‘SO WHY am I more optimistic than ever about the future of our islands, just one per cent of the world’s population, in this new era of globalisation?
‘By your efforts Britain is already second to none: for our openness, pro Europe, pro free trade, a world leader in stability, and we will entrench that stability, by ensuring Britain’s macroeconomic framework remains a world benchmark, and we are flexible, and in being vigilant against complacency, we must be, as I believe we are ready to become even more flexible.
‘So let me say as I begin my new job, I want to continue to work with you in helping you do yours, listening to what you say, always recognising your international success is critical to that of Britain’s overall and considering together the things that we must do – and, just as important, things we should not do – to maintain our competitiveness by enhancing a risk-based regulatory approach . . .’
That’s part of the speech given by Chancellor Gordon Brown to the great and the good of the City of London at the annual Mansion House banquet in June 2007. There was a good deal more in the same hubristic vein from the man who had pronounced the ‘end of boom and bust’. His changes to the regulation of banks in the early years of his tenure, by this time promoted as ‘light touch’, would over the following fifteen months lead Britain into a financial black hole. Throughout his time as Chancellor, his two main political advisers were Messrs Balls and Miliband, a duo who destroyed the common belief that two Eds are better than one.
Between them, they presided over a system that pretty much allowed our major banks to operate without restraint, so long as they produced the ever-growing tax revenues that funded Brown’s desire to grow the public sector and the welfare budget. Within ten weeks of that speech, members of the public were queueing outside branches of Northern Rock as the country experienced an old-fashioned run on a bank. Brown’s replacement, Alistair Darling, was forced to announce that the government would guarantee all deposits with the failing bank. It should have been a warning, it should have waved a huge red flag, but the much bigger banks were allowed to continue unquestioned towards the total collapse of 2008.
The biggest blow-up in 2008 was that of the Royal Bank of Scotland, which had grown from a provincial institution in Edinburgh doing the sort of old-fashioned business in which the manager was a familiar figure to his customers. Following a takeover bid from HSBC, which they resisted, the board realised they needed to grow in order to retain their independent Scottish identity. They entered a bidding war with their local rival, Bank of Scotland, for NatWest, which then was four times bigger than RBS.
‘There was a small bank that swallowed NatWest, I don’t know why they swallowed NatWest, perhaps they’ll die . . . ’
The recently recruited Fred Goodwin came to the fore, preparing a detailed plan showing how RBS would merge back office and IT parts of both banks to produce savings. The plan impressed the pension funds and institutions that held NatWest shares, and RBS won their bid. BoS were left to be gobbled up by the Halifax. Goodwin gained further kudos by executing his plan, on time and under budget, delivering greater savings than expected. His future promotion to chief executive was assured.
RBS continued to emphasise growth, both by further takeovers of small banks (particularly in the US) and by broadening their own business in terms of mortgages, personal loans and insurance. One major growth area was Direct Line Insurance, 100 per cent owned by RBS. Profits grew dramatically and the nature of the business changed as staff became salesmen. Goodwin was big on targets, not so big on long-term strategy. Crucially, RBS had acquired investment banking units in London and the US, which dealt in areas Goodwin didn’t understand and didn’t want to discuss, just so long as they were contributing profits.
And the profits were phenomenal, as were the payouts to senior staff. Goodwin was paid (I hesitate to use the word ‘earned’) over £1million per annum, with a profit-related bonus of around three million on top. He was awarded a knighthood and couldn’t conceal his delight at meeting the Queen. Gordon Brown arranged for Her Majesty to travel to Edinburgh specially to open the huge new HQ building that Goodwin had built. Goodwin and his wife were invited to Chequers for a weekend, he persuaded RBS to buy a private jet for his use and huge amounts were spent on sponsorship of sporting events that Goodwin enjoyed, such as Formula 1 and Six Nations Rugby. What could possibly go wrong?
Well, as we all know, the collapse of the US subprime mortgage market was the trigger. When the risk was first mentioned to Goodwin, he replied: ‘There’s no way that US house prices are going to fall by 30 per cent. It just isn’t going to happen.’ He was proved right: most of them fell by 100 per cent, and those left holding the parcels that had the rotten mortgages hidden inside were lumbered with thousands of properties that nobody wanted to buy.
Because banks had no idea how many of these worthless debt instruments were on the books of their rivals, nobody was keen to lend to another bank that might be about to go bust. That was the downfall of RBS, who had chosen this exact moment to launch a takeover bid for the Dutch bank ABN Amro using borrowed money. Sensing that RBS had blundered, their large corporate clients started to demand their money – and while most Northern Rock customers just wanted to withdraw a few thousand, RBS were leaking tens of millions every day.
Brown and Darling were on the hook. Having spent a decade promoting RBS as a great example of Scottish enterprise, they could hardly let it go to the wall, and a massive rescue was organised. I’m sure most people will remember that famous note left in the Treasury when the pair handed over to Cameron and Osborne. ‘Sorry, there’s no money left’, it said, and it wasn’t a joke.
What is the relevance of all this now, other than as a reminder of what eventually happens with almost any Labour government? It’s the alarming fact that the amounts the taxpayer laid out to rescue RBS (and others) were small compared with the enormous debts being run up by Johnson and Sunak. It took Brown and his team ten years to bring about financial turmoil, but the current shambolic bunch have done it in six months. In an earlier piece on TCW, I used the term ‘economic homicide’ and I stand by that. The government have in my view murdered the economy while the balance of their minds was disturbed.
My particular interest is the sport of horse racing, which is muddling along with no paying customers, trying to cope with the nuances of the government’s ever-changing instructions. Several courses are already deep in debt, and unless the turnstiles can be re-opened soon closures will inevitably follow. I don’t expect sympathy for the travails of a rich man’s sport, but I offer it as a mirror of what will happen to businesses everywhere without some rapid clarity from our leaders about a return to a genuinely normal way of life. We already face years of either higher taxes or public service cuts, but destroying the fabric of so many parts of society will only make it worse. Get your finger out, Boris, assert your authority over Carrie and get the country back to normal – and if you can’t cope, quit and give somebody else a chance.