Alistair Darling-Back From The Brink

Due to my personal interest in the origin of the SLS, I had that hoped that Alistair Darling would address the matter of the origin of the SLS and the reasons for the disagreement with Mervyn King regarding 'whose scheme it was'. Strangely enough, Alistair discusses the recapitalisation plan for the banks that was implemented from September 2008 and he says:

"In the aftermath of this crisis there have been many who have claimed authorship of what proved to be a highly successful plan. Gordon and I had earlier discussed the idea of forcing banks to raise capital, and of us providing it if necessary. He was immediately open to the idea and he did tell me, when I outlined it to him, that he and his advisors had been thinking along similar lines. It really doesn't matter who thought of the scheme first. What matters is that it worked. What I know for certain is that the Treasury, the Bank and the FSA started this work on 26 September, under my instruction."


Alistair Darling,  Back From The Brink, pg 142, 2011, with acknowledgements to Alistair Darling

In regard to the Special Liquidity Scheme, it does matter who claimed authorship because Mervyn King claimed copyright to the idea of exchanging mortgage collateral for Treasury bonds and the HM Treasury have declared in their response to my FOI request (2010) that they received the proposal from the Bank of England in "mid-March", a week before I sent in my suggestion. There was also a public disagreement between the HM Treasury and Bank of England regarding 'whose scheme it was'.
Incredibly, although there is much in the public domain regarding the origin and launch of the SLS, Alistair tells us:

"While I was away on the other side of the world, I was in constant touch with the Treasury and with Gordon. We had, up until my departure, been working closely with Mervyn and his colleagues at the Bank of England to address the problem that banks were having in obtaining enough funds to keep going. The result was the implementation of the 'special liquidity scheme'...


I had worked on this for several months and put a great deal of effort into persuading the Bank to agree to it-technical though it may be, it was one of the most successful things we did...It was a very good scheme and I was proud of it. That it was announced when I was on the other side of the world was a bit odd."


Alistair Darling, Back From The Brink, 2011, pg 94, with acknowledgements to Alistair Darling

http://www.youtube.com/watch?v=JukI3rcnhXI

Cabinet Office FOI reply 25th August 2011

Philip Augar: Chasing Alpha

" Mervyn King, who had worked out the Special Liquidity Scheme over the Easter weekend, felt confident that the initiative would solve their funding problem. 'Now is the time', he said, 'to take the liquidity issue off the table in a decisive way' " Augar, P, Chasing Alpha, pp 183-184

(Mervyn King quoted by Chris Giles, King puts his stamp on liquidity scheme, Financial Times, 22 April 2008)

With acknowledgements to Philip Augar, Chasing Alpha, The Bodley Head, London, 2009

Solvency rather than liquidity was at the core of the banking crisis of 2008 and this was known to Mervyn King in March 2008 (see below: Banking Crisis Now One of Solvency Not Liquidity). Hank and Ben were already leading the the way tackling the problem of global financial liquidity and Mervyn tagged on to himself the Special Liquidity Scheme.

Despite the BoE taking the liquidity issue off the table in a decisive way by providing UK banks and building societies with access to liquidity, and the recapitalization of major banks such as Lloyds and RBS by the State, share-holder value in these banks has virtually been wiped out.
Lloyds Banking Group
February 2007: £6.00  September 2011: 34P
RBS
February 2007: £7.00  September 2011: 22P

The stock market chart of the Dow Jones index shows that the crash of 2003 is almost replicated in 2008-2009. In 2003 there was no mention of a housing bubble collapse or sub-prime collapse and two years prior to that, the dot com crash and Enron collapse occurred.

The key to the events, beginning at the historical peak of the markets, is the exhaustion of leveraged financial trading (both banking system and the global markets) and the huge kickback surge of falling asset values that brought down some of over-leveraged giants of the global investment/financial services industry

http://www.greatdepression2.com/

Banking Crisis

     Banking Crisis Part 1

     Banking Crisis Part 2

     Banking Crisis Part 3

HM Treasury FOI reply June 2011

BoE refuse my FOI request

Towards a history of the origins of the SLS

In the Preface and Acknowledgements section of the book Age of Extremes, Eric Hobsbawn, a great historian, informs us of his research methodology:
"As the historian of the twentieth century draws closer to the present he or she becomes increasingly dependent on two types of sources: the daily or periodical press and the periodic reports, economic and other surveys, statistical compilations and other publications by national governments and international institutions. My debt to such papers as the London Guardian, the Financial Times and the New York Times should be obvious. My debt to the invaluable publications of the United Nations and its various agencies, and the World Bank is recorded in the bibliography. Nor should their predecessor , the League of Nations, be forgotten..." ( 1995, Abacus Books, Great Britain, page xi)
With acknowledgements to Eric Hobsbawm

The Special Liquidity Scheme was launched by the Bank of England on 21st April 2008. Mervyn King, the governor of the Bank of England, stated to the Press that he originated this scheme on his home computer a week before Easter; and Mervyn King "implicitly asserted copyright to the idea of exchanging mortgage collateral for treasury bonds." This blog is a critique of Mervyn's claim based on the email that I sent to HM Treasury on 23rd March 2008.

The Penny Drops- a comment on Andrew Rawnsley's history of the introduction of the Special Liquidity Scheme

Andrew Rawnsley mentions the origination of the Special Liquidity Scheme in his book, The End Of the Party (2010, Penguin Books, UK).

According to Rawnsley:
" There was another distress signal from the world's unstable financial system in mid-March. Bear Stearns, America's fifth largest bank, collapsed into the arms of JP Morgan for the fire sale price of $2 a share. Mervyn King was becoming so anxious that he was getting over his earlier preoccupation with moral hazard. The Governor was 'very badly scarred by his late reaction to Northern Rock' (note 27, unamed source in the BoE). He set up a new 'special liquidity scheme' to allow British banks to swap mortgage-backed securities for Treasury bonds." (No footnote to this comment)

The End of the Party, page 532
With acknowledgements to Andrew Rawnsley

Monday 17 March
CBS News:
    http://www.cbsnews.com/stories/2008/03/17/politics/animal/main3942247.shtml

CBS News reported that Bear Stearns was acquired by JP Morgan on Sunday 16th March for $2 a share (later upgraded to $10 a share).

Monday 17 March

US Ambassador cable containing Mervyn King's view on the financial situation (see full text further below):

"King said it is also imperative to find a way for banks to sell off unwanted illiquid securities, including mortgage backed securities, without resorting to sales at distressed valuations. He said sales at distressed values only serve to lower the floor to which banks must mark down their assets (mark to market), thereby forcing unwarranted additional write downs. He said we need to find an auction system where banks could move paper they want to sell without fear of stigma that the market views selling at a low price as a sign that a bank is in trouble. King said, however, he did not yet know how to structure such an auction and that further dialogue was needed. Kimmitt acknowledged the need to find ways to unblock these markets and said we should remain in touch bilaterally as well as in the G-7, the Financial Stability Forum, and the central banks."

2010 HM Treasury SLS FOI reply

Stated that the idea behind the SLS came in mid-March before your suggestion was received.

22 April 2008 Financial Times

"Mervyn King, the Bank of England governor, yesterday implicitly asserted copyright over the idea of swapping Treasury bills for mortgage backed security. At a press conference he revealed that he had personally tapped out the guts of the scheme, unveiled yesterday, on his home computer about a week before Easter." 

http://www.youtube.com/watch?v=JukI3rcnhXI

FOI request to Cabinet Office re: minutes of PM Brown's meetings held on 15 April 2008

On 28 June 2010, the Cabinet Office replied to my Freedom of Information request "for Correspondence between HM Treasury, the Bank of England, the Business Secretary and the Prime Minister's Office on the Bank of England's Special Liquidity Scheme."

Your replied that "Following a search of our paper and electronic records, I must inform you that the Cabinet Office, which includes the Prime Minister's Office, does not hold information relevant to your request." Your Ref: FOI 301 545

Under the Freedom of Information Act, I request the minutes of the meetings that Prime Minister Gordon Brown held on 15 April 2008:

1. With the leaders of the British banks and 

2. The meeting that the Prime Minister held immediately after the meeting with the British bank leaders.

Present at the second meeting were: Yvette Cooper, Shriti, Jeremy Haywood, Tom Scholar and Sir Gus O'Donnell. The discussion of the meeting was on "the work the Bank of England had been doing on liquidity. Banks were not lending, so we agreed in that meeting on the basis of a new special liquidity scheme and possible terms on which support would be given." Brown, G. (2010) Beyond the Crash, Simon & Schuster UK Ltd, pg.32 )


Note spelling correction (02/01/2012): Jeremy Haywood is Sir Jeremy Heywood - Cabinet Secretary - succeeding Sir Gus O'Donnell a.k.a GOD

HM Treasury FOI request re: March 2008

Thank you for your response to my 7 April 2011 FOI request. Your letter, dated 11 May 2011, ref: 11/373, states that I may contact you if I have any queries about the letter.

Under the Freedom of Information Act, I request that the HM Treasury provide me with a response to my email sent to ministers@hm-treasury.gsi.gov.uk on 23rd March 2008. 

The HM Treasury's reply, dated 2 July 2010 - Ref: 10/443, to my 24 June 2010 Freedom of Information request, stated that " the idea behind the scheme came from the Bank of England in mid-March, before your suggestion was received."

I request:

1. A copy of the correspondence containing the idea behind the scheme that came from the Bank of England in mid-March 2008.

2. You stated that my letter of 22nd April 2008 that was addressed and posted registered priority mail to the Chancellor of the Exchequer, Mr Alistair Darling, 'was transferred to the Bank of England for response in June 2008'. 

I would like to know if my 23rd March 2008 email or the contents thereof was transferred to the Bank of England, directly by HM Treasury or indirectly (via another department or person), and if the email or contents of the email was transferred to them then I would like a copy of this correspondence to the Bank of England or if it was conveyed in another manner then the date that the information was conveyed.

Request to BoE to review their decision to refuse my 7 April 2011 FOI request re: SLS

I have read the reasons for the declining of my request and I would like to request a review of this decision.I was informed by your office through the telephone discussion on 20th April that this decision would not be reversed and that my comments made during the conversation would be "passed on" to you.

7th April 2008 

Please may I have copies of the correspondence between the Bank of England and HM Treasury from 14 March to 30 April 2008 in regards to the Special Liquidity Scheme.

FOI HM Treasury-Request for letter

-

Bank of England-FOI reply-20th April 2011

HM Treasury-Freedom of Information request- 7 April 2011

1. In your letter to me, dated 27 June 2008, your ref: 10/40564/2008, you state:

"Thank you for your letters dated 23 March and 1 May to the Chancellor of the Exchequer about the Bank of England's Special Liquidity Scheme." 

Please may I have a copy of the letter of 1 May that you refer to.

2. Please, would you advise me as to why you did not reply to my letter of 22 April 2008 that I sent to Mr Darling.

Fraser Nelson-The Spectator

Fraser Nelson reported that in the days after the announcement of the SLS there seemed to be some disagreement between HM Treasury and the BoE regarding whose scheme the SLS was.

"Remember when Alistair Darling “announced” the £50 billion loan package to banks? That time he summoned banks to a meeting saying he wanted better fixed-rate deals and mortgage holidays “in return” for this scheme? He was talking through his hat. He has this morning been rumbled by Mervyn King, Governor of the Bank of England, who gave it straight to the Treasury Select Committee. This so-called Special Liquidity Scheme (SLS) is “a central bank scheme,” King said. The BoE, not any minister, proposed it. There are no conditions, no strings attached, no requirements for banks to ‘pass on’ Bank of England base rate. It is a facility there to provide relatively expensive emergency loans to any bank that needs it. Treasury approval was only required for technical reasons – ie issuing special Treasury bills. (Darling, remember, told MPs the SLS had been “developed following extensive discussions with the Treasury”–it was spun as our decisive government in action). 

Spectator: Mervyn King reveals truth behind Treasury spin, 29th April 2008

http://www.spectator.co.uk/coffeehouse/641451/mervyn-king-reveals-truth-behind-treasury-spin.thtml

With acknowledgements to Fraser Nelson
http://www.youtube.com/watch?v=JukI3rcnhXI

On 17th April 2008, The Times reported:
 Bank close to agreeing plan to end drought in funding for mortgages
"The Bank of England is close to agreeing a plan designed to ease the mortgage funding drought.
It is understood that the Treasury is about to finalise a scheme under which the Bank would allow lenders to swap their mortgage backed assets for government bonds rather than cash."
With acknowledgments to The Times


On 18th April 2008, The Times reported: Treasury's billion-pound swap plan depresses gilts prices


"The Treasury is expected next week to announce a scheme under which the Bank of England will accept asset backed securities from banks in return for gilts."
With acknowledgments to The Times

Bank of England reply to my letter to Alistair Darling in 2009

IBC letter

SLS email to HM Treasury, 23rd March 2008

From: Gregory Hessenauer <investus.gregory@gmail.com>

Date: Sun, Mar 23, 2008 at 9:14 PM
Subject: credit crisis suggestion box
To: ministers@hm-treasury.gsi.gov.uk

Dear Sir or Madam,

It seems to me that the general public may be somewhat dissatisfied if it is seen that the incompetence of the banking system is being bailed out by the BoE. It is generally known that the financial system returns the highest levels of remuneration to its administrative structure and it is difficult to provide a satisfactory justification as to why they need to be subsidised. The situation at present seems to be serious enough to discard crossing the threshhold of moral hazard for the general good of the public but the same result can be achieved by permitting the national treasury to 'nationalise' a portion of the mortgage market. 

Is it possible for the National Treasury to accept mortgage collateral from banks at mark-to-market value and then issue Treasury Bonds that could be bought by pension funds and sovereign wealth funds? I am not an expert economist but in my opinion it should be possible to raise £50 billion from these sources.

As the funds would be disbursed at mark-to-market there would be some fallout in the system until a new equilibrium was established by the inflow of new funds but it is absurd to think that you can succeed in pumping capital into the banking system to prop up losses in the financial system that have resulted from declines in mortgage values.

Kind regards,

Gregory Hessenauer 

Mervyn King's reply to my letter regarding the origin of the SLS

From: Purkiss, Vicky <Vicky.Purkiss@bankofengland.co.uk>

Date: Mon, Jul 21, 2008 at 1:17 PM
Subject: RE: Att. Mr Mervyn King Re.Bank of England credit liquidity scheme
To: "investus.gregory@gmail.com" <investus.gregory@gmail.com>

Dear Mr Hessenauer,

Thank you for your message.  I sincerely apologise for the delay in replying to your original message on 28 May. 

You asked about the source of the idea for the Bank of England's Special Liquidity Scheme (SLS).  Because the Scheme is a central banking operation rather than a fiscal one, it was designed by the Bank of England and not the Treasury.  I am afraid that neither I nor my colleagues were aware of the email you sent to HM Treasury on 23 March outlining a proposal which, as you say, seems very similar to the SLS.  Nevertheless, I am very pleased to know that your independent ideas were extremely similar to those now being put into effect to improve the liquidity position of the banking system in the UK. 

Kind regards,

Mervyn King

-----Original Message-----
From: Gregory Hessenauer [mailto:investus.gregory@gmail.com]
Sent: Saturday, July 12, 2008 5:44 PM
To: Enquiries
Subject: Att. Mr Mervyn King Re.Bank of England credit liquidity scheme

******************************************************
This email has reached the Bank via the Internet or an external network
******************************************************

Dear Mr. King

I have not yet received a response to my email to obtain you views regarding your use of my proposal to introduce mortgage collateral/treasury bond swaps and your claim that you originated this idea.

I am sorry that this is the course of action that you prefer to take as I do not intend to let this issue go.

If I do not receive a response from you within the next 7 days then you can expect to be contacted again.

You may reply by email or post to (deleted)

Yours sincerely,

Gregory Hessenauer

_____________________________________________________________________
This e-mail originated from the Internet and has been scanned for known viruses by the Messagelabs SkyScan Service.
***********************************************************************************
This e-mail is intended for the addressee(s) named above and any
other use is prohibited. It may contain confidential information. If you
received this e-mail in error please contact the sender by return e-mail.
The Bank of England does not accept legal responsibility for the contents
of this message if it has reached you via the Internet, as Internet
communications are not secure. Any opinions expressed are those of the
author and are not necessarily endorsed by the Bank of England.
Recipients are advised to apply their own virus checks to this message .
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_____________________________________________________________________
This e-mail has been scanned for known viruses by the Messagelabs SkyScan Service.

Beyond the Crash-Gordon Brown

"It used to be said that when the Governor of the Bank of England raised his eyebrows the banks would take notice. That was fine when you were dealing with perhaps a half dozen banks, run by the old-boy network typical of the English establishment."  

Alistair Darling, Back From The Brink, pg. 19, with acknowledgements to Alistair Darling

http://www.youtube.com/watch?v=u-qX9ERql50

The timeline set out below is from Gordon Brown's account of the the Special Liquidity Scheme in his book Beyond The Crash (Simon and Schuster, 2010). 

17 February 2008

"we announced that Northern Rock would be nationalised" (page 29)

27 March 2008

GB met President Sarkozy and discussed the need for immediate write offs of toxic debts and the importance of the banks making transparent disclosures.

11 and 12 April 2008

G7 finance meeting and IMF meeting in Washington. Focus was on the scale of impaired assets.

15 April 2008                                                                                                                                           GB called British bank leaders together. All the banks except HSBC asked for liquidity to be provided to the whole system.

"Immediately after the meeting I gathered together Yvette Cooper (then the formidably able Chief Secretary to the Treasury and representing Alistair, who was in Washington), Shriti, Jeremy Heywood, Tom Scholar from the Treasury (who had been my private secretary in the Treasury as well as No. 10 and had excellent judgement) and Gus O'Donnell, the head of the civil service and an eminent economist (and previously my Permanent Secretary in the Treasury), to discuss the work the Bank of England had been doing on liquidity. Banks were not lending, so we agreed in that meeting on the basis of a new special liquidity scheme and possible terms on which support would be given." (page 32)

Gordon Brown then went to the United States and met people including President GW Bush and Federal Reserve Chairman Ben Bernanke.

According to Gordon, three days after he returned from the United States:

"on April 21, Alistair launched the £100 billion Special Liquidity Scheme, which allowed banks and building societies to swap for up to three years some of their illiquid assets, including mortgage debts, for UK Treasury bills." (page 32)

With acknowledgments to Gordon Brown

Gordon does not say when the BoE commenced working on the SLS or attribute its origin to the Bank of England governor Mervyn King. 

Freedom of Information request-SLS- Cabinet Office

Freedom of Information request-SLS-HM Treasury

HM Treasury's 2nd response, dated 2nd July 2010, assures me that "the idea behind the Scheme came from the Bank of England in mid-March, before your suggestion was received."

WikiLeaks:Banking Crisis Now One Of Solvency Not Liquidity-US Ambassador cable-17th March 2008

Monday, 17 March 2008, 18:27

C O N F I D E N T I A L LONDON 000797

SIPDIS

NOFORN

SIPDIS

EO 12958 DECL: 03/17/2018

TAGS ECON, EFIN, UK

SUBJECT: BANKING CRISIS NOW ONE OF SOLVENCY NOT LIQUIDITY

SAYS BANK OF ENGLAND GOVERNOR

Classified By: AMB RTUTTLE, reasons 1.4 (b) and (d)

Summary

0.This cable provides a first insight into the thinking of Bank of England governor Mervyn King and Treasury deputy secretary Robert Kimmitt when world markets were just becoming concerned about the health of big banks. King's words show how far advanced his thinking was on the need for a pouring fresh cash into banks - six months before the collapse of Lehman Brothers. Key passage highlighted in yellow.

0.Read related article

Summary

-------

1. (C/NF) Since last summer, the nature of the crisis in financial markets has changed. The problem is now not liquidity in the system but rather a question of systemic solvency, Bank of England (BOE) Governor Mervyn King said at a lunch meeting with Treasury Deputy Secretary Robert Kimmitt and Ambassador Tuttle. King said there are two imperatives. First to find ways for banks to avoid the stigma of selling unwanted paper at distressed prices or going to a central bank for assistance. Second to ensure there's a coordinated effort to possibly recapitalize the global banking system. For the first imperative, King suggested developing a pooling and auction process to unblock the large volume of financial investments for which there is currently no market. For the second imperative, King suggested that the U.S., UK, Switzerland, and perhaps Japan might form a temporary new group to jointly develop an effort to bring together sources of capital to recapitalize all major banks. END SUMMARY

Systemic Insolvency Is Now The Problem

--------------------------------------

2. (C/NF) King said that liquidity is necessary but not sufficient in the current market crisis because the global banking system is undercapitalized due to being over leveraged. He said it is hard to look at the big four UK banks (Royal Bank of Scotland, Barclays, HSBC, and Lloyds TSB) and not think they need more capital. A coordinated effort among central banks and finance ministers may be needed to develop a plan to recapitalize the banking system.

Unblocking Illiquid Mortgage-Backed Securities

--------------------------------------------- -

3. (C/NF) King said it is also imperative to find a way for banks to sell off unwanted illiquid securities, including mortgage backed securities, without resorting to sales at distressed valuations. He said sales at distressed values only serve to lower the floor to which banks must mark down their assets (mark to market), thereby forcing unwarranted additional write downs. He said we need to find an auction system where banks could move paper they want to sell without fear of stigma that the market views selling at a low price as a sign that a bank is in trouble. King said, however, he did not yet know how to structure such an auction and that further dialogue was needed. Kimmitt acknowledged the need to find ways to unblock these markets and said we should remain in touch bilaterally as well as in the G-7, the Financial Stability Forum, and the central banks.

A Possible Approach To Recapitalization

---------------------------------------

4. (C/NF) The G-7 is almost dysfunctional on an economic level, said King. Key economies are not included, especially those that have large and growing pools of capital. King said that a new international group was needed to address the issue. It could be a temporary group, and he suggested that perhaps the central banks and finance ministers of the U.S., the UK, and Switzerland could coordinate discussions with other countries that have large pools of capital, including sovereign wealth funds, about recycling dollars to recapitalize banks. King said Japan might not be included because it has little to offer. King noted, though that including the Japanese might force their hand in finally marking to market impaired assets. Kimmitt said that he was cautious about starting new groups in the international financial community because of the inevitable debate around whom to include.

Comment

-------

5. (C) The King proposals were not casual ideas developed in the course of luncheon conversation. It was clear that his principal objective in the meeting was to outline his outside-the-box thinking for Kimmitt. King included very few details about his proposals and was content to present broad concepts, thereby planting the seeds for future discussion. END COMMENT.

6. (U) Participants: USG: Ambassador Robert Tuttle; Deputy Secretary Kimmitt; Eric Meyer, Office Director for Europe;

SIPDIS Robert Saliterman, Spokesman, International Affairs, U.S. Treasury; Warren Chane, ECONOFF. UK: Mervyn King, Governor, Bank of England; Chris Salmon, Private Secretary.

7. (U) Deputy Secretary Kimmitt has cleared this message.

Visit London's Classified Website: http://www.state.sgov.gov/p/eur/london/index. cfm TUTTLE

Visit London's Classified Website: http://www.state.sgov.gov/p/eur/london/index. cfm TUTTLE

Source:

http://www.guardian.co.uk/world/us-embassy-cables-documents/146196 
Published: Monday 13 December 2010  23.00 GMT

With acknowledgments to The Guardian and Wikileaks; and with thanks to Julian Assange

Apologies to:

USG: Ambassador Robert Tuttle; Deputy Secretary Kimmitt; Eric Meyer, Office Director for Europe    

King puts his stamp on liquidity scheme, Financial Times, 22nd April 2008

May 7th 2008, the FT replied to my email (also May 7th 2008)  regarding their reporting in this article.

I told the FT that I believed that they had reported the story "incorrectly" and that I would forward to them my March 23rd email to HM Treasury and my letters to Alistair Darling and Mervyn King.


Their reply resolved my enquiry to them.
"Whether the comments were true or not is a dispute between you and the Bank, not between you and the FT". They also said that the article was a "correct representation" of what the Bank of England said.

I have saved the newspaper copy on this blog as it had a profound impact on me.

A digital copy can be obtained at FT online: King puts his stamp on liquidity scheme, 22nd April 2008
http://www.ft.com/cms/s/0/1f7e36fc-0fd2-11dd-8871-0000779fd2ac.html#axzz1ODDfRwn4

SLS-HM Treasury reply to my letter

SLS-10 Downing Street reply to my letter

Gordon and Mervyn

http://www.youtube.com/watch?v=u-qX9ERql50

SLS: my email to HM Treasury, 23rd March 2008

SLS-letter to Alistair Darling, 22nd April 2008

SLS-letter to Prime Minister Gordon Brown, 9th June 2008