings the financial crisis to a head but Mr Brown and Alistair Darling, chancellor of the exchequer, have been trying to map out a route through the banking crisis since Northern Rock, one of the country’s biggest mortgage lenders, collapsed a year earlier.
It is five months since Mr Brown convened Britain’s bankers for breakfast in Downing Street. “There was a mood of desperation but they kept focusing on liquidity. Gordon kept asking them: ‘What about your losses? What about capital?’” says one official present.
Mr Brown is fixating on the danger that weak banks and a lack of demand could pose to the global economy: the risk that the mistakes made in Japan in the 1990s “lost decade” could be magnified.
September 17 2008: Two days after the collapse of Lehman, Mr Brown puts aside competition concerns and waves through the rescue takeover by Lloyds of HBOS, a bank crippled by bad commercial property loans and whose rights issue failed two months earlier. Officials who looked through the ailing bank’s tattered books say: “You could see at that point it was clearly about capital.”
September 19 2008: British officials are “thrown” when Mr Paulson announces the $700bn “troubled asset relief programme”, centred on the purchase or insurance of the banks’ toxic assets.
Although the plan is welcomed in London as ambitious, there are concerns that it only indirectly addresses losses and overleveraging. Will there be time for officials to value toxic assets, allowing the scheme to work? US officials later argue that Tarp always allowed for some of the fund to be used for recapitalisation, but that was not the original intention. A Senate committee is told by Mr Paulson that “the right way to do this is not going around injecting capital”.
September 24 2008: Mr Brown flies out of a fraught Labour party conference to New York. Operating out of his suite at the Waldorf hotel, he takes soundings from economists and world leaders in town for the United Nations general assembly. It is here that Mr Brown hatches plans for a summit of the Group of 20 industrial and developing nations to be held in London in April 2009. Two days later he proposes to President George W. Bush that there should be an initial G20 meeting in Washington. The Americans see themselves as driving the G20 process, often in the face of European resistance. British officials insist it is Mr Brown who helps to persuade Mr Bush – after enlisting support from Luiz Inácio Lula da Silva, Brazil’s president, as well as prime ministers José Luis Rodríguez Zapatero of Spain and Kevin Rudd of Australia – that such a global gathering would be useful in restoring confidence.
September 25 2008: While Wall Street investors are telling Mr Brown that a lack of capital was a problem with the banks, both he and Mr Darling are receiving different signals from the Bush administration. The suspicion grows in London that an ideological distrust of state intervention is holding the US back.
September 26 2008: Mr Brown makes an unscheduled trip to Washington for talks with Mr Bush at short notice. With his customary lack of small talk, the British leader goes straight to the point: the banks need more capital.
September 27 2008: Mr Darling and Treasury officials accelerate work on a comprehensive rescue strategy, including more liquidity, credit guarantees and – crucially – recapitalisation, although the plan is far from fully formed.
October 8 2008: The recapitalisation, liquidity and credit guarantee plan is revealed to the markets.
While Lady Vadera tries to catch 20 minutes’ sleep that afternoon on a sofa in her office, Sir Fred Goodwin, the boss of Royal Bank of Scotland, phones her to say his bank needs £5bn-£10bn of capital. He spent the previous days insisting that liquidity was his only problem. “You’re going to be shocked,” Sir Fred says as he discloses how much he thinks his bank will need. “I am shocked because I think you’re going to need more,” Lady Vadera says. In the end RBS takes £20bn from the taxpayer.
October 12 2008: Mr Brown travels to Paris again to explain to Mr Sarkozy the detail of his plan. The president drags him into a meeting of eurozone leaders – normally a sanctum closed to the British – where Mr Brown explains what he has done. As French officials recount, Mr Brown plays two important roles in the week leading up to the summit: he teaches his counterparts about the scale of the problem and he works on Ms Merkel, getting her to sign up to an EU-wide framework.
“There was a real complicity between them,” says one British official. “Sarkozy got it that Gordon got it.” French officials say that while Mr Brown’s experience is respected, he was forced into action because UK banks were in such a mess: “It wasn’t a question of leadership or particular imagination – he just had to act.” Nevertheless, within 24 hours the big European countries announce capital and state-backed funding guarantees similar to those in place in Britain.
Mr Brown’s role in promoting bank capitalisation proves “very important”, Ms Merkel’s team acknowledges, as the focus of others including Germany lingers on banks’ problems with high overnight money market rates. “We think the decisions taken in Paris helped avert a disaster,” says Ms Merkel’s aide.
October 14 2008: Mr Paulson changes Tarp to include bank recapitalisation.
For all the global approbation for his decisive action a year ago, domestically there has so far been little dividend. “It was perhaps Gordon’s finest moment,” says one cabinet minister. “I’m not sure how many votes there are in it, though.”
If this has wetted your appetite, I’d highly recommend this (very long, 11,000 word) book extract in Vanity Fair about the US bailouts. It’s a little more, erm, ‘colourful’.
At Treasury, Jim Wilkinson, Paulson’s chief of staff, was by now practically sleepwalking down the halls. Paulson had just updated him on the Goldman-Wachovia talks and asked him for his counsel. Should the government provide assistance? Wilkinson, in his stupor, said he thought that it sounded like a reasonable idea.
But a half-hour later, after a cup of coffee and further reflection, Wilkinson changed his mind. He realized that such a deal would be a public-relations nightmare at the worst possible time, just as they were trying to pass tarp. Paulson would lose all credibility; he would be accused of lining the pockets of his friends at Goldman; the “Government Sachs” conspiracy theories would flourish.
Wilkinson ran back into Paulson’s office. “Hank, if you do this, you’ll get killed,” Wilkinson said frantically. “It would be fucking crazy.”