Negotiations weren’t on the agenda when British Chancellor of the Exchequer George Osborne and Bank of Canada Governor Mark Carney sat down for a drink to get better acquainted on a terrace overlooking the Mediterranean in the harbor city of Marseille on Sept. 9, 2011.
The chat turned into a chase that spanned three continents. By the time it was done 14 months later, Carney agreed to become the first foreigner at the helm of the 319-year-old Bank of England. His pay would exceed the combined earnings of the Federal Reserve and European Central Bank chiefs.
Carney is “simply the best,” Osborne told a full House of Commons on Nov. 26.
The recruitment marked the first instance of poaching a central banker among the Group of Eight nations. It underscored the breadth of Carney’s experience and the shortage of British candidates untainted by both financial scandal and U.K. policy makers’ failed attempts to spur the economy, according to a reconstruction of events based on interviews with 10 officials with direct knowledge of the matter.
A central bank governor wooed by another government “really is unprecedented,” said William White, a former Bank of Canada deputy governor and now chairman of the economic development and review committee at the Paris-based Organization for Economic Cooperation and Development.
Carney, a former Goldman Sachs Group Inc. managing director, has led the Bank of Canada since 2008 and the Financial Stability Board, a global regulatory body, since 2011. He testifies in the House of Commons in London tomorrow and starts his job on July 1 with a compensation package of more than $1 million, including housing costs. He will serve a five-year contract, compared with the standard eight, a reduction he sought to dovetail with his FSB post.
When they sat down for drinks in Marseille, where they were attending a Group of Seven gathering focused on Europe’s debt crisis, Osborne, 41, was already considering looking outside the Bank of England for a successor to Governor Mervyn King. Still, he didn’t bring up the topic with the 47-year-old Carney, said two officials familiar with the talks.
Five months later and 6,000 miles away in the Nikko Hotel in Mexico City, at another finance chiefs’ meeting, Osborne sounded out the Canadian about the post. That marked the start of the talks that would conclude with his appointment.
At the time, Carney was developing a reputation as an advocate for tougher banking oversight. At a closed-door gathering of bank executives on Sept. 23 in Washington, Carney got into a dispute with JP Morgan Chase & Co. Chairman and Chief Executive Officer Jamie Dimon over regulation in the presence of more than two dozen bankers and officials.
In the following months, as his potential candidacy circulated, Carney brought the same message to London. He made at least four visits to the City, giving speeches and meeting with banking executives and government officials.
In November 2011, he was named to succeed Mario Draghi as head of the FSB, the Group of 20 advisory body for global financial regulation.
A tough line on banks wasn’t all Osborne was after even as the BOE governor was set to become chief bank supervisor in an overhaul of U.K. financial oversight. The chancellor also needed a diplomat. King had clashed with the Treasury during the 2009 financial crisis because he wanted to extend bailouts beyond Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. Adair Turner, head of the U.K. financial regulator, was more outspoken, saying some financial activity was “socially useless.”
Carney was also putting his diplomatic skills to use. During a visit in early November 2011, Carney gave a speech at Drapers’ Hall in London to press for tougher global regulation. He dined with at least three banking executives and met with a government official, according to travel records posted on the Bank of Canada’s website.
Carney would be back in London two weeks before his February 2012 meeting with Osborne in Mexico City, when he met a bank executive and government official. In April, the Financial Times reported he was informally approached by a member of the court, which governs the Bank of England’s affairs, about taking over from King.
While never explicitly ruling out the possibility, Carney dismissed the reports. The Bank of England and Treasury denied them.
By August 2012, Carney began telling people publicly and privately he was not interested in the job. In an Aug. 8 interview with the British Broadcasting Corp. in London, Carney ruled out the possibility.
“I look forward to working with the new or the next governor of the Bank of England,” Carney said in the interview. Asked if his reply meant “it’s a never,” Carney said: “Yes.”
One of the sticking points for Carney was the eight-year term, which he felt was inconvenient because he wanted to return to Canada in time for his oldest daughter, who is 12, to begin university, two people said. Carney decided not to apply for the job.
The position was advertised in the Economist magazine on Sept. 14, 2012.
More than 50 people did put their names in. No more than half a dozen were invited to interviews in at least two secret London locations including Eastbury House, a modern building on the south side of the river Thames about 2 miles from the Treasury.
Paul Tucker, King’s deputy for financial stability who has spent more than 30 years at the central bank, was the bookmakers’ favorite. Other candidates included Turner, chairman of the Financial Services Authority, and John Vickers, chairman of Osborne’s Independent Commission on Banking.
The Oct. 8 application deadline came and went. Carney told reporters three days later in Tokyo at the International Monetary Fund’s annual meeting that he was looking forward to working with the next BOE governor. That weekend, Osborne talked to him privately at the meetings and asked Carney to reconsider.
On the weekend of Nov. 3, at the same hotel in Mexico City where Osborne first broached the job, Carney agreed to be interviewed. At least one candidate in London complained that Osborne was re-writing the process, according to one person familiar with the matter. A Treasury spokesman, who declined to be identified in line with policy, denied that it had received a complaint.
Return to Ottawa
Carney returned to Ottawa from Mexico City on the morning of Nov. 6 on the same flight as more than half a dozen officials from the Bank of Canada and finance department, including Finance Minister Jim Flaherty. They were unaware of his plans.
From Ottawa, Carney flew to London to interview for the job on the weekend of Nov. 17, nine months after Osborne brought it up. He cooled his heels having coffee with an Osborne aide before being escorted to meet the recruitment panel and, separately, the chancellor.
Carney had steered the Canadian economy through the financial crisis, helping deliver three times as much economic growth as the U.K. since the end of the global recession in 2009. Canada’s banking system was in better shape than Britain’s and his role as head of the FSB showed he had the right skills to lead the Bank of England’s expanded role.
“The fact that Canada seems to have had a good crisis, I’ve heard people suggest, has upped Mark’s reputation,” White said.
Carney was told he would be recommended to Queen Elizabeth II by Nov. 21. Osborne discussed the appointment with Prime Minister David Cameron and Deputy Prime Minister Nick Clegg and the recommendation was made to the Queen to make it official. Cameron called Canadian Prime Minister Stephen Harper and Osborne spoke to Flaherty to inform them of the appointment.
The terms of the appointment would make any central banker jealous: a basic salary of 480,000 pounds ($755,856), about 50 percent more than the maximum he could earn at the Bank of Canada and 57 percent higher than King’s basic pay. He would also get an allowance of 30 percent of salary in lieu of a pension and a 250,000-pound annual housing allowance.
In base compensation alone, Carney will earn more than the combined salaries of U.S. Federal Reserve Chairman Ben Bernanke and European Central Bank Governor Draghi. Draghi makes about 371,000 euros, not including the use of an ECB residence in Frankfurt, while Bernanke has a salary of $199,700.
“It’s going to be very hard for him to justify that package when he is going to be in a position in which he calls for pay restraint,” said John Mann, a Labour Party lawmaker who sits on the Treasury Committee of the House of Commons. “He’s going to have to do remarkably well to justify this expense.”
Carney told reporters on Nov. 26 that he changed his view about taking the job after considering how well Canada was doing and the “real challenges” faced in the U.K.
“These discussions really only intensified in the last two weeks,” Carney said. “I had an opportunity to reflect on where this institution stood, where the Bank of Canada stood, where our financial system stood, where our economy stood and all the strengths that are there.”