Alistair Darling just had time for one last check on the trading screens
before catching his flight to Washington a week last Thursday. It was not a
pretty sight. The screen, on the desk of Dan Rosenfield, his principal
private secretary, was already showing a disturbing shade of red.
The day before, he had stood with Gordon Brown in Downing Street and announced
he was willing to pump up to £50 billion of taxpayers’ cash directly into
Britain’s banks. The boldness of the move had stunned the world and shares
had briefly rallied. But as Mr Darling settled into his seat on a Virgin
flight at Heathrow, London’s market was showing worrying signs of fragility,
on its way to what would be the FTSE’s biggest one-day fall in 21 years.
Traders, panicking at the failure of other administrations to get a grip, were
selling everything they could. The world, seeking leadership, was looking at
Washington and the crucial G7 meeting of the finance ministers of the
world’s richest nations.
Arriving at the British residency in Massachusetts Avenue Mr Darling was shown
a draft communiqué. The Chancellor — who has tried to maintain an impression
of calm control throughout the crisis — lost his cool. Instead of a clear
plan of action, he was handed a three-page document containing the usual mix
of platitudinous diplomatic fudge and vague aspiration. The reaction of the
markets to yet more inaction was likely to be catastrophically bad. Unless
other administrations signed up to similar action to that already taken by
Britain soon, the wave of panic threatened to leave the British taxpayer —
and Government — ruinously exposed to events.
The combination of a lame-duck US President and divisions between France and
Germany was dragging the world’s financial system to the edge of the abyss.
The Chancellor had another reason for feeling alarm — he had pushed the
bailout plan hardest both within Government and with the banks.
The Times can reveal today that the Chancellor believed that recapitalisation
was the “only show in town” some time before Gordon Brown and that the Prime
Minister signed up only after the intervention of his ministerial fixer and
enforcer, Baroness Vadera.
Today Mr Brown is happy to take the plaudits but eight days ago it looked just
as likely that he would be content for history to remember the bailout as
“Darling’s plan”. In a conference call with Mr Brown, Mr Darling agreed that
it was time to get tough. Briefing reporters in the International Monetary
Fund’s headquarters, he said: “It is terribly important that governments
don’t just talk about what needs to be done but they actually get on and do
it.”
Behind the scenes, there were signs that others were gradually falling in
behind the British plan. Hank Paulson, the US Treasury Secretary, “looking
dreadful”, privately briefed Mr Darling on his intention to force US banks
to recapitalise on Monday. Despite having opposed the move as tantamount to
an admission of failure Mr Paulson admitted that he had changed his mind.
The Europeans were harder to read. Some diplomats suspected that President
Sarkozy of France wanted to prevent his Finance Minister, Christine Lagarde,
from signing up to a global plan of action in Washington because he wanted
to unveil a grand European programme at the European Council in Brussels the
next week.
In fact Mr Sarkozy had been an early and enthusiastic supporter of the British
model, ever since Mr Brown phoned him at 6.30am the day it was announced.
At a crisis meeting that afternoon he had told François Perol, his economic
adviser, and Jean-David Levitte, his diplomatic aide: “The English have
understood the risk to the system.” By the weekend Mr Perol and Mr Levitte
had barely left the Elysée as they worked around the clock to construct a
European response.
The main problem was German scepticism. Angela Merkel, the German Chancellor,
had been robust in her rejection of a previous pan-European model floated
before a Paris summit on October 4. “It’s up to each country to clean up its
own s**t,” she had said.
Even more hostile was Peer Steinbrück, Germany’s socialist Finance Minister.
Mr Steinbrück had made his feelings clear at a EU meeting in Luxembourg on
October 7, where “wearing a 1970s tie and in a filthy mood”, according to a
French official, “he refused everything”.
Arriving in Washington early, the minister told a small group of influential
US economists and policy advisers that Germany would not support anything
that resembled a European-wide guarantee of bank lending. Over dinner on
Thursday at the German Ambassador’s residence, a starkly modernist
structure, he said that German voters would not tolerate such an open-ended
commitment to the banks of other countries.
The next day at the meeting itself, Mr Steinbrück was diplomatic but insistent
that whatever was done in the name of international co-operation, had to
have at its core the principle that each country would do what was necessary
for its own financial institutions.
When the final communiqué was published that night, the initial reaction among
many economists was scepticism. Although Mr Darling had helped to sharpen
and strengthen it there was no clear-cut commitment to use public money to
shore up the capital of banks in the major countries, or to guarantee
interbank lending, the two ideas that the British Government had already
announced and that were gaining traction in international policy discussions
as the best way to deal with the crisis.
As the BlackBerries of bankers and hedge-fund managers buzzed with expressions
of alarm from financial clients in the bars and restaurants it was clear
that the G7 meeting had not done enough. The risk of meltdown when markets
reopened on Monday loomed large.
Arriving back in 1 Horse Guards Road early on Sunday morning, Mr Darling found
the Treasury overrun with teams of bankers, lawyers and sundry other
advisers. As soon as the recapitalisation plan had been revealed that it was
obvious it had to be finalised as quickly as possible. With the markets
closed, the high street banks and the Government had just two days to hammer
out the details. There were so many people in the building that it ran out
of chairs, leading to the extraordinary sight of groups of six-figure-salary
experts sitting on the floor of the Treasury’s open-plan offices in huddled
consultation.
He may have derived a measure of satisfaction from their discomfort —
especially those working for Royal Bank of Scotland. When he had first
raised the prospect of a government-funded recapitalisation the reaction
from banks was “mixed but mostly hostile”, according to a senior Treasury
source. “They knew it would be an admission of failure and of weakness.”
Even after the unpalatable became inevitable there was an element of denial.
“I think a few of them didn’t realise it would happen so quickly.”
Mr Darling had first started plotting his move in mid-September, hiring the
legal firm Slaughter and May to carry out contingency planning. He quickly
became convinced that it was the only viable option to ease lending.
Mr Brown was persuaded only when an informal committee of “wise men” drawn up
by Lady Vadera, his ministerial enforcer, worked up a secret blueprint in
the first few days of October. The details were developed after a meeting on
October 1 in the City office of Peter Sands, chief executive of Standard
Chartered, the international bank, The Times has learnt.
Mr Sands — an old friend of Lady Vadera — was joined by his finance director,
Richard Meddings; Tom Scholar, a senior Treasury official; Robin Budenberg
from UBS; and Michael Klein, the former chairman of Citigroup’s investment
bank. It was only after a formal presentation to Lady Vadera in No 10 on
October 3 that Mr Brown finally decided to sign up.
It needed dramatic falls in the banks’ share prices to persuade many that
there really was no alternative. As the banks began to realise what the
Government was up to, an order of preference emerged in Mr Darling’s private
office. Andy Hornby and Lord Stevenson of Coddenham, both of HBOS, were the
most highly rated, with Lloyds’ Eric Daniels and Sir Victor Blank also
liked. Sir Tom McKillop and Sir Fred Goodwin, of RBS, on the other hand,
were judged “totally out of touch with reality” and “arrogant”. Now the
final days of reckoning were at hand it was with some satisfaction that
negotiations were being conducted not with Sir Fred but with Stephen Hester,
the man who was to replace him.
If — by last weekend — the bankers were in any doubt about the dramatic shift
in power, catering arrangements for the marathon sessions underlined it. The
stream of takeaway pizzas and plates of sushi arrived and were consumed by
Treasury staff — not shared.
By contrast there was a hefty helping of charm when Mr Sarkozy had lunched
alone with Ms Merkel at Colombey-les-Deux-Églises in eastern France. The two
leaders, inaugurating a monument to Charles de Gaulle on Saturday, quickly
got on to the banking crisis once their public duties had been discharged.
Aware that the French President had already invited Mr Brown to brief a
meeting of the 15 eurozone countries the next day in Paris, the German
Chancellor finally gives way. Germany would accept the emerging package, she
said, but insisted that it be depicted not as a new federal-style deal but
as a “tool box” from which member states may use the instruments of their
choice.
Briefed about the change of heart, Mr Brown left for Paris on Sunday morning
in confident mood. After a private session, Mr Sarkozy introduced him to the
others in the Elysée conference room. With Mrs Merkel on side, agreement was
swift and at 8.30pm Paris time, a jubilant French President briefed the
press.
At the same time, US bankers waking in Washington found themselves called to
the phone to speak to the US Treasury Secretary. Mr Paulson invited them to
an urgent meeting the next day. Few if any, realised that he was preparing
to strong-arm them into a US version of the direct-equity recapitilisation
plan.
Just as the world was warming to the British prototype it was speeding to a
last-minute disaster. After the weekend of negotiations between the Treasury
and the banks, agreements in principle had been reached with all shortly
after midnight. But just as exhausted officials, lawyers and politicians
drifted off into the early hours of Sunday morning, a deal-breaking row
broke out between two crucial advisers at 3am.
Merrill Lynch’s Matthew Greenberg, who was advising Lloyds, violently
disagreed with Simon Robey at Morgan Stanley (for HBOS) over the
interpretation of several key clauses of their merger deal. With less than
five hours to go before the London markets opened Paul Myners, the City
Minister, was faced with having to wake Mr Brown and Mr Darling to tell them
a global humiliation was looming.
He decided to leave the pair to argue between themselves in a corridor.
Finally at 6am — with the fate of the world’s financial system hanging in
the balance — Mr Greenberg backed down.
It was the US banks’ turn for hard-ball when — at 3pm Washington time — the
chief executives of the country’s nine largest lenders gathered around the
dark wood table of the gilded conference room at the Treasury Department.
Mr Paulson handed each a one-page document which said that they agreed to sell
shares to the Government and said they must sign it before they left. “It
was a take it or take it offer,” one witness told The New York Times.
In three extraordinary days, an international political logjam was finally
broken and governments — not panicking markets or bankers — had regained a
measure of control. It was, after all, to be the “Brown plan”.
Additional reporting by Helen Power, Gary Duncan and Charles Bremner
