The consistent lack of manners of the Treasury

The Treasury - shorthand for its political leadership and the politicised section of its permanent establishment - is institutionally nasty.  It ever was thus.  The Treasury is ruthless, and at times unprincipled and unscrupulous in the pursuit of what it wants.  Its indifference to the collateral damage this may cause to people’s reputations, self-esteem and feelings is legendary and well-documented.  Recent examples include letting former Governor of the Bank of England, Eddie George and current Governor Mervyn King twist slowly in the wind - unnecessarily dragging out the decision on their reappointment when they were up for reappointment at the end of their first terms as Governor.  Apart from being rude and kak-handed, it also did nothing to promote financial stability, especially in the case of Mervyn King’s reappointment, which came at the high of the North Atlantic area financial crisis.

An example: the (announcement of) the departure of Sir John Gieve from the Bank of England

A particularly distasteful example of unscrupulous and gratuitously nasty behaviour by the Treasury was the manner in which it orchestrated the leaking of the announcement of Sir John Gieve’s departure from the Bank of England.  That departure itself, whatever the legal niceties, amounted in substance to the constructive dismissal of the Deputy Governor. The job description of Deputy Governor for Financial Stability was being redefined and enhanced.  The new job would go into effect in the Spring of 2009.  His existing job would expire at that point.  He would therefore not be able to serve out the remaining two years of his five year term.  He would not be appointed automatically to the new enhanced Deputy Governor for Financial Stability position, but would have to apply for the job like any other candidate.  In the future, all MPC positions, including the executive positions, will be advertised - a distinct improvement over the current grab-bag approach.

Having been found surplus to requirements by the Treasury, it was agreed that Sir John’s departure in the Spring was to be announced on June 19, 2008, the day following the Mansion House dinner with the traditional speeches by the Governor and the Chancellor.  His leaving was to be announced as part of a longer message containing details of sweeping changes to the Bank’s financial stability structure.  The substance of that message is contained in the Chancellor’s letter of June 19 2008 to the Chairman of the Treasury Committee, John McFall.  Instead, the forces of darkness in the Treasury leaked the news of Sir John’s resignation during or just before the Mansion House dinner on June 18 - a dinner attended by Sir John.  He was texted or e-mailed the news of the leak and spent most of the rest of the meal working away on his BlackBerry to put together a press statement.  It was undignified, embarrassing and pointless.  The leak was planned, intentional and deliberate.

This crass behaviour reflects a basic lack of class and manners.  In the words of a colleague who knows the Treasury well: “they are bastards.”  In the even more damning words my mother would use when faced with this kind of behaviour: “they are not very nice people”.

Why was Sir John Gieve considered expendable?

Scapegoat for Northern Rock

The main reason the Treasury were keen to get rid of Sir John Gieve was that for many, including the Treasury and the House of Commons Treasury Select Committee, he had become the scapegoat for the Northern Rock debacle.  This choice of scapegoat was quite surprising and in my view unfair.  Sir John does not even figure in the top three of the hit parade of contributors to the Northern Rock fiasco.

The Northern Rock shambles was first and foremost the result of the recklessness and incompetence displayed by Northern Rock’s management and board.  Among the three public entities that constitute the Tripartite Arrangement for financial stability in the UK, the direct operational responsibility for not spotting Northern Rock’s predicament before it became terminal, lay with the regulator, that is, with the FSA.

The Treasury shares the number two and three slots on the blame parade with the FSA.  The Treasury had and continues to have overall responsibility for the Tripartite Arrangement for financial stability in the UK.  It was also the Treasury (past and present) that failed to create an operational and effective deposit insurance scheme for UK banks.  With a proper deposit insurance scheme, the run on Northern Rock’s deposits would not have happened.  Once again it was the Treasury (past and present) that failed to create a workable special resolution regime (SRR) for banks, along the lines, say, of the one run by the FDIC in the US for insured deposit-taking federal banks.  With a proper SRR and the prompt corrective action (PCA) it permits, the balance sheet of Northern Rock could have been ring-fenced and its insured depositors paid off swiftly.  An administrator could have been appointed who could have fired the management and board, taken away the decision-making powers of the existing shareholders and put them at the back of the queue of claimants on Northern Rock’s assets.

The Bank of England, in the person of the Governor - not the Deputy Governor for Financial Stability - dropped the Northern Rock ball a number of times.  In evidence to the House of Commons Treasury Select Committee on September 20, 2007, the Governor explained that he decided not to offer covert support to Northern Rock, as he would have preferred to do and as he would have done under the ancien regime, because the (Brussels) Market Abuse Directive (technically the 2005 UK Implementation of the EU Market Abuse Directive) made such assistance illegal or at least legally doubtful. The Governor’s interpretation of the Market Abuse Directive seemed strange, and was promptly denied by Brussels: “It is crystal clear that there is sufficient flexibility to delay information by the issuer of the type that the Governor of the Bank of England would have been referring to,” said a spokesman for the European Commission on that same day. “There is also no obligation for central banks to disclose its activity under the market abuse directive.” “The very notion of the directive including such a limitation is outlandish as it would render any central bank activity to help an ailing institution virtually impossible.”  Covert support could have prevented Northern Rock from hitting the rocks.  Not to pursue this covert support was the Governor’s call, not that of Sir John.

The Governor also referred in his September 20 evidence that it had not been possible “… to invite the directors of Northern Rock and prospective purchasers into the Bank or the FSA for a weekend to see if that could be resolved and a transfer of ownership agreed over the weekend such that the depositors in Northern Rock would have woken up on Monday morning to find themselves depositors of a larger and safer bank. That is not possible because any change of ownership of a quoted company - and Northern Rock is a quoted company - cannot be managed except through a long and prolonged timetable set out in the Takeover Code.”  Again, the validity of the Governor’s interpretation of the relevant applicable law has been disputed.  Again, the decision not to pursue this course of action (with Lloyds-TSB or another party) was the call of the Governor, not of Sir John.

In August 2007, the Bank of England’s discount window facility (the standing (collateralised) lending facility) and its liquidity-oriented open market operations, mainly repos, were also woefully underdeveloped in comparison to those managed by the Fed and the ECB.  The range of eligible collateral was ludicrously restricted.  Effectively, the Bank of England in August and early September 2007 accepted only highly liquid public sector debt instruments as collateral at its discount window and open market operations.  A central bank doesn’t do much to enhance liquidity if its counterparties have to offer highly liquid collateral in exchange for access to the central bank’s liquidity.  In addition, the Bank of England, even during the early months of the crisis, was inclined to attribute most of the spread between market rates and the official policy rate (or the market’s expectation of future policy rates) to credit risk (that is, default risk) rather than to liquidity risk.  As a result it failed to inject enough liquidity at the longer maturities where it was required.  The Bank of England learnt its lesson and is now performing rather better in the area of liquidity provision.  Again, these arrangements and policies were almost all developed before Sir John joined the Bank in January 2006.  The final say on the Bank’s liquidity management decisions was the Governor’s.

What then were the mistakes made by Sir John in connection with the Northern Rock kerfuffle?  As Deputy Governor for Financial Stability, and with an ex-officio non-executive position on the board of the FSA, he was the Bank’s point man for financial stability and the communication channel of first resort between the FSA and the Bank.

Clearly, Sir John did not foresee Northern Rock’s demise.  But neither did anyone else in the Treasury, the FSA or the Bank of England.  In fact, the Treasury now recognises that there were structural defects in the flow of communication between the Bank and the FSA, and it proposes to remedy these defects through future legislation.  In his letter to John McFall of 19 June 2008, Chancellor Darling states that “to ensure that the Bank of England has access to information needed to inform its analysis of the stability of the financial system as a whole, it will be able to request that the FSA obtain firm-specific information on its behalf”.  Without this power to request information from the FSA, what could Sir John conceivably have done, even in his full glory as a non-executive Board member of the FSA, to find out more about individual institutions?  Even more to the point, even with that power, how could he have know to ask for information about Northern Rock (and how will, under the new arrangements, his successor know what information to ask for)?

The first reason the Treasury made Sir John the scapegoat for Northern Rock was  that they knew he would be too decent to fight back publicly or privately.  Because they knew the man, they knew he would not risk any course of action that might hurt the Treasury, where he spent much of his career, or the Bank.

New and Old Labour class warfare

There is also likely to be a second reason why Sir John was picked on.  He was on the wrong side in the New Labour class struggle.  Under New Labour rules, it is OK to have gone to Oxbridge, but not OK to have gone to public school and Oxbridge.  Sir John went to Charterhouse School and to New College, Oxford.  He is a toff.  He has a languid mandarin manner which rubs the New Labour in-crowd the wrong way.  The insecure classes feel they are having the mickey taken when confronted by someone with Sir John’s mannerisms - and for all I know they may well be right.  They should get over it.

Sir John certainly rubbed John McFall, the Chairman of the Treasury Select Committee and an Old Labour class warrior the wrong way.  McFall savaged Sir John during a Treasury Committee hearing because the latter had taken leave during August 2007, when the financial crisis had just started.  I know that postal pigeons are unreliable, but surely even Mr. McFall must be aware of the invention of the telegraph, the telephone (including the mobile telephone), conference calls, two-way radio, fax, e-mail, video-conferencing and many other ways of communicating and making group decisions?  The fact that Sir John attended his mother’s funeral during his August leave was apparently unknown to McFall (I hope).

New Labour class consciousness has caused damage on other occasions.  I am convinced it was behind the decision of the then Chancellor Gordon Brown not to re-appoint Professor Charles Goodhart to a second term on the MPC in 2000.  I believe Charles would have been willing to accept a second term.  He was and is the most eminent British monetary economist alive, and one of the very few economists anywhere who really understood, even in 2000, issues of liquidity management and financial stability.  But he’s posh - a toff: Eton, Trinity College Cambridge and Harvard - a fatal combination in New Labour Land.

I well remember him causing considerable dismay among a number of members of the Treasury Select Committee during a hearing we both attended.  One of the MPs referred to some document that had just been released and might contain information relevant to the next interest rate decision of the MPC.  The next meeting was still a couple of weeks or so in the future.  Charles said he had not yet read the document because he had been busy marking exams for the LSE.  Eyebrows were raised so high by some of the Labour MPs present, they almost touched the roof.  The fact that Charles, like many other external MPC members with academic affiliations, was part-time with the MPC (3 days a week) and spent 2 days each week working at the LSE, was lost on them.  I am convinced it was the way he said what he said as much as what he said that got their dander up.

If, as I suspect, it was the New Labour class war that caused Charles not to be reappointed for another term on the MPC, it was the country’s loss, as a comparison of his qualifications with those of the average external MPC member appointed since he left will confirm.

Conclusion

Politicians and others in positions of power should be judged not only on the quality of the decisions they take and the choices they make, but also on the manners they display in their public and administrative roles.  The arrogance of power manifests itself in unnecessary brutality and cruelty - sometimes born of ignorance or indifference, sometimes deliberate - toward those whom it considers ‘disposable’.  As the most powerful government department, the Treasury displays contempt for and nastiness towards those whom it considers to be obstacles to the effective pursuit of its goals, more frequently and with greater intensity than other institutions.

Even when the goals of the Treasury are aligned with the public interest, there is no presumption that these ends will justify the means used to achieve them.  This is true even when these means are necessary; it is true a fortiori if the means are unnecessary ‘bad manners’ add-ons.

In practice, even the goals of the Treasury can be in conflict with the committed pursuit of the public interest.  They may represent no more than the opportunistic pursuit of party-political or other sectional interests.  To use gratuitous nastiness in the pursuit of the wrong objectives would be the nadir of public policy.  Regrettably we see this too often.

June 29th, 2008 in Culture, Economics, Ethics, Financial Markets, Monetary Policy, Politics | Permalink