How our banks were rescued
The main story of tonight's Panorama is quite how close we came to the collapse of two banks - Royal Bank of Scotland and HBOS - in the second week of October. RBS in particular was alarmingly close to meltdown.
For Royal Bank of Scotland, the owner of NatWest, it was all hands to the pump from Tuesday 7 October until the end of that week.
This giant British bank, which has just under £2000bn of loans and other assets, was having enormous trouble hanging on to vital deposits and loans made by money managers and other financial institutions.
Without these deposits, it would have been insolvent.
The head of RBS's corporate bank, Johnny Cameron - who has now left RBS - was summoned to the Bank of England for crisis talks.
The Bank of England itself contacted Royal Bank's creditors in New York and Tokyo to persuade them to keep faith with the group.
By Friday, RBS was a weekend away from disaster. And the troubles at RBS were being replicated at HBOS, which by 10 October was perceived by the Bank of England and the Financial Services Authority, the City watchdog, to be almost as vulnerable as RBS.
So on Saturday 11 October and Sunday 12 October, crisis talks were held at the Treasury - led by the Chancellor of the Exchequer, Alistair Darling - that forced all our big banks to raise additional capital to strengthen their balance sheets.
And in return for this additional capital, the Treasury and the Bank of England provided banks with £350bn of loans and guarantees from taxpayers.
A trio of banks received a direct investment of capital from taxpayers. Royal Bank of Scotland has received £20bn from the state and is now 58% owned by taxpayers.
There is £17bn of our money that is expected to go into HBOS and Lloyds TSB, with most of it going into HBOS. Lloyds TSB is buying HBOS and taxpayers are likely to emerge with a stake of more than 40% in the newly formed retail superbank.
This rescue package has prevented RBS and HBOS from collapsing and has stabilised the banking system.
This extraordinary story is told on Panorama in interviews with a quartet of the leading actors in this drama: the Chancellor of the Exchequer, Alistair Darling; the deputy governor of the Bank of England, Sir John Gieve; the chief executive of the Financial Services Authority, Hector Sants and the chief executive of Barclays, John Varley [all pdf links].
Here are some of my questions to these four, with their answers from a verbatim transcript. First, Sir John Gieve.
Peston: I was talking to a big bank yesterday actually and they were saying to me it was extraordinary - their department, their treasury department, which you know exists basically to get them the funds they need on a daily basis - I mean every night the sums of money they had to raise just to keep going for the next day got bigger and bigger. The chap I was talking to just said that they'd never experienced anything, anything like it. How many banks do you think in the UK were in this position? Were they broadly all in this position of just seeing the availability of long-term funds just drain away?
Gieve: Well, I mean each bank is, is different and some of the banks were benefiting from this. They were attracting, they were seen as the safe havens and they were getting an inflow of deposits and their problem was: "what do we do with this money we don't need?" And they started looking to deposit it with central banks, in fact. But several of our large banks, and I mean I don't want to go into names, were, were in real difficulty and you know, were having hour-by-hour minute-by-minute to balance the books at the end of the day, and obviously we were talking very closely, but it wasn't just happening here. It was happening in the States, it was happening in Europe...
Peston: I mean, I suppose what I found profoundly shocking at the time was the difficulty that an enormous bank, Royal Bank of Scotland, was having in rolling over its short-term funding. I mean that seemed to me at the time to be momentous.
Gieve: Well absolutely, and you know it, it always rolls a large amount of funding but normally this is routine. You know you've got it arranged pretty much by the middle of the day. There's no panic about it but as I say, it became a nail-biting business right up until the end of the day and obviously we were talking to them on, on a daily basis. So that was one factor, but it wasn't just RBS. I mean, remember what was happening in the States, what was happening in, in Europe as well. You could see that the banks were falling over.
Peston: No, totally - and of course, HBOS was in a very similar position before the merger with - the takeover proposal was announced by Lloyds TSB. Now, you came together with the banks over the weekend to, in a sense, allocate the capital and to negotiate who would get what. Give me a flavour of what those negotiations were like with the treasury, with the FSA, with the banks.
Gieve: Well, we made the announcement of the plan - the availability of capital and so on - on the Wednesday. What became very clear on the Thursday and Friday was that we needed to get on with it. You know, we'd offered the cash. We needed to actually get it out there and RBS quite honestly was the leading candidate but we were also clear that if you just dealt with one, you'd leave the others in a rather exposed position, you know, the caravan would move on and the searchlight would pick out Lloyds and HBOS and even Barclays. And so, really, Friday and Saturday we began to get, and the treasury in the lead on this, but again I think it was a joint effort with the FSA and the Bank, we began to sort of line people up in different rooms on different floors for a series of meetings, and it was an extraordinary, it was an extraordinary weekend. There wasn't that much negotiation because someone described it as more a drive-by shooting.
Peston: Yes - Fred Godwin, the famous phrase, the negotiation was a drive-by shooting.
Gieve: And that, you know it had to be like that. There was very little time. The government was announcing the terms on which it was prepared to come in and the banks had to think about it, but they broadly had to accept it.
Peston: As I understand it, Fred Goodwyn, his famous phrase about the drive-by shooting, what he meant was banks were told [by the FSA] "we've done the sums, this is the capital you need". Is that broadly, you know, how it happened? I mean, that's certainly what he's been saying.
Gieve: Yes, that's right. We had done some sums and between us we'd, we'd come up with what we thought was necessary and really there was only one provider [the taxpayer]. Now, for Barclays they were, they chose a different route. They thought that they were given the number and they, they said "no, we can raise this ourselves on the market," so they took a different route to the other three.
Now, Alistair Darling.
Peston: Now, my recollection of the day and night where you put together the shape of the rescue plan prior to the announcement the following morning, I think you were in, in Brussels I think, in the morning, weren't you? I think there was, I think there was an Ecofin that morning and then I think you then came back and then there was a great sort of working through the night to get, to get a package together. Did you know when you were in, in Ecofin, in Brussels for this European meeting, that you were likely to come back and have to put this thing together very fast?
Darling: During the weekend before that, there had been a lot of speculation about whether or not the banks would be recapitalised and the markets were very very febrile on the Monday morning. I wasn't surprised when I was called early on on the Tuesday that one bank in particular really was in difficulties and I decided that you know whilst there was a bit more work to be done, we needed to get our plans out and so I decided we'd do a statement in the House of Commons on the Wednesday which I did. It was obvious it would always have to be a two-stage process, because you had to announce the principles, then sit down with the banks and of course I then had to go to Washington to the IMF meetings when I took the opportunity of course to speak to my counterparts, to say "look, we're doing this, you know I hope you can do it too". And then the final deal was done on that Sunday night and announced the following Monday.
Peston: I mean that bank in difficulties was the Royal Bank of Scotland, having tremendous difficulty renewing its short term borrowings on wholesale markets. Was this irrational, was there any fundamental reason do you think why Royal Bank was having such difficulty?
Darling: There's lots of things been happening over the last few weeks and months that are you know, on one level you can say they're irrational [I think he meant "rational" here] because as it turned out, RBS needed an awful lot of capital. It's one of the biggest banks in the world and we now own 57% of it. And when people had seen, you know, giant banks in the US collapse, everything that, that's happened, you can say on one level it's irrational. On another, another, the other level you can understand why people began to lose confidence. What we had to do, though, is to say "well never mind that, let's you know really take some decisive action - let's make sure that we can maintain the banking system" - and that's what we did.
Peston: I mean, I found it profoundly shocking, I must admit, at the time. I mean, here was the owner of NatWest, this enormous bank, that one just assumes couldn't possibly fail, having these difficulties raising short-term funds. You announced the structure of the rescue, but then again on the Thursday and the Friday they've still got these difficulties. There's a fear also that it's going to infect other banks like HBOS which was beginning to have difficulties of these sorts. You then come to the Friday of that week. Was it obvious to you again on the Thursday and the Friday that what you were going to have to do was negotiate with all the banks through the weekend to put together the detail of the rescue package, or in a sense did you decide quite late on the Friday that if you're going to do Royal Bank, maybe you should do all of them?
Darling: I was very clear even before the turbulence of that week that whatever we did, we had to do it for the entire banking system. We couldn't get ourselves into a situation where you're simply fixing one problem because the problem was then moved to somebody else and, you know, we just couldn't allow that to carry on happening. We'd seen it in America where they, no sooner had they sorted one bank's problems out than the problems transferred to the next. So on the Wednesday, I announced a general overall plan - the scheme, if you like. Things did get worse during that week because confidence was just draining out of the system and in some ways, that made it easier for us to talk to the banks and say, "look, we're all in this together. No one's got any choice. Everybody's going to have to recapitalise. The only choice we'll give you is you either do it through us or you raise the money on the markets yourselves" - and you know, that's precisely what happened. But on the Monday when we'd done it, it did actually, there was a sense of calm and the fact it then became clear that it wasn't just us. The Americans were going to do something, we had, Gordon Brown had been in Europe on the Sunday before and he'd got agreement, you know, surprisingly quickly right across Europe that central banks, governments would do the same sort of thing...
Peston: Did you get any sleep that weekend [of 11-12 October, when agreement was reached to inject £37bn of taxpayers' money into RBS, HBOS and Lloyds TSB], in fact?
Darling: Yes, I did. I had to go to Washington on the Friday and Saturday and so I came back on the Saturday night overnight and you know, there's a limit to the amount of sleep you can ever get in an aeroplane. Then I had meetings all day on the Sunday and then at ten o'clock on the Sunday night, just when you know everything was agreed as far as I was concerned, inevitably when you deal with a bunch of bankers, they started trying to re-open it. So I said about one o'clock - "okay, re-open it if you want. I'm going to my bed. If you haven't agreed it by five o'clock, then you're on your own". So happily, when I woke up at five o'clock, we'd got an agreement.
Peston: Crikey, and was the agreement very different from the agreement that you'd had at, you know, or where you thought it was going to be when you went to bed?
Darling: Not fundamentally, not at all. If you - look, you're negotiating with people who are running multi-billion pound businesses and who, you know, whose world had changed and of course they had one or two legitimate points that we were ready to talk about and you know, I talked to, to them about it but you know, what I wasn't going to have is someone trying to unpick the deal, basically ask for the bits they wanted and not the bits that I wanted. It had to be an all-encompassing deal. The deal was done you know, and completed, on you know, the early morning of that Monday and it had to be, because we had to make a market announcement when the markets opened at eight o'clock on the Monday morning.
Finally, John Varley.
Varley: What was clear was that confidence in the system was, was suffering very badly [in the week of 6-10 October]. It was, the circumstances were as extreme as anything that I can remember. And if I put it in context, it seemed increasingly likely as the week went on that one or two of the British banks would not be capable of opening for business the following week, and it doesn't get much more extreme than that. And as you know, the government stepped in and took action, and came to a decision about a system-wide remediation that I think was very helpful for the regeneration of confidence. But it was a, it was a surreal week because the markets were extremely skittish, the media was very extreme in its commentary and it was a challenging week for all stakeholders of banks, and indeed the employees of banks.
Peston: I mean, the two banks in question were Royal Bank of Scotland and HBOS. Do you think that their vulnerability was irrational or, you know, were the markets behaving rationally in the way that they were finding it difficult to raise money. Were they actually fundamentally weak?
Varley: Well, I'm not going to make a comment, least of all on Panorama, about our competitors. It wouldn't be appropriate for me to do so. But what is clear is that there was a crisis in the market that week and it had to be addressed because what you couldn't have was any big bank being in a position where it wasn't capable of opening for business. That, the systemic consequences of that, would have been too awful to contemplate. And I think it was, the week was symbolic in the following way which was that up to that point - I mean, over the preceding twelve months, put it like that - a lot of what had gone on in the United Kingdom and elsewhere around the world was what I would think of as national firefighting. Individual bush fires broke out and they were doused by the authorities. What was very clear in that week in October was that something much more system-wide - much more generic - needed to be applied both in the United Kingdom and elsewhere. And market-wide solutions were put in place in that, in that week in October and since then, and I think actually, actually it's been very positive for the world, because it seems to me as though the national firefighting forces have now been overtaken by the international fire brigade. And the international fire brigade I think is doing quite a good job in managing banking systemic risk.