The Treasury was under-resourced and lacked relevant expertise, but responded nimbly and with a strong esprit de corps; the lawyers come of it well, the investment banks less so
HM Treasury has today published a review of its performance in the financial crisis, 2007 to 2009. The review can be read here.
Slaughter and May come out of it well. On the investment bankers involved, it doesn’t burnish their reputation; it’s not hard to read between these lines:
“The relationship with investment bankers was less effective…over time, the Treasury became a more intelligent customer and was able to consider critically the advice that it sought and was given.”
“The financial crisis of 2007 to 2009 was arguably the most difficult set of economic circumstances that the Treasury has faced in its history.”
“The Treasury, like many other institutions, did not see the crisis coming and was consequently under-resourced when it began. The Treasury responded nimbly – with a strong ‘esprit de corps’. It drew in outside expertise where it did not have the skills in-house. Resources could have been brought in more quickly and greater investment should have been made in staff and project management.”
“Looking ahead, the Treasury will need deeper expertise – ‘generalists’ with greater experience and some financial sector specialists – if it is to play an effective role in the new regulatory arrangements.”
The Treasury response to the events of 2007 to 2009
“The financial crisis placed extraordinary demands on the Treasury. The nature of the challenge, the scale of the workload and the immediacy of the deadlines were unprecedented.”
“Organisationally, the Treasury responded in a nimble and dynamic fashion. Resources were ramped up, although this could have been quicker. In hindsight, the peak in staffing in 2009 should have come earlier – in the summer of 2008…The level of personal commitment shown by officials was outstanding, both those working directly on the crisis and those providing cover. Overall, the Treasury was stretched and could have been better prepared.”
Northern Rock was the trigger for the Treasury to get its act together
“Once the broader implications of the collapse of Northern Rock in the autumn of 2007 became clear, the Treasury reacted quickly to establish a well resourced project team [which] had few staff with specific banking expertise and they were highly valued. The majority of staff had to learn on the job.”
“Staff working on financial stability peaked in the summer of 2009 at around 120, although the total number, including officials providing support from other Treasury teams, was closer to 200. However, there was enormous pressure on workloads and staff well-being, including for people not directly working on the crisis. More resources should have been brought in.”
Slaughter and May and Goldman Sachs
“The Treasury rightly sought expert external legal and financial advice; this was sometimes at short notice, even overnight. The Treasury had not previously sought external advice on this scale or at this speed, and at times was not strong enough in its procurement processes or, due to the novel circumstances of the crisis, able to be clear about what specifically it was paying for.”
“Part of the difficulty at the beginning was that the Treasury had had no significant experience of working with external specialists on such a scale. It took the Department time to get to grips with the sort of advice that it required. While the relationship with Slaughter and May – which had advised the Treasury in the past – worked well from the start. The relationship with investment bankers was less effective initially. Over time, the Treasury became a more intelligent customer and was able to consider critically the advice that it sought and was given.”
Prepared for a Euro exit?
“The Treasury has made significant progress on financial sector contingency planning to deal with any fall-out from the Eurozone.”
The Treasury’s need for expertise
“Going into the crisis, few mainstream Treasury officials had technical banking and financial markets experience or expertise. Over time, the Treasury built up its experience in these areas, but was reliant throughout the crisis – especially in the early stages – on a range of external experts…Many interviewees suggested that the biggest challenge the Treasury faces is maintaining its financial sector expertise. Most people who were working on the crisis in 2009 have moved on to new roles in the Treasury or have left. The upside is that the Treasury has a large number of alumni who could potentially be drawn on in the event of a future crisis.”
Useful parts of the review
In addition to the analysis of the Treasury’s response to the crisis and its recommendations, the review contains:
- A brief history of the financial crisis 2007-2009
- A timeline of key events
- A summary of policy interventions during the crisis.
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