♪ mr. king it is difficult to : exaggerate the severity and importance of these events. not since the beginning of the first world war has our banking system been so close to collapse. francine: mervyn king was at the epicenter of the biggest crisis -- biggest exercise in crisis management in modern financial history. he was at the helm of the bank of england in 2007, pumping billions of pounds into the economy and knocking interest

rates to near joining me on zero. "leaders with lacqua," former bank of england governor mervyn king. mervyn king thank you so much , for speaking to bloomberg tv. it is always a great pleasure. what lessons have we learned? mr. king: i hope we learned the lesson that this was bigger than just a this was bigger than -- just a financial crisis. it represented a serious problem in the world economy. i am sure not everyone sees it that way, but i think that is the most important lesson. second, we learned we need to worry not just about the amount of equity capital banks issue, we need to limit the leverage, but we also need to tackle the problem that banks are inherently unstable. people lose confidence in them. they take their money out, or they do not roll over their lending and we need to do that. , francine: did we see early signs of it, or will relate to the game? mr. king: i think we saw signs in the world economy, and we should have given more weight to the rise of leverage in the banking system.

of course at that point, the banks themselves were deeply reluctant to admit what was going on was not sustainable. francine: at what point in the lead up to the financial crisis did you think there was something seriously wrong? mr. king: i give a speech before the crisis interrupted in 2007 rupted in 2007 at the mansion house in london. ignore the unsolicited emails that rained down on us offering unwanted credit. i received one last week that began, "we have the solution, mervyn, for your bankruptcy." [laughter] mr. king: excessive leverage is the common theme of many earlier financial crises. are we so much cleverer than the financiers of the past? that was not a welcome statement. people thought we are wiser than

people in the past, but it turned out we weren't. i don't think it is ever easy to say that that particular level of leverage was going to generate a crisis. there is an element of randomness in the small events that triggered the crisis. but it was pretty clear, i think that the system as a whole was , in trouble. francine: in hindsight, would you have done something differently to placate this nonconfidence? mr. king: i think the things we had to do have been identified before. one was we did not have a resolution framework to deal with the failing of the bank and -- in the u.k.. had one.er g7 country we did not have 100% deposit insurance. that was bound to mean once a bank run were to start, it would be rational for other depositors to join it. these things were understood and well known. i don't think that made the judgment of whether we were

about to go into a banking crisis any easier. what we knew was the system was not as resilient as it should have been. >> i am bringing you the session -- special report on northern iraq subprime fallout that is , spreading across the atlantic to the united kingdom. >> panic in the straits, and who knows whether your money is going to be safe? >> i do want to transfer my money. francine: this represented the first bank run in britain in 150 years. depositors were demanding money back after was revealed the bank -- the lender had tapped the bank of england for emergency funding. the run did not stop until the government gave a taxpayer backed guarantee that all existing deposits were safe. would you have done things differently for northern rock? mr. king: we were the lender of last resort. right up and to the point where they ran out of money and could not give us any collateral to lend against. the thing that is odd about that is people seem to think we did not lend to northern rock. we lended a vast amount to

northern rock. the first conversation i had with the chairman and august 2007 was if it comes to it, we would be there as a lender of last resort. the problem was, northern rock, which was not doing anything other banks themselves were not doing, had a business model that ended when the market for mortgage backed securities they and they had a very high leverage at that point, even though they met all the international capital standards. it was not as if northern rock was somehow taking big risks with the definition of capital that the international standards said they should hold. it was just that the structure of the bank, which was borrowing short and mortgage lending meant they were not required to hold very much equity capital. that is what made them very vulnerable. you could draw a timeline and no when the bank would run out of money. it did at exactly that point. i remember when the government appointed goldman sachs to help

them find a way of selling northern rock. when i met goldman sachs for the first time we agreed within a , few minutes the only end result was nationalization. if we had had a resolution framework, northern rock would have been dealt with over one weekend, it never would have become the news story it became. after the fall of lehman a signal that was we would do whatever was necessary to keep the financial system going. i think the move in october 2008 originated in a telephone conversation with ben bernanke and myself. i said to him i thought it would be a good idea, since we were all probably considering a cut in interest rates, we agreed that he would speak to jean-claude trichet and i would , speak to some others, and it would become a g10 movement. it took about a week to put together. we changed the time of our normal meeting so we could announce at the exact same time. i agree we informed our -- i remember we informed our

politicians just before we did it. the house let us know that the governor for the bank of england has just announced a 0.5% cut in interest rates. he has done so in action around the world in which u.s. fed has cut interest rates by 0.5%, the swiss have cut interest rates, other members of the g10 are all showing showing global problems are best dealt with by global action. francine: we do about the 10 central bankers. peopleg: and among other inside the central banking world. we did not brief the political world because that, i'm afraid in modern circumstance, means inevitably a leak. that was one thing that would have undermined the operation. francine: is that what makes the difference between central banks and the politicians? mr. king: yes. i will not go into detail, but i

would say the big difference between the central banks and politicians in the crisis i , could talk to another central banker confident it would be a , conversation in confidence, and it would be treated with discretion. i think that whatever discussions took place with politicians, they seemed to end up in the media. francine: how did you cope with the financial crisis? what are the attributes a central banker needs for working under extreme pressure?

francine: well before mervyn king set foot on threadneedle street, it was an academic teaching in the university of leverage, harvard, and m.i.t., where his office attached to then assistant professor ben bernanke's. he brought his quick thinking to the bank of england as its chief economist, moving up the ranks to deputy governor and then to the top job. it was a long way from his humble beginnings in the english midlands. what did you want to be as a child? mr. king: i wanted to play cricket for my county, worcestershire. i would play for the full season apart from the last week of june and the first week of july, and then i would take two weeks off to defend my singles title at wimbledon. francine: that did not work out. mr. king: it did not. francine: are there similarities parallels between sportsmanship

and business? mr. king: there are. one reason i started a children toncourage play cricket and competitive sports is that it is a good way to learn in a harmless environment that it is important to compete, and the ability once the game ends to be friends with people. i think in business life it is very important to people to realize they are competing. it is not just a happy game. you are competing against each other, but you can still have good personal relationships outside. you learn how to win and how to lose, something which some politicians have, but not all. these are lessons for life, which are very important. francine: how did you get this love of sports? did it come through your father? mr. king: yes. i was growing up, my father was a schoolteacher, we moved around a lot. i remember we lived in yorkshire for a while. we were living in a council

house next to the cricket ground, and i went to a small -- which to sleep as a small -- went to sleep with a small boy listening to the ball on the bats outside my window. francine: did your family have a big influence on you growing up? mr. king: yes, i think my father particularly. he could have gone to university had his parents been able to afford to send him. but he couldn't. i came from the lucky generation, people born in 1948. we did not have to fight in the war. my parents did. i went to an education that i had free of charge. i was sent to the united states on a scholarship. i paid nothing for that. everything worked in my favor, and young people today are facing a more challenging environment. they have to pay for their college education. now there are good reasons for , that, because many more people go to college, and it is not obvious why the people who don't go to college, who by and large unless should pay for people who

, do go to college who earn more later in life. but nevertheless it is tougher , for the younger generation. i think it is beholden on the older generation to recognize we will have to make some sacrifices to help the younger generation. francine: what has made you the central bank that you became? academics, studying? mr. king: it was a mixture of things. there was no doubt my academic background was fundamentally important in being concerned all the time about what is the fundamental reason this is happening? have we seen this in the past? i was much less concerned about the moment to moment movement in financial markets because it was mean a greatd not deal. it was a symptom of a deeper problem that i was trying to get to the bottom of. that was fundamentally important. the other thing was a number of people i have known well in academic life like ben bernanke, janet yellen, stan fischer,

larry summers -- they were all in policy positions. it was a natural ease of having a conversation about these questions. tim geithner, who did not have an academic background, had been in the treasury a long time. that was very important in tim being able to interact with people around the world because he knew them all. i think if he arrived in office only six months previously, it would have been very, very difficult. he had experience in the federal reserve bank of new york and then the u.s. treasury, the continuity there, knowing people, having had a long time in your career where you have had a chance to think through what you really believe about why banking systems are fragile, what causes disruptions, what is the right way to respond to it, these things are important. i think one of the problems that the political side had was that deep down, they did not really understand these issues. i thought my god, it is a

crisis. we have to have a better way of dealing with it, but they were not able to easily conceptualize the nature of the problems and therefore to come up with a right solution. francine: how do you cope with the financial crisis? what are the attributes that a central banker needs for working under pressure extreme , pressure? mr. king: you generally need to know what is the right thing to do. i think that both ben bernanke and i benefited from a study of financial history, which meant that the problems that were coming up were not unheard of. we knew that these problems had occurred in the past and what we had to do about it. i don't think in that sense that we were reacting by saying, my goodness, what is going on? francine: the critics say central banks play a key part in inequality by putting money out there. mr. king: that is a misleading way of putting it. there is no doubt in terms of wealth, by allowing interest rates go to zero and buying assets, undoubtedly the apparent

inequality of wealth distribution has increased, and that is only a temporary phenomenon that will last as long as interest rates stay low. now, it has an intergenerational effect. it has undoubtedly made life much more difficult for young people than for old people because people who are buying , houses for the first time now are likely to find themselves buying houses at the top of the market and later in life, when it comes to sell them, they might the selling much lower at house price levels relative to their income. there is an intergenerational aspect, but i think that broad apparent increase in wealth inequality will reverse themselves as interest rates get back to a normal level, if we can find a way of getting back there. when it comes to labor incomes, i don't think central banks have any responsibility for what is going on. this is partly a function of technology, partly a function of trade and globalization, and we should not shy away from admitting that fact. it is the failure of politicians to confront it and say yes, we

think there are benefits for the country as a whole for having these cheap imports from china, but we must as a society protect those who are losing out in this competition. that is what we have been reluctant to do. francine: how do you explain brexit? mr. king: it looked as if there was a propaganda campaign going on. ♪

>> the governor of the bank of

england, sir mervyn king. francine: in 2013, mervyn king stepped down as the governor of the bank of england. he did help calm the storm, but did not stop sounding warnings that the world faced a new crisis unless there was reform in the financial sector. where do you think the next crisis lies? mr. king: i would guess that it would be in the area of high amounts of debt, which the debt in the world today is higher than it was years ago. i think the risk is that there will be some defaults around the world, which will not look coordinated or related, but actually they will have knock on effects that will lead other people to default. i think once that happens, you'll find the banking system once again looks overleveraged or undercapitalized because the losses that they will take as a result of these defaults will eat up some of the equity capital that they have on their

balance sheet at present. i think that is where we may see -- we can see examples in china. there have been some defaults. within the monetary union in europe greece has effectively , defaulted from part of its debt. in terms of the present value of its liabilities. indeed, the banking system does not look very resilient in the monetary union. francine: what will the u.k. look like in 10 years? mr. king: i do not know again, because there are big challenges facing the u.k. i don't think myself that brexit is the biggest economic challenge. i think the biggest economic challenges that as a nation, we are saving less as a fraction of our national account than any other country in the g20. we are not saving enough to finance our pensions. we are not saving up to finance care for the elderly. we don't seem to know how to finance the national health service. we still have a large budget deficit.

and we have a large external current account deficit. the biggest risk to the u.k. on the political side is of muddled thinking. francine: on brexit? or on everything? mr. king: on all these issues. in terms of thinking now that we improveeasy way to people's living standards, when there is not, and in terms of thinking that well, we can all have a softer, cuddlier brexit. i think this completely fails to cope with the realities of it. there are two positions you can take on brexit, both of which are logically coherent, but neither of which seems to me to represent what most politicians are now saying. one is to say that we really do want to stay in the single market and customs union, in which case that is effectively being in the european union, and we should confront that fact, and politically going way to -- politically, the only way to deal with that is have a second referendum and to argue

we should reverse course. francine: do think we will have a second referendum? mr. king: that is a political judgment. i think it is unlikely, but it a coherent positions to say that if we want to stay in the single market and customs unit we should stay in the , european union. the other coherent position is to say no, we have said we will leave. that means as everyone made in the referendum campaign, we would leave the single market and customs union, and we are ready to do that. but having made that position clear, the u.k. would, first of all be able to announce its new , u.k. immigration policy and say to our partners in europe that we would like to negotiate a free trade agreement at least in manufactured goods. such a coherent position. what is not coherent is suddenly to turn around and say we are leaving, which was the position of the manifesto in both major parties, who afterward increased their votes, and say at the same time we really want to stay in

the single market and customs union. that is not coherent. francine: how do you explain brexit? why did people vote for brexit? mr. king: there are two main reasons. one is that it was crystal clear that the only way the u.k. could control immigration was to leave the european union. the government had promised it would control it. it had not done so. it did not seem to show much remorse for that fact. most voters did want some control of immigration, and being in the eu meant that was impossible. it was interesting that the government simply avoided the issue of immigration. it did not argue for migration, and immigration, it simply ignored it. i think that was a powerful motive. the second was both sides talked down to the voters, and, in a sense, the only thing the two sides in the campaign had in common was the belief that anyone who voted for the other side must be ignorant or stupid or uneducated or even racist. this actually did more damage to

the government side than it did to the pro-brexit side. of the exaggerated statements about being 4300 pounds or saw -- worse off for each family did not have any traction, because people knew that nobody could be that certain. so it looked as if there is a propaganda campaign going on. i think if the government had said this is a difficult issue, , there are arguments on both sides, which is why i understand why some of our colleagues want to leave the eu, and i am in favor of it but the , unwillingness to admit it was a complex issue with arguments on both sides i think played badly for the government side particularly badly for the , -- government side, particularly because it played to the issue of trust. how can you trust these people when they are saying things that no one could conceivably know? francine: thank you so much for your time. mr. king: thank you. ♪

♪ >> from our studios in new york city, this is "charlie rose." charlie: we begin this evening with the continuing search for answers in las vegas. here is the cbs evening news. >> investigators are no closer to understanding what allowed stephen paddock to create some of the carnage. his preparations were so elaborate, including placing cameras outside his room and -- room, that investigators believed had a -- paddock may have had an accomplice. >> stephen paddock is a man who spent decades acquiring weapons and ammo and living a secret life, much of which will never be fully understood.