Cablegate: Conservative Party Caught Flat-Footed by Brown's

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P 311533Z OCT 08
FM AMEMBASSY LONDON
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C O N F I D E N T I A L SECTION 01 OF 02 LONDON 002765

SIPDIS

DEPT FOR EEB PDAS NELSON, MSAKAUE
TREASURY FOR MURDEN, CARNES

EO 12958 DECL: 10/30/2018
TAGS ECON, EINV, PGOV, UK
SUBJECT: CONSERVATIVE PARTY CAUGHT FLAT-FOOTED BY BROWN’S

QUICK MANEUVERS ON FINANCIAL CRISIS, SAYS SENIOR TORY MP
REF: A. LONDON 2666 B. LONDON 2603

Classified By: Economic Minister Counselor Mark Tokola for reasons 1.4 b and d.

1. (C) PM Brown’s relatively deft performance (ref b) in handling the economic crisis over the past month has caught the Conservative Party off-guard, and the Tories’ response to the crisis has been regrettably tepid, Michael Fallon, Tory MP and senior Tory member of the Treasury Committee, House of Commons, told emboffs October 29th. The Conservative Party felt the absence of a strong Shadow Chancellor and, the party’s counter-proposals to Labour’s plans have been “all over the place.” Fallon particularly criticized Shadow Chancellor George Osborne’s op-ed piece in the October 28 Daily Telegraph, as a “weak”, almost laughable, response to the economic crisis. While Brown was enjoying higher poll numbers because of his perceived solid handling of the crisis, Fallon argued that once the recession worsens and the public feels its effects, Brown would no longer be immune from criticism, and from being held accountable for the failures of an economic system that he supervised for ten years as Chancellor of the Exchequer.

2. (C) Fallon said that Brown should be held responsible for the weakness of the Tripartite Committee, which he implemented and which failed to identify problems in their incipient stages -- and then which failed to respond effectively. The Committee - which consists of Her Majesty’s Treasury, the Bank of England, the Financial Services Authority - is charged with maintaining financial stability. When Northern Rock Bank failed, Chancellor of the Exchequer Alistair Darling was new to his job, and the FSA was in the closing stages of being led by outgoing chairman Sir Callum McCarthy (Lord Adair Turner took over in September). It would be too harsh to criticize their performance then, Fallon said, given the changes in leadership, but the Tripartite Committee’s reaction since then and particularly over the summer to the crisis has been inadequate. Gordon Brown has had to be the architect of the rescue plan for which, Fallon said, he gleefully has taken responsibility. One problem with the Committee during the time of the Northern Rock failure was that the three leaders of the Committee viewed each other with distrust, wanted to keep the others’ institutions at arms’ length, and even, Fallon contended, disliked each other. As a result, there had been minimal coordination among the three. Fallon himself said he personally dislikes Turner as a rather “soul-less technocrat,” but that he was highly competent and the right person for the job. Fallon argued that the Tripartite Committee structure should be disbanded, and that the Bank of England should be given greater authority and the mandate to ensure financial stability, on the order of the mandate of the Federal Reserve Bank. In his view, the FSA should be responsible for business practices, not financial stability.

3. (C) The economic crisis was not near its end, Fallon remarked, saying that he expected even greater shocks in the near-future. He was most concerned about the lack of disclosure about the toxicity on banks’ balance books. Once the extent of the toxicity was revealed, he said he expected many more banks to fail. Fallon said the Tories reluctantly acquiesced to the need for recapitalization of some banks, but that this bail-out had to be limited in nature. But what would the government do -- can it do -- when faced with more bank failures? he wondered. The government’s rescue plan has raised the risk of moral hazard and the costs of more bank failures would be too high to fund. Fallon also criticized the Labour Government for not having a plan to extricate itself from banks that the government has recapitalized. If there was no timetable for government divestment, there was no incentive for investors to purchase the remaining shares. Furthermore, he argued, the banks could be subject to pressures to fund politically expedient, but not commercially profitable projects, the longer they were owned in whole or part by the government. Fallon said that further drastic steps may be required as the crisis unfolds. For example, he could imagine a nationalized insurance company.

Comment
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4. (C) Fallon’s comments to us reflected Conservative frustration -- and some grudging admiration -- for Prime Minister Brown’s skill, so far, in seizing the high ground during the economic crisis. The image Brown projects of “a
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serious man for serious times,” and a “leader born for this hour,” has worked so far. The Conservatives, on the other hand, came across as weak junior partners while taking the tack of supporting the Labour government in a time of crisis; and are now coming across as confounded and confused now that they are trying to go on the attack -- so far not being able to articulate an alternative to Brown’s actions. Meanwhile, the scandal that has enveloped Shadow Chancellor George Osborne has not helped (ref a).
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