Finance & Business World

Lehman Brothers Holdings Inc.’s collapse in 2008 surprised former Bank of England Deputy Governor John Gieve because the rescue of Bear Stearns Cos. led him to assume U.S. officials would save investment banks.

“I remember being alarmed and surprised,” Gieve, the central bank’s financial stability chief at the time, told BBC Radio 4 in an interview broadcast today. The U.S. government’s actions on Bear had “established a strong presumption that it would do what was necessary to prevent a collapse of an investment bank as well as a commercial bank.”

U.S. officials didn’t share much information with the Bank of England as they struggled to save Lehman, Gieve said. The investment bank announced on Sept. 15 it had filed for bankruptcy after negotiations at the New York Federal Reserve to engineer a rescue by its peers failed.

“This was the weekend so I think I was patched in on various calls through that evening to the U.S. to get the latest news,” Gieve said. “I must say that we didn’t get a lot of news, we were told hour after hour that they would have some news shortly.”

U.S. officials were unable to broker a rescue of Lehman after talks including Treasury Secretary Henry Paulson and the heads of as many as 14 financial institutions. The U.K.’s Financial Services Authority blocked a rescue by Barclays Plc.

‘Fear’

“It took a week or two before it became clear that Lehman’s failure had triggered not just another round of bank problems but it caused a major loss of confidence worldwide,” Gieve said. “That wasn’t clear on day one. It was a fear.”

The turmoil jeopardized funding for banks around the world. Gieve said his main concern then was the focus that would follow on some U.K. financial institutions.

“I knew one thing that it would do was lead the markets to focus on who’s next,” Gieve said. In the U.K., “the people in the firing line were Bradford & Bingley which had been struggling through the summer, and HBOS online payday loans. Beyond that, of course was RBS, Barclays. The only question was: well how far will this wave go?”

Officials at the Bank of England began working “pretty much straight away” on a rescue plan that involved recapitalizing the banks, Gieve said.

Turning Point

“Over the next two to three weeks a lot of work went into producing what in the end turned out to be the capital package that we produced in early October,” he said. “I was pretty confident the capitalization plan would work if it was done on a big enough basis internationally. Over that week we did see some of the measures taken by the Americans in particular, and that more or less was the turning point.”

Questioned about the contribution of Britain in causing the financial crisis, Gieve said that the most serious errors were made in the U.S.

“We’re the tail, not the dog here,” Gieve said. “This whole crisis was born in the U.S. and the biggest mistakes that led up to it were made in the U.S. We made some of the same ones but we’re not big enough to shape the world.”

Gieve, asked about his time on the bank’s rate-setting panel, said Governor Mervyn King never tried to “browbeat” the Monetary Policy Committee.

“As chairman of the MPC, he acted entirely properly,” Gieve said. “He gave his views. They were influential — of course they were influential. Outside the MPC, the bank is more of a monarchy,” he said, citing the money-markets division as an example.

King doesn’t deserve to bear most of the blame for any mistakes made in the crisis, Gieve said.

“Looking back on this, the arrangements we set in place for economic and financial policy didn’t work as well as we wanted,” Gieve said. “I don’t think you can blame this on an individual being over-mighty.”

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