Hester on Lehman: nothing about situation was thought 'life-threatening'

RBS building

Three hours. That was how long Stephen Hester was given to decide if he would like to become the boss of Royal Bank of Scotland.

It was just after 7pm on Friday 10 October 2008 when he took the call from Sir Tom McKillop, then chairman of the failing bank.

With Treasury officials embarking on a 48-hour operation to rescue the Edinburgh-based bank before the markets opened on Monday morning, McKillop told Hester he needed to know that night if he would take over from Fred Goodwin. Hester put down the phone, discussed it with his family, then called McKillop to say he would.

In an interview to mark the fifth anniversary of the collapse of Lehman – which led to the bailout of the UK banking system 28 days later – Hester says he is not the sort of person who "agonises" over such decisions.

His one caveat was that he wanted assurances about the plans of the then Labour government, assurances that he would be "a chief executive rescuing a company, not a quasi civil servant running a government department".

The newly appointed City minister, Lord Myners, was dispatched to put him at ease and Hester agreed to take on the task that he has since likened to defusing a time bomb – and one with a balance sheet, at £2.2 trillion, that was bigger than the annual output of the UK economy.

Yet while Hester can recall the moment he was offered a job that was to catapult him on to television and radio news bulletins, newspaper front pages and their gossip columns, and into the middle of a political storm over bankers' pay, he struggles to recall the night Lehman Brothers collapsed.

When it happened, Hester was running property company British Land, having started his career at Credit Suisse and then turned around the troubled Abbey National. He was, however, preparing to attend his first board meeting of RBS as a new non-executive director. The meeting was held on 23 September, eight days after the Lehman collapse. His memories about that first board meeting are more about what had gone wrong following RBS's takeover of ABN Amro a year earlier than the implications of the Lehman collapse. "Nothing was thought to be life-threatening," Hester says.

In the following fortnight, before RBS was put on taxpayer-backed life support, the board was regularly updated about urgent meetings taking place at the Treasury with bank bosses. But Hester says that the board was learning after the event about the rapid outflow of funds that eventually forced the bank to accept a bailout by 13 October 2008. The then chancellor, Alistair Darling, has vividly recalled how on 7 October McKillop had called him to tell him the bank would run out of cash in two to three hours.

Board meetings during that crucial week were dominated by a debate about the bank's capital position: "There was huge controversy in the board about the scale of support we needed, from some thinking it was not very much, almost a token [amount] to others thinking it should be a lot."

Hester reckoned RBS needed a lot more capital, but "it never got quite as high I wanted it to go". By the end of 2008 some £20bn of taxpayer funds was used to buy shares in RBS; by the end of 2009 the total had risen to £45bn – money that has yet to be unlocked through a share sell-off.

Hester had hoped to stay on until the shares were sold, but has been forced to leave at the end of this month – with the bank half the size it was five years ago. During his tenure, his own bonus payments became a focus for politicians mindful of an electorate enduring the biggest wage squeeze since the 1870s. In January 2012 Labour leader Ed Miliband called a debate about Hester's pay, prompting the furious RBS boss to waive the potential payment.

Hester, however, doesn't take personally either the political rows over money, or the decision to force him to quit: "Political goals don't sit easily with business goals for very long."

Old and new bosses overlapped briefly, and Hester says he doesn't recall his predecessor being the domineering bully that has since been portrayed: "Fred was quieter than I thought he would be. He was supposed to be this tyrannical figure. He never was in my presence."

But he adds: "The interesting thing about the financial crisis is that the problems were staring you in the face." Economies were unstable and banks were, in general, mispricing risk. RBS, specifically, had taken over ABN Amro in autumn 2007, just as the credit crunch hit.

Some of Hester's plans were later frustrated by government policy: the investment bank is now 20% of the business rather than the third he had been aiming for. And he is unconvinced that ringfencing high street from casino banking will make a rerun of 2008 any less probable. He notes that the Co-op, currently asking bondholders to take losses to avoid a taxpayer bailout, has no casino operations.

"My regret is that the world of regulation and politicians hasn't been as fast as it might be in understanding all this, and has taken a whole load of blind alleys – like ringfencing – which won't do anything to stop it."

Powered by Guardian.co.ukThis article was written by Jill Treanor, for The Observer on Sunday 15th September 2013 00.07 Europe/London

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image: © Mark Ramsey

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