“We’re at a Huge Transition Phase in Our History”

Former British Prime Minister Gordon Brown was at the helm in London when the global financial system came close to collapse in the autumn of 2008. He speaks about his snap decision to recapitalize British banks and explains why global regulation has been so long in coming.

Early one morning at the height of the banking crisis, you told your wife Sarah to get ready to move out of Downing Street as you might resign that afternoon. How did she react?

Very professionally. She got on with the preparations. Of course, she couldn’t call in the movers just yet. That would have been a bit too disastrous a signal to the markets.

We’re talking about Wednesday, Oct. 8, 2008. Lehman Brothers had just filed for bankruptcy. In your new book “Beyond the Crash,” you write: “I sensed that if no-one acted, total collapse was imminent.” What exactly were you expecting?

The Royal Bank of Scotland would have collapsed within hours. HBOS was not far behind, and in that case, other European and American banks would have followed. I think people still misunderstand, in retrospect, the scale of the collapse that we were facing: It would have been absolutely catastrophic.

Would the ATM’s have stopped handing out money?

Most likely. People would have been in panic about their savings, there would have been a run on the banks. But what worried me most was that at this moment there was a total lack of leadership about the way forward, both within banks and governments. The banks still deceived themselves. One banker told me on the day before his bank collapsed: “All we need is overnight funds.” He didn’t even realize that his institution was virtually on the brink.

That morning, you announced the immediate recapitalization of the British banks using billions of pounds in public funds, and which basically meant nationalization. Today, you receive a lot of praise for the steps you took. But how did you know then that it would work?

 I didn’t. To be honest, it was a gamble. No other country had done it before. I would have resigned that day if it failed. But it worked. Within days, most large economies followed our path. At around the same time, German Finance Minister Peer Steinbrück was still in denial, blaming the problem entirely on Anglo-American banking practices. What really sparked the whole thing was the subprime crisis in America. But what people hadn’t yet realized was that half the subprimes had been sold into European banks. The banks were undercapitalized, and they had a lot of impaired assets on their balance sheets.

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by Marco Evers and Christoph Pauly © 2011 Der Spiegel/Distributed by The New York Times Syndicate