RBS Faced Risk of Full Seizure by Brown in Crisis, Gieve Says

Oct. 7 (Bloomberg) -- Royal Bank of Scotland Group Plc posed such a threat to the British and global financial systems at the height of the crisis last year that Prime Minister Gordon Brown could have ended up fully seizing the bank, former Bank of England official John Gieve said.

Brown didn’t need to go that far because Fred Goodwin, then RBS chief executive officer, conceded to government rescue aid on the weekend of Oct. 11-12, Gieve said. Other officials were scrambling from London to Washington and Paris at the time to coordinate the response to the panic sparked by Lehman Brothers Holdings Inc.’s collapse four weeks earlier.

“If Royal Bank of Scotland hadn’t been propped up as it was, in practice it would have been nationalized the following week,” Gieve, who was the bank’s deputy governor at the time of the 2008 crisis, said in a Bloomberg Television interview yesterday. “If RBS, HBOS, Lloyds had gone down, that would have had huge contagious effects throughout the rest of the world.”

Brown’s government took stakes in RBS, Europe’s biggest bank by assets at the time, and Lloyds Banking Group Plc, the bank formed in the merger of Lloyds TSB Group Plc and HBOS Plc, as the financial crisis intensified. Gieve said some bank chiefs resisted aid before realizing that “the game was up” and accepting the full rescue package unveiled on Oct. 13, 2008.

‘Crashing’ Dreams

“For the boards and chief executives, particularly of RBS and HBOS, this was a terrible day,” Gieve said. “All their dreams were crashing to the ground, but there wasn’t a great deal of arguing. In truth, both RBS and HBOS knew they needed government support and they were being told the terms they had to accept.”

Goodwin and Andy Hornby, who was chief executive officer of HBOS, then resigned as their banks ceded majority control to Brown’s government. HBOS, the country’s biggest mortgage lender at the time, is based in Edinburgh, as is RBS.

The two banks were not “confident they could get to the end of the day,” on Oct. 6 and Oct. 7, 2008, Bank of England Governor Mervyn King told the BBC in an interview broadcast last month. On Oct. 8, the government offered to take stakes in British banks to shore up their capital.

Gieve said that he spent much of the following weekend in negotiations with the banks, the U.K. Treasury and the Financial Services Authority to prepare the rescue package.

The talks took place amid an “intensive diplomatic effort” to press for other governments to recapitalize their banks, Gieve said. Alistair Darling, the finance minister, was with King at the International Monetary Fund meetings in Washington and Brown was in Paris to discuss the crisis with European Union leaders.

‘We Pulled it Off’

“This was something that has never been done before, an attempt to recapitalize the heart of the British banking system in two days flat, and at the same time persuade the rest of the world and the rest of Europe that this was the model which they should adopt,” Gieve said. “We pulled it off.”

The deal wasn’t perfect and had to be tweaked in January to adjust the terms of the RBS bailout, Gieve said. The government now owns stakes of 70 percent in RBS and 43 percent in Lloyds Banking Group.

“We had to convince the markets that this was enough, that they didn’t need to worry that any of these banks were going to fail,” he said. “It did that trick. It was a reestablishment of confidence that was key, not the actual fine print of the numbers.”

Gieve, who left the central bank at the end of February, also participated in the global coordinated interest-rate cut on Oct. 8, 2008.

‘Real Tsunami’

“The coordinated cut wasn’t as important as the recapitalization of the banks,” he said. “Everyone was focused on the fact there was a real risk of total financial meltdown, and a real risk of another Great Depression. In the summer, we’d been in a storm which was severe. We were now facing a real tsunami which could sweep away all we’d worked for, for years.”

Asked to identify his biggest mistakes during the three years he spent as deputy governor, Gieve said that he wished he had spoken out more about the risks to the financial system before the crisis. He also said that interest rates should have been higher in the U.K. from 2005.

“We did identify vulnerabilities in the financial system in 2006, including things like wholesale funding exposure and so on,” Gieve, 59, said. “But we didn’t make enough noise about them. Personally, I just wish that I’d beaten the drum a bit more than I did.” Oct. 7 (Bloomberg) -- Royal Bank of Scotland Group Plc posed such a threat to the British and global financial systems at the height of the crisis last year that Prime Minister Gordon Brown could have ended up fully seizing the bank, former Bank of England official John Gieve said.

Brown didn’t need to go that far because Fred Goodwin, then RBS chief executive officer, conceded to government rescue aid on the weekend of Oct. 11-12, Gieve said. Other officials were scrambling from London to Washington and Paris at the time to coordinate the response to the panic sparked by Lehman Brothers Holdings Inc.’s collapse four weeks earlier.

“If Royal Bank of Scotland hadn’t been propped up as it was, in practice it would have been nationalized the following week,” Gieve, who was the bank’s deputy governor at the time of the 2008 crisis, said in a Bloomberg Television interview yesterday. “If RBS, HBOS, Lloyds had gone down, that would have had huge contagious effects throughout the rest of the world.”

Brown’s government took stakes in RBS, Europe’s biggest bank by assets at the time, and Lloyds Banking Group Plc, the bank formed in the merger of Lloyds TSB Group Plc and HBOS Plc, as the financial crisis intensified. Gieve said some bank chiefs resisted aid before realizing that “the game was up” and accepting the full rescue package unveiled on Oct. 13, 2008.

‘Crashing’ Dreams

“For the boards and chief executives, particularly of RBS and HBOS, this was a terrible day,” Gieve said. “All their dreams were crashing to the ground, but there wasn’t a great deal of arguing. In truth, both RBS and HBOS knew they needed government support and they were being told the terms they had to accept.”

Goodwin and Andy Hornby, who was chief executive officer of HBOS, then resigned as their banks ceded majority control to Brown’s government. HBOS, the country’s biggest mortgage lender at the time, is based in Edinburgh, as is RBS.

The two banks were not “confident they could get to the end of the day,” on Oct. 6 and Oct. 7, 2008, Bank of England Governor Mervyn King told the BBC in an interview broadcast last month. On Oct. 8, the government offered to take stakes in British banks to shore up their capital.

Gieve said that he spent much of the following weekend in negotiations with the banks, the U.K. Treasury and the Financial Services Authority to prepare the rescue package.

The talks took place amid an “intensive diplomatic effort” to press for other governments to recapitalize their banks, Gieve said. Alistair Darling, the finance minister, was with King at the International Monetary Fund meetings in Washington and Brown was in Paris to discuss the crisis with European Union leaders.

‘We Pulled it Off’

“This was something that has never been done before, an attempt to recapitalize the heart of the British banking system in two days flat, and at the same time persuade the rest of the world and the rest of Europe that this was the model which they should adopt,” Gieve said. “We pulled it off.”

The deal wasn’t perfect and had to be tweaked in January to adjust the terms of the RBS bailout, Gieve said. The government now owns stakes of 70 percent in RBS and 43 percent in Lloyds Banking Group.

“We had to convince the markets that this was enough, that they didn’t need to worry that any of these banks were going to fail,” he said. “It did that trick. It was a reestablishment of confidence that was key, not the actual fine print of the numbers.”

Gieve, who left the central bank at the end of February, also participated in the global coordinated interest-rate cut on Oct. 8, 2008.

‘Real Tsunami’

“The coordinated cut wasn’t as important as the recapitalization of the banks,” he said. “Everyone was focused on the fact there was a real risk of total financial meltdown, and a real risk of another Great Depression. In the summer, we’d been in a storm which was severe. We were now facing a real tsunami which could sweep away all we’d worked for, for years.”

Asked to identify his biggest mistakes during the three years he spent as deputy governor, Gieve said that he wished he had spoken out more about the risks to the financial system before the crisis. He also said that interest rates should have been higher in the U.K. from 2005.

“We did identify vulnerabilities in the financial system in 2006, including things like wholesale funding exposure and so on,” Gieve, 59, said. “But we didn’t make enough noise about them. Personally, I just wish that I’d beaten the drum a bit more than I did.”