>
Alex Brummer says: Some say Bailey screwed up
As fatherly Andrew Bailey reclined in his chair yesterday in a conference room in the Ronald Reagan Building, a short walk from the White House, you would have thought that the Governor of the Bank of England had no worries in the world.
Responding to questions from the titans of the global banking community, he lightly referred to how he had recently pulled an “all-nighter” amid the turmoil in the financial markets at home.
And what a night it must have been. For the sake of those who have vacationed on a wifi-free tropical island, I should point out that it was Bailey who prevented a run on the pound late last month that threatened to bring it below par with the dollar with a ££ purchase package. 65 billion to be announced.
The idea was that by buying government bonds, called gilts, the Bank would halt a catastrophic fall in value and stabilize the predicament of the pension funds that had invested so heavily in them. It worked like a dream.
But then, according to some, Bailey screwed up. On Tuesday, while pension funds are still in some degree of turmoil, he warned fund managers that the bailout program would not be extended beyond the end of this week. Then they were on their own. ‘You have three days left now. You have to get this done,” he told them.
His casual announcement at a fringe event linked to the annual IMF meeting in the US capital was greeted with a collective breath. In such circumstances, the Governor of the Bank should certainly not have made policy at a conference abroad, but should have coordinated the response from his office in the city.
It was Bailey who prevented a run on the pound late last month that threatened to push it below par with the dollar by announcing a £65bn purchase package
The impact of his words was immediate and the pound quickly came under heavy selling pressure in the currency markets. London may be 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 the shaky markets and save the pensions of its ten million citizens secure in fixed salary schedules.
At 5 a.m. yesterday, the Financial Times’ online service reported that bank officials had warned major trading chambers that they were now willing to extend their bailout plan beyond tomorrow. How accurate that report was is anyone’s guess, but it was enough to make the markets shudder again.
Five hours later, the mixed coverage came around. A statement from the Bank reiterated previous statements that “its temporary and targeted purchases of gilts will end on October 14.”
It was the Bank of England’s second such ‘market announcement’ in 48 hours and one that only reinforced the impression that Bailey is a governor who has lost control of events and whose credibility is in serious jeopardy.
As a city journalist whose experience of financial crises dates back to James Callaghan’s application for an IMF loan in 1976, I wondered what some of Bailey’s predecessors would have done in similar circumstances. The late great Eddie George would no doubt have stayed in his post, rallying the leaders of the pension industry and all but forcing them to take the drug offered in the form of the Bank’s promise to return contaminated assets. to buy.
Markets became unstable after Kwasi Kwarteng (left) announced its ‘mini-Budget’ last month. Pictured: Quarteng with Bank of England Governor Andrew Bailey
Mervyn King summoned then-Barclays chairman Marcus Agius to his office during the 2012 interest-setting scandal (Libor) and ordered him to fire controversial US chief executive Bob Diamond for his dodgy behavior.
And on the day after the Brexit referendum, when David Cameron announced his resignation as Prime Minister and the markets went into turmoil, Mark Carney set up a stage in the Bank’s grand central corridor, inviting the TV cameras and assuring the nation that he, as governor, was there to stabilize the markets during the transition to a new government.
Given these precedents, I find it remarkable that since the devastating September 23 mini-Budget, Bailey has chosen not to speak directly to the public about events.
He and his colleagues at the Bank have to take much of the blame for the market’s zigzags over the past few days. Nor can they escape blame for failing to master the dangers of the complex derivatives built on gilt-edged stock at the heart of the current catastrophe. After all, the Bank already warned of the dangers in 2018.
But the roots of the current mess go back much further. In 1997, then-future Secretary of the Treasury, Gordon Brown, was desperate for income to pursue social goals without raising general tax rates. With the help of auditors Arthur Andersen (now defunct), he found an unobtrusive way to initially raise £5bn. Defined benefit plans at the time were well funded with large surpluses, so retirees could look forward to a safe retirement.
Brummer says: I find it remarkable that since the devastating mini-Budget of September 23, Bailey has chosen not to speak directly to the public about events
Because they provided a public benefit, these pension funds enjoyed the privilege of receiving tax-free dividends from corporations and other entities.
On taking office, Brown took an ax from this advantage, which cost pension funds up to £100 billion over the following decade and turned surpluses into deficits. At the same time, the funds were ordered to keep more gilts to make them safer after the late Robert Maxwell’s looting of the Mirror Group workers’ pension fund.
Brown’s initiatives have pushed pension funds to increasingly desperate methods of putting their money back in surplus. Hence the explosion of liability-driven mutual funds, volatile financial derivatives that used the tens of billions of pounds that most low-risk gilt pension funds held as collateral to attract additional assets – usually in the form of even more bonds.
For a while they seemed to be doing their job, with many companies reporting miraculous reparations in their finances. But the events of recent weeks have exposed this financial miracle as a chimera.
While the Bank of England has temporarily eased pressure on the pound, this is a crisis that is far from over. By setting a hard and fast deadline for tomorrow to call in the lifeboat, Bailey and his team have made the fatal mistake of creating a cliff.
This presents 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 quickly losing the trust of both Whitehall and the city, it may not be long before someone in government asks: Who can deliver us from this gaffe-prone governor?
Some links in this article may be affiliate links. If you click on it, we can earn a small commission. That helps us fund This Is Money and use it for free. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.