Ten years on: The day RBS ran out of money
A decade after the collapse of Royal Bank of Scotland, Martyn Mclaughlin revisits the crucial 24-hour period when the UK government put up more than £45bn to save the banking giant – and the country – from ruin
The morning of 7 October 2008 began like any other morning for Sir Fred Goodwin. The chief executive officer of the Royal Bank of Scotland breakfasted at his suite in the Ritz in central London before a chauffeurdriven Mercedes whisked him on the 15 minute-trip north to the Landmark Hotel in Marylebone, where he had an 8.45am appointment.
In the Landmark’s grand ballroom, Goodwin assumed the position to which he had been accustomed – centre stage. Addressing an audience of nearly 1,000 investors at a Merrill Lynch conference, he rhapsodised about his bank’s strong balance sheet and highlighted areas of further growth.
Only three weeks had passed since the collapse of Lehman Brothers had sent the world’s financial markets into a tailspin, yet Goodwin was unbowed.
But by the time his halfhour spiel drew to an end, one curious banker raised a pertinent question. “In the time you have been speaking, your share price has fallen 35 per cent,” he observed. “What is going on?”
Even though his speech did not betray any uncertainty, it is a query Goodwin must have been reflecting on. The previous day, a major oil firm had taken out billions of pounds from its RBS account in a single transaction, believed to be the biggest withdrawal in the bank’s storied history.
By the time Goodwin came off the stage, the whispers were growing in volume and in number. Reports emerged claiming RBS would be bailed out by the Treasury, sparking bedlam in the City. Over the course of the morning, the bank’s shares were suspended, relisted, and then suspended again. Inter-bank lending all but dried up.
As the panic set in, the bank’s chairman, Sir Tom Mckillop, took emergency action. He called the Treasury, which in turn alerted chancellor Alistair Darling, in Luxembourg for a routine monthly Ecofin council meeting with his European counterparts.
It was a pedestrian engagement, especially in light of the looming problems at home, but the chancellor – now Lord Darling – knew that a no-show would spook the horses.
In an instant, however, the Scot’s itinerary became considerably more lively. After being called out of the gathering by Geoffrey Spence, his special adviser, Darling was quickly put into a conference call with Mckillop at around 10.30am.
RBS, Mckillop told him, could not guarantee it had enough money to get to the end of the day, let alone the week.
“We are haemorrhaging money, there’s billions going out the door,” Mckillop implored, before demanding: “What are you going to do about it?”
The situation, Darling recalls, was a potential doomsday scenario. “It was rather like a nuclear war, you know you think it will never happen. And then someone tells you that a missile’s been launched. It was very scary.”
So too, Mervyn King, governor of the Bank of England, heard first hand from Mckillop the scale of the bank’s problems. He had been aware for several months of RBS being in difficulty, but the situation had rapidly deteriorated.
“They were struggling to finance their balance sheet by borrowing overnight,” he says. “The markets were simply not willing to lend, even for a matter of hours.”
King arranged a meeting between Andrew Bailey, the Bank of England’s chief cashier, and John Cummings, the bank’s CFO, to determine what needed to be done. A minimum figure of £25bn was mentioned.
At midday a government bailout team set up by Prime Minister Gordon Brown was ensconced in the Treasury, with bankers, ministers, and senior civil servants tasked with finding a solution ahead of the markets opening the next morning.
David Soames, an investment banker and government advisor with UBS recalls: “It was terrifying to be involved in something so enormous. It was disaster movie type stuff.”
Darling arrived back in the UK at around 2pm, by which time the plans to avert a Black Tuesday were taking shape. RBS would be the biggest beneficiary of a vow to underwrite industry-wide losses of up to £500bn to secure the banking system, with a proposal to buy shares in banks at risk of collapse.
At 5pm, Goodwin, who spent the afternoon at RBS HQ in Bishopsgate, was called to a meeting at the Treasury’s offices in Horse Guards Parade in Westminster.
Those in attendance included Lord Myners, the City minister, and Tom Scholar, managing director of the Treasury’s finance directorate.
Myners informed Goodwin the government was prepared to recapitalise RBS, but Goodwin, aghast at the prospect of the UK government becoming the majority shareholder in the behemoth he had built up with a series of high-risk acquisitions, insisted a cash injection would best stem the bleeding.
There followed a series of meetings between Treasury officials and other banking officials, including Eric Daniels, the chief executive of Lloyds TSB.
A few hours later, at 7pm, he, Goodwin, and a clutch of other bank executives
“It was rather like a nuclear war, you know you think it will never happen. And then someone tells you that a missile’s been launched. It was very scary”
– including Barclays boss, John Varley, and HBOS chief, Andy Hornby – convened for a meeting in Darling’s office. Also present were Myners, Yvette Cooper, the Treasury chief secretary, and Shriti Vadera, minister for economic competitiveness. Together, they began to outline the rescue plan.
Goodwin, sat beneath an imposing John Bellany portrait – titled, suitably enough, Death’s Head – remained a reluctant guest, but as time marched on, he found himself flailing against the tide.
At around 9pm, Darling called his favourite restaurant, Gandhi’s, to order a £245 takeaway, consisting of industrial quantities of karahi lamb, tandoori rice, vegetable curry, and aloo gobi.
It was enough to fortify the exhausted attendees through the final stages of the discussions. Darling went to bed just before 1.40am. A half hour later, all but one of the major banks agreed to the bailout. Goodwin was the lone dissenting voice, but with no alternative on offer, he relented.
When Darling awoke a little over three hours later, the terms of what became known as the Balti bailout had been ratified. Some £45.5bn of public money would be pumped into RBS.
He attended a briefing with Treasury officials, where they agreed to announce the bailout in two tranches so as to avoid causing market jitters.
As morning broke over central London, Darling sat overlooking St James Park and signed off on the final deal. It was, he thought, a “historic moment.”
That moment of quiet was fleeting. By 7.30am, a half hour before the stock market opened, the plan was officially announced, and Darling embarked on a whirlwind tour of television stations. When the market opened, the FTSE 100 plunged 350 points. It would go on to close 238 points down.
At 9.20am, he and the prime minister held a press conference at Downing Street to explain the “innovative intervention”. At one point, the latter was asked how long the crisis might last. “We know it is a long haul,” Mr Brown replied.
With the British economy yet to recover from the events of that day, 62.4 per cent RBS remains owned by the taxpayer, and perceptive questions continue to be asked about what the UK government could have done to prevent RBS, the banking system, and the economy from teetering on oblivion.
The nuclear war Darling feared may have been avoided, but the fallout is ongoing.