There is a little-known story from the early days of the financial crisis which is worth recounting today. It’s a story which, to some extent, explains why Sir Mervyn King is still, even five years on, railing against the way the Government nationalised RBS and HBOS – why he believes it wasn’t handled right and still needs to be further overhauled.
The story goes back to 2007, after Bear Stearns had collapsed and with Northern Rock teetering on the brink, but well before the recapitalisation of RBS or the recession that followed. It was clear at that point that all was not well with the financial system. The Bank of England had been conducting so-called “war games” over the consequences of a financial collapse, prompting Sir Mervyn and a number of senior officials to devise what was described to me (not, I should add, by anyone in the Bank) as “a cunning plan”.
That plan was to swap the bad assets off the troubled banks – banks like RBS and HBOS – and chuck them into a toxic waste dump. To do it early and, at the same time, to pump a lot of capital into the banks to shore up their balance sheets.
Sir Mervyn shared the idea with the Treasury in the UK, and also took it to the International Monetary Fund, which at the time was led by Dominique Strauss-Kahn. With the help of a number of people at the Fund and, I’m told, Christine Lagarde, who was then finance minister of France, it was honed into a 35-page top secret dossier. The plan was passed to the finance ministers of a number of leading countries, including Hank Paulson of the US Treasury.
And if the plan sounds somewhat familiar, it’s for a reason: it is almost exactly what Paulson ended up doing in the US.
However, when Britain came to nationalise its trouble banks (by which I mean HBOS but mainly RBS), it stopped short of this plan. The initial 2008 recapitalisation was too timid, too small-scale, with the result that the Government ended up having to pour even more cash into RBS a year later. Britain’s version of the toxic waste dump – the Asset Protection Scheme – arrived later and in smaller scale than the US Treasury’s TARP.
So while many may hear Sir Mervyn’s comments – such as those before the Parliamentary Commission on Banking Standards calling the RBS semi-nationalisation a “nonsense” – as revisionist history, that’s not quite fair. According to people involved in these talks back in 2007, the Bank Governor was “way ahead of his time – six or seven months before Paulson came up with this.”
But he did fail – and perhaps this is just as worthy of criticism – to get those ideas implemented in his own country. That is the legacy Sir Mervyn is still fighting to put right. It wasn’t that he didn’t spot what needed to be done to overhaul the UK banking system – it’s that he simply failed to get his way.