Thursday, 15 September 2011

Darling, We Have a Crisis

Book review: Alistair Darling, Back from the Brink: 1000 Days at Number 11, Atlantic Books, London, 2011, 338 pages

I bought this book by Britain’s ex-Chancellor (finance minister) because he had distinguished himself in 2008 by clearly asserting that the crisis under way was the ‘worst for 60 years’ and that it would last for years, not months. He was also directly involved in the series of UK bank nationalisations, starting with Northern Rock, and took part in fashioning the government’s policy responses to the later troubles, working closely with his counterparts in the US, Europe and elsewhere from 2007 until the Labour government lost power in May 2010.

In the event, although the book is an easy read it offers little reflection on the crisis and its broader significance. Where it does have value is in giving some extra detail on the course of events, especially by highlighting how far policy makers were taking enormous bets to save the system and how they made it up as they went along. Otherwise, much of Darling’s coverage is on the issues that normally feature in recent-history memoirs, and which fascinate national media, but in which I have no real interest: the previous Labour government’s internal squabbles and the personalities of the various players.

Three topics that come up in the book are worth discussing: the role of banks for the major countries, the double dealing and protection of national interests occurring between the major powers, and the fact that the politicians have no idea what to do to resolve the crisis. Even though Darling’s treatment of these is cursory, the examples he gives illustrate some important points.

Banking on success

From 1997, when Labour first came to power, it gave the Bank of England full autonomy over interest rate decisions – ie the country’s central bank was now ‘independent’ of government direction. This had the effect of endorsing Labour’s business credentials and showed that it was serious about doing the right thing for capitalism. The reward for the lower risk was lower interest rates, and, by the early 2000s, still lower rates were encouraged by developments in the international economy. This helped produce the UK’s version of the credit boom, as mortgage interest rates and other borrowing rates fell to levels far lower than in previous decades. One important side effect was strong economic growth, based on the extra debt, and this produced lots of extra tax revenues. Darling admits, however, that

“we mistakenly assumed that the revenue that rolled in from the financial services sector and from stamp duty would keep on coming. Our spending was based on that assumption and, when it came to an end, borrowing rose. There had been no reason to assume that revenues would fall – after all, very few foresaw the banking crisis – but it is a timely reminder to everyone that the good times will not last forever.” (p310)

This is a refreshing admission that Labour’s social services and other spending programmes were based on the unsustainable speculative boom. But it also reveals how much that phase of economic ‘success’ was due to financial services in the City of London and why the Labour government was so accommodating to the financial sector. Darling’s book is full of accounts of meetings and discussions with bankers and the close ties they had with the Labour party. However, he takes this so much for granted that this pervasive theme gets no special attention or comment from him.

Darling is Scottish, as were many other leading Labour government officials, not least Prime Minister Gordon Brown. This sets the scene for an incident related in his book when Sir Fred Goodwin, the honoured, then later reviled, senior executive of the Royal Bank of Scotland, came on a private visit to the Chancellor in his Edinburgh home. It was in the early stage of the RBS crisis, but Goodwin seems to have made the mistake of protesting too much that his bank was perfectly sound. Darling smelt a rat and immediately asked his Treasury officials to check out RBS.

The end result was that this bank had to be bailed out by the government, and here the term ‘too big to fail’ was all too true. RBS had liabilities that were higher than the value of Britain’s GDP! So when the RBS chairman, Tom McKillop, made an emergency telephone call to Darling while he was in a Luxembourg finance ministers’ meeting, Darling answered straight away. RBS had “a couple of hours, maybe” before it collapsed, McKillop said. So Darling ordered his assistant to tell the Bank of England to put “as much money into RBS as was necessary to keep it afloat” (p154).

Bailing out RBS led to a 70% government equity stake initially (later 84%), costing around £15bn, as well as government guarantees for all its liabilities, which is basically an indeterminate amount. Another Scottish bank, HBOS, was also in big trouble and Darling helped organise a takeover by the banking major, Lloyds, that ended up needing further government cash of £17bn, with a 43% government equity stake. This was the ‘old Labour’ dream of nationalising the banking sector, ironically realised by the new Labour technocrats. They had figured out that the state was necessary to protect capitalism, not to reform it.

Darling notes that he, as a British Chancellor, had far more freedom than his international peers. Together with other measures, he “effectively wrote a cheque to buy £50bn of bank shares in the UK” and “did not even have to get specific parliamentary authority to do so” (p118).

When Darling was one of the UK stars at the London G20 summit in April 2009, in those far off days when they thought that they had brought things back under control, he noted that “there was still a sense that the UK-American model had been the cause of such a spectacular series of disasters in the banking world”. This made the anglo-sphere politicians feel a little uncomfortable, now they were outside their cosier G7 network, sitting alongside up and coming rivals from China and elsewhere.

At most, however, this led Darling to consider the issue of ‘regulating’ banks, with no particularly novel conclusions. He did not reflect upon an earlier visit to China, when he “took the opportunity to promote the cause of Standard Chartered Bank, which was launching a new service for business there” (p93). Nor did he see reason to question his view that banking was “an industry that was exceptionally important” (p274). This view is correct, insofar as banking and finance are critical to the economics of British imperialism.[1]

The Lehman weekend

Most people know that the US bank Lehman Brothers collapsed in September 2008 when the US Treasury could find no buyer for it. Bear Stearns had already collapsed the previous March, but at that time the US authorities had organised a takeover by JP Morgan. The UK angle on the Lehman collapse is less well known, and Darling’s account (pages 121-126) offers some interesting details.

On the Lehman weekend of 13-14 September, US Treasury Secretary Hank Paulson had two prospective buyers lined up to take it over: Bank of America and the UK’s Barclays. But this was no ordinary sale. At question for the buyer was who would give guarantees to cover any worse than expected losses from Lehman’s toxic assets. Bank of America pulled out of the running, leaving Barclays to say that it would only do the deal if the UK authorities would offer support, since the US Treasury at this point was giving none. Paulson tried to bully the British into a deal, with vague promises of support, but he avoided saying anything definite. That led Darling to refuse to put British taxpayers in the possible position of bailing out an American bank, and Barclays pulled out. As Darling put it: “We were deeply suspicious: why were the Americans prepared to hand over what they claimed was a good deal to the Brits?” Lehman filed for bankruptcy on Monday 15th, and Barclays bought much more cheaply the bits of Lehman it wanted on the Tuesday.

The reason for the US subterfuge, and for its lack of support for Lehman, was simple. The US government was running out of resources to manage the crisis, in terms of both cash and time. Paulson probably thought that he could pull off a smart coup, by fooling Barclays up to the last minute into thinking that there was another bidder for Lehman, and by using pressure on the British government. From his book, Darling indicates that he had no knowledge that the US Treasury and Fed had already been involved in Bank of America’s rescue of Merrill Lynch. However, he did sense that “the US administration was in a state of panic” and his telephone call to an “exasperated” Paulson underlined that something bigger was going on. The Bank of America-Merrill deal was announced on the 15th, the day of Lehman’s bankruptcy. The following day, the US insurance giant, American International Group, was effectively nationalised, adding to the US government’s growing list of acquisitions, following the previous week’s rescue of Fannie Mae and Freddie Mac. Letting the arrogant Lehman go probably looked like the least risky thing for Paulson to do, though it had disastrous effects on the financial markets that the ex-Goldman Sachs Treasury man claimed to understand.

Make it up as you go

The last few years of the crisis have seen governments in major capitalist countries adopt policies that would have been anathema to their ideology only a short while before. There have been nationalisations, bans on the short-selling of equities, government guarantees for bank assets, unlimited bail outs of bankrupt companies and the tearing up of guidelines for government spending and borrowing. In Darling’s account of his actions, this caused no ideological shock or reflection. Instead, he adopts the stance of a surprised, but nimble technocrat, pleased with his actions and rarely questioning the bigger picture behind what is going on, except to see that, indeed, it is a bigger picture involving complications worldwide.

Take the matter of fact way in which he relates the tale of using a provision in the Anti-Terrorism Act of 2001 to freeze the UK assets of an Icelandic bank, Landsbanki.[2] Darling could use this Act, since he could claim that “action to the detriment of the United Kingdom's economy” was taking place – ie that Landsbanki (under the name Icesave) would potentially repatriate £4.5bn of deposits belonging to 300,000 UK residents after it had been declared bankrupt in Iceland (p166). He regrets effectively labelling the company (or Iceland) a terrorist organisation, but is pleased to have been able to use an element of legislation that was nominally for something quite different. Here is a lesson that, at times of crisis, the state will make use of all weapons at its disposal.

In January 2009, Darling had another cunning plan. This was the UK’s Asset Protection Scheme, “the largest insurance policy ever written”, insuring £325bn of assets, mostly mortgages, credit derivatives and business loans that were hard to value (p202). In return for a fee, banks could guarantee their assets – so the UK government was effectively taking on the role of a giant insurer, like AIG in the US! The scheme was set up mainly with RBS in mind, and RBS was really the only taker.[3] As another concession to RBS, its ‘fee’ of £6.5bn was not paid in cash, but by its issuance of special shares to the UK government! At the same time, the government raised its stake in RBS to 84%, so it insured a company that it almost fully owns. The reason it did not fully own RBS was in order to make it easier to sell it back onto the market when the time was right. Such is the creative thinking of the modern technocrat, together with the fond belief that it will all turn out right in the end. As it stands, the shares were bought at an average price of 50.2p, and a cost of £45bn. So, at the recent share price (23.9p), the government has lost nearly £24bn!


Alistair Darling’s white hair and jet-black eyebrows were a focus of media coverage, but largely, it would seem from this book, because there was little of substance that would otherwise claim attention. One small step back from his workaday discussion of economic and policy measures is where he raises a criticism of former Prime Minister, Tony Blair, for doing nothing to protest about Israel’s attack on Lebanon in 2006 (p321). But that is about it.

Darling was happy to take on the role that almost all politicians do today, that of being a loyal civil servant of imperialism. For these people, there is not even really a debate over policy, just a discussion of the effectiveness of different measures. Darling comes across as a decent chap, self-effacing and not seeking the company of plutocrats, as did many of his ministerial colleagues. Yet one gets the impression that he would do anything – within the law, of course - to protect the imperial ‘national interest’.

In his Treasury job, he was able to look upon the blood and gore as somebody else’s department. But from 1997 to 2010, he was a senior member of the Labour government, continually having a position in the cabinet in a variety of different roles. He is as responsible as the others for the crimes of the Blair and Brown governments, not least as shown in his strong support for the war on Iraq, and his having no record of rebelling against any government policy at all. His economic policies were part of the same apparatus.

Tony Norfield, 15 September 2011

[1] See my 22 May 2011 article on this topic on this blog.
[2] This was the Landsbanki Freezing Order 2008.
[3] After initially joining the scheme, Lloyds pulled out in November 2009.

1 comment:

Tony Norfield said...

Note that in June 2012, RBS swapped 10 old shares for 1 new one, so the share price 'rose' by 10 times. This makes the UK government's average purchase price 502 pence, in new share terms, not 50.2 pence.