The Johnson administration had loosened regulations governing City financiers
“Although desirable, financial deregulation alongside political liberalisation can be disastrous if not managed properly. If the regulatory structure is not in place before liberalisation, risk-taking behaviour will not be constrained. Bad loans are a likely outcome, with potential calamitous consequences for bank balance sheets at some point in the future. Financial deregulation alongside political liberalisation also often leads to a lending boom, because of increased opportunities for citizens. We saw this in the British example. The authorities (Treasury and Bank of England) realised that the previous framework was flawed in many respects. The regulations in place at the time of the banking crisis were inadequate and insufficient. The financial statements provided by banks did not permit testing of the real risks of the institutions.”
- The Financial Crises and Financial Reforms in Transition Britain, Scott James (2020)
You know what the great thing is about being allowed back into the global democratic order? - International finance. As an up and coming new market spending vast sums on infrastructure improvements, Britain became a hub for international investors and infrastructure borrowing. Britain’s accession to this new-fangled euro currency made it even easier for Britain to procure international capital. Then a thousand miles away a bank by the name of Lehman Brothers collapsed, then another then another and suddenly the entire international financial system was crumbling down and Great Britain was stuck in the middle. Britain’s many rich friends suddenly began to cash out as all the world’s nations looked inwards to mitigate the crash in their own borders.
For Britain the main problem was a housing bubble. The Johnson administration had overseen a mass sale of state housing. Hundreds of thousands of Brits became homeowners for the first time ever, and international investors had bought up homes in major cities like London. House building had also exploded as the government sought to modernise Britain’s housing stock with 1.4 million new homes built in four years. Despite all these new homes many were built up by wealthy external investors, with over a quarter of British homes unoccupied. Real estate prices had exploded by over 200% in just a few short years since the fall of the Junta and British homeowners owed almost a trillion euros in mortgage debts collectively.
Britain’s politicians were reluctant to do anything about Britain's housing bubble as nearly all MPs had at least some investments in the housing market, with some MPs owning over 20 homes. Then the banks tumbled down and the bubble popped, the British construction industry crumbled by over 25%, areas on the periphery like Scotland and Northumberland were hit especially hard with the construction industry in these provinces falling by nearly 50%. Britain’s construction boom had provided decent paying good quality jobs for thousands of working class Brits, now many of them were in the dole queue, eyeing up the airport to emigrate.
Emigration increased by 30% in 2008, mostly to Ireland
As the bubble burst Britain’s housing market collapsed, many who had invested their life savings into a mortgage deposit found their shiny new house worth less than half of what they had paid for.Many of Britain’s infrastructure plans were abandoned halfway as the state ran out of money, extra runways on Heathrow and Stansted airport were abandoned before finishing as the Treasury rushed to secure capital, planned new “eco-towns” were dropped and rail upgrades were “indefinitely shelved”. This of course had knock-on effects for the banks, especially smaller ones. Britain had a system of small, partly state owned regional banks operating in most of the larger provinces.
“New towns, like Churchill, in the East of London, or Brunel, North of Eastbourne, were never finished and became ‘ghost towns’. In Churchill, for instance, 21,000 apartments were built, out of 80,000 planned, and less than 4,000 were occupied. One of the transformations of savings banks practices in Britain involved offering loans to private corporations, which was not the case under the Junta. For many bank ranches, this practice changed daily activities, and even their socio-economic role. Some savings banks like Anglia based Lowestoft Savings, were more reluctant than others, such as the Bank of London, in accepting this change. But, the transformation took place by “doubtful loans” in the “construction” business. Managers at every level started to meet entrepreneurs involved in construction.”
- The new social role of savings banks and the British financial crisis, Lecture by Mark Blyth, Brown University (2017)
Banks were deeply intertwined with the housing bubble
Leftover from the Junta days, these “Savings Banks” were designed to provide easy to access savings accounts and provide loans for citizens to become homeowners. These banks lent heavily to real estate companies who, one by one were going bankrupt and defaulting on their debts. The Savings Banks found themselves left with the collateral and properties of those companies, overpriced real estate and land, now worthless, rendering the Savings Banks in essence bankrupt. The banks had given the state some control over finance, much more so than banks in Ireland or France, but it also meant when the banks failed the buck stopped with Westminster.
Chancellor Simon Hughes had two options: bailouts or nationalisations. The central government could buy private shares in the Savings Banks and take failing private banks into public ownership, giving the state the resources needed to combat the impending recession, the other option was bailouts and concentrations. The idea being the Treasury would bail out the largest banks and in return these large banks would buy up the smaller regional banks. This would not only consolidate Britain’s bloated financial system but it would cost a lot less in immediate capital than a mass nationalisation programme.The Cabinet was split on the issue, Chancellor Hughes favoured the bailout and consolidation strategy, known in the media as the “Hughes Plan”.
The Hughes plan was supported in Cabinet by Deputy Prime Minister Alan Milburn and Justice Secretary David Miliband. Meanwhile a faction around Agriculture Secretary Glenda Jackson, supported by Culture Secretary Charles Kennedy and Health Secretary Eddie Izzard supported a nationalisation plan. It came down to a Cabinet vote, but with the loss of John Prescott, Peter Tatchell and others from the left of the SDP, the Cabinet was strongly stacked in favour of the Hughes Plan, with Prime Minister Johnson himself voting in favour of the plan. There would be no nationalisations, if the Savings Bank failed, it failed, the Government's main goal was keeping the bigger banks above water, the little banks could always be absorbed, but if the City of London fell the whole British economy could go tumbling down with it.
““A very solid group with more than 14m customers.” That was how a senior Nationwide executive described the big British bank. He assured journalists that the task of integrating the ten regional savings banks in the group was complete. The executive stressed plans to cut costs and reduce debt were well advanced. “We’ve created a brand,” the executive said, although the confidence he sought to convey was undermined by his evident unease. Over a week later, the government of Alan Johnson intervened to save the bank. The game was up for an ill-fated behemoth with more than 5,000 branches and 40,000 employees. Howard Flight, a former Chancellor who became Nationwide's chairman, was obliged to resign. The government announced a bailout at an estimated cost of up to €14bn.”
- The bank that broke Britain, Victor Mallet, Financial Times (2008)
Nationwide was one of the largest banks to be bailed out