This is the story of the world on the brink of economic disaster.
The most intense period in the crisis was that period in the fall of 2008.
There was an extraordinary loss of confidence, a panic I'd call it.
The state of the financial markets was, was very critical indeed.
It'll be for others to judge just how on the edge many institutions were.
A crisis that had been triggered by the collapse of Lehman Brothers bank
was now spreading to every country in the world.
Financial institutions, banks, bankers, traders were at a loss.
And they were not only holding out their hand, but also,
you know, turning to us to say, what are we going to do?
We need help.
No government was ready for the consequences.
This is the inside account of the arguments, mistakes and hesitations
that dramatically worsened the crisis.
I didn't feel that we'd be dumb enough to let the misfunction
of the financial engine bring down the country, but there was a time there where you wondered about that.
Now, decision-makers in the world's capitals tell how close we really came to total financial meltdown.
I know the counterfactual is very hard to prove, but it does make my blood run cold.
We literally thought that we were on the verge of the great depression
and, looking back, I think we probably were.
I was in no doubt that the burden on our shoulders, that the gravity
of the task we faced, it's probably the worst situation, as I say, we faced in peacetime.
September is hurricane season in America.
On Monday, the 15th, Texas took stock of the damage caused by the latest, Hurricane Ike.
These storms are devastating, but not unusual.
What was unexpected was the scale of economic disaster that was coming.
This is really stupendous this has happened.
That same day, Lehman Brothers bank went bust.
It was the start of a month
when the world came within hours of catastrophe.
A lot of people expected it, and others were simply devastated.
This is an event like a hurricane, it's unanticipated,
I don't think any of us were smart enough to see it
and, you know, that's unfortunate.
It was the biggest bankruptcy in history.
It sent stockmarkets into a nosedive and the media into a frenzy.
Something of a financial hurricane... A financial tsunami...
One of the ugliest days I have ever seen...
..de la banque Lehman Brothers sur la finance mondiale...
Nightmare on Wall St...
Very, very bad...
SHE SPEAKS GERMAN
A day of turmoil on the world's financial markets.
The two capitals of international finance were especially hard hit.
In New York the Dow fell a record 504 points.
The FTSE lost £51 billion in value.
The dramatic numbers and anguished faces on Wall Street and the City were the obvious effect.
But, the events set in motion that day would have an impact far beyond these financial districts.
The amount banks charged each other for short term loans doubled overnight.
That meant they couldn't afford to borrow money.
Banks lost confidence in banks.
The essence of a bank is confidence.
If people don't have complete confidence in a bank,
the bank won't be able to borrow the funds which it needs to lend to others in business, or to families.
So, that confidence was at threat and after
the failure of Lehman Brothers, it ebbed away very quickly.
It was the Lehman's collapse that really burst the dam which had been building up all summer.
A 20-year global boom was over.
All summer, banks around the world had been haemorrhaging money,
But Lehman Brothers was the first to go.
Lehman's failure made things dramatically worse.
Coming into the fall, you had a global financial crisis
that was accelerating momentum,
had tremendous force at that point.
And that's what's ultimately caused that failure.
Lehman made things worse though, there's no doubt about that.
That Monday, Tuesday and Wednesday were really a blur for me because,
we were all working so hard, looking at every tool we had,
seeing where the fires were.
Dozens of institutions were in trouble.
The man running US economic policy during the crisis was Treasury secretary Hank Paulson.
He seemed to change America's policy day by day.
He had just refused to bail out Lehman Brothers,
but a week earlier spent 200 billion nationalising America's huge mortgage holding companies.
He spent 30 billion in March to save a bank called Bear Stearns.
Good afternoon, everyone,
and I hope you all had an enjoyable weekend.
MILD LAUGHTER
No wonder the public was confused.
Yes, you.
Why did you agree to support the bail-out of Bear Stearns but not Lehman?
The situation in March and the facts around Bear Stearns
were very, very different
to the situation we're looking at here in September.
And I never once considered that it was appropriate to put taxpayer money on the line
in resolving Lehman Brothers.
But a day later, Tuesday the 16th, the policy changed again.
The government spent 85 billion saving insurance giant AIG.
If the policy-makers didn't seem to know what to do,
how could the public hope to understand the complexities
of banking and bail-outs now coming at them?
And if I may, a sincere congratulations
to everybody out there who pays taxes in the United States.
We just bought an insurance company!
CHEERING AND APPLAUSE
Congratulations! AIG!
We own 80% of the world's biggest insurance company now,
causing day three of the nationwide outbreak
of huge banner headlines nobody understands.
Oh, my God, that huge number is attacking that three letter acronym.
It was like a slow moving train wreck.
On Monday morning, lots of people woke up and said,
"Well, that's not so bad."
By Wednesday, the money market complex was under threat and suddenly people realised
this is something we're going to be talking to our kids and our grandkids for a long, long time.
What happened on Wednesday, three days into the crisis, was unprecedented in modern times.
The lubricant of the economy, the stable flow of US dollars, froze.
And not just in America.
TRANSLATION: They said there were trillions and trillions of dollars
crossing the ocean, and suddenly these dollars disappeared.
You no longer had credit in the world
and this had, even in Brazil, disastrous consequences.
Lending between banks had already shut down.
And big businesses, like banks also need to borrow large amounts of money for very short periods.
They use a kind of special IOU called "commercial paper".
By Wednesday, the Lehman's aftershock was closing the commercial paper market.
We'd been witnessing, for the last two days, a sequential freezing of market after market,
deemed to be absolutely critical to the functioning of the capital system.
I remember picking up the phone and saying, "Jamie,
"drop what you're doing, go to the ATM and take money out, take the maximum 500 we can".
And she said, "Why? Why?" I said, "Because I'm not sure the banks will be open tomorrow".
I closed all my savings bank accounts today because I'll earn more with Lincoln money market savings.
Now I can do all my banking with Lincoln.
Since the 1980s, Americans had been encouraged to put their savings in money market funds.
Lincoln's new money market savings.
These funds then lent this cash to banks and big businesses.
Lehman Brothers had been a key player in this trade.
It collapsed owing almost 800 million to a money market fund called the Reserve Primary.
Caught short of cash as a result, the Reserve Primary told its depositors they would lose money.
It's something that the text books just never contemplate.
Which is the, the most safe and secure assets having
market participants look at them and say, "these aren't safe, we're not going to touch them".
Depositors withdrew 300 billion from the money market funds.
It threatened huge companies that rely on short-term loans for their day to day cash flow.
There was an enormous amount of fear and anxiety as to what we
were going to do, because
money market mutual funds are one of the biggest providers of cash to all these large
institutions in the country and, essentially, in the world.
It all happened incredibly fast.
By Wednesday, only three days into the crisis,
credit for any institution, large or small, was unavailable.
The crisis had entered a new and dangerous phase.
Bank CEO's are saying the inter-bank funding market is essentially seized up,
something they've never seen before in their 40-year histories of being on the Street.
Not just banks and commercial banks,
we were getting calls from large American businesses,
Blue Chip Businesses, saying, they couldn't fund themselves.
They couldn't make their payroll or fund their inventory.
These are some of the best American companies, that have very little to
do with financial markets, saying they can't access basic funding needed to pay employees.
It's fair to say there's a lot of panic.
That's when we knew the time had come,
For the first three days after Lehman Brothers fell,
governments had responded to problems as they came up.
The UK's banks had been suffering since the fall of Northern Rock a year earlier.
Lehmans accelerated the process.
We knew that we had...
..banks collapsing around the world, we knew that we had very little time.
The next to go was HBOS.
On Wednesday, the government stepped to help broker its sale to Lloyds TSB for £12 billion.
There was no confidence within the system now that people knew
exactly what was wrong with each individual bank,
did you not have to go further?
Gordon Brown and his city advisor, Baroness Vadera, saw Britain might
have to take on the job of rescuing the financial system.
Their plan, when it came, would profoundly alter the story.
But America got there first.
The problem facing banks everywhere were huge bundles of mortgages
they'd bought and traded during the boom.
These were the so-called "toxic assets".
Banks borrowed money to buy them.
It's called "leverage".
They increase leverage dramatically in a way that people can't even
measure, either as the individual institutions or as to the system,
but it's dramatic nevertheless.
Leverage does increase profits in good times,
but leverage also worsens losses.
When property prices crashed, so did the value of these assets.
But they were so complex, it was almost impossible for the banks to price them or sell them off.
And banks all over the world had huge loans that still had to be paid.
Banks couldn't raise enough money,
because they couldn't raise enough money they had to sell assets.
They sold those, asset prices went down,
had to sell more , because they lost the capital and so it went on.
They haven't got enough capital, they hadn't got enough
liquidity and they were also having difficulty raising funds.
By late on Wednesday afternoon, three days after Lehman fell,
the US Treasury decided to tackle the problem head on.
We really came up with, with four main options.
One was to buy the assets, buy the toxic assets from the banks,
the second was to insure the assets, the third was
to actually just inject capital, to buy stakes in financial firms directly.
Then, the fourth was, let's just bail out all the home owners.
The problem with all these options was the price tag.
All would cost over half a trillion dollars and they needed the support
of the President and legal authority from the US congress.
There was a conference call to discuss these options.
It must have been at one or two in the morning - as Wednesday night turned into Thursday morning.
That Thursday morning, 18 September, Paulson and his Treasury team
decided to ask the President to support a plan to buy the toxic assets from the banks.
That afternoon, they went to the White House.
The President was less interested in what does the plan exactly look like, he was more interested in,
what are the broad strokes of the authority you need, why do we need this authority?
We were in that situation right then, the question is
should we take action which, after the fact,
might have been unnecessary and create some problems down the road?
Or, should we simply not take action, hope that things work out, but if they don't and we end up
in the Great Depression, the costs of having gone that path would be extreme.
The President approved the plan to ask Congress to pass an emergency
bill giving the treasury authority to buy up the toxic assets.
The news leaked almost instantly.
I've just got a wire here that says that Hank Paulson
and Ben Bernanke are about to meet people on Capitol Hill, the lawmakers here,
to talk about that. We don't know for definite that it's sure.
It was sure. An hour later America's Central Bank Chairman, Ben Bernanke
and Hank Paulson called on the most powerful politicians in Washington.
And that we have a financial crisis in our country,
that we're here to work together for solutions that resolve that crisis...
We didn't know what they were going to say. What they said was,
"Our intervention in AIG has staved off disaster,
but not for a very long time".
Secretary Paulson said that if he didn't get
proper authorities within 48 hours, the banking system would collapse,
and everybody just sort of looked at him, like he wasn't serious.
And then he turned to Chairman Bernanke and Chairman Bernanke said that if
Secretary Paulson didn't get proper authorities within the next 48 hours, the banking system would collapse.
We are talking about, erm, not a recession,
but even beyond a depression, just a complete stoppage.
That was a pretty stark statement, I mean that was
almost a surreal event, it was so overwhelming in its implications.
Paulson asked for authority to buy hundreds of billions of dollars of toxic assets from the banks.
It would free up the banks to raise their own capital and start lending again.
Then one of the group asked an awkward question.
Secretary Paulson said we want to buy these at tax payer expense.
I said I knew that was a terrible deal for the tax payer.
I said, there has to be an alternative.
He said, what the banks need is capital and I said, "Why not inject capital into the bank?"
The Congressman was suggesting the Government buy shares in the banks, partially nationalising them.
Simpler, but heresy within Bush's Republican party.
The problem is that I believe it's socialism,
you know, the government's involved, owning private property,
owning stock here and there.
I think it's a road to disaster, it's not a good road.
We've tried it in Europe, it never works,
it's always you go back and they want more money from the tax payers.
Paulson left the meeting and announced that America
was united and was marching full speed ahead with the plan to buy up toxic assets.
Secretary of the Treasury, Mr Paulson...
Thank you very much, Madam Speaker.
I think we saw the best of the United States in the
Speaker's office tonight.
This country is able to come together and do things quickly when it needs to be
done for the good of the American people.
TV REPORT: 'Action on both sides of the Atlantic to try to end ...'
'The US Stock Market has recorded the biggest rise in share prices for nearly six years...'
The fact America was at last acting, was enough to boost world-wide markets.
In London, the FTSE rose over 400 points.
Today, financial shares pushed the French market is up more than 6%.
It's because of yesterday's announcement from the USA.
As I see it, the market is eagerly waiting for the bailout package
from the USA, which is quite substantial.
We think that trust in the financial system is rebuilding again
and we can see that judged by today's growth in the market.
One of the challenges in crises, and I lived through them when I
worked at the IMF for 15 years, is there is no right solution,
there is no first best.
By definition, a crisis hits, you're not prepared, but you've got to react.
But it was a very bad time to be asking Washington to be doing
anything, let alone save the world from an economic catastrophe.
Elections were six weeks away.
Getting lawmakers to agree on a bailout bill would be hard.
Paulson had gone to Congress three days after Lehman collapsed.
It was now day nine, and they were still debating the bail-out bill.
The price tag was 700 billion.
And it was deeply unpopular.
I got 3,000 calls in my office from constituents,
3,000 of those calls were against the bailout, I got one call
in favour and that was from Hank Paulson(!)
At this point, I do not think the world is in desperate need
of hearing any more from me on this subject.
I, therefore, waive my minutes and recognise the ranking member. Who's not here.
I was with Secretary Paulson at the hearing
and one of my colleagues had to hand him a note.
The note said that Republican Presidential candidate, John McCain,
had just announced he was going to lend a hand in the crisis.
I'll suspend my campaign and return to Washington.
I've spoken to Senator Obama and informed him of my decision and
I have asked him to join me.
John McCain set off for to Washington to broker
a deal on the bail-out bill at the White House with Barack Obama and President Bush.
The problem was, nobody had actually asked him to help.
Hank Paulson was furious.
We really didn't want this to be debated on the campaign trail,
so he was, I would say, frustrated, is a demure way to say how
he was about the fact that this was now entering into the election.
McCain's intervention would waste valuable time and cost the world dear.
I want to thank the leaders of the House and the Senate for coming.
I appreciate our presidential candidates for being here, as well.
We're in a serious economic crisis in the country if we don't pass a piece of legislation.
Speaker Pelosi started by saying that she was going to allow
Senator Obama to speak for the Democrats, and he began by speaking and asking a few questions.
The Republican McCain refused to say if he supported the plan to buy up the toxic assets.
The Democrats goaded him for it.
I don't recall Senator McCain making any statements, one way or the other,
in terms of what we were doing. I think he was basically keeping his powder dry.
Finally, the president, who had seemed somewhat distracted,
I think realised what was happening and said, "Meeting over".
McCain returned to the campaign trail.
There would be no agreement that week.
It set us back significantly.
I mean, we lost a few days.
All of the kind of national
parties were looking towards their candidates, as to how to think about
the bail-out, which made things profoundly difficult.
# It's the end of the world as we know it.. #
The US rescue plan to buy up toxic assets was bogged down in politics.
It had been ten days since the collapse of Lehman.
Stock markets were panicked.
The Russian exchange had three times suspended trading.
Half a dozen European banks were hours from insolvency.
Ireland was in recession.
The veneer of international unity began to crack.
The French President was the first to break rank.
He blamed the policies London and New York had been pushing for decades.
I remember very clearly the address, because I was sitting at the front row.
I hadn't read the speech before he gave it.
I thought to myself, that's a turning point.
Well, we certainly felt that something major was happening, or was cracking or breaking up.
And in retrospect, it was clearly a crisis of all the excesses that were taking place.
Excess of the sophistication, excess of liquidity, excess of leverage, excess of compensation...
Excess of greed., at the end of the day.
It was the breaking down of the doctrine.
Britian's biggest export is banking.
It needed, more than any other European country, to fix the system.
Gordon Brown went to New York to see if the US plan
now known as TARP, would work.
What he found changed the course of the crisis.
His Excellency, Gordon Brown.
I wanted to test in America what analysis people had
of the current situation.
The American interest in what was called the TARP scheme, would that
be enough to deal with the problems of the financial system?
The UK team was coming to the conclusion the American plan to buy toxic assets was flawed.
It didn't address directly the key problem - banks' capital was spiralling down.
The simplest solution was to pump in money.
The breakfast was with investors in global banks, as well as UK banks,
and it was very clear that they
shared our analysis, which was the underlying issue was around capital
and the question of course, then naturally arises where the sources
of capital are which only left the Government.
The next day Gordon Brown flew to Washington.
He asked President Bush how America's plan would increase capital in US banks.
..make sure that friendship stays strong, and I appreciate you coming down from New York.
What I talked to him about was obviously the TARP scheme, was a big scheme,
but would it be enough and would it actually answer the problem?
We obviously needed whether it would plan to do anything around capital,
and we wanted to do that with the President directly.
It wasn't clear to us what their response was going to be.
The only source of capital at that point was Government.
Brown was in effect asking the President
if he was prepared to nationalise, at least in part, US banks.
What the Prime Minister wants to know is, is the plan we've devised
big enough to make a difference, and is it going to be passed?
And I told him the plan is big enough to make a difference and I believe it is going to be passed.
Thank you.
Brown left America unconvinced by the President's assurances.
On his flight home he was handed a Cabinet Office paper.
It was a confidential blueprint to tackle the crisis - under British, not American, leadership.
Gordon had commissioned, beforehand, from Number Ten as well as the Treasury
and the Bank of England, the FSA, views on capitalisation,
and that came through in a fax,
that was given to us as we got on the plane.
If we were to go ahead with a scheme to recapitalise the banks that would give us confidence we could deal
with the impaired assets and then have a funding scheme that followed that, what would it look like?
What would we have to do?
It was unclear if we were going to be followed by other countries, it was unclear how the markets
were going to react, it was unclear how the public was going to react.
By the time I came back from America I was pretty sure, and I was talking
to Alistair Darling of course all the time, pretty sure that we had to take, radical action.
What the Prime Minister had decided to do was unprecedented.
By setting the UK on the path to directly recapitalise the banks,
he was going to break with the United States - a massive gamble.
We still had to hold to the conviction that we were doing
the right thing, and it was...it was quite a moment.
I don't think I'll ever forget it.
Brown kept his decision secret.
First, he'd let Washington vote on its plan to buy toxic assets.
Monday the 29th of September would be one of the most dramatic days in the crisis.
The US bail-out bill was moved to the floor of the US Congress.
The vote was too close to call.
The stakes for the whole world were huge.
Are we standing at the edge of this abyss?
Nobody knows.
But maybe.
It's very probable.
Madam Speaker, this bill offends my principles.
But I'm going to vote for this bill in order to preserve my principles,
in order to preserve this free enterprise system.
This is a Herbert Hoover moment.
He made some big mistakes after the Great Depression,
and we lived those consequences for decades.
Let's not make that mistake.
Put yourself in the average Member of Congress' mind at the time.
They're up for re-election in about a month.
Every single one of their constituents hates this thing.
They think it's a 700 billion dollar bailout of risky, greedy Wall Street
bankers, and they're being asked to vote for this.
Time has expired. The gentleman from Massachusets.
Madam Speaker, I yield myself...
I never thought, when we got to the house floor,
that we wouldn't get the authority.
Now is the time to act on the free market principles we profess to believe in.
Let's vote down this bill. Please, please don't betray this nation's great history.
On this vote the yeas are 205.
The nays are 228.
The motion is not adopted...
It failed. 11 days wasted.
Still no rescue.
Hank Paulson said this was his worst day in office.
Nobody thinks about the banking system until there's a problem with it.
If we had explained that a little bit better and said that it's not just a Wall Street problem, it's a
credit problem and and everybody needs credit - from students to workers to small businesses -
we probably would have had a little buy-in earlier.
It took another four days to pass the bill.
But by then, the damage had been done.
# I'm standing on a corner with a dollar in my hand... #
Within minutes of the "No" vote, the stock market crashed by a record 777 points.
In London, RBS shares lost a fifth of their value.
The lending rate between banks skyrocketed.
It was disappointing to see that the Congress either did not perceive
the gravity of the situation, or to think, "Well, Lehman Brothers'
catastrophe was not enough - what else is going to be needed?"
It was a Black Monday.
Governments stepped in to save major banks in France and Belgium, the Netherlands, Germany and Britain.
And then there was Ireland and Iceland.
All over Europe at that same time governments were facing the same kind of problem
and we didn't really know how they were reacting and we didn't really
know what the reaction
to their reactions would be and how that would then affect us.
'The approach of the Icelandic coastguard vessel, Valdur,
'was observed without comment.
'Valdur is commanded by Captain Jarne Helgusson
'who claimed the very last cuttings of...'
When Iceland fought the cod war with Britain in the '70s, it lived off fishing.
But during the boom it was transformed into
a banking centre and grew rich, using high interest rates as bait to lure foreign depositors.
With this cash they borrowed even more from overseas.
The Lehman collapse and the credit freeze hit one of Iceland's banks particularly hard.
It was nationalised on Monday the 29th.
But it proved a costly move.
Iceland's banks had debts eight times the country's GDP.
International depositors didn't believe it could meet them.
They began withdrawing money. A run on Iceland started.
What we thought and saw immediately was that, most likely, our sort of
deposit funding in the UK and in the Netherlands would become under siege.
We would have to be extremely lucky if we would get away from this unharmed.
Like Iceland, Ireland had been riding the boom.
Low taxes, cheap credit and the Euro had fuelled an Irish building bonanza.
But the property market crashed, taking the banks with them.
Ireland's finance minister was in emergency session on the same Monday of the bail-out vote in America,
In the early evening I received
a call indicating to me that the chief executive and
chairman of the two leading Irish banks, the Bank of Ireland and the
Allied Irish Bank wished to meet us.
The bank chiefs told him the entire Irish banking system was on the verge of collapse.
We were anxious to avoid that at all costs.
The policy options available to us were to immediately nationalise an institution.
If we immediately nationalised that institution, the risk was that it
could lead to a systemic collapse of all the other institutions.
We decided that the best course of action was to
guarantee the six institutions which exclusively looked to Ireland for their protection.
They didn't hesitate.
Brian Lenihan scheduled a press conference for the next morning.
Were liquidity to dry up in the Irish banking system,
in the weeks ahead, the inevitable result would be economic catastrophe for this country.
He announced Ireland would guarantee its banks.
The principle of united European action was rupturing.
It was a bold move, with far-reaching consequences.
Anybody in the EU holding Euros could transfer them to Ireland.
And he didn't tell Europe until the last minute,
when he called his French counterpart, Christine Legarde.
She was the president of the European Finance Council at the time.
And I felt that she was the appropriate person on the political side to advise,
and so I spoke to her in French and advised her that we were guaranteeing the Irish banks.
He gave me a call. It was prior to the opening time on the stock market
and I thought, "Oh, gosh."
I think she said, "Oh, gosh." She didn't seem too surprised.
She took it very much in her stride. Christine is like that.
She takes things in her stride. She's very good in that way.
We had to very swiftly react to that,
'and certainly I had extended telephone conversations with
colleagues to, you know, sort of build up counter measures.
The Irish announcement also caught the UK on the hop.
British depositors were only guaranteed to get back £35,000 per account if a bank went bust.
Now Ireland was offering unlimited guarantees.
Depositors rushed to move money to Irish banks.
It just would have been a lot better if we'd known in advance
because we'd have had proper measures in place in the morning
when the branches opened.
We had to do it over a period of days.
But it wasn't just us that was concerned.
France was concerned, Germany was concerned, and the lesson that you draw here
is you can't do these things on your own - you've got to talk.
It was 17 days since Lehman collapsed.
Europe was at loggerheads, America getting nowhere.
And - on camera at least - Gordon Brown wasn't ready to announce anything but platitudes.
We are dealing with the problems one by one that have emerged
as a result of the fallout from America.
But I think everybody knows that the foundation of your ability
to run your lives financially is that you have trust in the financial institutions...
We had to get all the details, we had to look at the individual banks,
we had to look at what was necessary.
Of course, we were in regular touch with the Treasury.
We were working together. We had to get a new plan.
I was definitely under some pressure from the Prime Minister
to get it delivered on time.
The next day, Gordon Brown's Business Minister, Shriti Vadera, secretly brought together a group
of city bankers to work out details of the British plan.
Her office rang up on Thursday morning.
We were sort of expecting a call of sorts.
We didn't know how it would work,
but we realised that weekend and the next few days were crucial.
They met at the London offices of Standard Chartered Bank.
None of the participants has spoken publicly about what happened.
That was the start of many long days.
We were sitting in the Standard Chartered boardroom
and there was lots of wine and beer there, which never really got touched,
but I remember thinking that whoever had laid it was being quite optimistic.
Baroness Vadera was accompanied by one of Alistair Darling's close advisors.
The senior Treasury official and I went to the meeting
and we had already identified the question.
We were sitting there, looking at one another, hoping somebody had the answer.
And so Shriti opened the meeting very simply, saying that
we needed a comprehensive solution,
that confidence was clearly ebbing away, we didn't have much time...
We needed to work through how we were going to provide a guarantee for funding, on what terms...
What was needed and what the market reaction would be, and how enforceable a plan would be.
They finished at about 3am that first night,
with a draft proposal to inject funding and capital into the UK banking sector.
This document has never been made public before.
Their proposal had three measures - buying £50 billion
of shares in the banks to increase their capital position.
UK Banks had to borrow to pay off loans, so they'd set up
a £250 billion loan guarantee fund to build confidence for the credit markets.
And the Bank of England would put another £200 billion into the market.
The plan was put to the three bosses of Britain's economy.
Mervyn King, governor of the Bank of England,
obviously Alistair Darling, as Chancellor -
we had very, very regular meetings to look at these problems, and we agreed.
We played our part in contributing ideas
to how that should be carried out.
The Treasury had to be responsible for the design of this because we were going to stand behind it,
and of course, ultimately, the decision had to be mine and the Prime Minister's.
The plan was approved by all three men by the end of the weekend.
Get this. Shoot Shriti... Shoot...
Any news about a banking bail out, Lady Vadera? Shriti, any news?
There was plenty of rumour circulating, but nothing concrete had leaked.
We thought we were going to have a bit more time get the banks in and explain it to them,
get them to sign up to it, which we assumed would take a little bit of time.
And I think the idea was probably...
There was no hard deadline, but I think it felt like it might take a week.
He was wrong. They had very little time indeed.
The climax of the crisis was approaching fast.
Investors were scared by the rumours and wanted to get their money out of the most fragile banks.
Two of our major banks, which had had difficulty in obtaining funding, could raise money only for one week,
then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks
really to be confident they could get to the end of the day.
Those two banks were HBOS, now part of the Lloyds group, and Royal Bank Of Scotland,
which had vast amounts of toxic assets on its books.
On Tuesday morning, October 7th, the city advisors were at the Treasury,
presenting to ministers and the Bank of England.
We opened the presentation up and I got a message through from a colleague of mine,
who said, "I don't know where you are...
"..but rumour has it you're involved in some sort of scheme."
And he said, "You should know that the banks open very, very weakly."
And I thought "very weakly" meant sort of 10%, 15%, which is a lot but it's not dramatic.
It's been another tumultuous morning on the markets.
Some of Britain's biggest banks have seen their share prices plummet again.
At one point, the value of shares in the Royal Bank of Scotland was down by more than 30%...
At the bottom, which was about ten o'clock, it had become 40 percent.
I had to stop what I was saying...
and say, I think we should know that the stock price of Royal Bank of Scotland was seemingly in freefall.
Well, it was in freefall.
At that moment, the deputy governor of the Bank of England,
who was attending the briefing at the Treasury, also got a phone call.
Could I come back with Andrew Bailey, the director of banking at the bank
and could I help sort that out?
And at that time
the people we were presenting to got up and left.
As usual in this crisis, attention in the media was on the violent movements in share price.
But behind the scenes, the real worry was that big depositors in RBS
would pull out their money and the bank would become insolvent.
In that situation the most important thing is whether RBS can fund itself,
and we just had to hold our nerve.
I spoke to the then chairman of RBS during the course of the morning,
and I said it was important that they had to keep going throughout that day.
RBS, one of the ten biggest banks in the world, was running out of US dollars.
It was touch and go if it would be bankrupt before morning.
We know Royal Bank of Scotland was on the verge.
We know that other banks in other countries were facing ruin.
Individuals would not have had access to the money in that bank -
their deposits would have been frozen.
The accounts would have not been there for salaries to be paid into,
so many people would not have been paid their salary.
In turn, they wouldn't have been able to pay bills to businesses, so the businesses would have found
that their flow of payments would have come to an end.
I was in no doubt that the burden on our shoulders, that the gravity of the task we faced,
and it is probably the worst situation, as I say, we've faced in peacetime.
The Government didn't need to imagine what might happen.
It could just look to the North Atlantic.
That day, the Icelandic boom finished its crash into ruin.
The government there declared a national emergency.
New laws were rushed through to protect personal savings and domestic banking.
The shops stayed open, but the country was technically bust.
The collapse of Lehman Brothers had set in motion events that brought a sovereign state to its knees.
I think it was the only option available.
If we had gone any other way then we would, I think, have faced
the banks being closed
and then we would probably have had general panic
and...maybe riots on our hands.
TRANSLATION: Fellow Icelanders,
I have requested the opportunity to address you at this time
when the Icelandic nation faces major difficulties.
The entire world is experiencing a major economic crisis which can be
likened in its effects on the world's banking systems to an economic natural disaster.
I was in the parliament and I heard it in the parliament and obviously it was quite
a dramatic moment and I think everybody realised that the events
that we were experiencing were historic events.
And that we really didn't know what they would lead to.
TRANSLATION: May God save Iceland.
Back in London, throughout that day and into the evening,
officials at the Treasury, the FSA and the Bank of England nervously watched over RBS.
It was a tremendous struggle,
hour by hour, to keep enough funding coming in.
We only really knew by...
probably about seven o'clock at night,
that everyone was going to get through to the next day.
Disaster had been averted, but only till the markets opened the next morning.
The team at the Treasury would not leave that night.
It would have been nice to announce every last detail of the plan.
I had to announce first thing on the Wednesday morning,
"In principle, this is what the British Government intends to do."
They'd announce all big UK banks would increase their capital.
For HBOS and RBS that meant nationalisation.
Time to call in the bankers.
It was strange. Everyone knew that they would be expected at the Treasury that night,
because people were rung and five minutes later they popped in through the door,
and I don't think they all live in Whitehall.
We got the banks in and told them what we were going to do.
I made it clear that there was no choice in the matter.
The initial reaction was as you would expect - reasonably defensive,
and the Chancellor was...charming
in his resolution that something would have to be agreed.
I said, "This is what we're going to do,"
you know, "there's nothing else.
"You really have to concentrate on that."
The banks that urgently needed Government money were HBOS and RBS.
But for the plan to work, all the big UK banks needed to agree to take part.
A message of "The British banking system is resilient, it is strong,
"we the government will do whatever it takes
"to ensure that it can cope with the pressures being placed on it."
RBS boss Sir Fred Goodwin reportedly denied he needed Government capital,
claiming RBS just had a liquidity or cash flow shortage.
"I don't have a capital problem.
"I have a liquidity problem."
After it was said, the room went quite quiet for a while
and one of the other chief executives said,
"Everyone knows it's your problem."
Sir Fred declined to be interviewed but he said it is not true
he did not understand there was a capital issue.
He believed the immediate issue was liquidity.
The bigger long-term issue was capital.
The RBS view was it didn't have a capital problem, whereas it most certainly did.
That's why we own 70% of it now.
Goodwin said he was "particularly upset at the suggestion there was some dispute at the meeting."
One of the lessons that we need to draw from this is the first line of defence
is having people sitting in a bank boardroom that understand what is going on in their own business.
NEWSREADERS: 'Is this a new dawn for our troubled banks...
'A dramatic morning - the final chapter...
'The Chancellor, Alistair Darling, is due to give details...'
The cameras were out early the next morning.
Everybody knew this was a make-or-break moment for the country -
possibly the world.
The Bank of England quietly prepared to loan RBS and HBOS
enough cash to keep them going to the end of the week.
And the Chancellor and the Prime Minister prepared to announce their plan.
When Gordon and Alistair stood up and made the announcement on the Wednesday morning,
for me was the scariest moment, because at that point,
we had no idea who was going to follow, no idea what the markets were going to think,
no idea what the public was going to think, no idea if it would really boost confidence...
The problems that started in America, these are also global problems -
global action is required.
This is a long haul
and we have invited other European countries to consider proposals we have put to them this morning.
The day that we announced the recapitalisation of the British banking system,
I was hoping that the rest of the world, at least the major countries in the world, would follow.
We hadn't yet persuaded other countries that it was a necessary thing to do.
So it was a very difficult day for us.
We were putting up £50 billion of taxpayers' money.
Nobody had ever done that before, nobody had ever talked in these sort of figures before.
It could have been an initiative that went entirely wrong because no other country was prepared to support us.
For the plan to work, they needed America and Europe to sign up.
Brown set off for Paris to convince the Eurozone countries...
..while Alistair Darling and Mervyn King went to Washington to sell it to a gathering
of the International Monetary Fund, and the G7's finance ministers.
This wasn't the normal IMF meetings, where you meet for a couple of days
and you produce a ten-page communique and all go home again.
There was, in my experience for the first time at international meetings,
a sense that the collective need outweighed the interests of any individual country.
One of the finance ministers in particular haunted the proceedings -
a warning to the others of what fate awaited them if they failed.
Iceland was bankrupt - a victim of its banks.
I don't think I ever left Iceland
with as much money as I did at that time, because I didn't know,
when I would be checking out of the hotel, whether my credit card would be working at all.
Country after country resembled deer stuck in headlights.
They were paralysed.
Financial institutions, banks, bankers, traders, were at a loss.
And they were sort of not only holding out their hand but also,
you know, turning to us to say, "What are we going to do?
"We need help."
The UK Chancellor had a chance to have a word in the right ears.
I had a long conversation with Hank Paulson.
He knew that the same thing was happening in the United States.
So I think there was a consciousness that this was a case where
actually, internationally, you can make a difference.
It wasn't like the UK sent capital injections
and we looked at that and said, "Oh, boy, we never thought of that.
"It's going so well there, we never thought of it, we'd better go do it."
I mean, from the very beginning it was one of the options.
Britain's audacious gambit to infuse banks with taxpayer money
and guarantee loans put America in an impossible position.
London now had a competitive advantage over its New York rival.
It certainly had an impact on what we were doing,
because if the UK authorities were going to
do a broad equity investment in their banks and probably, more importantly, do a broad liability guarantee
from the Government, that would have a very profound impact on the US banking institutions.
Today's actions are not what we ever wanted to do but today's actions
are what we must do to restore confidence in our financial system.
Today I'm announcing that the Treasury will purchase equity stakes
in a wide variety of banks and thrifts.
The UK had manoeuvred America into following its plan.
The US diverted the money allocated for buying toxic assets
and instead bought shares in its banks and set up a scheme to guarantee bank loans.
The Eurozone states did the same.
Those two - the capital injections and the loan guarantees -
were really the keys to stabilising the financial system.
It was very effective, because this was the clearest indication that we can make
that the government was going to stand behind the institutions in the US.
In the weeks afterwards, matters clearly improved and the panic was over.
Of course, it did not mean that the problems were over.
Had we not had that British announcement,
we may be a very different place today - a much worse place today.
By the end of the year, policy makers were confident the cash machines would stay open.
But even that could not prevent the first great recession in the age of globalisation.
In Britain, three quarters of a million jobs have gone in the last year alone.
The recession has touched almost every country.
I don't think there is anything comparable to that unless you go back to 1914 or the 19th century,
and I think the global consequences there were probably less than we saw last autumn.
TRANSLATION: I think the fault lies with the rich countries. Why?
Because they believed for decades the market by itself could resolve all problems.
So when the market proved to be fragile, incompetent,
then the states started to see that they had to act, and act decisively.
NEWSREADERS: '..The stock of national debt is going to keep on rising...
'..for a £175 billion budget deficit...
'..involves unprecedented levels of debt, tax increases and a squeeze on public spending...'
You belong in jail! Jail! You criminal!
The crash was decades in the making.
The final cost will not be known for years.
Since the collapse of Lehman Brothers, governments have spent or pledged
at least six trillion dollars to fight the crisis.
The Treasury says UK national debt could rise by 20% to around
£1 trillion in five years - equivalent to £16,000 per person.
However, its investment in the banks could eventually turn a profit.
Even right up until September, most of these big banks basically were pretty disdainful of Government.
What's blindingly obvious is they are certainly global institutions
when things are going well, but they become very, very local when things go badly.
And then they turn up at the front door of the Treasury saying, "Could you help, please?"
The world's 20 biggest economies all now profess the need for stricter regulation.
But, in the four times they've met since the fall of Lehman, reaching consensus has been difficult.
If we wait until after the fact,
the appetite for better and appropriate regulation will be gone.
And everybody will be back to business as usual,
and we run the risk of our taxpayers saying,
"Well, we're paying all this money, but what's in it for us at the end of the day?"
Aren't you promising a better world?
The Lehman collapse shattered assumptions built up over decades
that modern finance eliminated risk,
that asset prices would only rise, and the market operates best when left alone.
And perhaps biggest of all, the collapse of Lehman shattered the illusion that we can ignore history.
There's no new paradigm here at all.
This is something we've seen on many occasions over several hundred years.
But the fact that we've seen it in the past and not been able to improve things is a worry.
This is one of a long series of financial crises.
Its been the biggest one, perhaps ever, but it's come out of almost
the same sort of problems that we've seen in the past.
People who think the world has changed, I'm afraid, have not read history.
From the south sea bubble to the dot com boom,
from 1929 to 2008, every crash is a story of its time.
But they have all shared a common theme - a reckless love of money.
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