Wednesday's Picks
- Robert Peston
- 7 Jan 09, 03:37 PM
What should happen to business leaders' remuneration in this downturn?
Well Sir Stuart Rose, the chairman of Marks & Spencer, was characteristically blunt when I interviewed him earlier today.
"I certainly won't be taking a pay rise" he told me. "It would be inappropriate for me to do so...I am 99.99% certain there won't be a bonus. I certainly won't be getting anything over and above what my staff will enjoy."
As for the example that should be set by Britain's executive class in general, Rose said there must be absolutely "no payments for failure."
Which most of you may well say is common sense, at a time when almost every company tells me that it's either reducing job numbers or is about to do so.
But as we've seen over many years, common sense doesn't always rule in the board room when remuneration is being decided
I also asked Rose whether he agreed with Simon Wolfson, the chief executive of Next, that the government's emergency VAT reduction had been a waste of time and money (see my note this morning, "M&S: no ordinary downturn").
Rose, who is a member of the prime minister's Business Council, started by saying that he "doesn't do politics". But he then added that the VAT decrease has "not made a material difference to our sales."
Which some will see as a criticism of the Treasury, although Rose was at pains to point out that he felt the government was acting with the best of motives.
As for the Treasury and Number 10, they believe that criticisms of the VAT cut miss the point.
They say that the point of the reduction in the VAT rate from 17.5% to 15% - which lasts a year and will lead to a £12bn reduction in tax revenues - was not to boost the sales of M&S or any other individual retailer.
It was to put money into the pockets of consumers and businesses, at a time when households are feeling strapped for cash and when companies' profit margins are under pressure.
The VAT reduction has done that - but, perhaps, only as an uninteresting matter of definition.
Where retailers pass on the VAT cut in the form of lower prices, that represents an increase in the real value of our disposable income. And where firms have maintained their VAT-inclusive prices (and loads of restaurants and leisure groups haven't passed on the cut), that's a boost to their profitability.
Either way, there are cash benefits to households and businesses from the VAT reduction.
But what's much more interesting - and what's hotly debated - is whether the VAT cut is the best possible use of that precious £12bn for the purpose of dampening the magnitude of the economic contraction we're experiencing.
And that's where the remarks of Wolfson and Rose are relevant.
The Treasury cut VAT partly to stimulate economic activity in the private sector. It hoped that the £12bn of foregone revenues for the Exchequer - and the corresponding increase in public-sector debt - would generate incremental revenues for business and would therefore protect jobs.
If substantial retailers like Marks and Next say the VAT cut hasn't stimulated trade to any noticeable extent, that matters (although it is not beyond the realms of possibility that Marks and Next are wrong).
- Robert Peston
- 7 Jan 09, 07:58 AM
Is Marks & Spencer the true story on the high street or a bit worse?
The story it tells is certainly pretty dire.
The famous like-for-like sales, which show sales per square foot in older stores, are truly horrible - with general merchandise 8.9% lower in the 13 weeks to December 27.
However, it's probably the trend to unadjusted, overall sales that's more disturbing.
For the group as a whole, these were 1.2% lower, thanks to a particularly strong performance outside the UK and on the internet.
But here's the ghastly bit: overall UK sales were down 3.4%, including the benefit of Marks' well-publicised and unprecedented promotional days.
Clothing was the worst performer, with sales 6.5% lower. Food was just 1.1% down - which represents a modest recovery.
Also, the profit margin of Britain's largest clothing retailer was significantly lower, because Marks has been forced to slash prices.
Sir Stuart Rose, Marks's chairman, expects the bad times to last at least a year.
So he's closing 27 less profitable stores, shedding 1,230 jobs and making the pension scheme less generous. He's also taking a knife to investment, with capital spending falling from £700m this year to no more than £400m next year.
This is pretty savage stuff, designed to keep the group profitable during the worst high street downturn for almost 30 years.
Marks' profits this year are expected to slump around 45% to a bit over £600m.
So the days of laurels and awards for Marks' well-known executive chairman probably feel to him like a lovely distant memory.
Update 0839: It's rare that Simon Wolfson, the chief executive of Next, makes public utterances. And perhaps today we know why, because he certainly stirred things up a bit this morning in his Today interview, when he criticised the government's emergency cut in VAT.
This reduction for a year in the VAT rate, from 17.5% to 15%, will cost £12bn. It's supposed to help groups like Next, Britain's second biggest fashion chain, by encouraging all of us to spend a bit more.
But Wolfson said that the expensive VAT reduction was a mistake, that it was a waste of taxpayers' money, and that the Treasury would have been far better to cut income taxes if it wanted to encourage spending.
A well-known Conservative supporter, Wolfson also raised serious concerns about the government's central economic policy, of spending more and cutting taxes to combat the contraction in our economy. He's very worried about the consequential ballooning of public-sector debt - and he believes that, like Next, Gordon Brown could do more to make the public sector more efficient.
Quite rightly, he was at pains to point out that the difficulties on the high street are a recession, but not Armageddon - and that groups like his and like M&S remain solidly profitable.
In which context it's as well to point out that Marks has managed expectations among its investors of what to expect from its results in a characteristically astute way.
Although its trading update was hardly uplifting stuff, its shares have risen a smidgeon this morning.
Tuesday's Picks
- Robert Peston
- 6 Jan 09, 09:15 AM
Sales in a typical Next store, so called like-for-like sales, have fallen 7%.
To put it another way, the UK's second biggest fashion retailer is selling one in twenty fewer skirts and shirts in shops unaffected by new openings.
This sounds disastrous.
But investors in its shares may actually breathe a small sigh of relief that its performance in the last five months of 2008 wasn't even worse, given the gloom that's engulfed the High Street.
Also there's comfort to be had from Next's announcement that it's on course to make profits in line with City forecasts of more than £415m before tax.
At Debenhams too the theme is that it could all have been a lot worse, as the leading department store chain reported like-for-like sales down 3.5% in the 18 weeks to the beginning of January.
Although Debenhams is widely viewed as having too much debt, barring an unexpected calamity both it and Next will still be standing after the downturn in consumer spending which has exterminated weaker rivals.
What will particularly impress Debenhams' creditors is that the gross value of its transactions and profits have risen, the business is generating cash, and net debt has fallen
But it won't be easy.
Next warns that the coming headache will be a massive increase in costs caused by the sharp devaluation of sterling.
In Next's case this doesn't bite until the autumn and winter of this year, because it has hedged its currency exposure until then. For most big retailers, including Marks & Spencer, the big impact of the weakened pound will come in the middle of the year.
There will be a horrible choice for Next, M&S, Primark and the rest, who buy most of their stock outside the UK.
Should they absorb an estimated 20% currency-related increase in the cost of clothing and other goods manufactured for them in China, India, Hungary and so on?
That, of course, would mean that their profits - which are already on a crash diet - would be squeezed further.
Or, in a period of feeble consumer demand, is there any chance they'll be able to pass on the cost increases to cash-strapped consumers?
Their ability to pass on the costs to us will depend on the intensity of competition at the time.
Right now, with Tesco announcing yet another round of price cuts, there's no sign of an easing up in the competitive assault.
In fact, one of the reasons that the sales of Debs and Next weren't even worse was the significant discounting that took place in the Christmas fortnight.
Anyone who made the mistake - as I did - of venturing to a mall or shopping centre in late December will know that we haven't been wholly weaned off our spend-spend-spend habits.
There was a mob, frantically looking for bargains.
But we're all back at work now, the last Woolworths have shut their doors forever, and a chill wind is blowing through the economy.
Those who run our biggest stores tell me they're braced for the worst of winters.
Update 1243: The Times is, of course, correct that M&S is poised to announce around 1,000 job cuts. Details will be announced tomorrow in its trading update and the statutory consultation period will commence. But this shouldn't be seen as a savage and massive redundancy programme. M&S is the largest fashion retailer in the UK and employs more than 70,000. These job reductions represent less than 2% of the workforce.
Also, I didn't mean to imply, as some have suggested, that Next's figures include the post-Christmas sale (its trading update relates to the period up to and including Christmas Eve). What I thought I was saying was that it and Debs (and lots of other big store groups) benefited from a shopping surge in the holiday season (which is in Debs' announced figures, but not Next's).
Monday's Picks
- Robert Peston
- 5 Jan 09, 09:36 AM
Companies burdened with debt and dependent on discretionary spending by consumers are currently as fragile as the finest crystal or bone china. So, sadly, there's no surprise that Waterford Wedgwood - which had net debt around £470m last spring - has called in the receiver in Ireland and has gone into administration under insolvency procedures in the UK.
Almost everything that Waterford Wedgwood manufactures is a nice-to-have rather than a must-have. And most of us are thinking twice about shelling out on nice-to-haves.
WW's collapse is a resonant event that speaks of a noxious global squeeze on consumer spending. But although it has more history than most of the FTSE-100 companies combined - Waterford, Royal Doulton and Wedgwood are great names from Britain and Ireland's industrial past - WW is not a huge company.
Global sales are £650m. In the UK, it employs 1,900. Of these, around 600 work in manufacturing at Barlaston.
There are 5,800 employees outside the UK. And (lest you've forgotten that we live in a globalised world where production gravitates to low-cost economies) the biggest manufacturing centre is Indonesia, where there are 1,500 staff.
The brands will surely survive under new owners. And my understanding is that there have already been expressions of interest from possible buyers of the brands.
However, what happens to its manufacturing plant - and that of many other companies like it - is what matters. Even if in WW's case there are just a few hundred British manufacturing jobs at stake, the UK can ill afford to see yet more precious exporting capacity relocated to more productive competitor economies.
That said, for biggish British companies this morning, there's some good news on this, the first proper business day of the new year.
What I mean by this is that there's no news of any significance from them - and that's good news.
If trading by retailers over Christmas had been even worse than investors had been led to expect, there would have been emergency announcements by those retailers (under Stock Exchange rules).
So in the coming few days we can expect the likes of Marks & Spencer, Next and Debenhams to say - in their scheduled trading updates - that turnover per square foot of selling space is falling pretty sharply and that profit margins have been squeezed by heavy discounting and promotions. But we knew that.
And we can be fairly confident that they remain on course to meet much reduced expectations for their profits this year (a bit over £600m in the case of Marks & Spencer, down from £1.1bn last year, or an eye-watering drop of around 45%).
More generally, the question to be asked is whether most of the bad stuff that could happen to companies is already discounted in stock market prices.
Analysts are forecasting that the earnings of European companies will fall fairly sharply this year and that those of US businesses will drop in the first half before recovering. The outlook is more mixed in Asia.
Against that ostensibly gloomy background, stock markets have been rising fairly generally over the past two or three weeks. The FTSE-100 is now more than 20% above its low point of last year. The S&P 500 is 26% off its 2008 bottom. Asian stocks have been rising solidly for the past eight days.
Shome mishtake, shurely?
Not at all.
Stock markets are looking at the prospects for 2010 and 2011. And however rotten 2009 will turn out to be, in the form of companies going kaput and unemployment rising sharply, investors are increasingly confident that armageddon has been avoided.
They look at the way that central banks have slashed interest rates and are - in effect - dropping money from helicopters. They look at Barack Obama's plan to pump something over $700bn into the US economy in the form of tax cuts and public spending. And they conclude that an economic turn for the better must surely come towards the end of 2009.
Here are a couple of almost needless words of caution.
Stock markets aren't always right (we've all learned that painful lesson in the past couple of years, haven't we?).
And, as and when we see the green shoots, they may be fragile, stunted and spotted with a disease called inflation.
Sunday's Picks
- Robert Peston
- 4 Jan 09, 01:09 PM
Those of you of a puritan nature may have come close to fainting this morning when the Prime Minister told Andrew Marr that our biggest banks may have to lend more than they did in the boom years rather than less.
"Is he totally bonkers?" you may have found yourself asking. "Surely it was excessive borrowing by companies and households that got us into this mess. So how can it make sense for the banks to lend even more?"
The answer, which Gordon Brown hinted at in a characteristic mumble, is that our biggest banks provided only a proportion of loans during the era when the debt bubble was created. And lots of the other providers of credit in that time of crazy lending are now out of the market altogether or have become much smaller players.
That's one of the major reasons why there has been a sharp reduction in the availability of debt-finance even for creditworthy businesses and prudent households.
And, to state what you all know too painfully well, it is the main reason why our economy is contracting so painfully.
Here's an incomplete list of banks that were major providers of loans that - for a variety of different reasons - are no longer the aggressive providers of credit in the UK that they once were: the Icelandic banks (you know why); Northern Rock and Bradford & Bingley (ditto); the finance arms of major motor manufacturers; Citigroup/Egg; Alliance & Leicester (absorbed by Santander); many of the Irish banks and their subsidiaries; the smaller building societies; the specialist mortgage lenders.
The collapse of Woolies told this story. Among the big lenders who demanded their money back in November, only one - Barclays - was British. And Barclays' exposure was smaller than most. The big lenders - GMAC, Burdale (part of Bank of Ireland) and GE Capital - have overseas parents.
So how much capacity has been taken out of the British lending market? Well that's what the Treasury and the Bank of England are desperately trying to evaluate - because it will determine the next phase in the Government's commitment of taxpayers' money to ensure that sufficient credit is available to viable businesses and households.
My strong sense is that the Treasury is moving towards a plan that looks awfully like the Tories' proposal for taxpayers' to guarantee a proportion of lending to business.
What's under consideration is an insurance scheme, whereby banks would pay a fee to the Treasury to reduce the potential losses they would face on lending to companies and also possibly to households.
Here's how such a scheme could work - though it's early days, so don't assume that the numbers I quote will be the ones the emerge as and when a scheme is announced.
The banks would retain liability for - say - the first 5 per cent of the loss on a loan. So they would retain a strong incentive to lend prudently. But the banks would be able to purchase insurance from taxpayers to cover the next 10 per cent or so of any losses on loans that went bad (and, in a severe recession, many loans would go bad).
Why would this encourage banks to lend more than they are doing at present?
There are two reasons.
First, the banks could take a bit more risk when lending, because the loss to them in the unlikely case that all the stinky stuff hit the fan at the same time would be knowable and manageable.
Second, with the state sharing the risk, the banks' capital ratios would look much healthier as their balance sheets expanded, because the formal regulatory risk-weighting of lending would be significantly reduced.
Of course, the corollary of all this would be a significant increase in the risks and potential losses carried by taxpayers. And as I said in my Christmas Eve note ("We are the banks") the line between the public and private sectors would become even more blurred.
As for the banks, if they took advantage of such a scheme, they would be under an unavoidable obligation to direct their incremental lending at the UK: they would have to massively increase the credit they provide here, and shrink the credit they provide in other countries.
To be clear, there's a lot of this going on anyway. Royal Bank of Scotland, for example, is scaling back its global ambitions and is rebalancing its business towards the UK.
And there, as they say, is the rub.
RBS's shift towards its home market is a microcosm of what most banks are doing all over the world. And as banks do their patriotic duty and direct their increasingly precious and scare capital resources towards their domestic markets, the amount of credit available in the world as a whole is being compressed.
What's going on can be seen as a partial retreat from globalisation in the financial economy. The scale and longevity of that retreat in this new year will determine all our economic fortunes, wherever we may be in the world.
Wednesday's Picks
- Robert Peston
- 24 Dec 08, 08:55 AM
The past 18 months was a story about the collapse of lending to banks and by banks - and about how we as taxpayers came to the rescue by providing £600bn of loans, guarantees and capital to the banks, to keep them afloat.
The story of the next year will be about the implications of this continued shrinkage in the availability of credit and about the implications of this massive, unprecedented support given to banks by taxpayers.
As a nation, our fortunes in 2009 will be conspicuously tied to the fortunes of our banks as never before.
First, an economic recovery rests on the ability of banks to support viable businesses during what increasingly looks like a severe recession.
Second, and as important, the balance sheet of the British public sector can be seen as the aggregated balance sheet of some substantial banks - because the state now controls three banks, Northern Rock, Bradford & Bingley and Royal Bank of Scotland, and will have a huge stake in a soon-to-be created fourth, LloydsTSB/HBOS.
It means that if the perceived credit-worthiness of our banks - with their trillions of pounds of assets and liabilities - were to deteriorate further, that would have an impact on the perceived credit-worthiness of the state.
As never before, it matters to all of us that the banks run themselves in a prudent way. In an extreme and highly unlikely case, if the markets viewed our banks as recklessly managed basket-cases, that would have an impact on the value of sterling and on the ability of the government itself to borrow.
So our prospects and welfare depend to a huge extent on an institution that was created a few weeks ago by the Treasury to manage its investments in the banks, UK Financial Investments (UKFI).
It's probably no exaggeration to say that - for the coming year or two at least - UKFI will be as important to all of us as the Treasury, or the Bank of England or the City watchdog, the Financial Services Authority.
UKFI's primary aim is to "protect and create value for the taxpayer as shareholder" - while also making sure that the banks we own provide "competitively priced" loans to small businesses and homeowners "at 2007 levels".
Those objectives are not quite irreconcilable - in that the banks over which it has sway should be capable of providing substantial credit to the housing and small-company markets without chucking good money after bad, even though this is a dire period of economic contraction and proliferating bankruptcies.
But, for the avoidance of doubt, UKFI has no ability to increase the supply of credit in the economy as a whole.
Remember that the ability of banks to lend is anyway being undermined by losses on the stupid loans they made in the boom years and also by the collapse in the price of houses, property and shares, which slashes the value of vital collateral that backs loans.
So many banks are lending less to big companies, they are lending less for commercial property transactions, they are lending less to City institutions, they are lending less in the form of unsecured personal loans.
Lots of overseas institutions are cutting back significantly on the bounteous credit they provided directly to the real economy in the UK during the preceding few years.
Also many bigger companies that borrow directly on wholesale markets by selling bonds and other securities are finding it much harder and more expensive to raise money.
And credit provided between companies that buy and sell to each other is being massively restricted, by a collapse in the availability of insurance for such credit.
All of which can be summed up as "ouch" for businesses and households - and is the primary reason why some companies are going bust, and why those that will survive are reducing investment and cutting jobs.
So even with £600bn and rising of support for banks from taxpayers, our banks simply don't have the resources to keep afloat real companies - manufacturers, exporters - that are vital to the future of the British economy.
Which is why early in the new year, the Treasury will announce details of yet more taxpayer lending, this time to ensure that credit is provided to viable and strategically important companies - such as the more efficient carmakers.
The line between private sector and public sector, which became blurred in 2008, may become almost impossible to see in 2009.
Monday's Picks
- Robert Peston
- 22 Dec 08, 08:30 PM
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.
- Robert Peston
- 22 Dec 08, 05:00 AM
The point of the Panorama I've made with Stephen Scott and Vivien White (which will be broadcast tonight at 8.30pm) is to convey quite how close we came in October to the collapse of the banking system.
It's a suspenseful story told in interviews with a quartet of the leading actors: the chancellor, 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.
I hope the programme also gives a sense of the shocks generated by this near catastrophe and the tumultuous year that lies ahead.
For me, what stood out when interviewing this quartet was the revelation about how Royal Bank of Scotland and HBOS were - in October - only hours away from being unable to open for business.
Inevitably, in a 30 minute documentary, many fascinating contributions from interviewees hit the cutting-room floor (such as John Varley's remarks on how it will take between one and two years for the contraction of lending to stop - which you can read in the note I published on Saturday).
So here are some resonant and significant remarks from Sir John Gieve that didn't make it into the finished film; Sir John rarely gives interviews and is to stand down in March from his role in charge of financial stability at the Bank of England.
This is Gieve's explanation of how and why the Bank of England failed to curb the growth of the bubble in borrowing and asset prices which lies behind our current woes: "We didn't think it was going to be anything like as severe as it's turned out to be... Why didn't we see that it was so serious? I think that's because we, perhaps, we hadn't kept pace with the extent of globalisation. So the upswing here didn't involve the big increases in earnings and consumption and activity which we saw in previous booms. We saw the credit, we saw the house prices, but we did see a fairly stable pattern of earnings, prices and output."
As others at the Bank of England have told me, the Bank's Monetary Policy Committee believed mistakenly that the lending binge and asset-price surge were semi-independent from activity in the real economy, and that they would eventually moderate without wreaking devastating damage to prospects for households and businesses.
But, as Gieve says, the Bank had identified the bubble, even if it didn't fully understand quite what misery its popping could and would cause. So why didn't he and his colleagues raise interest rates to attempt to stem the growth in lending and the rise in the price of houses and other assets?
"If we'd used interest rates to try and address this asset-price credit growth, we would have been holding down the level of activity elsewhere in the economy, in manufacturing, in other services, holding down the level of employment at a time when consumer price inflation and earnings were stable and reasonably low. And people would have said, you know, 'this is a wilful reduction in the prosperity of the country'."
The mess we're in demonstrates for Gieve that the Bank of England does not possess the proper tools for dealing with incipient booms in assets and lending. The power to raise and lower interest rates isn't adequate for the task, he says: "I think that one of the main lessons from this is that we need to develop some new instruments which sit somewhere between interest rates, which affect the whole economy and activity, and individual supervision and regulation of individual banks.
"Maybe we need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand... I think we need to complement interest rates, which are a blunt instrument - you set one interest rate for the whole economy - with something which is more financial-sector specific."
So what might this new tool or instrument be? Well, it would have to be a mechanism to prohibit or at least discourage a lending splurge during a period of sustained economic growth, such as a formulaic stipulation that banks have to hold more capital relative to their loans and assets during the good years (which is precisely the opposite of what happened in the euphoric phase before August 2007).
And what about the price that we as taxpayers will eventually pay for the bailouts in 2008 of many of our biggest banks? I asked Gieve - who was intimately involved in these rescues - whether we would end up with a profit or loss on the nationalised and semi-nationalised banks. Would we as taxpayers get our money back?
"Well, I think it'll be a mixed picture. I mean, I think there are some [lending] books - Northern Rock, Bradford & Bingley - which the taxpayer is now holding which clearly have a level of defaults in them: I'm not quite sure how that will balance out against the residual of the capital. As for the more mainstream banks: yes, I think they've got a commercial future and I'm sure that in time they will, as for example the Swedish banks have after their crisis, revive and start building and growing as commercial entities again."
In other words, he says there is quite a risk of us making a loss on the Rock and Bradford & Bingley. But he's hopeful that we'll end up in the black on our massive investments in Royal Bank of Scotland, HBOS and Lloyds TSB.
ADDENDUM: It matters that we learn how to prevent a repetition of the economic mess we're in, partly for reassurance that we can plan on the basis that stability will return.
Which is why the frank admissions of what went wrong made by Gieve are significant, especially that interest rates are an inappropriate instrument for dealing with lending and asset bubbles.
What some may therefore see as worrying is that there is no sign right now of the Bank of England, or the Treasury or the Financial Services Authority being endowed with such bubble-busting powers.
Sunday's Picks
- Robert Peston
- 21 Dec 08, 07:21 AM
Further to my New Capitalism note last week, here are two short films I've made for the News At Ten. And if you want some bedtime reading, you can download the full 3,000-word essay (oh yes) here [37Kb PDF].
Part One [Broadcast Thursday December 18th]:
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Part Two [Broadcast Friday December 19th]:
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Saturday's Picks
- Robert Peston
- 20 Dec 08, 05:02 AM
One of the main contributors to what looks like a severe recession in the UK is a contraction of lending by our banks.
Which is why it's unlikely that a recovery will start until banks grow their lending again.
How long will we have to wait for that?
Well the chief executive of Barclays, John Varley, says in an interview with me for Monday's Panorama (8.30pm on BBC1) that it will take between one and two years for lending to stop shrinking.
He insists that banks are open for business, that loans are available. But he says that a reduction in the overall quantity of debt in the economy is absolutely necessary - although he concedes that the process is extremely painful.
John Varley also says that the banking industry is going through what he calls a public relations crisis, that it must apologise for what went wrong - because banks will not regain the vital trust of customers unless and until they own up to the sins of the past and say sorry.
UPDATE 09:12
Here are a few relevant quotes from John Varley.
He says: "I think that we will see the process of reduced borrowing play out over at least the course of the next twelve months maybe, maybe twenty four months. I think it's important to say though that the industry is open for business..."
Mr Varley stresses that credit remains available to businesses and households but that the amount available is "shrinking, it absolutely is, and that is a painful process; it's a process through which the world absolutely has to go and if you asked me 'when will it stop?' I think it will stop when asset prices stabilise.
"As soon as asset prices stabilise, then we will see the financial economy recover. And when will that occur? That will occur some time over the course of the next 18 months."
When he talks about asset prices, he means the price of property, shares and so on.
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