1 00:00:03,000 --> 00:00:07,600 This is the story of the world on the brink of economic disaster. 2 00:00:07,600 --> 00:00:12,920 The most intense period in the crisis was that period in the fall of 2008. 3 00:00:12,920 --> 00:00:17,440 There was an extraordinary loss of confidence, a panic I'd call it. 4 00:00:17,440 --> 00:00:20,000 The state of the financial markets was, was very critical indeed. 5 00:00:20,000 --> 00:00:25,600 It'll be for others to judge just how on the edge many institutions were. 6 00:00:25,600 --> 00:00:29,680 A crisis that had been triggered by the collapse of Lehman Brothers bank 7 00:00:29,680 --> 00:00:33,440 was now spreading to every country in the world. 8 00:00:33,440 --> 00:00:39,480 Financial institutions, banks, bankers, traders were at a loss. 9 00:00:39,480 --> 00:00:43,080 And they were not only holding out their hand, but also, 10 00:00:43,080 --> 00:00:45,960 you know, turning to us to say, what are we going to do? 11 00:00:45,960 --> 00:00:48,000 We need help. 12 00:00:48,000 --> 00:00:50,520 No government was ready for the consequences. 13 00:00:50,520 --> 00:00:54,560 This is the inside account of the arguments, mistakes and hesitations 14 00:00:54,560 --> 00:00:57,120 that dramatically worsened the crisis. 15 00:01:00,360 --> 00:01:05,880 I didn't feel that we'd be dumb enough to let the misfunction 16 00:01:05,880 --> 00:01:12,320 of the financial engine bring down the country, but there was a time there where you wondered about that. 17 00:01:12,320 --> 00:01:19,760 Now, decision-makers in the world's capitals tell how close we really came to total financial meltdown. 18 00:01:20,800 --> 00:01:25,880 I know the counterfactual is very hard to prove, but it does make my blood run cold. 19 00:01:25,880 --> 00:01:29,320 We literally thought that we were on the verge of the great depression 20 00:01:29,320 --> 00:01:31,520 and, looking back, I think we probably were. 21 00:01:31,520 --> 00:01:36,160 I was in no doubt that the burden on our shoulders, that the gravity 22 00:01:36,160 --> 00:01:42,120 of the task we faced, it's probably the worst situation, as I say, we faced in peacetime. 23 00:02:01,120 --> 00:02:03,960 September is hurricane season in America. 24 00:02:03,960 --> 00:02:09,920 On Monday, the 15th, Texas took stock of the damage caused by the latest, Hurricane Ike. 25 00:02:09,920 --> 00:02:14,480 These storms are devastating, but not unusual. 26 00:02:14,480 --> 00:02:19,880 What was unexpected was the scale of economic disaster that was coming. 27 00:02:19,880 --> 00:02:23,440 This is really stupendous this has happened. 28 00:02:23,440 --> 00:02:27,000 That same day, Lehman Brothers bank went bust. 29 00:02:27,000 --> 00:02:28,920 It was the start of a month 30 00:02:28,920 --> 00:02:32,240 when the world came within hours of catastrophe. 31 00:02:32,240 --> 00:02:36,440 A lot of people expected it, and others were simply devastated. 32 00:02:36,440 --> 00:02:41,520 This is an event like a hurricane, it's unanticipated, 33 00:02:41,520 --> 00:02:44,880 I don't think any of us were smart enough to see it 34 00:02:44,880 --> 00:02:46,960 and, you know, that's unfortunate. 35 00:02:48,640 --> 00:02:51,840 It was the biggest bankruptcy in history. 36 00:02:51,840 --> 00:02:56,760 It sent stockmarkets into a nosedive and the media into a frenzy. 37 00:02:56,760 --> 00:02:59,720 Something of a financial hurricane... A financial tsunami... 38 00:02:59,720 --> 00:03:02,680 One of the ugliest days I have ever seen... 39 00:03:02,680 --> 00:03:05,880 ..de la banque Lehman Brothers sur la finance mondiale... 40 00:03:05,880 --> 00:03:07,280 Nightmare on Wall St... 41 00:03:07,280 --> 00:03:09,600 Very, very bad... 42 00:03:09,600 --> 00:03:13,200 SHE SPEAKS GERMAN 43 00:03:14,680 --> 00:03:17,600 A day of turmoil on the world's financial markets. 44 00:03:19,840 --> 00:03:23,400 The two capitals of international finance were especially hard hit. 45 00:03:23,400 --> 00:03:27,440 In New York the Dow fell a record 504 points. 46 00:03:27,440 --> 00:03:31,000 The FTSE lost £51 billion in value. 47 00:03:34,520 --> 00:03:39,880 The dramatic numbers and anguished faces on Wall Street and the City were the obvious effect. 48 00:03:39,880 --> 00:03:47,520 But, the events set in motion that day would have an impact far beyond these financial districts. 49 00:03:47,520 --> 00:03:53,480 The amount banks charged each other for short term loans doubled overnight. 50 00:03:55,200 --> 00:03:57,960 That meant they couldn't afford to borrow money. 51 00:03:57,960 --> 00:04:00,920 Banks lost confidence in banks. 52 00:04:03,320 --> 00:04:05,200 The essence of a bank is confidence. 53 00:04:05,200 --> 00:04:09,240 If people don't have complete confidence in a bank, 54 00:04:09,240 --> 00:04:16,000 the bank won't be able to borrow the funds which it needs to lend to others in business, or to families. 55 00:04:16,000 --> 00:04:19,840 So, that confidence was at threat and after 56 00:04:19,840 --> 00:04:23,120 the failure of Lehman Brothers, it ebbed away very quickly. 57 00:04:23,120 --> 00:04:28,320 It was the Lehman's collapse that really burst the dam which had been building up all summer. 58 00:04:29,840 --> 00:04:33,480 A 20-year global boom was over. 59 00:04:35,360 --> 00:04:40,160 All summer, banks around the world had been haemorrhaging money, 60 00:04:40,160 --> 00:04:44,400 But Lehman Brothers was the first to go. 61 00:04:44,400 --> 00:04:47,280 Lehman's failure made things dramatically worse. 62 00:04:47,280 --> 00:04:50,360 Coming into the fall, you had a global financial crisis 63 00:04:50,360 --> 00:04:52,560 that was accelerating momentum, 64 00:04:52,560 --> 00:04:55,000 had tremendous force at that point. 65 00:04:55,000 --> 00:04:57,880 And that's what's ultimately caused that failure. 66 00:04:57,880 --> 00:05:01,600 Lehman made things worse though, there's no doubt about that. 67 00:05:01,600 --> 00:05:04,840 That Monday, Tuesday and Wednesday were really a blur for me because, 68 00:05:04,840 --> 00:05:09,080 we were all working so hard, looking at every tool we had, 69 00:05:09,080 --> 00:05:11,120 seeing where the fires were. 70 00:05:13,920 --> 00:05:16,720 Dozens of institutions were in trouble. 71 00:05:16,720 --> 00:05:22,560 The man running US economic policy during the crisis was Treasury secretary Hank Paulson. 72 00:05:22,560 --> 00:05:26,280 He seemed to change America's policy day by day. 73 00:05:26,280 --> 00:05:29,440 He had just refused to bail out Lehman Brothers, 74 00:05:29,440 --> 00:05:35,600 but a week earlier spent 200 billion nationalising America's huge mortgage holding companies. 75 00:05:35,600 --> 00:05:40,520 He spent 30 billion in March to save a bank called Bear Stearns. 76 00:05:42,920 --> 00:05:44,960 Good afternoon, everyone, 77 00:05:44,960 --> 00:05:47,440 and I hope you all had an enjoyable weekend. 78 00:05:47,440 --> 00:05:49,520 MILD LAUGHTER 79 00:05:49,520 --> 00:05:51,480 No wonder the public was confused. 80 00:05:51,480 --> 00:05:53,000 Yes, you. 81 00:05:53,000 --> 00:05:57,160 Why did you agree to support the bail-out of Bear Stearns but not Lehman? 82 00:05:57,160 --> 00:06:02,600 The situation in March and the facts around Bear Stearns 83 00:06:02,600 --> 00:06:04,600 were very, very different 84 00:06:04,600 --> 00:06:08,720 to the situation we're looking at here in September. 85 00:06:08,720 --> 00:06:16,280 And I never once considered that it was appropriate to put taxpayer money on the line 86 00:06:16,280 --> 00:06:18,000 in resolving Lehman Brothers. 87 00:06:18,000 --> 00:06:23,240 But a day later, Tuesday the 16th, the policy changed again. 88 00:06:23,240 --> 00:06:28,800 The government spent 85 billion saving insurance giant AIG. 89 00:06:28,800 --> 00:06:32,040 If the policy-makers didn't seem to know what to do, 90 00:06:32,040 --> 00:06:35,160 how could the public hope to understand the complexities 91 00:06:35,160 --> 00:06:40,760 of banking and bail-outs now coming at them? 92 00:06:40,760 --> 00:06:44,360 And if I may, a sincere congratulations 93 00:06:44,360 --> 00:06:47,920 to everybody out there who pays taxes in the United States. 94 00:06:47,920 --> 00:06:50,640 We just bought an insurance company! 95 00:06:50,640 --> 00:06:52,320 CHEERING AND APPLAUSE 96 00:06:52,320 --> 00:06:53,600 Congratulations! AIG! 97 00:06:53,600 --> 00:06:57,440 We own 80% of the world's biggest insurance company now, 98 00:06:57,440 --> 00:07:00,600 causing day three of the nationwide outbreak 99 00:07:00,600 --> 00:07:03,880 of huge banner headlines nobody understands. 100 00:07:03,880 --> 00:07:08,800 Oh, my God, that huge number is attacking that three letter acronym. 101 00:07:08,800 --> 00:07:12,600 It was like a slow moving train wreck. 102 00:07:12,600 --> 00:07:15,440 On Monday morning, lots of people woke up and said, 103 00:07:15,440 --> 00:07:17,120 "Well, that's not so bad." 104 00:07:17,120 --> 00:07:22,600 By Wednesday, the money market complex was under threat and suddenly people realised 105 00:07:22,600 --> 00:07:28,440 this is something we're going to be talking to our kids and our grandkids for a long, long time. 106 00:07:30,000 --> 00:07:35,560 What happened on Wednesday, three days into the crisis, was unprecedented in modern times. 107 00:07:35,560 --> 00:07:40,720 The lubricant of the economy, the stable flow of US dollars, froze. 108 00:07:40,720 --> 00:07:43,240 And not just in America. 109 00:07:43,240 --> 00:07:46,840 TRANSLATION: They said there were trillions and trillions of dollars 110 00:07:46,840 --> 00:07:50,120 crossing the ocean, and suddenly these dollars disappeared. 111 00:07:50,120 --> 00:07:52,240 You no longer had credit in the world 112 00:07:52,240 --> 00:07:55,760 and this had, even in Brazil, disastrous consequences. 113 00:08:00,680 --> 00:08:03,560 Lending between banks had already shut down. 114 00:08:03,560 --> 00:08:10,800 And big businesses, like banks also need to borrow large amounts of money for very short periods. 115 00:08:10,800 --> 00:08:15,560 They use a kind of special IOU called "commercial paper". 116 00:08:15,560 --> 00:08:20,960 By Wednesday, the Lehman's aftershock was closing the commercial paper market. 117 00:08:22,200 --> 00:08:29,640 We'd been witnessing, for the last two days, a sequential freezing of market after market, 118 00:08:29,640 --> 00:08:34,400 deemed to be absolutely critical to the functioning of the capital system. 119 00:08:34,400 --> 00:08:37,160 I remember picking up the phone and saying, "Jamie, 120 00:08:37,160 --> 00:08:44,160 "drop what you're doing, go to the ATM and take money out, take the maximum 500 we can". 121 00:08:44,160 --> 00:08:48,760 And she said, "Why? Why?" I said, "Because I'm not sure the banks will be open tomorrow". 122 00:08:48,760 --> 00:08:55,080 I closed all my savings bank accounts today because I'll earn more with Lincoln money market savings. 123 00:08:55,080 --> 00:08:57,160 Now I can do all my banking with Lincoln. 124 00:08:57,160 --> 00:09:03,040 Since the 1980s, Americans had been encouraged to put their savings in money market funds. 125 00:09:03,040 --> 00:09:05,680 Lincoln's new money market savings. 126 00:09:06,880 --> 00:09:12,720 These funds then lent this cash to banks and big businesses. 127 00:09:12,720 --> 00:09:16,160 Lehman Brothers had been a key player in this trade. 128 00:09:16,160 --> 00:09:22,280 It collapsed owing almost 800 million to a money market fund called the Reserve Primary. 129 00:09:22,280 --> 00:09:29,800 Caught short of cash as a result, the Reserve Primary told its depositors they would lose money. 130 00:09:29,800 --> 00:09:32,960 It's something that the text books just never contemplate. 131 00:09:32,960 --> 00:09:37,040 Which is the, the most safe and secure assets having 132 00:09:37,040 --> 00:09:41,480 market participants look at them and say, "these aren't safe, we're not going to touch them". 133 00:09:43,000 --> 00:09:48,040 Depositors withdrew 300 billion from the money market funds. 134 00:09:48,040 --> 00:09:55,000 It threatened huge companies that rely on short-term loans for their day to day cash flow. 135 00:09:55,000 --> 00:09:59,760 There was an enormous amount of fear and anxiety as to what we 136 00:09:59,760 --> 00:10:01,960 were going to do, because 137 00:10:01,960 --> 00:10:06,880 money market mutual funds are one of the biggest providers of cash to all these large 138 00:10:06,880 --> 00:10:10,000 institutions in the country and, essentially, in the world. 139 00:10:14,520 --> 00:10:16,680 It all happened incredibly fast. 140 00:10:16,680 --> 00:10:19,840 By Wednesday, only three days into the crisis, 141 00:10:19,840 --> 00:10:23,800 credit for any institution, large or small, was unavailable. 142 00:10:25,400 --> 00:10:28,360 The crisis had entered a new and dangerous phase. 143 00:10:29,320 --> 00:10:33,480 Bank CEO's are saying the inter-bank funding market is essentially seized up, 144 00:10:33,480 --> 00:10:38,600 something they've never seen before in their 40-year histories of being on the Street. 145 00:10:38,600 --> 00:10:41,160 Not just banks and commercial banks, 146 00:10:41,160 --> 00:10:44,480 we were getting calls from large American businesses, 147 00:10:44,480 --> 00:10:47,800 Blue Chip Businesses, saying, they couldn't fund themselves. 148 00:10:47,800 --> 00:10:50,880 They couldn't make their payroll or fund their inventory. 149 00:10:50,880 --> 00:10:54,560 These are some of the best American companies, that have very little to 150 00:10:54,560 --> 00:10:59,240 do with financial markets, saying they can't access basic funding needed to pay employees. 151 00:10:59,240 --> 00:11:01,480 It's fair to say there's a lot of panic. 152 00:11:01,480 --> 00:11:03,880 That's when we knew the time had come, 153 00:11:05,400 --> 00:11:08,480 For the first three days after Lehman Brothers fell, 154 00:11:08,480 --> 00:11:11,840 governments had responded to problems as they came up. 155 00:11:11,840 --> 00:11:18,680 The UK's banks had been suffering since the fall of Northern Rock a year earlier. 156 00:11:18,680 --> 00:11:21,920 Lehmans accelerated the process. 157 00:11:21,920 --> 00:11:24,080 We knew that we had... 158 00:11:26,120 --> 00:11:31,320 ..banks collapsing around the world, we knew that we had very little time. 159 00:11:32,400 --> 00:11:35,080 The next to go was HBOS. 160 00:11:35,080 --> 00:11:42,120 On Wednesday, the government stepped to help broker its sale to Lloyds TSB for £12 billion. 161 00:11:42,120 --> 00:11:45,400 There was no confidence within the system now that people knew 162 00:11:45,400 --> 00:11:48,040 exactly what was wrong with each individual bank, 163 00:11:48,040 --> 00:11:49,360 did you not have to go further? 164 00:11:50,200 --> 00:11:55,040 Gordon Brown and his city advisor, Baroness Vadera, saw Britain might 165 00:11:55,040 --> 00:11:59,320 have to take on the job of rescuing the financial system. 166 00:12:01,400 --> 00:12:05,640 Their plan, when it came, would profoundly alter the story. 167 00:12:05,640 --> 00:12:08,960 But America got there first. 168 00:12:08,960 --> 00:12:13,000 The problem facing banks everywhere were huge bundles of mortgages 169 00:12:13,000 --> 00:12:15,680 they'd bought and traded during the boom. 170 00:12:15,680 --> 00:12:19,440 These were the so-called "toxic assets". 171 00:12:19,440 --> 00:12:21,960 Banks borrowed money to buy them. 172 00:12:21,960 --> 00:12:23,800 It's called "leverage". 173 00:12:23,800 --> 00:12:28,400 They increase leverage dramatically in a way that people can't even 174 00:12:28,400 --> 00:12:32,200 measure, either as the individual institutions or as to the system, 175 00:12:32,200 --> 00:12:34,160 but it's dramatic nevertheless. 176 00:12:35,120 --> 00:12:38,400 Leverage does increase profits in good times, 177 00:12:38,400 --> 00:12:42,720 but leverage also worsens losses. 178 00:12:42,720 --> 00:12:46,040 When property prices crashed, so did the value of these assets. 179 00:12:46,040 --> 00:12:51,840 But they were so complex, it was almost impossible for the banks to price them or sell them off. 180 00:12:51,840 --> 00:12:57,920 And banks all over the world had huge loans that still had to be paid. 181 00:12:57,920 --> 00:12:59,800 Banks couldn't raise enough money, 182 00:12:59,800 --> 00:13:03,240 because they couldn't raise enough money they had to sell assets. 183 00:13:03,240 --> 00:13:05,400 They sold those, asset prices went down, 184 00:13:05,400 --> 00:13:08,760 had to sell more , because they lost the capital and so it went on. 185 00:13:08,760 --> 00:13:11,840 They haven't got enough capital, they hadn't got enough 186 00:13:11,840 --> 00:13:15,080 liquidity and they were also having difficulty raising funds. 187 00:13:24,080 --> 00:13:28,040 By late on Wednesday afternoon, three days after Lehman fell, 188 00:13:28,040 --> 00:13:32,440 the US Treasury decided to tackle the problem head on. 189 00:13:32,440 --> 00:13:34,840 We really came up with, with four main options. 190 00:13:34,840 --> 00:13:38,480 One was to buy the assets, buy the toxic assets from the banks, 191 00:13:38,480 --> 00:13:42,720 the second was to insure the assets, the third was 192 00:13:42,720 --> 00:13:46,680 to actually just inject capital, to buy stakes in financial firms directly. 193 00:13:46,680 --> 00:13:49,880 Then, the fourth was, let's just bail out all the home owners. 194 00:13:54,920 --> 00:13:58,320 The problem with all these options was the price tag. 195 00:13:58,320 --> 00:14:03,400 All would cost over half a trillion dollars and they needed the support 196 00:14:03,400 --> 00:14:07,440 of the President and legal authority from the US congress. 197 00:14:09,360 --> 00:14:12,280 There was a conference call to discuss these options. 198 00:14:12,280 --> 00:14:17,120 It must have been at one or two in the morning - as Wednesday night turned into Thursday morning. 199 00:14:18,080 --> 00:14:22,640 That Thursday morning, 18 September, Paulson and his Treasury team 200 00:14:22,640 --> 00:14:28,280 decided to ask the President to support a plan to buy the toxic assets from the banks. 201 00:14:29,480 --> 00:14:32,080 That afternoon, they went to the White House. 202 00:14:32,080 --> 00:14:37,680 The President was less interested in what does the plan exactly look like, he was more interested in, 203 00:14:37,680 --> 00:14:41,600 what are the broad strokes of the authority you need, why do we need this authority? 204 00:14:41,600 --> 00:14:45,080 We were in that situation right then, the question is 205 00:14:45,080 --> 00:14:47,800 should we take action which, after the fact, 206 00:14:47,800 --> 00:14:51,840 might have been unnecessary and create some problems down the road? 207 00:14:51,840 --> 00:14:57,400 Or, should we simply not take action, hope that things work out, but if they don't and we end up 208 00:14:57,400 --> 00:15:03,000 in the Great Depression, the costs of having gone that path would be extreme. 209 00:15:04,520 --> 00:15:08,880 The President approved the plan to ask Congress to pass an emergency 210 00:15:08,880 --> 00:15:13,160 bill giving the treasury authority to buy up the toxic assets. 211 00:15:13,160 --> 00:15:15,600 The news leaked almost instantly. 212 00:15:15,600 --> 00:15:18,880 I've just got a wire here that says that Hank Paulson 213 00:15:18,880 --> 00:15:26,000 and Ben Bernanke are about to meet people on Capitol Hill, the lawmakers here, 214 00:15:26,000 --> 00:15:29,200 to talk about that. We don't know for definite that it's sure. 215 00:15:29,200 --> 00:15:35,080 It was sure. An hour later America's Central Bank Chairman, Ben Bernanke 216 00:15:35,080 --> 00:15:40,040 and Hank Paulson called on the most powerful politicians in Washington. 217 00:15:40,040 --> 00:15:42,840 And that we have a financial crisis in our country, 218 00:15:42,840 --> 00:15:48,480 that we're here to work together for solutions that resolve that crisis... 219 00:15:48,480 --> 00:15:53,480 We didn't know what they were going to say. What they said was, 220 00:15:53,480 --> 00:15:56,120 "Our intervention in AIG has staved off disaster, 221 00:15:56,120 --> 00:15:57,680 but not for a very long time". 222 00:15:57,680 --> 00:16:00,680 Secretary Paulson said that if he didn't get 223 00:16:00,680 --> 00:16:04,880 proper authorities within 48 hours, the banking system would collapse, 224 00:16:04,880 --> 00:16:08,960 and everybody just sort of looked at him, like he wasn't serious. 225 00:16:08,960 --> 00:16:12,880 And then he turned to Chairman Bernanke and Chairman Bernanke said that if 226 00:16:12,880 --> 00:16:17,720 Secretary Paulson didn't get proper authorities within the next 48 hours, the banking system would collapse. 227 00:16:17,720 --> 00:16:21,840 We are talking about, erm, not a recession, 228 00:16:21,840 --> 00:16:25,320 but even beyond a depression, just a complete stoppage. 229 00:16:25,320 --> 00:16:28,120 That was a pretty stark statement, I mean that was 230 00:16:28,120 --> 00:16:32,240 almost a surreal event, it was so overwhelming in its implications. 231 00:16:33,760 --> 00:16:38,600 Paulson asked for authority to buy hundreds of billions of dollars of toxic assets from the banks. 232 00:16:38,600 --> 00:16:44,160 It would free up the banks to raise their own capital and start lending again. 233 00:16:44,160 --> 00:16:47,680 Then one of the group asked an awkward question. 234 00:16:47,680 --> 00:16:52,560 Secretary Paulson said we want to buy these at tax payer expense. 235 00:16:52,560 --> 00:16:56,720 I said I knew that was a terrible deal for the tax payer. 236 00:16:56,720 --> 00:16:59,440 I said, there has to be an alternative. 237 00:16:59,440 --> 00:17:07,040 He said, what the banks need is capital and I said, "Why not inject capital into the bank?" 238 00:17:07,040 --> 00:17:12,560 The Congressman was suggesting the Government buy shares in the banks, partially nationalising them. 239 00:17:12,560 --> 00:17:17,200 Simpler, but heresy within Bush's Republican party. 240 00:17:17,200 --> 00:17:19,600 The problem is that I believe it's socialism, 241 00:17:19,600 --> 00:17:23,520 you know, the government's involved, owning private property, 242 00:17:23,520 --> 00:17:25,480 owning stock here and there. 243 00:17:25,480 --> 00:17:28,640 I think it's a road to disaster, it's not a good road. 244 00:17:28,640 --> 00:17:30,800 We've tried it in Europe, it never works, 245 00:17:30,800 --> 00:17:34,360 it's always you go back and they want more money from the tax payers. 246 00:17:35,880 --> 00:17:38,680 Paulson left the meeting and announced that America 247 00:17:38,680 --> 00:17:43,920 was united and was marching full speed ahead with the plan to buy up toxic assets. 248 00:17:43,920 --> 00:17:46,720 Secretary of the Treasury, Mr Paulson... 249 00:17:46,720 --> 00:17:50,360 Thank you very much, Madam Speaker. 250 00:17:50,360 --> 00:17:54,600 I think we saw the best of the United States in the 251 00:17:54,600 --> 00:17:57,920 Speaker's office tonight. 252 00:17:57,920 --> 00:18:03,560 This country is able to come together and do things quickly when it needs to be 253 00:18:03,560 --> 00:18:05,720 done for the good of the American people. 254 00:18:05,720 --> 00:18:09,400 TV REPORT: 'Action on both sides of the Atlantic to try to end ...' 255 00:18:09,400 --> 00:18:14,080 'The US Stock Market has recorded the biggest rise in share prices for nearly six years...' 256 00:18:17,040 --> 00:18:22,200 The fact America was at last acting, was enough to boost world-wide markets. 257 00:18:22,200 --> 00:18:26,960 In London, the FTSE rose over 400 points. 258 00:18:30,880 --> 00:18:35,920 Today, financial shares pushed the French market is up more than 6%. 259 00:18:35,920 --> 00:18:38,840 It's because of yesterday's announcement from the USA. 260 00:18:38,840 --> 00:18:44,840 As I see it, the market is eagerly waiting for the bailout package 261 00:18:44,840 --> 00:18:47,440 from the USA, which is quite substantial. 262 00:18:48,760 --> 00:18:52,080 We think that trust in the financial system is rebuilding again 263 00:18:52,080 --> 00:18:55,360 and we can see that judged by today's growth in the market. 264 00:18:56,440 --> 00:19:00,400 One of the challenges in crises, and I lived through them when I 265 00:19:00,400 --> 00:19:04,600 worked at the IMF for 15 years, is there is no right solution, 266 00:19:04,600 --> 00:19:06,160 there is no first best. 267 00:19:06,760 --> 00:19:12,400 By definition, a crisis hits, you're not prepared, but you've got to react. 268 00:19:21,800 --> 00:19:24,880 But it was a very bad time to be asking Washington to be doing 269 00:19:24,880 --> 00:19:29,400 anything, let alone save the world from an economic catastrophe. 270 00:19:29,400 --> 00:19:32,960 Elections were six weeks away. 271 00:19:32,960 --> 00:19:36,160 Getting lawmakers to agree on a bailout bill would be hard. 272 00:19:51,200 --> 00:19:56,280 Paulson had gone to Congress three days after Lehman collapsed. 273 00:19:56,280 --> 00:20:00,480 It was now day nine, and they were still debating the bail-out bill. 274 00:20:00,480 --> 00:20:03,920 The price tag was 700 billion. 275 00:20:03,920 --> 00:20:07,280 And it was deeply unpopular. 276 00:20:07,280 --> 00:20:10,680 I got 3,000 calls in my office from constituents, 277 00:20:10,680 --> 00:20:13,760 3,000 of those calls were against the bailout, I got one call 278 00:20:13,760 --> 00:20:16,320 in favour and that was from Hank Paulson(!) 279 00:20:16,320 --> 00:20:20,320 At this point, I do not think the world is in desperate need 280 00:20:20,320 --> 00:20:22,960 of hearing any more from me on this subject. 281 00:20:22,960 --> 00:20:29,000 I, therefore, waive my minutes and recognise the ranking member. Who's not here. 282 00:20:29,000 --> 00:20:30,960 I was with Secretary Paulson at the hearing 283 00:20:30,960 --> 00:20:34,680 and one of my colleagues had to hand him a note. 284 00:20:34,680 --> 00:20:38,760 The note said that Republican Presidential candidate, John McCain, 285 00:20:38,760 --> 00:20:42,400 had just announced he was going to lend a hand in the crisis. 286 00:20:42,400 --> 00:20:46,200 I'll suspend my campaign and return to Washington. 287 00:20:46,200 --> 00:20:51,040 I've spoken to Senator Obama and informed him of my decision and 288 00:20:51,040 --> 00:20:53,360 I have asked him to join me. 289 00:20:54,880 --> 00:20:57,360 John McCain set off for to Washington to broker 290 00:20:57,360 --> 00:21:02,760 a deal on the bail-out bill at the White House with Barack Obama and President Bush. 291 00:21:02,760 --> 00:21:06,760 The problem was, nobody had actually asked him to help. 292 00:21:08,880 --> 00:21:12,120 Hank Paulson was furious. 293 00:21:12,120 --> 00:21:16,360 We really didn't want this to be debated on the campaign trail, 294 00:21:16,360 --> 00:21:21,040 so he was, I would say, frustrated, is a demure way to say how 295 00:21:21,040 --> 00:21:25,200 he was about the fact that this was now entering into the election. 296 00:21:27,120 --> 00:21:32,720 McCain's intervention would waste valuable time and cost the world dear. 297 00:21:32,720 --> 00:21:36,080 I want to thank the leaders of the House and the Senate for coming. 298 00:21:36,080 --> 00:21:39,560 I appreciate our presidential candidates for being here, as well. 299 00:21:39,560 --> 00:21:46,640 We're in a serious economic crisis in the country if we don't pass a piece of legislation. 300 00:21:46,640 --> 00:21:51,800 Speaker Pelosi started by saying that she was going to allow 301 00:21:51,800 --> 00:21:58,000 Senator Obama to speak for the Democrats, and he began by speaking and asking a few questions. 302 00:21:59,600 --> 00:22:05,080 The Republican McCain refused to say if he supported the plan to buy up the toxic assets. 303 00:22:05,080 --> 00:22:08,080 The Democrats goaded him for it. 304 00:22:09,600 --> 00:22:15,000 I don't recall Senator McCain making any statements, one way or the other, 305 00:22:15,000 --> 00:22:21,280 in terms of what we were doing. I think he was basically keeping his powder dry. 306 00:22:21,280 --> 00:22:24,600 Finally, the president, who had seemed somewhat distracted, 307 00:22:24,600 --> 00:22:27,800 I think realised what was happening and said, "Meeting over". 308 00:22:29,560 --> 00:22:32,920 McCain returned to the campaign trail. 309 00:22:32,920 --> 00:22:36,440 There would be no agreement that week. 310 00:22:36,440 --> 00:22:38,000 It set us back significantly. 311 00:22:38,000 --> 00:22:40,000 I mean, we lost a few days. 312 00:22:41,600 --> 00:22:43,800 All of the kind of national 313 00:22:43,800 --> 00:22:49,200 parties were looking towards their candidates, as to how to think about 314 00:22:49,200 --> 00:22:52,520 the bail-out, which made things profoundly difficult. 315 00:22:52,520 --> 00:22:58,280 # It's the end of the world as we know it.. # 316 00:22:58,280 --> 00:23:02,720 The US rescue plan to buy up toxic assets was bogged down in politics. 317 00:23:02,720 --> 00:23:06,840 It had been ten days since the collapse of Lehman. 318 00:23:06,840 --> 00:23:08,960 Stock markets were panicked. 319 00:23:08,960 --> 00:23:12,520 The Russian exchange had three times suspended trading. 320 00:23:12,520 --> 00:23:16,560 Half a dozen European banks were hours from insolvency. 321 00:23:16,560 --> 00:23:19,440 Ireland was in recession. 322 00:23:19,440 --> 00:23:23,360 The veneer of international unity began to crack. 323 00:23:27,880 --> 00:23:30,840 The French President was the first to break rank. 324 00:23:30,840 --> 00:23:36,080 He blamed the policies London and New York had been pushing for decades. 325 00:23:37,240 --> 00:23:41,440 I remember very clearly the address, because I was sitting at the front row. 326 00:23:43,200 --> 00:23:46,120 I hadn't read the speech before he gave it. 327 00:24:01,400 --> 00:24:03,560 I thought to myself, that's a turning point. 328 00:24:05,560 --> 00:24:11,960 Well, we certainly felt that something major was happening, or was cracking or breaking up. 329 00:24:11,960 --> 00:24:18,360 And in retrospect, it was clearly a crisis of all the excesses that were taking place. 330 00:24:18,360 --> 00:24:24,880 Excess of the sophistication, excess of liquidity, excess of leverage, excess of compensation... 331 00:24:24,880 --> 00:24:26,680 Excess of greed., at the end of the day. 332 00:24:26,680 --> 00:24:30,920 It was the breaking down of the doctrine. 333 00:24:33,960 --> 00:24:37,520 Britian's biggest export is banking. 334 00:24:37,520 --> 00:24:42,160 It needed, more than any other European country, to fix the system. 335 00:24:42,160 --> 00:24:46,200 Gordon Brown went to New York to see if the US plan 336 00:24:46,200 --> 00:24:48,920 now known as TARP, would work. 337 00:24:48,920 --> 00:24:52,400 What he found changed the course of the crisis. 338 00:24:52,400 --> 00:24:54,040 His Excellency, Gordon Brown. 339 00:24:54,040 --> 00:24:58,400 I wanted to test in America what analysis people had 340 00:24:58,400 --> 00:25:00,280 of the current situation. 341 00:25:00,480 --> 00:25:03,840 The American interest in what was called the TARP scheme, would that 342 00:25:03,840 --> 00:25:07,160 be enough to deal with the problems of the financial system? 343 00:25:08,360 --> 00:25:14,480 The UK team was coming to the conclusion the American plan to buy toxic assets was flawed. 344 00:25:14,480 --> 00:25:20,360 It didn't address directly the key problem - banks' capital was spiralling down. 345 00:25:20,360 --> 00:25:24,040 The simplest solution was to pump in money. 346 00:25:24,040 --> 00:25:30,520 The breakfast was with investors in global banks, as well as UK banks, 347 00:25:30,520 --> 00:25:33,800 and it was very clear that they 348 00:25:33,800 --> 00:25:39,840 shared our analysis, which was the underlying issue was around capital 349 00:25:39,840 --> 00:25:43,840 and the question of course, then naturally arises where the sources 350 00:25:43,840 --> 00:25:46,480 of capital are which only left the Government. 351 00:25:50,240 --> 00:25:52,920 The next day Gordon Brown flew to Washington. 352 00:25:52,920 --> 00:25:58,440 He asked President Bush how America's plan would increase capital in US banks. 353 00:25:58,440 --> 00:26:02,400 ..make sure that friendship stays strong, and I appreciate you coming down from New York. 354 00:26:02,400 --> 00:26:07,840 What I talked to him about was obviously the TARP scheme, was a big scheme, 355 00:26:07,840 --> 00:26:11,880 but would it be enough and would it actually answer the problem? 356 00:26:11,880 --> 00:26:17,280 We obviously needed whether it would plan to do anything around capital, 357 00:26:17,280 --> 00:26:20,280 and we wanted to do that with the President directly. 358 00:26:20,280 --> 00:26:23,920 It wasn't clear to us what their response was going to be. 359 00:26:23,920 --> 00:26:27,640 The only source of capital at that point was Government. 360 00:26:27,640 --> 00:26:30,080 Brown was in effect asking the President 361 00:26:30,080 --> 00:26:34,240 if he was prepared to nationalise, at least in part, US banks. 362 00:26:34,240 --> 00:26:37,920 What the Prime Minister wants to know is, is the plan we've devised 363 00:26:37,920 --> 00:26:41,200 big enough to make a difference, and is it going to be passed? 364 00:26:41,200 --> 00:26:46,560 And I told him the plan is big enough to make a difference and I believe it is going to be passed. 365 00:26:46,560 --> 00:26:48,120 Thank you. 366 00:26:48,120 --> 00:26:51,880 Brown left America unconvinced by the President's assurances. 367 00:26:51,880 --> 00:26:55,920 On his flight home he was handed a Cabinet Office paper. 368 00:26:55,920 --> 00:27:01,800 It was a confidential blueprint to tackle the crisis - under British, not American, leadership. 369 00:27:03,640 --> 00:27:09,880 Gordon had commissioned, beforehand, from Number Ten as well as the Treasury 370 00:27:09,880 --> 00:27:14,040 and the Bank of England, the FSA, views on capitalisation, 371 00:27:14,040 --> 00:27:18,040 and that came through in a fax, 372 00:27:18,040 --> 00:27:21,560 that was given to us as we got on the plane. 373 00:27:21,560 --> 00:27:26,160 If we were to go ahead with a scheme to recapitalise the banks that would give us confidence we could deal 374 00:27:26,160 --> 00:27:31,080 with the impaired assets and then have a funding scheme that followed that, what would it look like? 375 00:27:31,080 --> 00:27:32,640 What would we have to do? 376 00:27:32,640 --> 00:27:37,440 It was unclear if we were going to be followed by other countries, it was unclear how the markets 377 00:27:37,440 --> 00:27:40,920 were going to react, it was unclear how the public was going to react. 378 00:27:40,920 --> 00:27:46,760 By the time I came back from America I was pretty sure, and I was talking 379 00:27:46,760 --> 00:27:51,360 to Alistair Darling of course all the time, pretty sure that we had to take, radical action. 380 00:27:52,880 --> 00:27:56,680 What the Prime Minister had decided to do was unprecedented. 381 00:27:56,680 --> 00:28:00,920 By setting the UK on the path to directly recapitalise the banks, 382 00:28:00,920 --> 00:28:06,160 he was going to break with the United States - a massive gamble. 383 00:28:06,160 --> 00:28:09,480 We still had to hold to the conviction that we were doing 384 00:28:09,480 --> 00:28:14,920 the right thing, and it was...it was quite a moment. 385 00:28:14,920 --> 00:28:16,640 I don't think I'll ever forget it. 386 00:28:17,760 --> 00:28:20,520 Brown kept his decision secret. 387 00:28:20,520 --> 00:28:25,880 First, he'd let Washington vote on its plan to buy toxic assets. 388 00:28:27,520 --> 00:28:33,400 Monday the 29th of September would be one of the most dramatic days in the crisis. 389 00:28:33,400 --> 00:28:37,800 The US bail-out bill was moved to the floor of the US Congress. 390 00:28:37,800 --> 00:28:40,040 The vote was too close to call. 391 00:28:40,040 --> 00:28:43,800 The stakes for the whole world were huge. 392 00:28:43,800 --> 00:28:47,080 Are we standing at the edge of this abyss? 393 00:28:47,080 --> 00:28:49,480 Nobody knows. 394 00:28:49,480 --> 00:28:51,240 But maybe. 395 00:28:51,240 --> 00:28:53,960 It's very probable. 396 00:28:53,960 --> 00:28:59,040 Madam Speaker, this bill offends my principles. 397 00:28:59,040 --> 00:29:04,120 But I'm going to vote for this bill in order to preserve my principles, 398 00:29:04,120 --> 00:29:07,640 in order to preserve this free enterprise system. 399 00:29:07,640 --> 00:29:10,680 This is a Herbert Hoover moment. 400 00:29:10,680 --> 00:29:15,000 He made some big mistakes after the Great Depression, 401 00:29:15,000 --> 00:29:19,320 and we lived those consequences for decades. 402 00:29:19,320 --> 00:29:21,880 Let's not make that mistake. 403 00:29:21,880 --> 00:29:25,400 Put yourself in the average Member of Congress' mind at the time. 404 00:29:25,400 --> 00:29:28,040 They're up for re-election in about a month. 405 00:29:28,040 --> 00:29:31,520 Every single one of their constituents hates this thing. 406 00:29:31,520 --> 00:29:34,800 They think it's a 700 billion dollar bailout of risky, greedy Wall Street 407 00:29:34,800 --> 00:29:38,320 bankers, and they're being asked to vote for this. 408 00:29:38,320 --> 00:29:40,720 Time has expired. The gentleman from Massachusets. 409 00:29:40,720 --> 00:29:43,120 Madam Speaker, I yield myself... 410 00:29:43,120 --> 00:29:45,800 I never thought, when we got to the house floor, 411 00:29:45,800 --> 00:29:47,480 that we wouldn't get the authority. 412 00:29:47,480 --> 00:29:52,000 Now is the time to act on the free market principles we profess to believe in. 413 00:29:52,000 --> 00:29:58,360 Let's vote down this bill. Please, please don't betray this nation's great history. 414 00:30:01,800 --> 00:30:05,480 On this vote the yeas are 205. 415 00:30:05,480 --> 00:30:07,520 The nays are 228. 416 00:30:07,520 --> 00:30:09,120 The motion is not adopted... 417 00:30:09,120 --> 00:30:12,480 It failed. 11 days wasted. 418 00:30:12,480 --> 00:30:14,320 Still no rescue. 419 00:30:15,320 --> 00:30:20,120 Hank Paulson said this was his worst day in office. 420 00:30:20,120 --> 00:30:23,560 Nobody thinks about the banking system until there's a problem with it. 421 00:30:23,560 --> 00:30:28,120 If we had explained that a little bit better and said that it's not just a Wall Street problem, it's a 422 00:30:28,120 --> 00:30:34,520 credit problem and and everybody needs credit - from students to workers to small businesses - 423 00:30:34,520 --> 00:30:37,600 we probably would have had a little buy-in earlier. 424 00:30:41,120 --> 00:30:44,560 It took another four days to pass the bill. 425 00:30:46,920 --> 00:30:49,760 But by then, the damage had been done. 426 00:30:51,440 --> 00:30:54,760 # I'm standing on a corner with a dollar in my hand... # 427 00:30:54,760 --> 00:31:00,760 Within minutes of the "No" vote, the stock market crashed by a record 777 points. 428 00:31:00,760 --> 00:31:04,840 In London, RBS shares lost a fifth of their value. 429 00:31:04,840 --> 00:31:08,160 The lending rate between banks skyrocketed. 430 00:31:10,960 --> 00:31:15,000 It was disappointing to see that the Congress either did not perceive 431 00:31:15,000 --> 00:31:19,400 the gravity of the situation, or to think, "Well, Lehman Brothers' 432 00:31:19,400 --> 00:31:22,440 catastrophe was not enough - what else is going to be needed?" 433 00:31:24,880 --> 00:31:26,840 It was a Black Monday. 434 00:31:26,840 --> 00:31:33,800 Governments stepped in to save major banks in France and Belgium, the Netherlands, Germany and Britain. 435 00:31:33,800 --> 00:31:37,520 And then there was Ireland and Iceland. 436 00:31:37,520 --> 00:31:43,680 All over Europe at that same time governments were facing the same kind of problem 437 00:31:43,680 --> 00:31:48,360 and we didn't really know how they were reacting and we didn't really 438 00:31:48,360 --> 00:31:50,480 know what the reaction 439 00:31:50,480 --> 00:31:54,680 to their reactions would be and how that would then affect us. 440 00:31:55,240 --> 00:31:59,080 'The approach of the Icelandic coastguard vessel, Valdur, 441 00:31:59,080 --> 00:32:01,440 'was observed without comment. 442 00:32:01,440 --> 00:32:04,000 'Valdur is commanded by Captain Jarne Helgusson 443 00:32:04,000 --> 00:32:06,680 'who claimed the very last cuttings of...' 444 00:32:06,680 --> 00:32:12,440 When Iceland fought the cod war with Britain in the '70s, it lived off fishing. 445 00:32:15,120 --> 00:32:17,800 But during the boom it was transformed into 446 00:32:17,800 --> 00:32:24,600 a banking centre and grew rich, using high interest rates as bait to lure foreign depositors. 447 00:32:26,160 --> 00:32:30,720 With this cash they borrowed even more from overseas. 448 00:32:30,720 --> 00:32:36,840 The Lehman collapse and the credit freeze hit one of Iceland's banks particularly hard. 449 00:32:36,840 --> 00:32:40,120 It was nationalised on Monday the 29th. 450 00:32:40,120 --> 00:32:42,040 But it proved a costly move. 451 00:32:42,040 --> 00:32:47,840 Iceland's banks had debts eight times the country's GDP. 452 00:32:47,840 --> 00:32:51,080 International depositors didn't believe it could meet them. 453 00:32:51,080 --> 00:32:56,200 They began withdrawing money. A run on Iceland started. 454 00:33:00,240 --> 00:33:04,920 What we thought and saw immediately was that, most likely, our sort of 455 00:33:04,920 --> 00:33:11,080 deposit funding in the UK and in the Netherlands would become under siege. 456 00:33:11,080 --> 00:33:15,800 We would have to be extremely lucky if we would get away from this unharmed. 457 00:33:19,880 --> 00:33:23,520 Like Iceland, Ireland had been riding the boom. 458 00:33:23,520 --> 00:33:29,960 Low taxes, cheap credit and the Euro had fuelled an Irish building bonanza. 459 00:33:29,960 --> 00:33:34,440 But the property market crashed, taking the banks with them. 460 00:33:35,560 --> 00:33:42,440 Ireland's finance minister was in emergency session on the same Monday of the bail-out vote in America, 461 00:33:42,440 --> 00:33:44,800 In the early evening I received 462 00:33:44,800 --> 00:33:48,160 a call indicating to me that the chief executive and 463 00:33:48,160 --> 00:33:51,680 chairman of the two leading Irish banks, the Bank of Ireland and the 464 00:33:51,680 --> 00:33:53,640 Allied Irish Bank wished to meet us. 465 00:33:55,160 --> 00:34:02,200 The bank chiefs told him the entire Irish banking system was on the verge of collapse. 466 00:34:02,200 --> 00:34:04,960 We were anxious to avoid that at all costs. 467 00:34:04,960 --> 00:34:11,600 The policy options available to us were to immediately nationalise an institution. 468 00:34:11,600 --> 00:34:15,280 If we immediately nationalised that institution, the risk was that it 469 00:34:15,280 --> 00:34:19,040 could lead to a systemic collapse of all the other institutions. 470 00:34:19,040 --> 00:34:21,520 We decided that the best course of action was to 471 00:34:21,520 --> 00:34:26,280 guarantee the six institutions which exclusively looked to Ireland for their protection. 472 00:34:26,280 --> 00:34:28,720 They didn't hesitate. 473 00:34:28,720 --> 00:34:33,320 Brian Lenihan scheduled a press conference for the next morning. 474 00:34:33,320 --> 00:34:36,560 Were liquidity to dry up in the Irish banking system, 475 00:34:36,560 --> 00:34:42,000 in the weeks ahead, the inevitable result would be economic catastrophe for this country. 476 00:34:43,280 --> 00:34:46,560 He announced Ireland would guarantee its banks. 477 00:34:46,560 --> 00:34:50,480 The principle of united European action was rupturing. 478 00:34:50,480 --> 00:34:54,920 It was a bold move, with far-reaching consequences. 479 00:34:54,920 --> 00:35:00,120 Anybody in the EU holding Euros could transfer them to Ireland. 480 00:35:00,120 --> 00:35:02,680 And he didn't tell Europe until the last minute, 481 00:35:02,680 --> 00:35:06,200 when he called his French counterpart, Christine Legarde. 482 00:35:06,200 --> 00:35:11,200 She was the president of the European Finance Council at the time. 483 00:35:11,200 --> 00:35:14,840 And I felt that she was the appropriate person on the political side to advise, 484 00:35:14,840 --> 00:35:19,280 and so I spoke to her in French and advised her that we were guaranteeing the Irish banks. 485 00:35:19,280 --> 00:35:25,080 He gave me a call. It was prior to the opening time on the stock market 486 00:35:25,080 --> 00:35:27,360 and I thought, "Oh, gosh." 487 00:35:27,360 --> 00:35:31,560 I think she said, "Oh, gosh." She didn't seem too surprised. 488 00:35:31,560 --> 00:35:34,600 She took it very much in her stride. Christine is like that. 489 00:35:34,600 --> 00:35:37,240 She takes things in her stride. She's very good in that way. 490 00:35:37,240 --> 00:35:39,880 We had to very swiftly react to that, 491 00:35:39,880 --> 00:35:43,440 'and certainly I had extended telephone conversations with 492 00:35:43,440 --> 00:35:47,600 colleagues to, you know, sort of build up counter measures. 493 00:35:48,800 --> 00:35:53,040 The Irish announcement also caught the UK on the hop. 494 00:35:53,040 --> 00:35:59,920 British depositors were only guaranteed to get back £35,000 per account if a bank went bust. 495 00:35:59,920 --> 00:36:04,120 Now Ireland was offering unlimited guarantees. 496 00:36:04,120 --> 00:36:08,480 Depositors rushed to move money to Irish banks. 497 00:36:08,480 --> 00:36:11,640 It just would have been a lot better if we'd known in advance 498 00:36:11,640 --> 00:36:14,920 because we'd have had proper measures in place in the morning 499 00:36:14,920 --> 00:36:16,400 when the branches opened. 500 00:36:16,400 --> 00:36:18,360 We had to do it over a period of days. 501 00:36:18,360 --> 00:36:20,520 But it wasn't just us that was concerned. 502 00:36:20,520 --> 00:36:25,720 France was concerned, Germany was concerned, and the lesson that you draw here 503 00:36:25,720 --> 00:36:28,680 is you can't do these things on your own - you've got to talk. 504 00:36:30,480 --> 00:36:34,640 It was 17 days since Lehman collapsed. 505 00:36:34,640 --> 00:36:38,920 Europe was at loggerheads, America getting nowhere. 506 00:36:38,920 --> 00:36:46,200 And - on camera at least - Gordon Brown wasn't ready to announce anything but platitudes. 507 00:36:46,200 --> 00:36:49,440 We are dealing with the problems one by one that have emerged 508 00:36:49,440 --> 00:36:51,600 as a result of the fallout from America. 509 00:36:51,600 --> 00:36:55,640 But I think everybody knows that the foundation of your ability 510 00:36:55,640 --> 00:37:00,560 to run your lives financially is that you have trust in the financial institutions... 511 00:37:00,560 --> 00:37:03,800 We had to get all the details, we had to look at the individual banks, 512 00:37:03,800 --> 00:37:05,680 we had to look at what was necessary. 513 00:37:05,680 --> 00:37:08,680 Of course, we were in regular touch with the Treasury. 514 00:37:08,680 --> 00:37:13,280 We were working together. We had to get a new plan. 515 00:37:13,280 --> 00:37:16,480 I was definitely under some pressure from the Prime Minister 516 00:37:16,480 --> 00:37:18,000 to get it delivered on time. 517 00:37:20,680 --> 00:37:25,880 The next day, Gordon Brown's Business Minister, Shriti Vadera, secretly brought together a group 518 00:37:25,880 --> 00:37:29,760 of city bankers to work out details of the British plan. 519 00:37:31,880 --> 00:37:34,080 Her office rang up on Thursday morning. 520 00:37:34,080 --> 00:37:36,600 We were sort of expecting a call of sorts. 521 00:37:36,600 --> 00:37:38,200 We didn't know how it would work, 522 00:37:38,200 --> 00:37:41,320 but we realised that weekend and the next few days were crucial. 523 00:37:50,600 --> 00:37:54,840 They met at the London offices of Standard Chartered Bank. 524 00:37:54,840 --> 00:37:58,680 None of the participants has spoken publicly about what happened. 525 00:38:00,520 --> 00:38:05,320 That was the start of many long days. 526 00:38:05,320 --> 00:38:08,040 We were sitting in the Standard Chartered boardroom 527 00:38:08,040 --> 00:38:12,320 and there was lots of wine and beer there, which never really got touched, 528 00:38:12,320 --> 00:38:17,160 but I remember thinking that whoever had laid it was being quite optimistic. 529 00:38:18,120 --> 00:38:23,480 Baroness Vadera was accompanied by one of Alistair Darling's close advisors. 530 00:38:23,480 --> 00:38:27,000 The senior Treasury official and I went to the meeting 531 00:38:27,000 --> 00:38:31,040 and we had already identified the question. 532 00:38:31,040 --> 00:38:34,880 We were sitting there, looking at one another, hoping somebody had the answer. 533 00:38:34,880 --> 00:38:39,080 And so Shriti opened the meeting very simply, saying that 534 00:38:39,080 --> 00:38:41,160 we needed a comprehensive solution, 535 00:38:41,160 --> 00:38:45,160 that confidence was clearly ebbing away, we didn't have much time... 536 00:38:45,160 --> 00:38:51,040 We needed to work through how we were going to provide a guarantee for funding, on what terms... 537 00:38:51,040 --> 00:38:56,840 What was needed and what the market reaction would be, and how enforceable a plan would be. 538 00:38:59,000 --> 00:39:02,360 They finished at about 3am that first night, 539 00:39:02,360 --> 00:39:07,720 with a draft proposal to inject funding and capital into the UK banking sector. 540 00:39:07,720 --> 00:39:11,880 This document has never been made public before. 541 00:39:11,880 --> 00:39:16,320 Their proposal had three measures - buying £50 billion 542 00:39:16,320 --> 00:39:20,200 of shares in the banks to increase their capital position. 543 00:39:20,200 --> 00:39:25,040 UK Banks had to borrow to pay off loans, so they'd set up 544 00:39:25,040 --> 00:39:30,360 a £250 billion loan guarantee fund to build confidence for the credit markets. 545 00:39:30,360 --> 00:39:36,280 And the Bank of England would put another £200 billion into the market. 546 00:39:36,280 --> 00:39:40,560 The plan was put to the three bosses of Britain's economy. 547 00:39:40,560 --> 00:39:42,800 Mervyn King, governor of the Bank of England, 548 00:39:42,800 --> 00:39:45,640 obviously Alistair Darling, as Chancellor - 549 00:39:45,640 --> 00:39:50,360 we had very, very regular meetings to look at these problems, and we agreed. 550 00:39:50,360 --> 00:39:53,400 We played our part in contributing ideas 551 00:39:53,400 --> 00:39:55,840 to how that should be carried out. 552 00:39:55,840 --> 00:40:01,440 The Treasury had to be responsible for the design of this because we were going to stand behind it, 553 00:40:01,440 --> 00:40:06,360 and of course, ultimately, the decision had to be mine and the Prime Minister's. 554 00:40:07,880 --> 00:40:12,440 The plan was approved by all three men by the end of the weekend. 555 00:40:17,880 --> 00:40:20,200 Get this. Shoot Shriti... Shoot... 556 00:40:21,240 --> 00:40:25,280 Any news about a banking bail out, Lady Vadera? Shriti, any news? 557 00:40:25,280 --> 00:40:29,880 There was plenty of rumour circulating, but nothing concrete had leaked. 558 00:40:29,880 --> 00:40:34,200 We thought we were going to have a bit more time get the banks in and explain it to them, 559 00:40:34,200 --> 00:40:38,440 get them to sign up to it, which we assumed would take a little bit of time. 560 00:40:38,440 --> 00:40:41,640 And I think the idea was probably... 561 00:40:41,640 --> 00:40:45,600 There was no hard deadline, but I think it felt like it might take a week. 562 00:40:46,800 --> 00:40:50,360 He was wrong. They had very little time indeed. 563 00:40:50,360 --> 00:40:53,520 The climax of the crisis was approaching fast. 564 00:40:53,520 --> 00:41:00,280 Investors were scared by the rumours and wanted to get their money out of the most fragile banks. 565 00:41:01,760 --> 00:41:08,800 Two of our major banks, which had had difficulty in obtaining funding, could raise money only for one week, 566 00:41:08,800 --> 00:41:14,960 then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks 567 00:41:14,960 --> 00:41:19,400 really to be confident they could get to the end of the day. 568 00:41:19,400 --> 00:41:24,480 Those two banks were HBOS, now part of the Lloyds group, and Royal Bank Of Scotland, 569 00:41:24,480 --> 00:41:29,680 which had vast amounts of toxic assets on its books. 570 00:41:29,680 --> 00:41:34,480 On Tuesday morning, October 7th, the city advisors were at the Treasury, 571 00:41:34,480 --> 00:41:38,240 presenting to ministers and the Bank of England. 572 00:41:38,240 --> 00:41:43,880 We opened the presentation up and I got a message through from a colleague of mine, 573 00:41:43,880 --> 00:41:46,800 who said, "I don't know where you are... 574 00:41:48,440 --> 00:41:53,120 "..but rumour has it you're involved in some sort of scheme." 575 00:41:53,120 --> 00:41:58,320 And he said, "You should know that the banks open very, very weakly." 576 00:41:58,320 --> 00:42:03,800 And I thought "very weakly" meant sort of 10%, 15%, which is a lot but it's not dramatic. 577 00:42:03,800 --> 00:42:06,200 It's been another tumultuous morning on the markets. 578 00:42:06,200 --> 00:42:10,600 Some of Britain's biggest banks have seen their share prices plummet again. 579 00:42:10,600 --> 00:42:15,800 At one point, the value of shares in the Royal Bank of Scotland was down by more than 30%... 580 00:42:15,800 --> 00:42:20,920 At the bottom, which was about ten o'clock, it had become 40 percent. 581 00:42:20,920 --> 00:42:23,760 I had to stop what I was saying... 582 00:42:23,760 --> 00:42:30,160 and say, I think we should know that the stock price of Royal Bank of Scotland was seemingly in freefall. 583 00:42:30,160 --> 00:42:32,160 Well, it was in freefall. 584 00:42:32,160 --> 00:42:35,600 At that moment, the deputy governor of the Bank of England, 585 00:42:35,600 --> 00:42:39,800 who was attending the briefing at the Treasury, also got a phone call. 586 00:42:39,800 --> 00:42:45,760 Could I come back with Andrew Bailey, the director of banking at the bank 587 00:42:45,760 --> 00:42:48,880 and could I help sort that out? 588 00:42:48,880 --> 00:42:50,560 And at that time 589 00:42:50,560 --> 00:42:53,480 the people we were presenting to got up and left. 590 00:42:53,480 --> 00:43:00,080 As usual in this crisis, attention in the media was on the violent movements in share price. 591 00:43:00,080 --> 00:43:05,840 But behind the scenes, the real worry was that big depositors in RBS 592 00:43:05,840 --> 00:43:09,240 would pull out their money and the bank would become insolvent. 593 00:43:11,640 --> 00:43:16,040 In that situation the most important thing is whether RBS can fund itself, 594 00:43:16,040 --> 00:43:19,240 and we just had to hold our nerve. 595 00:43:19,240 --> 00:43:23,800 I spoke to the then chairman of RBS during the course of the morning, 596 00:43:23,800 --> 00:43:27,600 and I said it was important that they had to keep going throughout that day. 597 00:43:29,520 --> 00:43:36,200 RBS, one of the ten biggest banks in the world, was running out of US dollars. 598 00:43:36,200 --> 00:43:39,960 It was touch and go if it would be bankrupt before morning. 599 00:43:39,960 --> 00:43:44,000 We know Royal Bank of Scotland was on the verge. 600 00:43:44,000 --> 00:43:48,600 We know that other banks in other countries were facing ruin. 601 00:43:48,600 --> 00:43:52,000 Individuals would not have had access to the money in that bank - 602 00:43:52,000 --> 00:43:54,080 their deposits would have been frozen. 603 00:43:54,080 --> 00:43:59,200 The accounts would have not been there for salaries to be paid into, 604 00:43:59,200 --> 00:44:01,760 so many people would not have been paid their salary. 605 00:44:01,760 --> 00:44:06,600 In turn, they wouldn't have been able to pay bills to businesses, so the businesses would have found 606 00:44:06,600 --> 00:44:10,200 that their flow of payments would have come to an end. 607 00:44:10,200 --> 00:44:15,920 I was in no doubt that the burden on our shoulders, that the gravity of the task we faced, 608 00:44:15,920 --> 00:44:20,640 and it is probably the worst situation, as I say, we've faced in peacetime. 609 00:44:22,160 --> 00:44:25,760 The Government didn't need to imagine what might happen. 610 00:44:27,280 --> 00:44:29,960 It could just look to the North Atlantic. 611 00:44:29,960 --> 00:44:36,120 That day, the Icelandic boom finished its crash into ruin. 612 00:44:36,120 --> 00:44:39,120 The government there declared a national emergency. 613 00:44:39,120 --> 00:44:43,520 New laws were rushed through to protect personal savings and domestic banking. 614 00:44:43,520 --> 00:44:50,080 The shops stayed open, but the country was technically bust. 615 00:44:50,080 --> 00:44:56,600 The collapse of Lehman Brothers had set in motion events that brought a sovereign state to its knees. 616 00:44:56,600 --> 00:44:59,280 I think it was the only option available. 617 00:44:59,280 --> 00:45:03,080 If we had gone any other way then we would, I think, have faced 618 00:45:03,080 --> 00:45:05,200 the banks being closed 619 00:45:05,200 --> 00:45:09,720 and then we would probably have had general panic 620 00:45:09,720 --> 00:45:14,200 and...maybe riots on our hands. 621 00:45:17,840 --> 00:45:19,720 TRANSLATION: Fellow Icelanders, 622 00:45:19,720 --> 00:45:23,280 I have requested the opportunity to address you at this time 623 00:45:23,280 --> 00:45:27,800 when the Icelandic nation faces major difficulties. 624 00:45:27,800 --> 00:45:32,160 The entire world is experiencing a major economic crisis which can be 625 00:45:32,160 --> 00:45:38,200 likened in its effects on the world's banking systems to an economic natural disaster. 626 00:45:38,200 --> 00:45:43,480 I was in the parliament and I heard it in the parliament and obviously it was quite 627 00:45:43,480 --> 00:45:48,600 a dramatic moment and I think everybody realised that the events 628 00:45:48,600 --> 00:45:52,520 that we were experiencing were historic events. 629 00:45:52,520 --> 00:45:56,680 And that we really didn't know what they would lead to. 630 00:45:57,840 --> 00:46:00,440 TRANSLATION: May God save Iceland. 631 00:46:02,640 --> 00:46:06,560 Back in London, throughout that day and into the evening, 632 00:46:06,560 --> 00:46:12,920 officials at the Treasury, the FSA and the Bank of England nervously watched over RBS. 633 00:46:12,920 --> 00:46:15,760 It was a tremendous struggle, 634 00:46:15,760 --> 00:46:20,400 hour by hour, to keep enough funding coming in. 635 00:46:20,400 --> 00:46:22,960 We only really knew by... 636 00:46:22,960 --> 00:46:26,960 probably about seven o'clock at night, 637 00:46:26,960 --> 00:46:31,440 that everyone was going to get through to the next day. 638 00:46:33,080 --> 00:46:37,840 Disaster had been averted, but only till the markets opened the next morning. 639 00:46:37,840 --> 00:46:41,280 The team at the Treasury would not leave that night. 640 00:46:41,280 --> 00:46:44,760 It would have been nice to announce every last detail of the plan. 641 00:46:44,760 --> 00:46:47,720 I had to announce first thing on the Wednesday morning, 642 00:46:47,720 --> 00:46:51,040 "In principle, this is what the British Government intends to do." 643 00:46:51,040 --> 00:46:55,840 They'd announce all big UK banks would increase their capital. 644 00:46:55,840 --> 00:46:59,800 For HBOS and RBS that meant nationalisation. 645 00:46:59,800 --> 00:47:02,160 Time to call in the bankers. 646 00:47:02,160 --> 00:47:06,560 It was strange. Everyone knew that they would be expected at the Treasury that night, 647 00:47:06,560 --> 00:47:10,520 because people were rung and five minutes later they popped in through the door, 648 00:47:10,520 --> 00:47:12,800 and I don't think they all live in Whitehall. 649 00:47:12,800 --> 00:47:15,640 We got the banks in and told them what we were going to do. 650 00:47:15,640 --> 00:47:18,040 I made it clear that there was no choice in the matter. 651 00:47:19,560 --> 00:47:25,680 The initial reaction was as you would expect - reasonably defensive, 652 00:47:25,680 --> 00:47:29,440 and the Chancellor was...charming 653 00:47:29,440 --> 00:47:32,960 in his resolution that something would have to be agreed. 654 00:47:32,960 --> 00:47:36,120 I said, "This is what we're going to do," 655 00:47:36,120 --> 00:47:38,440 you know, "there's nothing else. 656 00:47:38,440 --> 00:47:40,800 "You really have to concentrate on that." 657 00:47:40,800 --> 00:47:46,920 The banks that urgently needed Government money were HBOS and RBS. 658 00:47:46,920 --> 00:47:52,280 But for the plan to work, all the big UK banks needed to agree to take part. 659 00:47:52,280 --> 00:47:57,040 A message of "The British banking system is resilient, it is strong, 660 00:47:57,040 --> 00:47:59,480 "we the government will do whatever it takes 661 00:47:59,480 --> 00:48:04,800 "to ensure that it can cope with the pressures being placed on it." 662 00:48:04,800 --> 00:48:10,320 RBS boss Sir Fred Goodwin reportedly denied he needed Government capital, 663 00:48:10,320 --> 00:48:14,960 claiming RBS just had a liquidity or cash flow shortage. 664 00:48:14,960 --> 00:48:16,880 "I don't have a capital problem. 665 00:48:16,880 --> 00:48:18,960 "I have a liquidity problem." 666 00:48:18,960 --> 00:48:22,880 After it was said, the room went quite quiet for a while 667 00:48:22,880 --> 00:48:26,240 and one of the other chief executives said, 668 00:48:26,240 --> 00:48:29,080 "Everyone knows it's your problem." 669 00:48:30,600 --> 00:48:34,160 Sir Fred declined to be interviewed but he said it is not true 670 00:48:34,160 --> 00:48:37,520 he did not understand there was a capital issue. 671 00:48:37,520 --> 00:48:40,960 He believed the immediate issue was liquidity. 672 00:48:40,960 --> 00:48:44,840 The bigger long-term issue was capital. 673 00:48:44,840 --> 00:48:49,360 The RBS view was it didn't have a capital problem, whereas it most certainly did. 674 00:48:49,360 --> 00:48:51,680 That's why we own 70% of it now. 675 00:48:51,680 --> 00:48:59,520 Goodwin said he was "particularly upset at the suggestion there was some dispute at the meeting." 676 00:48:59,520 --> 00:49:04,720 One of the lessons that we need to draw from this is the first line of defence 677 00:49:04,720 --> 00:49:10,520 is having people sitting in a bank boardroom that understand what is going on in their own business. 678 00:49:10,520 --> 00:49:13,320 NEWSREADERS: 'Is this a new dawn for our troubled banks... 679 00:49:13,320 --> 00:49:15,440 'A dramatic morning - the final chapter... 680 00:49:15,440 --> 00:49:18,600 'The Chancellor, Alistair Darling, is due to give details...' 681 00:49:18,600 --> 00:49:22,400 The cameras were out early the next morning. 682 00:49:22,400 --> 00:49:26,080 Everybody knew this was a make-or-break moment for the country - 683 00:49:26,080 --> 00:49:28,880 possibly the world. 684 00:49:28,880 --> 00:49:33,200 The Bank of England quietly prepared to loan RBS and HBOS 685 00:49:33,200 --> 00:49:37,240 enough cash to keep them going to the end of the week. 686 00:49:37,240 --> 00:49:44,600 And the Chancellor and the Prime Minister prepared to announce their plan. 687 00:49:44,600 --> 00:49:50,440 When Gordon and Alistair stood up and made the announcement on the Wednesday morning, 688 00:49:50,440 --> 00:49:54,840 for me was the scariest moment, because at that point, 689 00:49:54,840 --> 00:49:58,960 we had no idea who was going to follow, no idea what the markets were going to think, 690 00:49:58,960 --> 00:50:03,760 no idea what the public was going to think, no idea if it would really boost confidence... 691 00:50:03,760 --> 00:50:07,320 The problems that started in America, these are also global problems - 692 00:50:07,320 --> 00:50:09,280 global action is required. 693 00:50:09,280 --> 00:50:11,680 This is a long haul 694 00:50:11,680 --> 00:50:17,240 and we have invited other European countries to consider proposals we have put to them this morning. 695 00:50:17,240 --> 00:50:22,280 The day that we announced the recapitalisation of the British banking system, 696 00:50:22,280 --> 00:50:28,000 I was hoping that the rest of the world, at least the major countries in the world, would follow. 697 00:50:28,000 --> 00:50:32,560 We hadn't yet persuaded other countries that it was a necessary thing to do. 698 00:50:32,560 --> 00:50:35,160 So it was a very difficult day for us. 699 00:50:36,800 --> 00:50:41,080 We were putting up £50 billion of taxpayers' money. 700 00:50:41,080 --> 00:50:46,960 Nobody had ever done that before, nobody had ever talked in these sort of figures before. 701 00:50:46,960 --> 00:50:52,800 It could have been an initiative that went entirely wrong because no other country was prepared to support us. 702 00:50:55,640 --> 00:50:59,920 For the plan to work, they needed America and Europe to sign up. 703 00:50:59,920 --> 00:51:03,560 Brown set off for Paris to convince the Eurozone countries... 704 00:51:05,480 --> 00:51:09,960 ..while Alistair Darling and Mervyn King went to Washington to sell it to a gathering 705 00:51:09,960 --> 00:51:14,920 of the International Monetary Fund, and the G7's finance ministers. 706 00:51:16,480 --> 00:51:20,840 This wasn't the normal IMF meetings, where you meet for a couple of days 707 00:51:20,840 --> 00:51:23,800 and you produce a ten-page communique and all go home again. 708 00:51:25,360 --> 00:51:29,400 There was, in my experience for the first time at international meetings, 709 00:51:29,400 --> 00:51:34,480 a sense that the collective need outweighed the interests of any individual country. 710 00:51:35,440 --> 00:51:39,600 One of the finance ministers in particular haunted the proceedings - 711 00:51:39,600 --> 00:51:44,320 a warning to the others of what fate awaited them if they failed. 712 00:51:44,320 --> 00:51:49,040 Iceland was bankrupt - a victim of its banks. 713 00:51:49,040 --> 00:51:53,000 I don't think I ever left Iceland 714 00:51:53,000 --> 00:51:58,280 with as much money as I did at that time, because I didn't know, 715 00:51:58,280 --> 00:52:03,280 when I would be checking out of the hotel, whether my credit card would be working at all. 716 00:52:03,280 --> 00:52:08,400 Country after country resembled deer stuck in headlights. 717 00:52:08,400 --> 00:52:10,120 They were paralysed. 718 00:52:10,120 --> 00:52:17,200 Financial institutions, banks, bankers, traders, were at a loss. 719 00:52:17,200 --> 00:52:21,160 And they were sort of not only holding out their hand but also, 720 00:52:21,160 --> 00:52:24,080 you know, turning to us to say, "What are we going to do? 721 00:52:24,080 --> 00:52:25,240 "We need help." 722 00:52:26,440 --> 00:52:31,120 The UK Chancellor had a chance to have a word in the right ears. 723 00:52:32,560 --> 00:52:34,920 I had a long conversation with Hank Paulson. 724 00:52:34,920 --> 00:52:38,240 He knew that the same thing was happening in the United States. 725 00:52:38,240 --> 00:52:42,040 So I think there was a consciousness that this was a case where 726 00:52:42,040 --> 00:52:45,760 actually, internationally, you can make a difference. 727 00:52:45,760 --> 00:52:49,240 It wasn't like the UK sent capital injections 728 00:52:49,240 --> 00:52:52,480 and we looked at that and said, "Oh, boy, we never thought of that. 729 00:52:52,480 --> 00:52:56,200 "It's going so well there, we never thought of it, we'd better go do it." 730 00:52:56,200 --> 00:52:59,120 I mean, from the very beginning it was one of the options. 731 00:52:59,120 --> 00:53:03,480 Britain's audacious gambit to infuse banks with taxpayer money 732 00:53:03,480 --> 00:53:08,200 and guarantee loans put America in an impossible position. 733 00:53:08,200 --> 00:53:13,840 London now had a competitive advantage over its New York rival. 734 00:53:13,840 --> 00:53:17,200 It certainly had an impact on what we were doing, 735 00:53:17,200 --> 00:53:20,240 because if the UK authorities were going to 736 00:53:20,240 --> 00:53:27,800 do a broad equity investment in their banks and probably, more importantly, do a broad liability guarantee 737 00:53:27,800 --> 00:53:33,520 from the Government, that would have a very profound impact on the US banking institutions. 738 00:53:33,520 --> 00:53:39,600 Today's actions are not what we ever wanted to do but today's actions 739 00:53:39,600 --> 00:53:45,280 are what we must do to restore confidence in our financial system. 740 00:53:45,280 --> 00:53:50,560 Today I'm announcing that the Treasury will purchase equity stakes 741 00:53:50,560 --> 00:53:53,560 in a wide variety of banks and thrifts. 742 00:53:55,560 --> 00:53:59,880 The UK had manoeuvred America into following its plan. 743 00:53:59,880 --> 00:54:03,440 The US diverted the money allocated for buying toxic assets 744 00:54:03,440 --> 00:54:09,600 and instead bought shares in its banks and set up a scheme to guarantee bank loans. 745 00:54:09,600 --> 00:54:12,840 The Eurozone states did the same. 746 00:54:12,840 --> 00:54:16,040 Those two - the capital injections and the loan guarantees - 747 00:54:16,040 --> 00:54:19,080 were really the keys to stabilising the financial system. 748 00:54:19,080 --> 00:54:24,080 It was very effective, because this was the clearest indication that we can make 749 00:54:24,080 --> 00:54:27,800 that the government was going to stand behind the institutions in the US. 750 00:54:30,160 --> 00:54:35,040 In the weeks afterwards, matters clearly improved and the panic was over. 751 00:54:35,040 --> 00:54:37,600 Of course, it did not mean that the problems were over. 752 00:54:37,600 --> 00:54:40,280 Had we not had that British announcement, 753 00:54:40,280 --> 00:54:43,680 we may be a very different place today - a much worse place today. 754 00:54:59,280 --> 00:55:05,320 By the end of the year, policy makers were confident the cash machines would stay open. 755 00:55:07,120 --> 00:55:11,840 But even that could not prevent the first great recession in the age of globalisation. 756 00:55:14,880 --> 00:55:20,960 In Britain, three quarters of a million jobs have gone in the last year alone. 757 00:55:20,960 --> 00:55:24,640 The recession has touched almost every country. 758 00:55:25,640 --> 00:55:32,720 I don't think there is anything comparable to that unless you go back to 1914 or the 19th century, 759 00:55:32,720 --> 00:55:37,600 and I think the global consequences there were probably less than we saw last autumn. 760 00:55:37,600 --> 00:55:43,680 TRANSLATION: I think the fault lies with the rich countries. Why? 761 00:55:43,680 --> 00:55:48,360 Because they believed for decades the market by itself could resolve all problems. 762 00:55:48,360 --> 00:55:51,520 So when the market proved to be fragile, incompetent, 763 00:55:51,520 --> 00:55:56,200 then the states started to see that they had to act, and act decisively. 764 00:55:57,880 --> 00:56:02,040 NEWSREADERS: '..The stock of national debt is going to keep on rising... 765 00:56:02,040 --> 00:56:05,880 '..for a £175 billion budget deficit... 766 00:56:05,880 --> 00:56:11,000 '..involves unprecedented levels of debt, tax increases and a squeeze on public spending...' 767 00:56:11,000 --> 00:56:13,120 You belong in jail! Jail! You criminal! 768 00:56:13,120 --> 00:56:16,440 The crash was decades in the making. 769 00:56:16,440 --> 00:56:19,040 The final cost will not be known for years. 770 00:56:19,040 --> 00:56:23,120 Since the collapse of Lehman Brothers, governments have spent or pledged 771 00:56:23,120 --> 00:56:26,440 at least six trillion dollars to fight the crisis. 772 00:56:26,440 --> 00:56:31,200 The Treasury says UK national debt could rise by 20% to around 773 00:56:31,200 --> 00:56:37,880 £1 trillion in five years - equivalent to £16,000 per person. 774 00:56:37,880 --> 00:56:43,040 However, its investment in the banks could eventually turn a profit. 775 00:56:43,040 --> 00:56:48,920 Even right up until September, most of these big banks basically were pretty disdainful of Government. 776 00:56:48,920 --> 00:56:53,000 What's blindingly obvious is they are certainly global institutions 777 00:56:53,000 --> 00:56:57,280 when things are going well, but they become very, very local when things go badly. 778 00:56:57,280 --> 00:57:01,400 And then they turn up at the front door of the Treasury saying, "Could you help, please?" 779 00:57:03,000 --> 00:57:09,400 The world's 20 biggest economies all now profess the need for stricter regulation. 780 00:57:09,400 --> 00:57:15,880 But, in the four times they've met since the fall of Lehman, reaching consensus has been difficult. 781 00:57:15,880 --> 00:57:18,480 If we wait until after the fact, 782 00:57:18,480 --> 00:57:23,960 the appetite for better and appropriate regulation will be gone. 783 00:57:23,960 --> 00:57:28,320 And everybody will be back to business as usual, 784 00:57:28,320 --> 00:57:31,840 and we run the risk of our taxpayers saying, 785 00:57:31,840 --> 00:57:36,000 "Well, we're paying all this money, but what's in it for us at the end of the day?" 786 00:57:36,000 --> 00:57:38,520 Aren't you promising a better world? 787 00:57:38,520 --> 00:57:44,240 The Lehman collapse shattered assumptions built up over decades 788 00:57:44,240 --> 00:57:46,760 that modern finance eliminated risk, 789 00:57:46,760 --> 00:57:54,560 that asset prices would only rise, and the market operates best when left alone. 790 00:57:54,560 --> 00:58:00,760 And perhaps biggest of all, the collapse of Lehman shattered the illusion that we can ignore history. 791 00:58:02,280 --> 00:58:05,160 There's no new paradigm here at all. 792 00:58:05,160 --> 00:58:09,400 This is something we've seen on many occasions over several hundred years. 793 00:58:09,400 --> 00:58:14,120 But the fact that we've seen it in the past and not been able to improve things is a worry. 794 00:58:14,120 --> 00:58:17,520 This is one of a long series of financial crises. 795 00:58:17,520 --> 00:58:22,080 Its been the biggest one, perhaps ever, but it's come out of almost 796 00:58:22,080 --> 00:58:25,920 the same sort of problems that we've seen in the past. 797 00:58:25,920 --> 00:58:30,520 People who think the world has changed, I'm afraid, have not read history. 798 00:58:34,000 --> 00:58:36,800 From the south sea bubble to the dot com boom, 799 00:58:36,800 --> 00:58:44,800 from 1929 to 2008, every crash is a story of its time. 800 00:58:44,800 --> 00:58:51,640 But they have all shared a common theme - a reckless love of money. 801 00:59:13,120 --> 00:59:16,720 Subtitles by Red Bee Media Ltd 802 00:59:16,720 --> 00:59:20,640 E-mail subtitling@bbc.co.uk