Alistair Darling’s car nosed into an industrial estate on the edge of
Luxembourg in the teeming rain shortly after 7am yesterday. The Chancellor,
who had been woken at 4am, looked drawn.
The previous day there had been the largest fall in the FTSE 100 for 21 years
with bank shares taking the worst of the hammering. Markets, spooked by
European governments’ ill-disciplined and confused response to the credit
crisis, now threatened the survival of lenders across the continent.
Mr Darling, arriving for a routine meeting of EU finance ministers, already
knew that it was going to be a difficult day before an official passed him
his BlackBerry. On it, the Chancellor read an account by Robert Peston, the
BBC business editor, of a meeting that Mr Darling had had with the banks the
previous night. As soon as he saw the report the Chancellor knew that it
would create havoc in a market unable to withstand any more shocks.
Just how it was that the Treasury’s emergency plan to pump £50 billion of
taxpayers’ cash into Britain’s ailing banks dribbled into the public domain
over three days will be the subject of future parliamentary, if not
judicial, investigation.
What is certain today, however, is that, unlike the successful rescue of
Bradford & Bingley ten days ago, Mr Darling lost his ability to control
events.
As bank chief executives trooped into the Treasury for the 6pm meeting on
Monday, the mood was funereal. Sir Fred Goodwin, the chief executive of
Royal Bank of Scotland, had just seen his share price sink by 20 per cent to
an all-time closing low of 148p. John Varley, his opposite number at
Barclays, was looking at a 15 per cent slide. Top of the agenda was the
possibility of a government-led recapitalisa-tion of the banks.
David Cameron, the Conservative leader, had forced the issue – under
discussion for weeks behind closed doors – into the public domain at the
weekend after George Osborne had had his own private meetings with Mervyn
King, the Governor of the Bank of England.
Addressing Labour MPs at the same time, Gordon Brown made clear that he was
furious at what he called a breach of trust by the Tories. Mr Cameron and Mr
Osborne countered that they were showing political courage to push an idea
that had been “in the ether” for some time.
Now the cat was out of the bag, the bankers wanted Mr Darling to act swiftly
to reassure the markets about what he had meant on Sunday, when he had said
that “pretty big steps” might be needed.
But the banks were themselves divided about how best to take advantage of
taxpayers’ cash. The meeting with the Chancellor was followed by a meeting
of bank chiefs only. At that gathering, some said that the Government should
take preference shares, others that it should invest on the same basis as
existing investors, buying ordinary shares.
As they argued among themselves, Mr Darling sought at a reception for
newspaper columnists in No 11 to give the impression of a man coping with
the pressure.
After 45 minutes of forced jollity, the Chancellor held further meetings with
officials assessing how best to formulate and present the bailout before
trying to grab a few hours’ rest.
Suspicions that one or more banks were trying to force his hand hardened as Mr
Darling read Peston’s blog the next day.
In it, the BBC man wrote that the “Big Three” banks had told Mr Darling “to
pull his finger out”. As the Chancellor went into the Ecofin meeting, braced
for what the news might do to the market, he ordered an official to
remonstrate with Peston. Oddly enough, when the FTSE 100 opened bank shares
were – for a few minutes – reasonably resilient.
Then the roof caved in. RBS collapsed by as much as 39 per cent at one point
as traders frantically dumped its stock. The frenzied trading was partly
fuelled by fears that existing shareholders would lose out in a
taxpayer-funded rescue. But the shares were also plagued by worries that RBS
had been badly hit by writing insurance policies against Lehman Brothers and
other financial institutions that were going bust.
Mr Darling was called out of the meeting to be told of the seriousness of the
collapse. At the same time, it emerged that British customers of Icesave
could not withdraw their savings after the collapse of the Icelandic parent
bank, Landsbanki.
The Chancellor spent 45 minutes considering the Government’s response with his
two most senior advisers: Geoffrey Spence, the former head of infrastructure
at HSBC, and now a member of the Treasury’s council of economic advisers,
and Stephen Pickford, the managing director of the Treasury’s international
and finance directorate. Mr Darling decided that he must return to London
early and his charter jet was read-ied at Luxembourg airport for a quick
getaway.
Seeking to calm the storm, Sir Fred, of RBS, told a banking conference in
London that he expected a government decision on the bailout plan “sooner
rather than later”.
Mr Varley, of Barclays, who was at the same conference, added an impromptu
sentence to his prepared speech. “Contrary to press rumours,” he said,
“Barclays has not requested capital from the Government and has no reason to
do so.” By lunchtime RBS pushed out a similar denial.
Arriving back in the Treasury at 3.15pm, Mr Darling went straight into a
crisis meeting with all his most senior officials, leaving 20 minutes later
to brief the Prime Minister in No 10.
Together Mr Darling and Mr Brown decided that they had no option but to bring
forward their plans to shore up the troubled banks. The alternative would be
to risk the collapse of one – and possibly more – of the most vulnerable
lenders in another day of panic.
At 3.45pm Michael Ellam, the Prime Minister’s official spokesman, announced
that Mr King and Lord Turner of Ecchinswell had been summoned to No 10 to
discuss “proposals for longer-term reform”. Mr Ellam, pointedly refusing to
indulge in “irresponsible private briefings”, said that further information
would be provided in a “calm and ordered” fashion.
Officials scrambling to finalise the details of the most extraordinary bank
nationalisation programme in history might have permitted themselves a wry
smile at that.
Indices of fear
VIX The VIX, commonly referred to as the fear index, is traders’
shorthand for volatility index and is traded at the Chicago Board Options
Exchange. It provides an insight into investor expectations of price swings
of derivatives over the next 30 days, based on the US S&P 500 index. The
VIX’s average value over the past two decades is 20. In early 2007 it sat at
less than 10, which was close to its record low. On Monday it surged to 52,
its highest level since the 1987 crash.
CDS spreads A credit default is a form of insurance against bad debts:
the owner gets paid if a company defaults on its borrowings, whether through
bankruptcy or restructuring. The higher their price, the less creditworthy
the company is perceived as being. Yesterday the cost of insuring against
Royal Bank of Scotland’s default rose to 3.28 per cent, so that the annual
cost of insuring €10 million of RBS bonds rose by €45,000.
Libor The London Interbank Offered Rate is a daily reference rate that
indicates the interest rates at which banks are prepared to lend money to
each other in the wholesale markets. The higher the rate, the less willing
banks are to lend – either because they seek to conserve cash themselves, or
because they fear they will not be repaid. The gap between Bank of England
base rates and three-month sterling Libor widened to a record 1.90
percentage points yesterday, against a typical 0.10 points before the credit
crunch began.
The dividend/gilt yield crossover A nominal £100 invested in leading
company shares, other than bank stocks, now reaps more in annual dividend
payments than an identical amount invested in benchmark British government
debt – which currently yields 4.23 per cent. This is a rare phenomenon which
stock market investors say often indicates that shares have fallen too far
too fast, and signals a good time to buy.
Interest rates Savers desperately searching for a safe harbour for
their money were dealt a blow yesterday when National Savings &
Investments – which offers a 100 per cent guarantee on all deposits – cut
interest rates. The government-backed savings provider reduced interest
rates by up to 0.2 percentage points on some of its most popular accounts
after an influx of customers looking for protection. NS&I’s decision
comes after a similar move by Northern Rock. Last week the nationalised
bank, which also offers a 100 per cent guarantee to savers, was forced to
cut interest rates after it came close to breaching a 1.5 per cent cap on
market share of deposits.
