When the normally elusive, patrician John Varley, Barclays’ chief executive, turned up on Channel 4 News a week ago, to extol the virtues of what is known in the trade as “quantitative easing” (steps to make credit easier or printing money), it was clear that something was up.
Among Britain’s coterie of high-street bankers, Barclays has done all in its power to avoid being ensnared in the various rescue plans for British banking concocted in Downing Street. It would rather put its faith in the Gulf potentates – who pumped £7.3bn into the bank in November – than take the taxpayer’s shilling from Gordon Brown and Alistair Darling.
Barclays figured that when it comes to dealing with new Labour, there are always political strings attached. The Gulf statelets of Qatar and Abu Dhabi may charge more for their money, but they don’t tell you how to run your business.
As the financial crisis worsens, threatening to turn Britain’s recession into depression, the fates of British banking and government have become ever more entwined. Bankers have the privilege of being on the luncheon invitations list of the Prime Minister and the Chancellor of the Exchequer. But they can also expect to have their evenings and weekends interrupted, at a moment’s notice, when the government summons them to action, as it did last weekend.
As one irritated banker told me last week: “Valuable senior executive time is being spent talking to government when we just want to get on with the business of lending again.” In particular, there has been acute irritation at the way the Business Secretary, Lord Mandelson, trapped them into a plan (largely unformed) to lend a further £10bn to small and medium-sized businesses when several of the banks already had made commitments in this area.
Bankers see this as political grandstanding by Mandelson, who is determined that no Tory idea for dealing with the crisis goes unanswered. When the Conservatives proposed a scheme for National Insurance rebates to companies willing to take on unemployed workers, Mandelson replied with a £2,500 per head promise to every firm which saved a long-term jobless person. His small-business bailout plan was a direct response to a similar £50bn proposal by the Tories.
“Of course the government should interfere on a daily basis. Otherwise it would be a dereliction of duty”
All of this may be excellent politics, and Labour has shown an uncanny ability to bring respected City figures into its orbit to combat the credit crunch. Mervyn Davies, chairman of Standard Chartered, has been parachuted in as trade minister. Paul Myners is lording it over the banks from his perch as City minister. And the financial guru Sir Philip Hampton was tempted into the government’s net first as chairman of UK Financial Investments (the holding company for the UK’s shareholdings in the nationalised and part-nationalised banks) and more recently as chair of the very sick Royal Bank of Scotland (RBS).
Stephen Hester, brought in from British Land to rebuild confidence in RBS, has been a constant visitor to the Treasury since taking over at RBS’s Edinburgh folie de grandeur headquarters in November. Last Sunday he turned up, curiously dressed in a shooting jacket and blue jeans. He joked: “Well, if I was going to be shot, I thought I might as well be wearing a shooting jacket.”
As intimate as this increasingly cosy relationship between the bankers and government has become, the more troubled it is proving. There is already the feeling that the bankers taking the peerages and the privileges of office have become “quislings” of the financial sector, jumping to do the government’s business when they would be better working from within the privately owned parts of the industry.
In the US, when bankers do join government they face the detailed scrutiny of their public and personal affairs from the Senate before confirmation. In Britain, they simply have to say yes to being “milord” for the rest of their lives.
Yet despite the glittering jobs for those brought into the government, in one way or another, there is surprisingly little respect for them in Whitehall. Dealing with the bankers is regarded as a necessary nuisance. Their arrogance is scoffed at behind closed doors and some have even been awarded disparaging nicknames. When it poured £37bn of new capital into the banks in November, new Labour vowed to deal with the bankers at “arm’s length”. A new institution, UK Financial Investments, headed by John Kingman, the senior Treasury official who masterminded the auction and then the nationalisation of Northern Rock, was placed in charge.
But, in my conversations with senior bankers, it has become increasingly clear that this relationship has become testy. Banks outside the government’s clutches, such as the mighty HSBC (which makes most of its money overseas) and Barclays, have become irritated by government efforts to bounce them into ever more initiatives with which they do not want to be involved. This is not that surprising, given the lengths to which they have gone to avoid direct involvement with Whitehall. What is more intriguing is that those banks where the government has the whip hand – Lloyds Banking Group (the agglomeration of Lloyds TSB and HBOS) and the deeply damaged RBS – are also finding the new relationship with Whitehall stressful, time-consuming and difficult.
Lloyds TSB chairman Sir Victor Blank, who is close to the Prime Minister, enthusiastically embraced the idea of a takeover of HBOS, when first approached. It has been clear from the start, however, that Lloyds was unhappy with the restrictions the government planned to impose on dividend payments and bonuses to the workforce. Now it has crossed swords with Whitehall over plans it had to swap high-cost preference shares (which cost 12 per cent to service) for more ordinary shares, which would increase the decision-making power of government over the bank. In the end only RBS – keen to save £600m a year in interest – agreed to the changed terms.
Blank and the Lloyds TSB chief executive, Eric Daniels, should not be surprised by the long reach of Whitehall. As Dr Andrew Hilton, director of the City think tank the Centre for the Study of Financial Innovation, noted: “Of course the government should be interfering on a day-by-day basis. Otherwise it would be a dereliction of duty.”
A senior banker at one of the bailed-out banks sees things very differently now after almost three months on the Whitehall leash.
“The government is flip-flopping from day to day. This is the politics of recession. There is very little joined-up thinking.” This banker believes that Labour has been driving the process too hard, as it did last weekend when it put the final pieces in place for a new £419bn rescue plan (in addition to the £500bn already in place). In his view it would have been better if the Bank of England, like the Federal Reserve, America’s central bank, had taken a leading role.
Clearly, in its first run at the problems of the banking system, the Treasury and Downing Street have made a number of serious errors, which they are now repairing. The decision taken in February 2008 to encourage Northern Rock, the first bank to be nationalised, to run down its mortgage book was plainly a daft error. It resulted in a decrease in the capacity of the mortgage lenders to continue to make loans, just as the housing market was going into its most serious nosedive in its history. Similarly, the Treasury’s decision to charge the partly nationalised banks 12 per cent for preference shares (against much lower figures
in the US and Europe) was a ghastly mistake because it encouraged banks to accumulate capital rather than lend.
Yet for all that, it is more comfortable for banks to be inside the government tent than outside. Barclays, for all its bravado, is regarded in Whitehall as something of a pariah.
Banks around the world have been coming clean on the bad debts they hold on their balance sheets. Among those acknowledging the mistakes of the past and seeking to clean them up have been New York’s Citigroup and the mighty Bank of America and Deutsche Bank of Germany.
There is a belief among governments around confidence can never be restored to the banking market. John Varley sees things differently. Barclays maintains that it is still profitable (and will report profits of £5bn-£6bn shortly) and that its toxic debt is of better quality than those of other banks so it doesn’t need to mark down its value in the balance sheet. This runs counter, however, to Gordon Brown’s determination that toxic debt is fully disclosed. It was a battle that Barclays, armed with its Arab money, looked set to win despite the discomfort of being seen as a renegade by the government.
But in the end, if Barclays’ shares continue to slide (as has been the case recently) it may have no choice – despite a spirited show of independence – but to seek some form of Treasury assistance. Then it may find that there is no such thing as independent action once the cold hand of government is sitting on your shoulder.
Alex Brummer is City editor of the Daily Mail
Sir Fred Goodwin
Former Chief executive of RBS for period during which it accrued losses of £28bn, the biggest loss in British history. Sir Fred’s pay for the year 2007 amounted to £4.2 million. He left with a pension pot of more than £8 million.
Sir Victor Blank
As chairman of Lloyds was involved in talks with government over merger with HBOS. Government owns 43 per cent. Lloyds celebrated £17 bn government bailout with £20,000 party at Gleneagles. Blank earns £600,000; Chief executive Eric Daniels earns £2.9m. As Lloyds shares slumped 48 per cent, Blank told BBC “We have been able to fund ourselves pretty effectively.”
Chief Executive, Barclays, which has no government stake at present. Varley, 52, was finance director of Barclays 2000-03. In 2007, despite having no accounting qualifications became member of Gordon Brown’s High Level Group on City Competitiveness. Salary in 2007: £2.4m
As Chairman of Standard Chartered was parachuted in as Trade Minister. Aged 52, he already chaired Gordon Brown’s Business Council for Britain, set up in 2007. Will become a life peer. Awarded CBE in 2002 for services to the financial sector and the community in Hong Kong.