Shelf Life

Excerpt: Beyond the Crash

Matt Berger Dec 10, 2010

The following excerpt is from Beyond the Crash by Gordon Brown. Listen to the Marketplace Morning Report interview and learn more about the book.

Introduction: The First Crisis of Globalization

On the evening of Tuesday, October 7, 2008, eleven days after that sleepless night flight from Washington, after we had prepared the banks for the recapitalization announcement the following day, the head of one of Britain’s biggest banks told me that his only problem was cash flow, and that all he needed was “overnight finance.” His comment undermined any remaining confidence I had in the collective wisdom of our bankers. The next day two of our banks, then among the biggest in the world, became our biggest banking casualties ever. A few months later, in January 2009, they announced losses that were the highest in British history.

His bank’s problems were not short term, or simply about liquidity, and help with cash flow could not have helped for more than a few days. The problems were far, far worse than he knew or perhaps would admit. They were structural and fundamental. His bank owned assets of unimaginable toxicity and had been left with too little capital to cover its losses and remain solvent. The market clearly believed that as well.

But as Wall Street tried to work out if and how the Troubled Assets Relief Program would work, bankers, regulators, and governments across the world were still in shock and had not formed a consensus about what needed to be done. Some called for more liquidity to be pumped into the system. Others wanted to cordon off toxic assets. In Europe there was still a view that this was a problem of, and exclusive to, the so-called Anglo-Saxon economies.

It had taken us more than a year to get to this point, but during the summer holiday I had already come to a different and very troubling conclusion: that the banking problems ran so deep, and were so systemic, that Britain could not afford to wait for others to join us before taking root-and-branch action to save our banks. By September I knew we were days away from a complete meltdown. I had set a course, and was prepared to go it alone if necessary.

At five the next morning I told Sarah that she would have to be ready to pack our things for a sudden move out of Downing Street. I was about to announce that we were offering to invest money in the banking system–something no government in British history had ever done. If what I was about to do failed, I would have no choice but to resign. As I walked into the office that morning I didn’t know if I’d still be in office when the sun set that evening.

Then I got down to business. On October 8, 2008, Alistair Darling and I announced the biggest recapitalization in Britain’s banking history: a government-led recapitalization package, in which we offered to buy up to £50 billion of bank capital and equity, with a unique £250 billion credit guarantee scheme for banks to issue debt and £200 billion of extra liquidity. In return, we would hold firm to the tough conditions we had set on the plane back from America: no liquidity without recapitalization.

This book is my account of how we got there: an insider’s story of the financial crisis that burst upon the world in 2008. If the decisions recounted in this book had not been taken by leaders across the world, we could have faced a worldwide depression, bringing with it a return to the protectionism, mass unemployment, extremism, and political instability of the 1930s.1 This is a book about what happened then and what should happen now.

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