Beneath the dome of 30 Saint Mary Axe, in what suddenly seemed like an extravagantly large board room, a reduced and chastened Fitzwilliams sat looking at Pat Kennedy who was deeply focused on his fingernails, biting each in turn in an uncontrollable attack of nerves. The Irish Netherlands Bank was under siege, if help did not come within hours they would be unable to face the onrush of withdrawals, which seemed unavoidable and imminent.
Just a couple of hundred metres away on Threadneedle Street at the Bank of England, its governor, Mervyn King, was facing the dramatic task of putting together a rescue plan to save the British banking system from meltdown. It was a just question of hours from a liquidity shortfall.
Monday, October 6, the FTSE 100 had dropped nearly eight per cent as the City struggled to cope with the flow of bad news. For a week HBOS and Lloyds TSB Group had been experiencing growing difficulties in find funds and their situation was worsening by the hour. The implications were alarming. The prime minister and the chancellor desperately tried to piece together a plan to inject billions into the banking system in the aftermath of Lehman Brothers’ collapse.
With little doubt it would go down as one of Britain’s worst peace time crises. If the banks failed the chain reaction would bring the whole banking system to its knees and the entire British economy would go into a stall. Bank accounts would be frozen, salaries would be unpaid, businesses could no longer pay their invoices, money transfers would stop, and sterling would go into free fall dragging the international finance system into its downward spiral.
Tuesday, October 7, the business minister called an emergency meeting of senior bankers to give their recommendations to the government on a bailout plan. As the hours and minutes passed frantic ideas were proposed by the bankers to save what could be saved.
Only a few days before British depositors had rushed to move their money to Ireland following the Irish government’s measures to avoid a systemic collapse of its financial institutions by guarantying all deposits and borrowings at its six biggest banks.
The fear of an uncontrollable panic and a generalized run on British banks seized the City in the desperate hours of that Tuesday as a blackout concerning plans for RBS and HBOS was imposed. If RBS, HBOS and Lloyds were allowed to fail the effect on financial markets throughout the rest of the world would be catastrophic and would plunge the financial system into an unprecedented chaos.
‘Imagine what it would be like if banks were closed and ATMs stopped function. Without cash people could not buy food and the whole economy would collapse,’ said Kennedy almost nonchalantly.
‘Why don’t you shut up Pat, it’s bad enough without you adding to it,’ snapped Fitzwilliams.
Kennedy was right, violent protests had erupted in Iceland after the collapse of their banking system, a country of just three hundred thousand people. The same scene, repeated across the UK on a scale many hundreds of times greater, considering the differences and inequality in British society compared to Iceland’s, would led to a breakdown of law and order.
Fitzwilliams had spent the afternoon transferring what funds he could muster to safe havens. It was now seven thirty in the evening, two hours afters after the London stock exchange had closed. He had his eyes riveted on the TV screen that flashed news from Wall Street while Kennedy desperately telephoned left and right in search of the least sign of news from the frantic behind the scenes negotiations at 10, Downing Street and the Bank of England.
The country was just hours away from economic doom following a covert run on the banks that same afternoon as major depositors, despite huge penalties, attempted a massive withdrawal of money. If the government plan did not succeed it would be forced into nationalising the entire financial system and guaranteeing all deposits. During this time creditors of British banks watching from New York to Tokyo were getting nervous and were preparing to pull their money out of the UK. There would be little the banks could do to prevent them except selling off shares to meet demands thereby accelerating the stock market fall.
It was five in the afternoon on that fateful Tuesday when the Chancellor finally met with the Governor of the Bank of England and the Financial Services Authority Chairman at the Treasury to hammer out the final details of their plan. Late that same evening they ordered take-away chicken tandoori, balti, boiled rice and poppadoms to tide them through the long night that lay before them.