Alex Brummer says: In the opinion of some, Bailey blew it
As an avuncular Andrew Bailey leaned back in his chair yesterday in a meeting room at the Ronald Reagan Building, a short walk from the White House, you’d have thought the Governor of the Bank of England didn’t have a care in the world.
In response to questions from the titans of the global banking community, he light-heartedly referred to how he had recently pulled an ‘all-nighter’ because of the turmoil in the financial markets back home.
And what an all-nighter it must have been. For the sake of those who have been holidaying on a wifi-free tropical island, I should point out that it was Bailey who, at the end of last month, prevented a run on the pound that threatened to take it below parity with the dollar by announcing a £65billion bond-buying package.
The idea was that by buying up government bonds known as gilts, the Bank would arrest a calamitous fall in their value and stabilise the perilous positions of the pension funds that had invested so heavily in them. It worked like a dream.
But then, in the opinion of some, Bailey blew it. On Tuesday, with the pension funds still experiencing a degree of turmoil, he warned fund managers that there would be no extension of the rescue programme beyond the end of this week. After that they were on their own. ‘You have got three days left now. You’ve got to get this done,’ he told them.
His off-the-cuff announcement at a fringe event linked to the annual IMF meeting in the US capital was greeted with a collective intake of breath. Surely in such circumstances the Governor of the Bank should not have been making policy on the hoof at a conference abroad, but co-ordinating the response from his desk in the City.
It was Bailey who, at the end of last month, prevented a run on the pound that threatened to take it below parity with the dollar by announcing a £65billion bond-buying package
The impact of his words was immediate and the pound swiftly came under heavy selling pressure on foreign currency markets. London may have closed for business but there were plenty of dealers in New York ready to interpret the Governor’s clumsy remarks as a signal that the UK was losing its battle to calm disorderly markets and thus secure the pensions of its ten million citizens in defined salary pension schemes.
By 5am yesterday, the Financial Times online service was reporting that Bank officials had alerted key dealing rooms it was now prepared to extend its rescue scheme beyond tomorrow. How accurate that report was is a matter of conjecture, but it was enough to make the markets shudder again.
Five hours later, the mixed messaging came full circle. A statement from the Bank reiterated its previous ones saying ‘its temporary and targeted purchases of gilts will end on 14 October’.
It was the second such ‘market notice’ from the Bank of England in 48 hours and one that only added to the impression that Bailey is a Governor who has lost control of events and whose credibility is in severe jeopardy.
As a City journalist whose experience of financial crises dates back to James Callaghan’s application for a loan from the IMF in 1976, I found myself wondering what some of Bailey’s predecessors might have done in similar circumstances. The late great Eddie George would doubtless have stayed at his post and called the chieftains of the pensions industry together and all but forced them to take the medicine offered in the shape of the Bank’s pledge to buy back soiled assets.
Markets became unstable after Kwasi Kwarteng (left) announced his ‘mini-Budget’ last month. Pictured: Kwarteng with Bank of England Governor Andrew Bailey
Mervyn King, during the interest rate-fixing (Libor) scandal of 2012, summoned the then chairman of Barclays Marcus Agius to his office and ordered him to sack his controversial American chief executive Bob Diamond over his dodgy behaviour.
And on the day after the Brexit referendum, when David Cameron announced his resignation as prime minister and the markets descended into turmoil, Mark Carney set up a podium in the Bank’s grand central corridor, invited in the TV cameras and assured the nation that he, as Governor, was there to steady the markets during the transition to a new government.
Given these precedents, I find it remarkable that since the havoc-wreaking mini-Budget of September 23, Bailey has chosen not to speak directly to the public about events.
He and his colleagues at the Bank must take much of the blame for the market zig-zags of recent days. Nor can they escape culpability for failing to police the dangers of the complex derivatives, built on gilt-edged stock, at the heart of the present catastrophe. After all, the Bank initially warned of the dangers back in 2018.
But the roots of the present mess go back much further. In 1997, the then prospective Chancellor of the Exchequer Gordon Brown was desperate to raise revenues to pursue social goals, without increasing headline rates of tax. With the help of auditors Arthur Andersen (now defunct), he found an unobtrusive way to raise an initial £5billion. Defined benefit pensions were at the time well funded with big surpluses so pensioners could look forward to a secure retirement.
Brummer says: I find it remarkable that since the havoc-wreaking mini-Budget of September 23, Bailey has chosen not to speak directly to the public about events
As they offered a public benefit, these pension funds enjoyed the privilege of receiving dividends from companies and other entities free of tax.
On taking office, Brown took an axe to this benefit, which cost pension funds up to £100billion in the ensuing decade and turned surpluses into deficits. At the same time, the funds were being ordered to hold more gilts to make them safer after the late Robert Maxwell’s plundering of the Mirror Group employees’ pension fund.
Thanks to Brown’s initiatives, pension funds have been driven to increasingly desperate methods to bring their funds back into surplus. Hence the explosion in liability-driven investment funds, volatile financial derivatives that used the tens of billions of pounds that most pension funds held in low-risk gilts as collateral to raise extra assets – usually in the form of yet more bonds.
For a time, they appeared to be doing their job, with many corporations reporting miraculous recoveries in their finances. But the events of the past few weeks have exposed this financial miracle as a chimera.
The Bank of England may temporarily have eased pressure on the pound but this is a crisis that is far from over. By setting a hard and fast deadline of tomorrow for calling in the lifeboat, Bailey and his team have made the fatal mistake of creating a cliff edge.
This provides an opportunity for speculators and traders looking for a one-way bet against the pound and gilts. At the moment, the Governor has the support of Chancellor Kwasi Kwarteng, who has his own problems.
But with Bailey rapidly losing the confidence of both Whitehall and the City, it cannot be long before someone in government asks: who can rid us of this gaffe-prone Governor?
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