6 March 2009
The financial crisis has thrust Treasury select committee chair John McFall into the limelight. He talked to Judy Hirst about bankers, bonuses – and dealing with hooligans
It’s been another knockabout week at the Treasury, what with frantic negotiations over ‘Operation Broom’, the £500bn state-backed insurance scheme designed to sweep up the banks’ toxic assets – and the argy-bargy over former Royal Bank of Scotland boss Sir Fred Goodwin’s pension pot.
Cast in the role of pantomime dame, pan and brush at the ready, is Chancellor Alistair Darling, who must be desperately hoping that this time round the deep cleaning will work.
Meanwhile, down the road at Portcullis House, what promises to become the longest running show in Westminster – the Treasury select committee hearings on the banking crisis – is still pulling in the crowds.
Oscar-winning performances were recently given by four former Halifax Bank of Scotland and RBS banking chiefs (including Goodwin) who appeared before MPs to say sorry, sort of, for helping tip the nation into its most calamitous financial crisis since the 1930s.
They were queuing round the block for that one. But runners-up, such as the Financial Services Authority chair Lord Turner and Bank of England governor Mervyn King, have been good value too, as they attempted to explain where it all went wrong. This week, officials from UK Financial Investments have been grilled about who – if anyone – is controlling the taxpayers’ stake in semi-nationalised banks.
Keeping a beady eye on proceedings is the committee chair, Labour MP John McFall – a former chemistry teacher turned inquisitor of past and present masters of the banking universe. For the City suits – who sniffily refer to it all as a ‘show trial’ – McFall is the consummate pantomime villain, popping up all over the place to declare open season on casino culture bankers and their humungous bonuses.
As he surveys the scene from his airy Westminster office, the West Dunbartonshire MP seems relaxed about being depicted as the scourge of the Square Mile. Two decades at the school chalkface (eight years as deputy head) has given him plenty of tactics for tackling off-stage boos and hisses. ‘A lot of the time I was in charge of pastoral care, looking after the hooligans and the awkward ones. It put me in pole position for dealing with financial services,’ he says dryly. By all accounts, it has also helped make him, since 2001, one of the most effective, and collegiate, committee chairs – noted for extracting unanimous reports out of intensely partisan debates.
McFall doesn’t readily do deference; it’s not in his DNA. This, after all, is the man who accused the deputy governor of the Bank of England, Sir John Gieve, of ‘being asleep in the back of the shop while there was a mugging out front’ after the collapse of Northern Rock; told former Northern Rock executive Adam Applegarth that he had been ‘asleep at the wheel’; and (narcolepsy being a bit of a theme) claimed that the FSA was ‘not just sleeping, but comatose’. You wouldn’t have wanted to be kept behind by him after school.
Pugnacious tongue-lashings of failed bankers and regulators are a McFall speciality, and – particularly with the public baying for City blood – great theatre. But just how effective is all the naming and shaming? True, Sir James Crosby was forced to resign as deputy chair of the FSA after evidence from an HBOS whistleblower to the committee. And, for what it’s worth (not much, he concedes), McFall has made a lot of witnesses say sorry.
But when it came to foreseeing the bubble bursting, wasn’t the Treasury committee itself guilty of nodding off at the wheel, and of being taken in by what Lord Turner referred to last week as the light-touch ‘philosophy’ of the time? Why, to paraphrase the Queen’s infamous question, did nobody – including this influential body of MPs – see it coming?
‘People did see it coming,’ insists McFall. ‘They saw the increasing levels of debt and leverage, and the asset price bubble. I personally asked a lot of witnesses over the years: where’s the risk, where does it reside? But they told us: “it’s a new world we’re in now, in which risk is dispersed”. They claimed that when a hedge fund goes down, there will be no ripple effect.’
Even the best and brightest were ‘befuddled’ by the development of so-called complex products, he says – and, of course, by the vast profits they could make. ‘It’s hard to argue with that, it takes a lot of courage. A lot of questions went unasked and unanswered,’ he admits. Even when warnings were issued by committee witnesses about the freezing up of liquidity, the Treasury was ‘not taking heed’ – and the FSA and the Bank of England were passing the blame to and fro.
‘What all this points to is the need for much stronger regulatory institutions. They should be beefed up and have much more power. Someone’s got to be prepared to take the punch bowl away.’ So far, so on message with Turner, King and the chancellor, who all agree with hindsight that it’s time to tighten the screws on the banking system and bonuses. ‘Why do we need to give bankers such massive incentives to get themselves up in the morning, when ordinary public servants have no incentive over and above their basic salary?’
McFall says he is acutely aware of the ‘anger and dismay’ felt by the public, and calls the lack of appreciation from bailed-out bank executives ‘a slap in the face for the taxpayers’. He makes no secret of his preference for all-out nationalisation of state-supported banks such as RBS, as opposed to a situation where ‘the bankers get 70% of the upside, and we get 100% of the downside, even to the extent of guaranteeing them their pensions’.
But what of the Treasury itself? How fit for purpose is an institution whose ministers and officials have overseen an exponential growth in the casino culture that everyone now condemns – and who appear not to read the small print when signing off bank rescue deals? ‘It wasn’t as fit for purpose as it should have been when it comes to the financial services sector,’ concedes McFall. ‘For too long the Treasury has been second-guessing the financial services industry rather than having real-time information on what is happening there.’ Which could be taken as a polite way of saying it didn’t have a clue what was going on.
McFall has held a number of posts since coming down to ‘the house of hot air’ in 1987: opposition spokesman on Scottish affairs, parliamentary undersecretary at the Northern Ireland office and party whip (until he resigned over the first Gulf war). As chair of the Treasury committee he has clearly found his métier. However, he rarely unleashes his caustic Glaswegian one-liners on ministers, despite their role in the financial meltdown. While the committee’s vice-chair, Conservative MP Michael Fallon, has been making hay over the Treasury’s responsibility for the Goodwin affair, McFall has doggedly directed his ire at greedy bankers. And as a convinced Keynesian, he is four-square behind the chancellor’s efforts to pump-prime the economy out of recession.
‘The cancer in the system is the toxic assets. Until that’s dealt with, by a bad bank, a state bank or whatever, we won’t get the problem solved.’ As for the soaring national debt – which the chief executive of the Audit Commission has warned could reach ‘Armageddon’ proportions – McFall is relatively sanguine. ‘If you look back to the 1990s recession, the percentages are comparable, and within ten years we balanced the books. We’ve got to take a longer view.’ Protecting core spending on education and health, upping the level of fiscal stimulus in the April 22 Budget, acting boldly to prevent a 1930s-style slump: that’s the way to do it, he says.
On a recent visit to Japan he learned that ‘if you’re going to recapitalise the banks, you do it early and you do it big – and you’ve got to take the public with you.’ He admits the government has some way to go on this – but believes the Treasury committee can play a useful role. ‘Ministers are realising what a valuable asset we are, and that we can sometimes take the pulse of the country a lot better than them.’
He is taking the select committee on a road show to Belfast, Edinburgh and other cities to test the mood still further. Now 64, McFall is due to step down as chair at the next general election after two terms in charge (Fallon is the likely successor). But the ex-marathon running, golf-playing and hill-walking McFall looks like he’s got plenty of political life in him yet. He’s even being tipped for a job overseeing a state bank.
It’s all a long way from his working-class, Scottish Labour roots. McFall left school in Dumbarton with no highers, and his first job was with the council parks department. He has moved up the hard way – night school and the Open University, leading eventually to an MBA and visiting professorship at Strathclyde University. Married with four grown-up children, he can justifiably claim to know what matters to ordinary families.
One of his proudest achievements as chair, he says, was forcing banks to install more than 600 free ATMs, saving users millions of pounds each week. His committee also secured millions in compensation for investors who’d been stung by split-capital investment trusts.
McFall has spent many a long hour grappling with financial gobbledegook, and is on a mission to demystify as much of it as possible. ‘When I took over as chair, the view from the financial services industry was that these issues were too complicated for us to get our teeth into. But we’ve shown them otherwise.’
That said, some Treasury committee-watchers believe that its questioning can be wide of the mark – ‘like a much lamer Vince Cable’ – and ask whether its members really have the expertise to challenge well-coached financiers and mandarins. One senior adviser to the committee told Public Finance: ‘There has also been a real problem with Treasury officials withholding information and treating the committee with a certain amount of contempt, as if it is just one of a number of stakeholders.’
Glacially though, that culture is changing. Under the pressure of events, the Treasury committee is making the government sit up and take notice. When one committee member exclaimed at the four penitent bankers, ‘you’re all in bloody denial!’, he might just as well have been talking about Whitehall. But no more. It’s all coming out in the wash. And that’s due in no small part to the show-stopping performances on John McFall’s watch.
