In early October 2008, the world's financial system was on the brink of systemic collapse. Despite the announcement of a multi-million pound bail-out, major British banks were about to go bust.
World markets were in a death spiral. There was a vertiginous sell-off across the board as investors dumped stocks, commodities and currencies. The markets had no faith in their own ability to stabilise, nor in the capacity of governments to rescue them. The crisis of capitalism so long predicted by communists had arrived even if they were no longer in a position to take advantage of it. Every major index was plunging, day after day. Wall Street suffered the worst week in its history. Stocks on the Dow lost 18% of their value in five days. General Motors, once the pride of the American car industry, was now worth less than it was in 1929. London and Frankfurt were down 21% on the week. Japan's Nikkei index crashed 24%. "Black Friday", the name given to 10 October, was too tepid a headline for what was happening. There was no precedent for this combination of a worldwide collapse in asset values, a global run on banks and the freezing up of all credit markets.
Major depositors were now so scared about the state of RBS and some other British banks that they were trying to withdraw – and willing to pay large penalties for early withdrawal – all their money. At the Treasury, an alarmed Paul Myners, the City minister, saw that this "was happening with more than one bank".
This was the day, of all days, that Brown was spending out of London on a "regional tour" along the M4 corridor. He had embarked on it as part of a campaign to explain to voters why he was giving billions to the banks. "I want you to know that we are doing this for you," he argued in a podcast hurriedly recorded that morning in which he contended that the bail-out was vital to save jobs and businesses. So it was from a train carriage with imperfect phone reception that he spoke to Angela Merkel, Nicolas Sarkozy and other European leaders to urge them to recapitalise their banks as well.
By the end of Black Friday, says John Gieve, then deputy Governor of the Bank of England, HBOS and RBS had "run out of money". Alistair Darling agrees "they had run out of capital". Treasury officials confirm that these two massive banks would not be able to open their doors on Monday morning.
This was a stunning development for the bankers and the politicians. If both HBOS and RBS went down, it was thought highly likely that they would tip over Barclays, which would in turn crash Lloyds TSB. The chain reaction could topple the majority, even perhaps all, of the major British banks. Sober experts like the economist John Eatwell "thought there was a real possibility of a total banking collapse. That is, the banks actually shutting their doors and all the cash machines stopping, which would be a complete disaster." Alistair Darling believed "we faced a situation where the banking system right across the world, never mind Britain, could have collapsed". Paul Myners agrees that they were now "very close" to "a series of dominoes falling" and "a systemic collapse of the banking system". John Gieve concurs that "we were right at the brink of two of our major banks closing and if those two closed that would have a knock-on effect. You could have got Northern Rock times ten." Mervyn King, Governor of the Bank of England, was also in no doubt that "not since the beginning of the First World War has our banking system been so close to collapse.'
That would be a cataclysm without precedent. Cheques would be valueless. Credit cards would be useless. With the cash machines shut down, families would not be able to buy food. "Literally you wouldn't have any cash. The money would disappear," says one leading economist. Most of those things regarded as the essentials of modern society would cease to function.
Most Britons understood that something serious was unfolding, but the awesome gravity of this crisis was concealed from the public precisely because of the sheer terror that would have been ignited had the truth been known. Few outside government and the banks fully appreciated just how close the country was to an apocalyptic implosion of its entire banking system. Britain teetered on the lip of the abyss.
The bankers were called back into the Treasury on Friday evening for what became known among those involved in the crisis negotiations as "the long weekend". In the words of Alistair Darling: "The deadline that all of us set ourselves was seven o'clock on Monday morning when the markets would open. You couldn't have the markets opening with the deal not done. That would have been catastrophic." They had just 48 hours to avert apocalypse. They worked "through the night every night" from the evening of Friday to breakfast-time on Monday. Some at the Treasury found it "slightly surreal" as "all these bankers slipped in and wandered around the building, looking lost". There were so many people crowding into the Treasury that they ran out of chairs. Bankers, lawyers and six-figure consultants ended up sitting on the floor to do their business.
The situation was further complicated because both the Prime Minister and the Chancellor were out of the country for stretches of this pivotal weekend. Darling flew to America for a meeting of the finance ministers of the G7. The mood in Washington was deeply frightened. "People were in a state of shock about the scale of what was happening," says one present. "Stock markets around the world were falling by 5% a day and looked like they would never stop." Darling responded with anger and alarm when he was shown the first draft of a statement for the G7. He agreed with Tom Scholar, the managing director of International and Finance at the Treasury, that it was "a crappy communiqué": three pages of platitudinous waffle which would make the panic worse. Hank Paulson looked a wreck. He was publicly still committed to his contentious TARP scheme, which had only won approval from Congress at the second attempt. Privately, the US Treasury Secretary revealed to Darling that he was preparing to switch tracks and fall in with the idea of recapitalisation. The British were suspicious of Christine Lagarde. They feared the French Finance Minister was under instructions from the Elysée Palace not to agree anything of substance so that Nicolas Sarkozy could claim the glory by announcing a grand plan at the European Council in Brussels the following week.
Darling argued to his G7 counterparts that recapitalising banks with public money – the British approach – was the only solution with a chance of working in these circumstances. Mervyn King was also at the Washington talks. The Governor took to using a line from another King, Elvis Presley. What they needed, he said, was "a little less conversation, a little more action".
They agreed a five-point plan which included a pledge to prevent the collapse of "systemically important banks" by using taxpayers' money to buy up stakes. The final communiqué lacked precision, but for the first time there was something resembling a plausible global framework for bank recapitalisation.
While the Chancellor was selling that to the finance ministers in America, the Prime Minister was promoting the British plan to his European counterparts at a meeting to which he had not originally been invited. Sarkozy asked Brown to join his summit of leaders of the eurozone at the Elysée Palace. At one point, the French President said: "You know, Gordon, I should not like you. You are Scottish, we have nothing in common and you are an economist. But somehow, Gordon, I love you." Just in case Brown got the wrong idea, the Frenchman quickly added: 'But not in a sexual way.'
Also present at the Elysée were José Manuel Barroso, the president of the European Commission; Jean-Claude Trichet, the chairman of the European Central Bank; Silvio Berlusconi of Italy; and Angela Merkel. The scepticism of the German Chancellor had been a formidable obstacle to a comprehensive solution. At a Paris summit a fortnight before, Merkel declared: "It's up to each country to clean up its own shit." She was now shifting her position, not least because her officials were constantly in and out with updates about teetering German banks. To one present at this conclave, it was "a mad meeting" as Brown and his European counterparts clustered around a tiny table in the Elysée discussing what to do. At 8.30 that evening, Paris time, the French President came out to tell the media that they had broadly embraced recapitalisation schemes along the lines of the British plan.
Darling left Washington on Saturday night on the red-eye to Heathrow and landed back in London at breakfast-time on Sunday. When he arrived at the Treasury, the negotiations with the stricken British bankers had made important progress. The dynamic was changed by the fright they received on Friday. "When we began to have one-to-one meetings on Saturday, it was pretty clear to all the major banks that needed capital that they would have to do a deal," says Paul Myners. He and John Kingman, the Second Permanent Secretary at the Treasury, found that HBOS, Lloyds TSB and RBS were now willing to accept that they had to have immediate help. Barclays, though still preferring to recapitalise from foreign sources rather than the British Government, saw the necessity for urgent action. "No one wanted to be naked on Monday morning without a deal in place."
According to John Gieve, "essentially the Treasury laid out the terms on which it was prepared to support them and they had to accept it." In one of the gaps between meetings in Myners's office, someone referred to a "negotiation". Sir Fred Goodwin, RBS's chief executive, remarked: "This is not a negotiation; it is a drive-by shooting." His tone was more fatalistic than furious. "He said this with a rueful smile."
Until the Sunday evening, some of the bankers were "still fighting the proposition" that they had to agree to the terms and conditions offered by the Government. Darling eventually said to them: "You've got a choice. We're going to offer capital and we're going to impose conditions. If you don't like it, there's an alternative, but that's too awful to contemplate." In a display of brinkmanship untypical of the undemonstrative and cautious Chancellor, he declared: "I'm staying until midnight and then I'm going to bed. If you haven't done the deal by then, it's too late."
The bankers were "more or less signed up" to the broad structure when the Chancellor took himself off to bed, telling officials he had to get some rest when he would be presenting the deal to MPs and on the media the next day. As he slept, the lights continued to burn at the Treasury as the bankers wrangled over details. "That is what these people do," says Darling. They were getting "down to percentages", haggling over the precise size of the stake the Government would take in the rescued banks. At five o'clock, with just two hours left before the deadline to announce an agreement in advance of the markets opening, Darling held a stock-taking session in his ground-floor study at Number 11. The Chancellor was joined by Kingman, Myners, the civil servant Tom Scholar and the minister Shriti Vadera, none of whom had had any sleep at all. They were agreed they had a deal they could live with. Now they needed Gordon Brown's sign-off. The Prime Minister had returned from Paris late on the Sunday night and was still asleep in the flat above Downing Street. "Who's going to wake him up?" asked Darling. Eyes fixed on Shriti Vadera, the person in the room closest to Brown. "You need to get him up." She went through the connecting door into Number 10 and sought out the night duty clerk. "We need the Prime Minister," she said. "Can you get Gordon up?" "No," the duty clerk laughingly refused. "You go and get Gordon up."
Vadera made her way upstairs to the Browns' flat. She had never been in there before and stumbled around in the dark trying to locate the bedroom. Tripping over a child's tricycle, she disturbed Sarah Brown, who assumed one of her sons was up. The Prime Minister's wife shouted out: "John, go back to bed." Vadera identified herself: "Sarah, it's Shriti." A familiar growl then rumbled from the Browns' bedroom: "What's going on?"
Soon afterwards, the Prime Minister came down to join the meeting in the Chancellor's study. A purple tie at half mast around his neck, he "looked like a man who had jumped out of bed and thrown his clothes on in thirty seconds". Brown asked the multi-billion-pound question: "Will it work?" When the rest of them sounded positive, he gave his seal of approval. They had just met the deadline. Before the markets opened on Monday, it was announced that the Government was taking stakes in HBOS, Lloyds TSB and RBS in return for a £37 billion injection of capital while Barclays would be recapitalising from private sources. The state was now the majority shareholder of RBS and would own 40% of the new bank created by merging HBOS and Lloyds. Britain's banks opened their doors that morning. The cash machines still worked. As far as most people knew, it was business as usual.
One very senior civil servant, in many ways a sceptic about Gordon Brown's leadership skills, gives him much of the credit for bold action in this crisis: "Gordon was prepared to say: 'We need to bail them out' despite the political risks. He took the lead and then allowed Alistair to do it."
Britain had come close to tumbling into the abyss. Whatever else the rescue of that long weekend ultimately failed to do, it successfully set an example to the world and saved the country from the apocalypse of a total banking collapse.
© Andrew Rawnsley