I beg to move,
That this House
notes with dismay that the Chancellor of the Exchequer has presided over the first run on a UK bank for over one hundred years and that the taxpayer has now made approximately £30 billion worth of loans to Northern Rock without the Government providing evidence of either the exact amount or the security of the loan, over and above deposit guarantees;
further notes that the current search for a private purchaser for Northern Rock faces enormous difficulties in the face of the high costs of credit and the conflicting interests of different groups of shareholders;
applauds the important role played by the Northern Rock Foundation in the North East and regrets the potentially negative consequences for jobs in the North East should Northern Rock go into administration;
further regrets that the Chancellor chose not to recognise the importance of Northern Rock as a large employer in the North East amongst his principles for assessing Northern Rock proposals;
calls upon the Financial Services Authority to suspend trading of shares in Northern Rock immediately to prevent insider trading;
and calls upon the Government to introduce legislation to allow for Northern Rock to be placed immediately in temporary public ownership as the only action that will guarantee the loans are paid back in full as soon as possible at the lowest risk to taxpayers.
We are very much in the middle of a banking crisis that is without precedent— certainly in my lifetime and probably for most of the last century. I was always brought up to believe that banking runs occur in far-off countries and that the lender of last resort is an obscure academic construction that appears in monetary textbooks, not the real world. However, I suspect that when the dust has settled on the Northern Rock affair, future generations will think of it much as people think of the South Sea bubble: a major historical event when a speculative bubble in financial markets burst. If one were to be pessimistic by thinking that the crisis will continue unabated, one could well seek a historical precedent in the Creditanstalt in Austria in 1931. Those events had major financial and economic repercussions.
We are dealing with enormous sums: approximately £30 billion of Government loan, which excludes the deposit guarantees. To try to help Members get their heads around that, I point out that 30 billion is a "3" with 10 noughts. It is impossible to be precise about how much money is involved because the Government do not give the necessary information, and neither does the Bank of England. The information can only be inferred from the Bank's balance sheet, but the figure is approximately of that order of magnitude.
To put the amount in context so that we can make sense of such an enormous number, I simply equate it to a little bit less than the annual defence budget. Given that it is a one-off payment, we are talking about six Iraq wars. Such a sum would build a high-speed train route from London to Edinburgh, and enough money would be left to build another one to Glasgow. The sum is the equivalent of about £5 million for every Northern Rock employee.
That leads me to a key aspect of the argument: we are talking about not just money, but people. I have been to Newcastle several times in the past year to talk about its economic situation. Northern Rock is a major employer in north-east England. I understand that it has about 3,500 employees in Newcastle and about 1,500 in Sunderland. In addition to that employment, it has been an important part of the repositioning of the north-east of England from manufacturing towards financial services.
In addition, the Northern Rock Foundation makes an important charitable contribution. It has spent some £175 million over 10 years, but it does not just spend a lot of money. As I discovered when I walked along Hadrian's Wall last summer, an enormous number of local charities rely on the foundation for obtaining charitable money quickly and effectively. They receive the money from the foundation much more effectively than they do from the national lottery.
Before Ministers stand up and pose as angels of the north, it would be worth while for them and their Back-Bench colleagues— [ Interruption. ] I entirely understand why Labour Back Benchers will quite reasonably wish to speak up on behalf of their constituents and their constituents' jobs. If I was in their position, I would do exactly the same. However, if they have not already done so, I urge them to study the document on the principles for assessing Northern Rock proposals, which is the basis for the Government's sale. Those who have studied it will realise that it says absolutely nothing—not one word or one syllable—about either employment in north-east England or the Northern Rock Foundation.
I have studied that document, too. Has the hon. Gentleman looked closely at the last part of it, which refers to a long-term recapitalisation of the business and a sound business plan in the medium term? Will he bear it in mind that that statement of principles was put out on behalf of not only the Government, but the Bank of England and the Financial Services Authority, which can hardly deal with the matters about which he is thinking?
If the hon. Gentleman is basing his hopes on a sound business plan from the private bidders, I fear that he may well be disappointed. I will come to the details of the private bids in a moment.
A couple of days ago, I had a long session with one of the bidders, who had just come back from a tour of Northern Rock's north-east facilities. He said that he did not know whether to laugh or cry. He had been round the call centre, where every single employee was reading books and magazines because there was no work to do. Any Labour Member who imagines that some of the vulture investors who are part of Mr. Branson's consortium have the slightest interest in preserving that employment are labouring under an illusion. I do not know whether they realise, for example, that one of his largest investors is a gentleman called Wilbur Ross, who made billions of pounds in the United States smashing trade unions and ripping away company pension schemes. My starting point is that the employees of Northern Rock and the people of north-east England deserve rather better than that, which is what is likely to come out of the private bidding process.
Is the hon. Gentleman at one with the leader of the Liberal Democrats on Newcastle city council who, along with the majority of elected politicians in the north-east, supports efforts to get a solution for Northern Rock? Is he not in danger today, with the emotive language that he uses, of running down the company and making matters worse?
I am a strong fan of the leader of Newcastle city council. The Liberal Democrat group runs that city admirably. He has been endeavouring on an all-party basis both to honour the 100-year history of the bank and to find a solution to it. I have discussed it with him several times. He understands that the options are running out and that the solution that I am proposing—temporary public ownership—will probably serve the interests of the people who live in that region better than the hopeful venture being promoted by the Government.
One thing that Councillor John Shipley is not doing is talking the bank down or trying to talk the region down. He is trying to work with other people to support it. The Liberal Democrat council even gave the freedom of the city to Northern Rock a few weeks ago.
The council did that on an all-party basis and was right to do so, given the bank's past contribution. I have never run down the employees of the bank, with the exception of the chief executive, whose role in all this I will come to shortly.
What amazes me is that had we not initiated this Opposition day debate, there would have been no discussion of this massive problem before Christmas. The Conservatives have had three Opposition days and have chosen not to take the subject on any of those occasions. They seemed to think it was more important to discuss a £950 gift to a third division Scottish politician called Wendy than to have a debate on what has happened to £30 billion of taxpayers' money.
I have been trying to establish what the leader of the Conservative party thinks about the matter. He followed me on the "Today" programme yesterday and denounced nationalisation as a matter of principle, but as far as I could establish, and no doubt we will hear more in a few minutes, his only solution seemed to be to follow the Government and keep an open cheque book.
I, for one, congratulate the hon. Gentleman on calling the debate. Did he consider another option—the possibility of remutualising Northern Rock? Some of us feel strongly that one of the great problems of demutualisation is that it was predictable that some companies, because of the nature of the marketplace in which they operate, would overstretch themselves. Is it not time we looked at the strength of mutuals again?
That is a helpful intervention, with which I have a great deal of sympathy. I used to be involved in an organisation called Save Our Building Societies, which campaigned against the original demutualisation of Northern Rock for precisely that reason. After a period of temporary public ownership, that might be one of the options that appear viable, but rushing into a sale now would preclude it. The hon. Gentleman is absolutely right.
My colleague reinforces my point. I am sure we shall hear what the official Opposition have to say. I imagine, by default, that they want to see the company put into administration, its total closure, and the wiping out of the company without any opportunity for it to be relaunched. I assume that that is their default position, but no doubt we will hear from them.
I understand theoretically some of the points that the hon. Gentleman is making, and I have read the motion. Is he aware that Northern Rock employees do not want nationalisation? If it is difficult now to sell the business as a going concern, they wonder how much more difficult it will be to do so in future. The small shareholders, some of whom I see in the Gallery, oppose nationalisation because they would lose any value that they have.
I will come to those points. However, I should say in passing that there is an issue with the small shareholders; I understand that. Many of them, of course, acquired their shares free on demutualisation. Many of the people who call themselves "small investors" are not small; I believe that Lord Stevens is a large investor who bought into the company quite recently in order to make a killing from it. The key shareholders, of course, are the hedge funds, whose role I shall deal with shortly.
As one who has set out a positive alternative if the bids do not produce a satisfactory result, may I ask the hon. Gentleman how he can believe in the idiocy that taking on more than £100 billion of Northern Rock's liabilities—all its liabilities—would be good for the taxpayer? Why should the taxpayer have to pick up the bill for any losses, redundancy payments and other problems that nationalisation would bring?
Taxpayers are already committed to the hilt; they have already advanced staggering sums. In normal circumstances, I would not dream of recommending my solution, but we are in an extremity—and in an extremity we have to look at the options. The one that I propose is the least undesirable; I shall come to the reasons for that.
The hon. Gentleman has been dreadfully dismissive of the small shareholders, of whom there are 140,000. Yes, some acquired their shares on demutualisation and have been counting them as their savings for retirement. Many others, including people in my constituency, bought small quantities of shares because they wanted to support a good local business. They are the ones who will suffer. They should not be dismissed and put out of the picture.
I am not being in the least dismissive of small shareholders. However, when people buy shares, they take a risk. They understand that; it is in the nature of investing in risk equity. Is the hon. Gentleman seriously suggesting that taxpayers' money should rank behind risk investment by private individuals in the stock market? That is the implication of his remarks.
May I move on? I have been generous with interventions.
At this point, it will be useful to summarise why the Liberal Democrats have taken the position we have. I shall then develop in more detail comments on the financing of the company as it now is and discuss the options.
Of course it would be desirable for us to start from somewhere else. The financial shock that hit the markets a few months ago was unprecedented and unexpected, but that does not excuse the Financial Services Authority, the regulator, which should surely have spotted the high risk associated with Northern Rock's reckless expansion. None the less, the event was unexpected. We reacted to it by supporting what the Government did to stop the run—that is, guarantee deposits. That was a sensible reaction.
At the time, I opposed an open-ended unconditional loan to bail out the banks. Ever since the Government made that decision, they have been digging a deeper and deeper hole for themselves. There is nothing wrong in principle with exploring the idea of trying to get a private bidder, and that is why I do not fundamentally quarrel with some of the interventions from Labour Members. However, it has become painfully and increasingly apparent that, with the money markets now largely closed, it is simply impossible for any of the bidders, however credible or reputable, to raise the amount required, including the money necessary to guarantee the full repayment of the taxpayer. That is our position now.
Presumably, the hon. Gentleman has done some calculations on his proposal for nationalisation. What is his best estimate of the potential liability for the taxpayer in the next two to five years?
The taxpayer is already heavily implicated in the company. Its liabilities include the deposits, which are already guaranteed, and they would include the loans that are rolled over but are not being rolled over at present because the market will not do it. In practice, the taxpayer is 100 per cent. liable for all these liabilities as they come due. If it was a nationalised company, temporarily, the Government would have some control over the process instead of being an entirely passive spectator. Let me retrace the steps to some of the key decisions that the Government have made. In September, there was a key decision to provide what was said at the time to be unlimited support. The question that needs to be asked—it relates to the intervention by Mr. Kemp—is what estimate was made of the likely deposit withdrawal and the extent to which commercial loans would have to be replaced? At about that time, Lloyds bank made a proposal that involved £30 billion-worth of Government loans. The Chancellor, as we understand from the records, personally rejected that option on the grounds that the commitment of Government money was too large. We now know that £30 billion has already been advanced in Government loans without resolving the problem, so somebody made a horrendous miscalculation about the sums that were going to be involved. We need to know how that happened.
A second basic question that I have been asking throughout is: why was this loan advanced in a completely open-ended and unconditional way? The Government, as the major creditor, could have said, "We will advance credit to the bank subject to the removal of the chief executive and others who were directly responsible for getting the bank into trouble in the first place." Any major creditor could reasonably insist on conditions, but the Government said, as did the Chancellor, rather pathetically, on several occasions in the Chamber, "We can't do anything about this because we don't own the bank." We now have an extraordinary situation whereby the chief executive of the bank, Mr. Applegarth, who drove the bank on to the rocks, is still sitting in the chief executive's chair driving the company and managing the Government's taxpayers' money. It is an extraordinary situation for the Government to have allowed to arise.
Another fundamental question that I have asked is: when the loan had been advanced, what security did the Treasury or the Bank of England, or both, insist on in return for taxpayers' money? One would have thought that that was a reasonable, prudent provision to request. I have been writing letters to the Governor of the Bank of England to ask him what security was available, and he has written me a letter that is so shameless that even Sir Humphrey would have been embarrassed to sign it. There are no figures in it, nor an explanation of what happened to the rolled-up interest on the loan. It is completely and utterly uninformative and, frankly, borders on the impertinent, because the Bank of England and its Governor are saying that elected representatives have no right to know what happens to public money. That is a completely unacceptable position.
We can infer—we do not know it because it has never been confirmed—that roughly half the funding of the bank loan is secured pretty solidly against the assets of the bank, but the other half is not. Most of it is secured against what are called the free assets of the bank; in other words, it takes a secondary role to that of secured creditors such as Granite, which accounts for about half of the balance sheet. It is argued that that is fine because the money is secured against the bank's mortgage book. However, it has emerged that among the assets of the bank against which the Government loan is secured are £8 billion-worth of unsecured loans. It appears never to have occurred to anybody in the Treasury or the Bank of England to ask how secure those assets were.
The confidence of the Government and the Bank of England was based upon a belief that Northern Rock had a very good repayment record from its borrowers. On paper, that looks perfectly true. However, people have now started digging—notably Panmure Gordon, one of the brokers, which has established that a lot of bad debt is actually being hidden because the Northern Rock bank did not employ the sort of rigorous practices employed in other institutions such as Alliance and Leicester and Bradford and Bingley. However, whether or not that is the case, there was an underlying optimism, all based on the strength of the mortgage book and on the value of the domestic property that underlies those assets.
My hon. Friend has already highlighted the executive failings. Before he leaves the assessment of the debt, will he say whether he agrees that a major cause of the failure of Northern Rock was insufficient corporate governance by non-executives, and the failure of the audit committee and the risk committee to dig properly into these matters?
The directors who were directly responsible for those functions have now been removed, but that was well into the process.
In relation to the risk committee and the audit committee, is the hon. Gentleman in a position to confirm whether the individual who had that responsibility was none other than Sir Derek Wanless?
I believe that that was indeed the case.
The optimism that I described rests upon the fact that the assets of the bank primarily consist of mortgages, many of which were obtained at the peak of the housing market in the earlier part of this year. There was an extraordinary explosion of growth in the Northern Rock bank—it grew by about 55 per cent. and took 20 per cent. of the market in the earlier part of this year. That growth was not backed up by deposits, and it accounted for the fact that the bank had to borrow heavily in the wholesale market, which then seized up. As I told the House a few weeks ago, it was possible then to go to the Northern Rock bank and obtain a mortgage of about 125 per cent. of the value of a property, and of four to five times a person's income. That was the sort of frenzied borrowing that took place at the peak of the market. I checked yesterday, and those loans are still on offer. This is a supposedly responsible lender in the middle of a banking crisis, dependent on loans from the Government.
I am very interested in what the hon. Gentleman is doing. He is continuing to run down the bank, which I do not think is a very clever thing to do. Anyone who has a mortgage with the Northern Rock bank or who has applied for one—in the north-east, traditionally—will know that it was a damned hard building society, then bank, to get a loan from. The traditional, old loans are quite secure.
The hon. Gentleman will have to explain how the bank managed to expand its business so rapidly in the earlier part of this year.
The question I have been asking throughout is a "what if" question. We do not know the answer to it in reality, but it is an important question. What if the property market were to crash? I ask that because for some years before I came to this House, I worked in the oil industry. The question that was always asked by my prudent managers was, "What if the oil price were to fall drastically? What would then happen to our profits and our company?" Because they were always asking that question, they always hedged, diversified and prepared, and they saved themselves in difficult periods. What is amazing about this episode is that nobody at the top of the bank, nobody in the Financial Services Authority and none of the clever double-firsts in the Treasury ever seemed to have asked this basic question: what would happen to the value of these mortgages and of domestic property if the market fell heavily?
May I turn the hon. Gentleman's "what if" question around? What would happen if there were such a property crash where there had been a nationalisation of Northern Rock? How many more nationalisations of banking institutions would the Liberal Democrats want in that "what if" disaster scenario?
We are dealing with a very specific case where the Government have already advanced £30 billion, and I am concerned with how that enormous investment by the taxpayer should be protected.
To pursue the argument—I am just raising a possibility; we do not know that it will happen, and we hope that it will not—let us suppose that property prices fall very substantially. Twice in my working lifetime, domestic property prices have fallen in real terms by more than 25 per cent. It could happen again. We have been at the peak of an unprecedented bubble, the largest in the developed world. If it were to happen again, the obvious question is: what would happen to the value of the security that the Government have been given by the bank?
One person understood this all along: Mr. Applegarth, the chief executive. He is still there, sitting in his chair at the bank. He understood all this and, at the peak of the market, he sold his shares. He was urging the small investors—to whom Mr. Atkinson has rightly drawn our attention—to invest in his bank while he was selling up. We all know what happened. He invested his money in a very large country estate and bought a fleet of sports cars for his wife. That person is still at his desk at the Northern Rock bank; he is directing its affairs and is responsible for taxpayers' money. That is one of the unbelievable aspects of how this whole affair has been managed.
My hon. Friend is underlining the tragedy of Northern Rock. Traditionally, it was based on the relatively limited lending base of the borrowers in the region, which placed a constraint on what it could do, and on the housing market in the region, which is nothing like as volatile as that in the rest of the country, and into which Adam Applegarth took Northern Rock in his reckless expansion of the company.
My right hon. Friend is absolutely right. His intervention underlines why, historically speaking, Northern Rock was so highly regarded, particularly as a building society but later also as a bank. The chief executive exploited that reputation to run it into a very dangerous situation. I am not blaming him alone, however. The regulators should have seen the dangers.
I want to turn now to the different options available, and to where things stand in regard to the proposed private sale. There seem to be two serious offers, although others come and go. There is the offer by Branson, and that by Luqman Arnold's Olivant group. They differ in that Branson's consortium wants a takeover and is willing to trade on the basis of the Virgin reputation as a way of attracting new deposits, while Luqman Arnold is not interested in a takeover. He wants a minority stake and to run the bank properly while restoring it to its purpose as a responsible bank.
In normal circumstances, I am sure that either of those proposals would be an interesting proposal to be treated with the market. This is an extraordinary situation, however, and it is becoming increasingly apparent that neither of those two, or any of the others, will be remotely able to raise the amount of money required to take over the bank as a going concern and give the Treasury the guarantees that it requires. Of course, they say that they can guarantee the first half, the £15 billion. What they cannot guarantee is the next £15 billion. That will be the difficult bit, because that is where the lack of security is.
Nor should we be under any illusions about the motives of the people who are bidding. I have never met Mr. Branson, but he seems to be an engaging character who has had some successful ventures. He is, however, a front man for a consortium of hedge funds and private equity operators whose aim is to make a killing. He is proposing to invest about £200 million in a company whose gross assets will be more than £100 billion, and he will be hoping to sell it on in due course and make a large capital gain that, as he is registered overseas, might well not attract UK taxation. So we are not talking about Mother Theresa here; we are talking about some very tough short-term financial investors.
As I talk about the bidders, it is coming back to me that the Government have made a bad mistake—even within their own policy—in giving preferential status to one of the bidders, the Branson group. The other bidders have discovered, as they enter the early stages of due diligence, that the Government—and the taxpayer—are paying the legal fees of the Branson consortium but they are not willing to pay theirs. Understandably, they are aware that they are not operating on a level playing field.
I do not want to run Mr. Branson down, but it is a matter of fact—of which I was previously unaware—that he has a criminal record for tax evasion. There is therefore good reason to believe that the people who have to stump up the money for his consortium may well not regard him as a fit and proper person to run a public company, let alone a bank, and let alone as someone responsible for £30 billion-worth of taxpayers' money. So there are real questions about whether this private bid is ever going to succeed.
In the context of the private bid, one must also ask—this goes back to the question about private shareholders—
I am not taking sides regarding which bidder is best— [ Interruption. ] I am not. However, does the hon. Gentleman not recognise that someone with the reputation of Sir Brian Pitman—the ex-chairman and chief executive of Lloyds bank, who is part of the Virgin Group's bid—is serious about what they are doing?
I am sure that Sir Brian Pitman is absolutely admirable. He is a 75-year-old ex-banker with a formidable history and I am sure that he is serious. I have talked to some of those associated with both the people in question, and they are serious people. That is not the problem—the problem is how they are going to raise, in markets that are now almost closed, the staggering amounts of money that they need to realise their bid. That is the issue—it is not about their character or their history in running banks.
The private sale is becoming increasingly problematic, so we effectively have two options. One is to put the bank into administration, which is probably what everybody would regard as the "nuclear" option. Under those circumstances, not only are the shareholders in the north-east wiped out, but there are question marks over what happens even to the guarantee deposit. It would take a long time for those guarantees to be fed back to the depositors, and there would be continuing questions about deposits in other banks because of the difficulties. How would the public loan be retrieved? It would be retrieved either by a very slow run-off as the mortgages were redeemed, or through a fire sale in what is currently a very depressed market. Administration thus presents enormous problems, which is why we Liberal Democrats are suggesting that a period of temporary nationalisation is the least worst of the three basic options available: nationalisation, private sale or administration.
Of course we recognise that, in practice, civil servants are not the best people to run a commercial bank. Professional management would have to be hired, and they would have to get to the root of what is going on at this bank. It might prove to be a very sound institution deep down, with a lot of very good assets; we do not know. However, if, having dug down, those managers establish that that is so, they can re-launch it in future years and there would be a substantial upside for the taxpayer that would not result from a private sale. On the other hand, they might discover that it is a can of worms—we do not know—and if so there will have to be a gradual run-off in what is a very difficult environment.
Is the hon. Gentleman's purpose in advocating nationalisation to enable Northern Rock to survive as a growing business—a locally based, locally headquartered company in the north-east, of which we have very few in the growing sectors—or simply to put the Government at the head of the queue of creditors to get their money out?
I very much hope that the first proposition is indeed realised. That would be the most desirable outcome, and it might well be possible to achieve it. Frankly, however, the Government have an overriding responsibility to protect the interests of taxpayers, who have put £30 billion into this bank already. These objectives are not fundamentally incompatible, but it will be difficult. There are precedents for such an approach succeeding, although not many. In the United States, the Federal Reserve took over Continental Illinois bank, which was in a comparable position. It was not done for ideological reasons; I think that a Republican Administration were in power. The bank was turned round and eventually sold, so there are precedents.
I recognise that the hon. Gentleman's preference, like ours, is for a private sale. However, in advancing his case for nationalisation over administration, what analysis has he done that leads him to suggest that taxpayers, whom he has just identified as the primary beneficiaries of either of these routes, would do better out of nationalisation—given that they would potentially be taking on all £110 billion of liabilities, plus redundancy liabilities that we have not even calculated yet—than administration, through which they are currently exposed only to £30 billion-worth of liabilities?
None of us knows exactly what would happen because none of us has been exposed to the details of the bank's position. The Bank of England will not tell us and we do not have the resources to carry out the due diligence on the company. There is, of course, the possibility, which I have just alluded to, of temporary nationalisation—as has happened historically and as occurred with a small national mortgage bank that was temporarily nationalised and resold very successfully under the Major Government. It was a small enterprise, but it did happen. The whole point is to provide some legal and institutional stability in the hope that, in the end, not only will the taxpayer be repaid but any increase in the value of the bank from its currently depressed market conditions will accrue to the taxpayer. That is the objective.
Why does the hon. Gentleman ignore the fourth option, which involves the Bank of England acting as a tough but fair bank manager with repayment schedules and proper cash-flow monitoring of the bank's progress? It would then be for the bank to work out whether it needed to put itself into a kind of voluntary run-off and do it in an orderly fashion or whether it could actually grow the business. Would that not be the best option?
It is partly what the Bank of England has been trying to do, albeit not very successfully. If the Bank of England were good at running a commercial bank as opposed to a central bank, it would have taken some elementary precautions like insisting on conditions for its loan, but it has shown itself to be incapable of doing that.
My final point—I am conscious that other Members on both sides wish to speak—is that speed is of the essence. We are now in the position where the patient is in the operating theatre and, frankly, bleeding to death while the Government surgeon-general is sitting around saying that we need a full health check before anything can be done. That is not very sensible. Urgent action is required. I hope that I have made the case that public ownership is the least worst option. If it is, the Government will need to act very quickly and will need enabling legislation in order to do so. It is better that it is done now than in two months' time when the position may be infinitely worse.
I am rounding off.
Finally, there is a strong additional reason for wanting to park the problem of Northern Rock in the solution that I have described. There well be much worse to come. We may well have had the first of a tsunami wave with others behind it. We know what they are; we can see them. One of the problems that arises is that other banks—even very sound banks—are running into serious difficulties in raising capital from the markets. We know that there may well be a very nasty shock in the domestic property market. It is absolutely essential that the Treasury and the Bank of England are totally focused on how to deal with these emerging problems. At the moment, they are totally preoccupied with the problem of the Northern Rock bank, getting the wider problem of the emerging financial crisis completely out of perspective. The Government have failed so far, so they should pick themselves up from the floor, act quickly, take the bank into temporary public ownership and, we hope, limit some of the damage that has already been caused.
I beg to move, To leave out from "House" to the end of the Question, and to add instead thereof:
"endorses the approach taken by the Government to Northern Rock to maintain financial stability, protect the interests of taxpayers and safeguard the position of depositors;
welcomes the publication of a statement of principles underpinning the Government's response to proposals received by Northern Rock with regard to its future;
acknowledges that Northern Rock has announced that it is continuing to explore a range of options as part of its strategic review;
recognises that the Government continues to keep all options open in relation to the future of Northern Rock;
and notes the Chancellor's assurance that he will keep the House fully informed of further developments with regard to Northern Rock."
I am looking forward to the debate and particularly to the contributions of Back Benchers, but I thought it might be helpful if I made three main points. I shall talk about: first, the wider context to the events of the last few months; secondly, the current position with Northern Rock; and, thirdly, any lessons to be learned for the future from what has happened.
The UK entered the recent period of turbulence in the global financial markets in a very strong position. The UK economy has seen 61 consecutive quarters of growth—the longest period since records began—and we are growing faster than any other G7 nation this year and will continue to grow next year.
I will give way later, but not now.
The banking sector also entered this period on the back of a period of rapid growth with well capitalised balance sheets. Both the UK economy and the banking sector remain strong.
However, this has clearly been a testing time. The disruption to global financial markets that we have seen over recent months was triggered by problems in the US sub-prime mortgage market, as hon. Members will know. When the markets realised the extent of the problems in that market, they began to have doubts about the value of other asset-backed securities. Uncertainty about which institutions were exposed and to what extent meant that institutions lent to each other at much higher rates or not at all. The result was a large reduction of money in the market generally and an increase in the cost of borrowing not just for those with exposure to sub-prime mortgages, but for all institutions.
In those circumstances, Northern Rock faced specific difficulties, not because of direct exposure to sub-prime mortgages, but because its business model depended on securing substantial sums from the securitisation and money markets. In September, it became clear that Northern Rock was having severe difficulty in accessing the financing that it needed and that it had no option but to go to the Bank of England. On
Was not the real cause of Northern Rock's problem that whereas the Federal Reserve and the European Central Bank were pumping liquidity into the world's banking systems, the Bank of England sat back and did nothing, refusing in September to pump in any such liquidity?
The Economic Secretary's answer to Mr. Clifton-Brown was not wholly satisfactory. On
I refer the hon. Gentleman to the reply that I have just given. He is entitled to his view, but I believe that something fundamental about Northern Rock's business model led to its difficulties.
We could, of course, have let Northern Rock go down, but that would have had serious consequences for the banking system, including likely knock-on effects for other financial institutions, in which confidence would inevitably have been shaken, and for the British economy.
Does my hon. Friend accept that the comments made by Dr. Cable, in running down the bank, will make it much more difficult to secure a viable future through the private sector for it?
I am grateful for my hon. Friend's intervention. I have been slightly confused by the Liberal Democrats' comments throughout. On the one hand, they seem to want a sale to the private sector; on the other, they seem to want to nationalise Northern Rock in order to get that sale. However, I shall come to that shortly.
I should like to make a little more progress, and then I shall give way.
Our intervention was widely supported at the time, including by some who now imply that it was the wrong thing to do or who are now not prepared to accept the consequences of that support. All the lending that the Bank of England has provided is secured against assets held by Northern Rock, which include high-quality mortgages and securities. The Bank is the senior secured creditor. The Financial Services Authority has said, and continues to say, that Northern Rock's main asset base—its mortgage book—is strong and sound.
I should like to make a little more progress, and then I shall give way to the right hon. Gentleman.
We have also ensured that the Bank's lending is subject to the normal conditions and controls for a creditor of our scale, to ensure that our interests are protected. In return for that facility, Northern Rock has agreed a number of controls, including not declaring, making or paying any dividend without the prior consent of the Bank of England, and not making any substantial changes to the nature of its business.
Has the hon. Lady seen a list of the assets, including the Granite element, which totals the full amount of the current Government-Bank of England lending to Northern Rock?
I do not think it appropriate to embark on a running commentary on the number of assets on Northern Rock's balance sheet in relation to the lending that has already taken place. The crucial point is that the Bank of England's lending is secured against Northern Rock's assets.
Does the Economic Secretary agree that one of the priorities now is to ensure that Northern Rock continues to trade and keeps going at this crucial time? Contributions such as that of Dr. Cable, which resembled Private Frazer's "We're all doomed", do not help either Northern Rock itself or the large number of people in the north-east who depend on it for their employment.
I will press on, because I have some important points to make, but I will give way to the hon. Lady in due course. What I say next may answer the points that have been made so far.
I know that there has been much interest in the amount of support that the Bank is giving. The Bank publishes its balance sheet every week, but—this is important—in common with other central banks it does not provide details of any specific operations, because it believes that doing so would undermine its ability to provide such support. A running commentary on any operations would be likely to have adverse effects that none of us would want—even, I hope, Liberal Democrat Members.
As the House will know, as well as the support provided by the Bank of England there are the Government's arrangements to guarantee all deposits in Northern Rock, which will remain in place during the current instability in the financial markets. There is therefore no need for savers to take their money out, although of course they are free to do so. Those arguments were necessary, as I hope everyone will agree, and the guarantee will not be removed without proper notice being given to depositors. The Treasury has made it clear that that notice will be not less than three months.
Together, the ongoing support of the Bank of England and the guarantee of deposits have given Northern Rock an opportunity to consider its strategic options for the future, and it has asked for expressions of interest in purchasing the business. As a major creditor the Government clearly have a direct interest in that process, and will therefore have to agree to any proposals for the future of Northern Rock. On
First, we must consider the interests of the taxpayer. The money that has been lent must be returned at an appropriate time and rate, and the Government will consider all options with a view to reaching the best outcome for the public purse. Secondly, we want to protect depositors. It is essential for us to do all that we can both to safeguard their interests and to maintain the service given to them. Thirdly, we will of course maintain wider financial stability. As the Chancellor has said, any outcome must also meet European Union state aid rules. The Government are happy to talk to any bidder that satisfies those principles.
As Members will know, Northern Rock is taking part in accelerated discussions with the Virgin consortium, but says that it is not ruling out other bidders or alternative options. In answer to a specific question from the hon. Member for Twickenham, I can say that the Government are not paying the fees of the Virgin group. I understand that there is an arrangement between Virgin and the company to pay fees up to a specified cap.
The hon. Gentleman argued that rather than those options being pursued, Northern Rock should be nationalised. As the Chancellor has made clear, we do not intend to rule any option in or out at this stage. But when the hon. Gentleman speaks of public ownership of Northern Rock as a temporary solution, he means that we should use it to try to find a private buyer, and that is exactly what we are already trying to do. As the Chancellor has said, we will of course continue to keep the House informed of developments.
I thank the hon. Lady for giving way. Her last statement was almost too much. Does she not understand that in order to realise the full value of an asset, the timing and circumstances of the sale must be looked at, and that a fire sale is not the structure that realises the maximum for the taxpayer?
I am not sure that we can make our position any clearer than we already have: we have set out three principles, the first of which is to protect the interests of the taxpayer and the public purse. That is what we seek to do, and we will look at all options in order to do it, as well as the other interests that we have expressed.
But have the Government set a deadline to secure a private sale, given that the liabilities are mounting day by day? If that does not prove possible, would not temporary nationalisation be preferable to administration? Have civil servants prepared a draft Bill to take through the House, should that be necessary?
No, there is no specific deadline. We have asked the company to come back to us by February 2008; that was the date in the original discussions when we agreed to provide the stabilisation period. In response to the second part of my hon. Friend's question, we have not ruled any options in and we have not ruled any options out at this stage. As the Chancellor has said, we will continue to keep the House informed of developments.
Let me turn to the third part of my contribution. It is clear that there are lessons to be learned from what has happened over the past few months. As we look to learn them, we will be guided by three important principles. First, the primary responsibility for managing risk is and must remain with individual financial institutions and investors. Secondly, that needs to be backed up by strong national regulatory frameworks. Thirdly, regulatory authorities in different countries need to co-operate effectively across borders. With those principles in mind, my right hon. Friend the Chancellor has set out our proposals for the international response to what has clearly been an international set of events, and we will continue to work closely on them with the financial stability forum and the International Monetary Fund.
There are also lessons to learn at home, particularly from the fact that the existing financial services compensation scheme clearly did not have the desired effect of giving consumers the confidence they needed. As a first step, the Financial Services Authority has increased the coverage of the scheme to 100 per cent. of deposits up to £35,000, but over the past few months we have been asking whether further reforms to the scheme are required.
The hon. Lady spoke earlier of the fact that the Treasury still had all options on the table. Can she confirm then that Treasury officials have drafted a Bill for the nationalisation of the bank, on the basis that that might happen?
All options are on the table, and we are therefore taking appropriate actions to ensure that they remain on the table.
I was talking about depositor protection. We have also been exploring possible options to reduce both the likelihood of bank failure and the impact of failure if it does nevertheless occur. Our initial discussion period on those issues closed last week, but we intend to consult on more detailed proposals in the new year and we will legislate on that matter next year, if necessary.
At home and abroad, we are learning the lessons of what has clearly been a testing time. We are also continuing to work to resolve the situation with regard to Northern Rock. As I have said today, we have set out clear principles that proposals for Northern Rock's future must meet, and we will continue to assess proposals against them so that we can protect the interests of taxpayers and depositors and the wider financial stability. I have also said once again today that we are not ruling any option in or out at this stage, but that our preference is for the company to find a private buyer.
Let me conclude by saying that I believe that providing support for Northern Rock was the right decision, and that it is right to see that support through.
No, as I am coming to the end of my speech. The alternative of letting Northern Rock go down would have had severe consequences for the banking sector and the wider economy.
We have taken the appropriate action. I was glad that it had cross-party support at the beginning, and I hope there will be cross-party support for the Government amendment this evening.
After all the headlines and hype of the last few days, I had expected the leader of the Liberal Democrats, Dr. Cable, to come to the House with a clear, well thought-through plan demonstrating what the purpose of nationalisation was, what would happen when the bank was in state control and what his exit strategy would be. However, we heard little to demonstrate that the nationalisation idea was anything more than a gimmicky headline—but we should, of course, have expected that from the Liberal Democrats. The hon. Gentleman is known to be nimble on his feet, but given today's performance, if he ever achieves his ambition of appearing on "Strictly Come Dancing" he would be all sequins and no steps.
I also expected more of the Economic Secretary to the Treasury. Unless the Chancellor makes a statement before Christmas, this debate is all that we shall hear about the Government's position on Northern Rock, which is why we welcome the fact that the Liberal Democrats have secured an Opposition day debate on this issue. We had expected to be given a more substantive statement from the Chancellor before Christmas.
My speech will make it clear that a number of unanswered questions remain. We know that taxpayers, Northern Rock's employees, the creditors, the bidders and the shareholders face uncertainty. The Economic Secretary's brief speech did little to clear up that uncertainty. She said little about how the sale was progressing. Equally worryingly, she said little about the Government's plans in the event that the sale falls through.
Let me be clear that Conservatives want a rapid private sale of Northern Rock. We want a sale that safeguards the interests of taxpayers, maintains financial stability, protects consumers and, we hope, results in a bank with a viable future preserving valuable jobs in the north-east. Although we all share those aims, we cannot forget that we are in this crisis because of the Government's incompetence and mismanagement. Every problem in this crisis has been compounded by their dither and delay, and by confusion and chaos. Everyone accepts that the problems in the credit market are a global phenomenon, yet only this Government appear to be mired in a crisis of the magnitude of Northern Rock.
The hon. Gentleman laudably expresses a wish that we should have a solution to this involving a private sale that satisfies all the concerns, including those of the north-east. Is he therefore arguing that the taxpayer should forgo some part of either the £30 billion that has been lent or the interest on that sum in order to make the sale possible if it proves difficult?
The Government, and the Chancellor when he gave evidence to the Treasury Committee—I shall come back to the words that he used in a minute—made it clear that we would get the money back. That is the commitment that the Chancellor made, and we want to hold him to account on satisfying it.
The problem has become so bad that nationalisation is being discussed as a potential solution, but Labour Members should be in no doubt that nationalisation would be a signal of the Government's failure, rather than a triumph. Nationalisation has become an option only because of the litany of mistakes made by the Government: they failed to prepare for the problems in the banking sector, despite the advice of the Governor and the Financial Services Authority; they lacked leadership when the Bank became the lender of last resort; they were indecisive over guarantees; and they mishandled the sale process. We must ask ourselves every step of the way what the Government have done to get us into this mess.
The first mistake that the Government made occurred when the Prime Minister—the then Chancellor—rejected the clear and unequivocal advice of the Governor of the Bank of England that reforms were needed to the rules on early intervention and deposit protection. During an interview with Robert Peston on last month's "File on 4" the Governor said:
"I think we would have pressed even harder than we did, and we did press pretty hard, to inject some urgency into the need for new legislation to enable there to be a procedure for pre-emptive intervention in banks and the reform of deposit insurance."
"we conducted a particular exercise with the Treasury and the Bank in February we had identified in particular the problem of having a means of dealing with banking problems and the need to deal with the question of bank insolvency problems and also the question of the compensation arrangements."
Will the Minister tell the House what was done in response to that? Did the then Chancellor and the Secretary of State for Children, Schools and Families, who was then Economic Secretary to the Treasury, ignore that advice because it undermined the arrangements that they had put in place? Is this another example of the then Chancellor ignoring advice from outside his inner circle of advisers? When it became apparent that the credit markets were becoming tighter, what actions did the Treasury team take to examine the problems highlighted in February's exercise? Did they simply stand by and wait for things to happen?
May I caution the hon. Gentleman and the Conservatives to be a little careful about being wise after the event and backing away from the wholehearted support that they initially gave to the Government's position on Northern Rock?
Today's Financial Times made clear the Conservatives' position in the middle of August. It said:
"The Conservatives' economic competitiveness policy group...advocated....'We see no need to continue to regulate the provision of mortgage finance, as it is the lending institutions rather than the client taking the risk'".
That policy commission's findings were widely praised by the Leader of the Opposition and by the shadow Chancellor, so I caution Mr. Hoban about resiling from his party's former position and trying to be wise after the event. I urge him instead to continue the wholehearted support for the Government's policy. That is what leadership is about; it is not about ducking out when the going gets tough.
Cut government regulation, planning restriction and red tape."
At the time, we said clearly that it was a great analysis, but that we did not accept the policy recommendations it contained. My right hon. Friend Mr. Redwood and Simon Wolfson made a good analysis of some of the problems in the British economy and they made some proposals for policy prescriptions. We did not adopt those prescriptions at the time, so they were not Conservative party policy.
Let me return to the situation before the run on Northern Rock. It is ironic, in retrospect, that the private sector solution on offer at the time, from Lloyds, was vetoed by the Government because it would have involved the Bank lending money to Lloyds to enable it to take over Northern Rock. However, here we are now, a few weeks later, in a situation in which taxpayers' money will continue to fund Northern Rock once a private sector solution has been found.
The Chancellor rejected that bid for Northern Rock, and the wholesale market dried up, so he then agreed that facilities should be provided to Northern Rock with the Bank of England acting as lender of last resort. The leak of the announcement of that policy on
It is important to remember, in the context of London being a global financial services centre, that pictures of those queues were beamed right across the world. It could have a long-term impact on London's standing if prompt and decisive action is not taken following this crisis.
The strength of our regulatory regime has hitherto been one of the key factors in London's success and is one of the arguments that we have been able to use to counter the pressure for greater regulation from Europe. It is vital that this crisis does not erode that standing, and the Treasury will need to work much harder in Europe to defend the strengths of the regulatory regime and put in place the right reforms to make regulatory supervision more effective.
It is also important to recognise—and why the Chancellor's competence is now in question—that while the prospect of a run had been contemplated by the tripartite authorities, no plans were in place to reassure depositors. It appears that no plans were discussed until the queues formed. We know that over the weekend of 15 and
As the Governor made clear in his interview with Robert Peston, the scope of the guarantee was not clear when it was announced. It was only in a radio interview the following day that the Chancellor announced that he had extended the guarantee beyond retail depositors. Having given the guarantee, the Government are now consulting on reform of the existing arrangements to find a permanent solution to the problem. If only they had responded to the advice of the Governor and the chairman of the Financial Services Authority earlier in the year. Even the reform and consultation have caused confusion. When the plans were first announced in The Times, the Chancellor appeared to suggest that he wanted a scheme to cover deposits of up to £100,000. Now he is trying to back away from that figure, which shows yet more confusion in trying to deal with the aftermath of the problem.
We must also recognise that any guarantee scheme is a backstop, and is not a substitute for improving the regulatory framework—whether through the tripartite arrangements or the monitoring of solvency. We need to ensure that the regulatory system seeks to reduce the risk of future banking failure rather than focusing on merely mitigating any failure.
There are various estimates of the amount that the authorities have lent by acting as a lender of last resort. The hon. Member for Twickenham suggested £30 billion, while other reports have suggested £24 billion. The Minister said that she will not provide a running commentary on that analysis. However, can she clarify for the House and the taxpayer the assets on which the loans are secured? We understand that one tranche—about £11 billion—is secured on high quality mortgages of the type that the Bank would accept as collateral from other institutions. A second tranche has been secured on a more general pool of assets that the Bank of England would not have accepted as collateral had the Treasury not stepped in.
Will the Minister confirm that there are two separate lines of credit—one from the Bank and the other, in effect, from the Treasury? How are those reflected in the Government's accounts? The House and the taxpayer demand answers to those questions. We demand clarity where there is currently uncertainty and confusion from the Government.
We know—albeit only through the media and the Chancellor's later acknowledgment rather than because he said anything up front—that an element of the interest over and above the commercial rate has been rolled up, and that Northern Rock owes that to the Treasury. Will the Minister tell us how much that loan stands at? The taxpayer demands the answer to that question.
"is secured against collateral. We have also guaranteed various deposits...we fully expect to...get that money back."
"Secured lending is being given in relation to Northern Rock, guaranteed against Northern Rock assets."—[ Hansard, 14 November 2007; Vol. 467, c. 660.]
However, in his statement on
"Substantial sums have been lent, and that money has to be repaid at an appropriate time and rate. The Government will consider proposals with a view to reaching the best outcome for the public purse."—[ Hansard, 19 November 2007; Vol. 467, c. 961.]
That is certainly not the guarantee we were given when he gave evidence to the Select Committee.
We might ask why the Chancellor is much less certain now than he was in September. It is clear from the press reports about the two remaining bidders for Northern Rock that although a tranche of the debt will be repaid immediately the balance will be repaid over time. The timing and likelihood of repayment will depend on the new management's ability to rebuild Northern Rock's depositor base and their management of the mortgage book.
Even the sale process has been mired in chaos and confusion. Last week, to keep the pressure up on the bidders, the Treasury was briefing the papers that the Conservatives had agreed to co-operate on the nationalisation of Northern Rock. That is to do with a Bill that is apparently not even drafted by the Treasury. However, we were not approached on that. We even wrote to the Chancellor of the Exchequer in September to offer to facilitate the passage of a deposit insurance scheme and the reform of the banking and insolvency rules. We have not had a response from the Chancellor of the Exchequer to that offer of support.
On that specific point, the hon. Gentleman is aware, I am sure, that we are consulting on the reform of depositor protection and the insolvency regime for banks. That was, of course, mentioned in the Queen's Speech. Will he confirm now that he will therefore support any legislation that we introduce?
We said that we would facilitate the passage of any such legislation, but we need to see it first so that we can examine the reforms that the Government propose. We have offered that support but have had no response from the Government.
I turn now to the speech by the hon. Member for Twickenham, who is no longer in his place. He did not say how he thinks that nationalisation would improve matters, or set out what he would do if the situation did not improve. He did not detail what his strategy for running the bank would be. Would he want to continue to accept deposits? In his speech today and in previous statements to the House and the media, he has been very critical of Northern Rock's lending practices. Would he want to continue to offer mortgages, or would he close down that aspect of the business? How would he manage the existing book of mortgages? Would he encourage prepayments, or would he roll them over? How much more money is he prepared to put at risk while Northern Rock is in public ownership? Those are all decisions that a nationalised bank and its owners—the Government—would need to make. The hon. Gentleman failed to set out a clear strategy for a nationalised bank. He may have captured the headline, but there is no substance to the soundbite.
One thing is crystal clear—it would be a sign of monumental failure if the Government had to nationalise Northern Rock. It would be an indictment of their handling of the crisis. At every step of the way, the Government have demonstrated incompetence. The Prime Minister ignored the proposal from the Governor of the Bank of England for reforming the rules to do with early intervention and deposit insurance. The Chancellor failed to display leadership by not having a plan when it was announced that the Bank of England was acting as the lender of last resort. That triggered a run on Northern Rock, in the face of which the Chancellor dithered over whether to issue a guarantee to depositors. Even when he announced it, he was not sure what he had guaranteed. The Chancellor and his aides have sown doubt and confusion in the sale process, keeping options open but remaining unclear about what they are.
I infer from the hon. Gentleman's remarks that his party thinks that nationalisation is not the way forward. Would he then be content for Northern Rock to go into administration, if the other options, including nationalisation, were ruled out or were not available?
The problem is that we have not heard from the Minister—and certainly not from the Liberal Democrats—what the strategy should be if the private sale fails. We want there to be a proper discussion of the options, but we would much prefer a private sale to go ahead. It is time for the Government to be much more straightforward about the options that they are considering, so that we can debate them. The House needs to know the Government's plan B if a private sale does not go ahead.
No one is proposing nationalisation as a solution in itself. It can be no more than the route to a final solution, and anyone who proposes it must be able to justify the solution that it leads to.
The Minister said that all options were on the table. Is the hon. Gentleman ruling out nationalisation at any point, even if it turned out to be the least bad consequence of the crisis?
I repeat what I have just said—that nationalisation would be a monumental failure and an indictment of Government policy. It would demonstrate that the Government had failed to manage the crisis properly. We hope that there will be a proper sale that will protect consumers and the interests of taxpayers. We hope that such a sale will maintain the financial stability of the system and preserve Northern Rock as a viable bank in the future.
No one expected flashes of brilliance from the Chancellor, but the Northern Rock crisis—let alone the loss of half the nation's personal details and the botched capital gains tax reforms—has destroyed even his reputation as a safe pair of hands. For the past few months, we have seen dither and delay, chaos and confusion. When we needed leadership, he was indecisive; when we needed clarity, he was confused; when we need certainty about the safety of taxpayers' money, he is full of caveats and qualifications.
Today's motion from the Liberals shows that all we have is a headline in need of a story, an argument that is half made, and an opportunism masked as the wisdom of age. We expect that from the Liberal party, but we expect something more from the Government. We are entitled to expect them to protect taxpayers' money, and to know how much of that money is at risk. Above all, we are entitled to know how the Government plan to resolve the crisis. Today, we are left with plenty of questions, but we are still to hear any answers.
I start with the Conservatives. The idea that if Northern Rock is forced into administration or nationalisation it is a disaster for Government policy is absolute nonsense. That is not an indictment of the Government; it is a market failure in dealing with a difficult situation in our banking system arising from weaknesses and faults in the American banking system. Let us have none of that nonsense. A real problem has to be faced and I expect a sensible Opposition to look at the real options and back them rather than try to make party politics from them.
On the subject of party politics, the Liberal motion says that
That is absolute nonsense—absolute rubbish—and it is not just me saying that, as I shall explain.
If the Chancellor had no commitment to the future of Northern Rock and its vital importance to the economy of the north-east and jobs in the north-east, why did he give the depositors guarantees and almost immediately provide loans for the business to keep it from insolvency in September?
I have plenty of answers and the north-east has plenty of answers for the Liberal Democrats—I can tell them that. I want to engage with one of those answers.
The Newcastle Journal is not renowned in the north-east as an anti-Liberal Democrat newspaper. On
"The Chancellor did the right thing yesterday when he held true to the path he has taken since crisis engulfed Northern Rock...Of course, the approach has its critics, such as the hapless Vince Cable, whose posturing must embarrass Lib Dems in the region."
It is unfortunate that Dr. Cable is not in the Chamber to hear what people in the north-east are saying. The hon. Gentleman has a reasonably measured demeanour when he is in the Chamber, but when he is in a television or radio studio, we hear headline grabbing, without a thought about his party's policy, or the consequences of his posturing not only on his party's effectiveness in the north-east but, far more important, on the economy of the north-east and the people of the north-east.
The hon. Gentleman gave the game away during the debate, so it will be interesting to read the Official Report tomorrow—I took a note. He was asked what would happen after nationalisation and his reply was clear. He said that none of us knows exactly what would happen. That was this afternoon—not half an hour ago. If the Liberal Democrats want to be a serious political party with serious policies about serious issues affecting people in the north-east, what sort of strategy is that? Not today, but at least four or five weeks ago, the Liberal Democrats made the main plank of their policy that the business should be nationalised. When the hon. Gentleman said that, he knew he could grab a cheap headline, as the Conservative spokesman pointed out, yet he does not know what the consequences of his policy would be.
In that case, the hon. Gentleman owes it to the House to set out what will happen with a private bidder—presumably he knows. Will a private bidder be able to repay the whole of the debt to the taxpayer and ensure the continuance of a Newcastle-based Northern Rock?
That is an important question. I am not evading it and I shall come back to it.
The hon. Member for Twickenham said he did not know what would happen if Northern Rock was nationalised. The small shareholders who live in my constituency know what would happen: they would be left high and dry with nothing, and there would be interminable arguments in the House about whether the Government should subsidise someone who takes a risk. I have spoken regularly to the workpeople over the past three months. The workpeople in my constituency—4,000 of them—want the business to be kept intact and they believe that the best way of doing so is to find a private bidder to work in partnership with the Government to secure the business's future.
The other issue about nationalisation, rather than administration, is that under administration the Government's liability and the taxpayers' liability might be about £25 billion or £30 billion, but under nationalisation—I have looked at the figures carefully with people from the City—the Government's liability would be about £115 billion, and much of it would not be secured. That would be a disastrous policy to adopt.
The Liberal Democrats have another issue to address. If a private bidder is not prepared to become involved in the business at this time, with the necessary banking support from the Royal Bank of Scotland, Deutsche Bank and Citibank, why should we expect that they would be after a period of nationalisation? I do not know what short term is in this context, but why should we expect that, after three months, six months, three years, or six years, the private sector is going to be any more prepared than it is now? That makes a nonsense of the position, as the workpeople and the shareholders have already recognised.
Mr. Beith asked me about the way forward. There are no easy ways forward on an issue such as this. I have spent a lot of time talking to all the bidders about the detail of their options. I have spoken to the board of Northern Rock and other stakeholders. Realistically, all that can be done is for the Government to protect their back as well as they can with the loan finance that has been made available, to make sure that the depositors are safe—otherwise there is no chance of ever getting any more deposits in the business, either now or following restructuring—and to move forward gradually to try to reach a solution. I am told that that probably will not happen until January.
The heat has to be put on those who now have a shareholding stake in the business. Some of the hedge funds have bought into the business and probably have an exposure of £150 million to £200 million. I expect that they would lose that if the business were nationalised. There has to be a dialogue between the Government and the Bank of England, and those bidders, on how a deal can be structured to allow the bidders to take over—albeit not unconditionally. The banks that are backing the bids will not allow any unconditional takeover to be made by either of the bidders. The Royal Bank of Scotland is not exactly naive about this sort of thing and it seems to be the lead bank on the syndicate of banks. It is going to lay down conditions that I believe have to be consistent with what the Government are looking for. If so, the shareholders have to make a decision, perhaps following advice from the board of Northern Rock, on whether, given all the circumstances, that is the best way forward.
That is not going to be easy, but I hope that the situation can be addressed in that way, because that will be best for the workers, the small shareholders and the north-east. But I am not naive enough to think that we are bound to be successful. If we do not succeed, of course we will have to look at other ways of making sure that the bank has a future and that those who have a stake in the bank—the workpeople, the shareholders, the depositors and others—have a future. It is quite a long process, and it is unavoidable. I wish it were quicker, because the longer it goes on, the more of a drain there is on the business and the more insecurity is created.
When the Liberal Democrats talk about the bank bleeding to death, as the hon. Member for Twickenham did this afternoon, they are not helping the situation. The hon. Gentleman is not helping to build confidence either in the north-east or elsewhere. I hope that the House rejects the Liberal Democrat motion and backs the Government on what people in the north-east know is the best way forward, and the only way forward at the moment.
If we leave aside the party politics, there was a lot in what Mr. Henderson said with which I entirely agreed. However, our objective is to try to ensure that the bank's circumstances can be protected in the future in better market conditions than those that will exist between now and the beginning of January, which is the time scale about which we are talking. For all the hon. Gentleman's passion, which I fully respect as I am well aware of the number of his constituents who are directly involved—my constituents are involved, too—we must face uncomfortable facts and make some difficult decisions.
The collapse of Northern Rock has been a disaster for north-east England and, on the part of those responsible, a betrayal of the region's history and the great traditions of Northern Rock as an institution. The events have had such serious and traumatic effects on the region that there is understandable reluctance to face up to the uncomfortable facts of how they came about and what must happen now, if something is to be saved from the wreckage. There is an understandable desire to see a knight in shining armour coming to the rescue, but such knights as have appeared are not self-evidently in a position to repay the vast and unprecedented debts to the taxpayer that the company is piling up.
Those with mortgages will not suffer—they will be comfortable—and those with retail deposits are unlikely to suffer, because this is the Government's problem, not theirs. However, the shareholders, including the small shareholders, will lose heavily whatever solution emerges. No one in the House would be prepared to advance any basis on which small shareholders would be protected from the consequences of what has happened. The big losers in the region will be those who work for Northern Rock, the many businesses that supply it, those who benefit from Northern Rock's sponsorship in the community and, significantly, all the good causes in the region that benefit from the Northern Rock Foundation, which owns 15 per cent. of the shares and got 5 per cent. of Northern Rock's profits.
Why does the foundation exist? The official history of Northern Rock makes it clear that it was devised to persuade reluctant building society directors and members to support demutualisation. It was designed to persuade them that there would be a block of shares that would help to resist takeover by anyone from outside the region, and that the region would continue to benefit from the future success of Northern Rock. What an irony that that 15 per cent. shareholding now has little or no value and certainly will not be a blocking share to a takeover, which people in the region are now anxiously asking for. The events have had a wider impact on confidence in the region. The Government must realise that they could help confidence in the region in many ways that go beyond Northern Rock itself.
The fundamental responsibility for what has happened lies with the directors, many of whom I know, who either failed to understand the dangers in the chief executive's strategy, or were just not willing to stand up to him. Many of us were worried by the speed of the company's expansion, but we did not know—although the directors must have known—that it was five times more exposed than any other UK bank to borrowing from the markets, relative to the size of the institution.
There were clearly failings in the regulatory system, including due to the division between responsibility for regulation and the position of lender of last resort. The Prime Minister created that division when he was Chancellor, alongside his commendable action of giving the Bank of England independence over monetary policy, for which I had long argued, but it has proved, in this instance, to be an unsatisfactory division of responsibility.
It can just about be argued, although I am not entirely convinced by the argument, that the run on the bank might have been forestalled by earlier injections of liquidity into the system by the Bank of England. However, we must bear it in mind that liquidity was exceptionally low at that time. I hope that the Treasury Committee will examine both that and the previous issue more closely.
Does not the right hon. Gentleman accept that the fatal thing that caused the run on the bank was the quite improper leaking of the news that the bank had gone to the Bank of England for a credit facility? The directors and employees of Northern Rock all feel a profound sense of betrayal about that leak. Sadly for the directors, they never recovered their leadership after that and the feeling of betrayal sent them off course. Does he acknowledge that that leak caused the damage?
Yes, I do, although the lack of leadership of the directors goes back much further than that. However, the hon. Gentleman is right in the other part of what he said. I am still not convinced that the bank's position was sustainable, or that we can be certain that a run would not have happened, but the speed with which the run took place indeed resulted from that news bulletin deriving from that leak. Would we not all like to know how that came about and whether there was any motive on anybody's part that generated the leak?
To return to what happened, if one drives round a blind corner at 80 mph and crashes into a broken-down bus, it is no use saying, "Somebody should have stopped me speeding" or "I didn't know there was a broken-down bus round the corner". That is essentially what the defenders of the bank's previous policy are saying—that the regulator should have stopped them having a bad business model, and that banks cannot be relied on to cater for unexpected circumstances. Banking is about managing the risk of the unexpected. That is what banks are for. What happened to risk management? Did it fail because Mr. Applegarth had a majority of executive directors on the risk committee?
Then there is the squalid episode of the creation of the Jersey-based Granite Trusts, where Northern Rock parked its mortgage assets, supposedly to benefit Down's Syndrome North East. The association was completely unaware of its name being used and had not received a penny from the trust or network of trusts, whose real purpose was to facilitate the securitisation of the bank's loan book in terms intended to benefit charitable trusts. It transpires that other banks, including Halifax-Bank of Scotland, Standard Life and Alliance and Leicester, have all engaged in similar exercises, which may involve breaches of UK charity law or procedures.
I hope the Charity Commission will look at this, and that the Government will review the law in this area. The irony is that Northern Rock's hard-working staff raised £40,000 for the Down's Syndrome Association by their own efforts six years ago, but the creature created in Jersey by the bank has not given a penny, so far as I know, to Downs Syndrome North East.
The question that we must consider is whether the interests of the north-east are likely to be best served by waiting to see whether a saviour can be found who will repay the taxpayer's £30 billion and get the bank on a sound footing. That looks increasingly uncertain. The big danger is that the bank will be driven into administration, in which case the north-east's interests are not even in the queue for the proceeds of the resultant fire sale—and it would be a fire sale, selling into the market at a bad time.
Or are people asking for the taxpayer to waive some part of the loan and the interest, perhaps as much as £10 billion, to give a potential buyer a better chance? If we start to say that we could do more to enable a private buyer to take over the bank, the only way in which that could be made realistic—everything else is being done at present—is to offer a lot more taxpayers' money to a particular private buyer to enable that to happen.
For heaven's sake, if we can have billions of pounds of Government money to help the north-east, which certainly needs help, would we choose to put money on such a scale into a failing bank? What about all the other things that we need in the north-east, such as our infrastructure, the A1, fast rail links, schools, universities to build up our skills base, and new businesses? We have to ask whether that would be the best way to help the region, and note that it took not something about the north-east but a threat to London's banking system to drive those huge amounts of money out of London. Why is London, so to speak, sending so much money to the north-east? It is doing so because London's banking system, on which London depends, was threatened by what was happening at Northern Rock.
The taxpayer is pouring into Northern Rock sums far beyond the wildest dreams of regional bodies, local authorities and the whole north-east business community, with no guarantee of getting more than a part of it back, no current interest payments, and precious little control over what is happening to all the money. That is why Northern Rock probably will be nationalised, and, if not, will probably go into administration.
We probably ought to bite the bullet now, but in doing so we must recognise what the Government's principles failed to recognise—that the north-east has suffered and will continue to suffer from this disaster, and that the interests of the region must be one of the guiding factors in deciding how the business can be managed into a state where it can survive as a regional financial institution. That is what it was, before it was taken so recklessly into an aggrandising policy that has proved so disastrous. Frankly, to expect more than that—to expect to get more than a modest regional institution at the end of the day—would be unrealistic. Even now, no private bidder, realistically, looks able to promise that.
We also need to ensure that the foundation survives. I hope that it will, and with wider participation from businesses in the region. At one time in London there was a 1 per cent. club of businesses that gave 1 per cent. of their profits to a charitable foundation. Here we have a ready-made charitable foundation, and I hope that more businesses in the north-east will see that it could belong to them in future. Whatever emerges from Northern Rock, it is unlikely to produce the yield for the Northern Rock Foundation that Northern Rock itself produced.
It gives me no pleasure to say harsh things about what has happened to Northern Rock—still less does it please me not to be able to offer a comforting picture of a private participant coming in to rescue the business and meet all the conditions that we desire. I wish I could say that that would happen, but we are in a much more challenging situation.
The last time that we debated this issue, a number of my colleagues and I were accused in the Tory press the following morning of being parochial. Perhaps I have got it wrong, but I thought that that was part of my job. I have not read the job description, but I think it is all right to be parochial.
Last week, the House had a parochial debate about the road scheme around Stonehenge. The hon. Members for Salisbury (Robert Key), for North Dorset (Mr. Walter), for Somerton and Frome (Mr. Heath), for Bridgwater (Mr. Liddell-Grainger) and for Torbay (Mr. Sanders) and Sir George Young rightly argued their corners for their parts of the world. Mr. Beith has mentioned the A1. In any debate on transport and road structures, we would all argue strongly for the improvements that we want in our parts of the world. That is why we are here, and I feel no shame whatever about being parochial again. The argument is parochial, although it is also a national and potentially international argument.
I want to start with the parochial impact on the work force. There are thousands of workers in the north-east in this very key sector—one that is not a traditional strength in our area but one that we want to build on. If that fails, the knock-on impact could be very serious.
The trade union representing the majority of that work force has set up a charter of rights that it wants included in its discussions. It wants to be recognised as a stakeholder in the future of Northern Rock and to ensure long-term job security for its employees. It wants to protect and improve terms of employment for the employees and to improve and maintain existing pension rights.
Clearly, the union wants the work of the Northern Rock Foundation to continue and the bank to stay a listed company. It is entering discussions with the private companies and saying, "These are the things that we want to work with you on." As far as I am aware, it is not saying to us or any other political party that it wants to discuss nationalisation. For it, nationalisation would simply mean that it had failed totally and saw no way out other than nationalisation. The union says clearly that it would like politicians to stop playing politics with our lives and asks people to stop talking down Northern Rock's opportunity to make its way out of its situation. I hope that Members across the House will listen to that.
In my region, we are far too used to the realities of unemployment. Twenty years ago, the Conservative party was clear that unemployment was a price worth paying. The truth, of course, was that it was not paying it—but people in our part of the world were paying it in spades. We do not want to go back to those days—certainly not in respect of the people working at Northern Rock.
I turn now to the Northern Rock Foundation. This is a parochial point, but an important one to ordinary people on the ground. I shall go through some of the things that the foundation is doing day in, day out, as it promotes social justice. It has invested £8.5 million in work with disadvantaged young people across the north-east; £8 million in regeneration; £8 million in schemes to help disadvantaged people to set up their own businesses; £6.5 million in tackling domestic abuse; £6.5 million in reducing crime; £4.5 million in helping people with mental health problems who do not get support from elsewhere; £4 million in helping people with debt problems; £16 million in the cultural renaissance of the region, including £1 million in the establishment of the Sage music centre in Gateshead, which is now among the world's state-of-the-art opera houses; £5.5 million in heritage projects; £6 million in advice and support to local charities and development of the region's voluntary sector; and nearly £5 million in providing training and development support directly to local groups.
In my own constituency, the foundation has spent £15,000 to provide a live-at-home scheme for elderly people. Last week, I was fortunate to be able to go to their Christmas party with 100 people who, but for the foundation's support, would not be getting out of the house and enjoying this time of year. It has provided nearly £2 million to establish a domestic abuse rapid response service, £70,000 to a women's health project, and £120,000 to a young women's outreach project. Of course we do not want to lose that. It is a key thing in our region; we are very proud of it and want to hold on to it.
I appreciate the list of good things that the hon. Gentleman has given to the House, but does all that justify committing the equivalent of the defence budget in taxpayers' money to propping up the bank?
I am glad that the hon. Gentleman asked that question; I was about to come to that. He is right to say that all those important things alone would not justify it, but they are part and parcel of what will not be there if we do not carry on trying to find a resolution.
This is not just a parochial matter. Dr. Cable said that what happened was unprecedented and unexpected. It hit Northern Rock in a way that it should not have, and it hit other banks, but we did not intervene as a Government solely to protect Northern Rock but to protect the whole banking system. As Mr. Beith pointed out, it was about not only what was happening in the north but in this part of the world. The whole system was at risk, and we stopped that.
It is clear that the Liberal Democrats are starting to bottle out. As usual, they have taken an opportunistic chance to make some hay while the sun shines—that is the way they work, and that is up to them. They talk about nationalisation. I spent my life working in nationalised industries—20 years in coal mines and 16 years in local government. I have a very different ideological view from that of my party's Front Benchers: their view is that public ownership is a good thing and we should have more of it. However, we should not have it only when things are on their knees. That is what happened in the past. In the post-war years, we nationalised the pits, the railways and the steel industry because we had to, because they had been run down and not looked after properly by the Government or the businesses that were supposed to be protecting them.
Northern Rock may not be nationalised, but we should give a chance to the people who have stepped in and fulfilled some of the criteria put forward by people who work for the Rock and by the Governor. Virgin and Olivant have said in their bids—they must be tested; I do not have a problem with checking carefully what companies say before we sign up to it—that they will make up-front payments back to the Treasury on day one, give guarantees that the rest of the taxpayers' money will be paid back over two or three years, support the work force with guarantees of no compulsory redundancies, support the foundation, and protect mortgage holders and savers. They will also do what they can for the shareholders who, as Members on both sides of the House have said, need to understand the situation and bear the risk. Surely we should give the people who have come forward with a bid the opportunity to work with the bank and with the trade union, on behalf of the work force, to try to make this work.
The Liberal Democrats have come forward with proposals that they think will grab a headline. We are used to that. The people of the north-east will see through what they are doing and will not forgive them for it.
I agreed with the mover of this motion, Dr. Cable, who has been such a very effective temporary leader of the Liberal party, when he stressed the great seriousness of the situation we are facing. He pointed out not just the tremendous tragedy for those people, mainly in the north of England, who are depositors and shareholders, but the seriousness of the situation for our banking system, which is part of this debate and which, as the Minister pointed out in her speech, is part of an international banking system.
For the past 10 years, while the present Prime Minister was Chancellor, whatever question I asked him on any subject, he always prefaced his answer by pointing an admonitory finger at me and saying, in his usual genial way, "I want to remind the House that that was the hon. Member who spoke and voted against the Bank of England Act 1998, which has been such an enormous success." Having waited 10 years to reply, as unfortunately, unlike when I first entered the House, Back Benchers never get the chance of a second supplementary, I hope that the House will bear with me for a moment—rather a long one, I fear—while I read a bit of the speech I made on
"The capacity to act effectively and in time as lender of last resort in a crisis...depends on the Bank's commercial intelligence system. The roles of prudential supervision and operational surveillance are closely linked, but they are not the same thing, and they are now to be separated, leaving the Bank with responsibility for operational surveillance but stripped of its powers for supervising prudential banking.
Will the Bank continue to have the same day-to-day knowledge of everything that is happening in the banking world when its supervision staff are transferred to the new Financial Services Authority? I doubt it, although it will retain responsibility for the stability of the financial system as a whole. I therefore predict considerable buck-passing in the years ahead between the Financial Services Authority and the Bank of England when anything goes wrong. The Bank of England will say, 'We could not have known in advance that this would happen: we no longer supervise that institution, and the FSA never told us.' That will be a source of great trouble".—[ Hansard, 11 November 1997; Vol. 300, c. 761-62.]
Well, so it has proved. The institutional root cause of the Northern Rock disaster lies in that separation of powers by the present Prime Minister.
I happened to be in Tokyo when the news broke and, of course, any senior banker or businessman travelling abroad—I have spent a great deal of my time doing that—spends most of his time in hotel bedrooms watching CNN. I was absolutely amazed to see queues of people waiting to draw their money out of Northern Rock. I happened to be in Tokyo to visit various banks, including the Bank of Japan, and the people there were exceedingly polite and hardly likely to raise the matter with me. The fact is, however, that it did a great deal of damage to the prestige of British banking. That is perfectly clear.
One of the people I visited while in Tokyo was the governor of the Bank of Japan when it went into its great financial crisis in 1985; he is an old friend of mine whom I have known for more than 40 years. He told me that he had to buy up the equity of almost all the leading Japanese banks. They were starting to sell that equity back at a considerable profit when I was there. It is worth noting, however, that it had taken them 15 years to reach a position where they could start to do that. We should not assume that this crisis over Northern Rock will be solved in a matter of weeks or months. It is going to take years to unravel.
The scale of the so-called credit crunch problem has yet to be fully revealed, and we might end up with the world's major banks engaging in massive asset reductions. When Citibank, the largest bank in the world, has to borrow $7.5 billion from the Abu Dhabi investment fund at 11 per cent. interest, and has to offer that amount in convertible preference shares, it is a pretty serious situation. I was in Abu Dhabi when the then ruler, Sheikh Zayed, opened the new, rather modest, building to house the Abu Dhabi investment authority. Of course, it is now a building of almost unexampled magnificence, as Lord Curzon might have said. The fact is that Citibank is paying 11 per cent. for that money. We can just imagine the arguments that went on before it agreed to that rate of interest, which is more than double what the Fed was proposing as the present inter-bank rate in the United States.
The most dangerous aspect of this situation is the growing reluctance of banks to lend to one another. Inter-bank lending is a crucial and essential part of the banking system. Also, the central banks are in danger of losing monetary control if, when the Fed and the Bank of England reduce their bank rates, the inter-bank rate rises. That is what has been happening, and it sends a very dangerous signal. There are historical parallels, including what happened in Japan in the 1980s. Excess competition in the banking sector led to a huge property bubble and ended in one of the longest recessions in history. Japan is still technically in recession, 15 years later, and its interest rate is 0.25 per cent.
The resignation of a few prominent chief executive officers, accompanied by huge golden handshakes, will not satisfy public opinion. The fact is that we face a grave international situation. The largest bank in the world, Citibank, is borrowing billions of dollars at 11 per cent. This means that money power has moved out of western hands and into those of Russia, China, India and the middle east. Have I only got 17 seconds left? I cannot solve the world's financial problems unless I am given another half hour.
There were two important points in that last contribution—among the travel adverts. One was that this problem in Northern Rock is going to take some years fully to resolve, and a certain amount of patience is going to be required to resolve it. The other was that the Northern Rock problem is a problem not just for one small English region, but for the whole British financial community and for London's standing in the world. It would be sensible to bear both those points in mind in dealing with this issue.
Today, five central banks, including the Bank of England, have announced that they will work together on ways of putting far more cash into the international banking system. That will only increase the growing anger in places such as Newcastle, Sunderland and Durham about this whole situation. If the same arrangements that were announced today had been in place four or five months ago, the Northern Rock collapse would not have occurred. There might still have been problems at Northern Rock, but the collapse would not have occurred. There is a far bigger problem out there than Northern Rock itself, and one bank in the north of England has now become a scapegoat for a much wider set of problems.
In August, the Governor of the Bank of England presented himself to us as the hard man who would face the markets down. Where is that policy today, and where would Northern Rock and the City of London have been if his judgment of the situation at that time had been rather better?
When we come to questions of judgment, we must also look at the contributions made on this issue by Dr. Cable. Northern Rock is now trying to rebuild its deposit base. It is advertising attractive savings at attractive rates, which is the proper thing to do to rebuild that base, and it is trying to retain its existing deposit base by offering incentives to some of the savers who have stayed with it. What does the hon. Gentleman say? What did he say this very afternoon in this place? He said that the workers are doing no work, and that the default rates at Northern Rock—they are one of its real market strengths, and they give its workers not just a great deal of pride but market value in the financial sector—were not genuine. Previously in this House, he described the mortgage practices of Northern Rock as being
"little short of a...scam."—[ Hansard, 11 October 2007; Vol. 464, c. 468.]
All these statements are profoundly unhelpful in resolving this problem. They are extraordinarily damaging to the workers and savers at Northern Rock.
There were shreds of evidence, but not shreds on which one would build the kind of case that the hon. Gentleman was making. I also draw attention—this is a very important point—to the hon. Gentleman's very negative comments about the preferred bidder that Northern Rock has selected.
One thing that my hon. Friend the Member for Twickenham did say that could be tested against the factual record is that the bank is today lending up to 125 per cent. of the value of a property, near the peak of the housing market, on four or five times people's earnings. Does the hon. Gentleman think that that is wise practice today?
I come back to this point. One of the real skills built up by Northern Rock's workers is making mortgage lending available to the lower end of the income scale and making those mortgages work in a sustainable way. So far, the published record indicates that the bank has been very successful in doing that. That set of skills is of enormous value to our current housing market and it would be sensible not to downgrade those skills and destroy that reputation, which would make that work impossible.
I am grateful and I will be brief. Does the hon. Gentleman agree with Citizens Advice, which highlighted this issue today, saying that many people on low incomes are taking on too much debt and that the banks should be acting more responsibly? That was raised as a general issue.
But it is precisely that general underlying point—a sound one—that reinforces the value of Northern Rock's lending practices in being able to make lending available to workers on lower incomes and to make it work on a sustainable basis. Northern Rock's default rates were among the lowest of the big mortgage lenders—a point that needs to be repeated time and time again, because it is part of the real hidden value in the Northern Rock business, which must not be thrown away for nothing in our debates.
The hon. Member for Twickenham also sought—I return to the point—to downgrade the preferred bidder. He referred to Richard Branson, the gentleman who runs the Virgin consortium. I freely acknowledge something that is not widely known—that the name Virgin has everything to do with tax and very little to do with sex. It is a reference to the British Virgin islands, which were the original tax location of that particular business. All that is fair stuff and fair copy. That is why the hon. Member for Twickenham should have acknowledged the significance of the Government's requirements, set out clearly in a letter of
"returns on equity investments made by members of the Virgin Consortium and other holders of ordinary shares must be restricted until the public sector loans have been paid back with interest and all other public sector commitments are at an end."
That was a requirement set out by the Government on
Now we come to the question that I asked the hon. Member for Twickenham in an intervention: what is the point of nationalisation? Is it to secure Northern Rock's future as a growing business, headquartered in the north-east? The hon. Gentleman was not very clear in his answer, but the real answer appears in his motion, which refers to
"temporary public ownership as the only action that will guarantee the loans are paid back in full as soon as possible at the lowest risk to taxpayers."
It could not be clearer that the purpose of nationalisation is to put the Government at the head of the queue of creditors in getting their money out. Those are the worst possible conditions in which to be considering the bank's future. That is a profoundly irresponsible policy. It is nationalisation for fire sale and nationalisation for break-up. Nationalisation for sustained recovery and growing on the business would be a different proposition, but that is not the proposition that the Liberal Democrats are putting forward.
I return to the heart of the matter. The north-east of England does not want to exist for ever as a welfare-dependent region. My hon. Friend Mr. Anderson pointed out that we have in Northern Rock an important business, in a growing part of the British economy, headquartered in our region, which few big businesses are now, whose lending practices have been a success. That is part of the new economy of which the north-east of England wishes to be part. The Question before the House is: how do we secure the future of Northern Rock, so that it can play its part in the wider recovery of the north-east economy? If Northern Rock goes down or is broken up, made bankrupt or run off, as Mr. Redwood mentioned, that would be a disaster for the north-east. It would do psychological damage to the north-east, just as the first Thatcher recession did between 1980 and 1981. Yet that is the hidden meaning of the policy of nationalisation that has been put before the House today. It must be rejected.
There is a wider point, however. If Northern Rock goes down—broken up in a fire sale, nationalised with the Government putting themselves at the front of the queue of creditors—that will do enormous damage to the City of London's reputation not only in this country and Europe, but throughout the world. That is not a policy that can be contemplated. How will the Government deal with other banks in order to make arrangements for the run-off of sub-prime mortgages, of which Northern Rock has very few, if they are themselves the owner of a bank? It is a ridiculous—
It is a pleasure to follow Jim Cousins, given his experience of the circumstances surrounding Northern Rock on his constituents. I should like to focus on the Government's decision making throughout the process and conclude with some comments on nationalisation, following up on what the hon. Gentleman said.
It is clear that the origins of the crisis extend way beyond this country and the confines of Northern Rock, and lie in the difficulties in global credit markets and the inability of Northern Rock in particular to achieve its regular securitisations in order to provide funding. However, the problem was identified in January this year by the FSA in its remarks on the state of credit availability and the implications for liquidity around the world. They were also endorsed by the Bank of England in its quarterly review in April, yet individual financial institutions in this country were slow to react, to put it mildly.
Northern Rock continued with, and in some areas even increased, its pace of lending, increasing its share of the mortgage market in the first half of the year to 20 per cent. There are many reasons for that, which we could go into. It is fitting that we are having this debate on the day when Northern Rock is being removed from the FTSE 100 index, to mark its demise from its previous position in our financial services sector. The business model was clearly flawed, and the executives in the bank were carried away, partly as a result of their lack of experience.
Northern Rock's board appeared before the Treasury Committee, and it is notable that the chairman, who was acknowledged not to be a banker and who had quite properly offered his resignation to the senior non-executive when the crisis struck, has been replaced by somebody else who is not a banker. He has recently been non-executive director of a major bank, but his entire career was spent in the oil industry. The chief executive of the bank, who was responsible for the rapid growth in its lending, is still there, as we heard earlier. The chairman of the audit committee—the same person as the chair of the risk management committee—who oversaw the explosion of lending was the only member of the board who was a recognised banker. As emerged earlier today, he was Sir Derek Wanless, the man who was appointed by the Prime Minister to review the finances of the national health service.
A curious track record, although I believe that his role in banking preceded his role in advising Government.
When the crisis hit, how did the Government react? They reacted through the tripartite arrangements that had been established by the Chancellor as Chief Secretary to the Treasury 10 years ago, and by the present Prime Minister when Chancellor. It is now clear as day that the tripartite arrangements had not been stress-tested when they were put in place, and it was therefore not at all clear how decisions would be made, and by whom, during a crisis. That fundamental uncertainty about where responsibility lies and decisions are made in the depths of a crisis lies at the heart of the Government's reaction to this crisis and some of the false moves that they have made. The first real test of the tripartite arrangements has failed.
In her chronology of events, the Economic Secretary omitted the first key decision that the Government got wrong in the crisis. The Chancellor failed, in fact, to make the right decision over the offer for Northern Rock that was on the table from Lloyds TSB.
That is precisely the point that I was about to make. With the benefit of hindsight, it is undoubtedly clear that had the Government decided to advance the facility to Lloyds TSB, it would have done so on terms that would have been commercially more attractive to the bank. That would have meant that the bank would not have had to pay the penal rate of interest that is causing part of the problem to the profitability of the remaining part of Northern Rock. I shall say more about that shortly.
Much has been made of the fact that what was on the table was not a firm proposal. Indeed, the Chancellor told the Treasury Committee that there was no firm proposal. However, my research makes it clear that Northern Rock ran a competitive bidding process among institutions that might have been in a position to make a bid, that the process began on
The offer was there. It was not completely unconditional, but had the Government accepted it, confidence would have been provided for Northern Rock's funders and much of the present mess would have been avoided. Had a different decision been made it would undoubtedly have attracted political flak at the time, and there would have been difficulty, but it would have been nothing compared to what we have now.
The next piece of indecision from the Government occurred when someone—it is not certain who, but the finger of suspicion clearly points towards the Treasury, as the hon. Member for Newcastle upon Tyne, Central suggested—decided to brief the BBC on the extent of the problem surrounding Northern Rock on
The next poor decision was the security package that the Treasury and the Bank of England negotiated for their facility. The Bank of England is a bank so it understands security and it appears that it took security over the best assets available, which is good for the Bank of England. The Treasury is not a bank and did not take such good security. What package of security has the Treasury taken? The Economic Secretary gave us a clue; it seems that it does include the seller's share owned by Northern Rock in the mortgage collateral within Granite. The seller's share is, I believe, £7 billion of the worst tiering of security within the Granite structure, which effectively means that if the Granite mortgages start to default that will come out of the Government's security package first—in other words, it is the weakest form of security.
What will happen if either of the current offers are pursued? It will be interesting to hear from the Economic Secretary in her winding-up speech what security the Bank of England and the Treasury will be encouraged to surrender. Will they share in the risk with the bidding group, or will—as would be more normal practice—new money coming into the business require priority in security, in which case the Government would be left with even lesser quality assets?
That would be helpful not only to those of us who are trying to understand what has gone wrong, but to the bidders to get some idea of the details of the security package.
As my hon. Friend Mr. Hoban said, the Chancellor has confirmed that taxpayers' money is safe and will be repaid. That puts the Chancellor's position and credibility firmly on the line in the context of the Northern Rock situation and its resolution. I very much hope that taxpayers will receive all their money back—that is the outcome we all want—but it is hard for me as a former banker to see how that can possibly occur. While the chairman of the Financial Services Authority confirmed yesterday to the Treasury Committee that he regards Northern Rock as solvent, that is due only to the Government facility, since it has not been able to meet its debts as they fall due since mid-September, which is why it went to the Bank in the first place. We now know from the Economic Secretary that the security package includes Northern Rock's residual share of the mortgage held in Granite, ranking behind £48 billion-worth of security, at the last count, in Granite. It is composed of unsecured lending and home-equity release mortgages, which are the UK equivalent of sub-prime mortgages. It also rests on a portfolio of traded securities—some £15 billion according to the last balance sheet we saw—issued by others. Given what is happening in the credit environment and to the valuation of traded securities around the world, whether that is of par value is somewhat doubtful and an open question.
Let me conclude on nationalisation and pick up on Members' observations on that. Nationalisation is not a solution that protects the taxpayer. It could do so only in the event of benign market circumstances and over a prolonged period, with the bank being run as a business in competition with every other financial institution that is in the mortgage business around the country by a Treasury that, frankly, is not equipped to do so. It is highly unlikely that those circumstances will prevail. The other circumstance in which it might possibly work is as a facilitation of a back-to-back deal with a private sector purchaser. As I pointed out in an intervention, nationalisation places the Government in the position of being a 100 per cent. equity owner responsible for meeting all £110 billion of liabilities that might fall due. Is that a responsibility that the Liberal Democrats really want the Government to undertake?
I do not know how much light this evening's debate has been able to throw on the problems in the inter-bank market or the problem of Northern Rock. It has shed a lot of light on the state of the Front-Bench teams of the Conservatives and Liberal Democrats. Once again, it has shown that the Conservatives have no original ideas. As has become blatantly apparent this evening, they are not even prepared to answer their own questions. They are in the business of saying contradictory things to different people, of gesticulating in different directions, and of hinting that their policy line is one thing and then, when that becomes inconvenient, simply saying that it was not party policy when it was stated after all. We have seen through them this evening.
The Liberal Democrats, who called for this debate, have also shown that they are all over the place, even though they have a concrete proposal in the form of nationalisation—it is surely the wrong one. It makes no sense for Dr. Cable to say that he is extremely worried about the exposure of taxpayers' money through the Bank of England deposits with Northern Rock and a second later to say that he thinks the taxpayer should not just have the deposit risk of a defined amount of money, but should take on the equity risk too by nationalising the bank. That equity risk will not only be the existing equity risk, because, as has been pointed out by Mr. Redwood, who made a sensible intervention for once, future liabilities in the form of redundancy liabilities and so forth can crystallise subsequently.
The hon. Member for Twickenham said two other odd things this evening. One was that there has not been a comparable banking collapse since Creditanstalt in 1931. A range of banking collapses have occurred since then—there were a number in the 1970s involving the secondary banking crisis. One such collapse happened to London and County Securities bank, which had as its director at the time Jeremy Thorpe, then leader of the Liberal party. It is little wonder that the hon. Gentleman does not want to remember that one. That situation had to be solved by the famous lifeboat, which turned out to be a successful support operation. The leader of the Conservative party is even more ignorant than the temporary leader of the Liberal Democrats, because he said, at Prime Minister's questions, that there had not been a comparable bank crisis or run on a bank for 140 years. He was even further from the mark than the Liberal Democrats are.
Another extraordinary thing took place. The hon. Member for Twickenham knows quite a lot about economics, but he allowed himself to be completely seduced into demagogy of the most irresponsible and superficial kind this evening. He started comparing £30 billion-worth of deposits placed by the Bank of England with Northern Rock—if that is what the real figure is—with the cost of high-speed trains or hospitals. He knows as well as anyone, and perhaps better than most, that if one buys high-speed trains or hospitals, one loses the cash because it will have been definitively given away. If one places money on deposit with a bank, one has it there. Unless any further write-offs, in addition to existing provisions on the book of Northern Rock, prove to be more than the value of the equity, all the deposits will be repayable, and it is inconceivable that more than a very small proportion of those would be the target of subsequent provisions. The hon. Gentleman knows that. He was merely trying to play to the gallery and to be demagogic when to do so is thoroughly irresponsible.
What should we do in this situation? The Government are doing the right thing. It was right for the Bank of England to intervene, because that is what lenders of last resort are for. It would be disastrous to have a banking collapse when the inter-bank market is in a considerable psychological crisis, and we are right to prevent that from happening. We should continue with the present arrangements—that may be for much longer than next February, and that does not matter—until we can find a suitable trade sale. Ultimately, if that did approach not work, we would have to opt for administration.
I hope that the Government bear one point in mind: the enormous moral hazard involved if there were any attempt—I am sure that the Government would not be tempted to do this—to bail out shareholders. That would be wrong. They bear the equity risk of the business and they would have been the beneficiaries had the high-risk strategy of funding the bank up to 70 per cent. on the inter-bank market worked, so they must take responsibility for that strategy that their management adopted. We cannot have the moral hazard of shareholders in that situation being bailed out, otherwise every bank will think that it can adopt the highest-risk strategies, whether on the asset side or the liabilities side, because if it works they will get the reward and if it does not, the taxpayer will pick up the tab. The result of that would be corruption of good banking standards throughout the country.
I welcome today's important news that the regulators and lenders of last resort here in the European Union and in the United States have got together to provide liquidity for up to three months for the world banking system. What we need in this crisis is exactly what the Government have displayed—calmness, strong nerves and consistency. It is clear that the only Front Benchers displaying those qualities tonight are my right hon. and hon. Friends.
I had hoped for a greater welcome in the House for this debate, because this is the only opportunity we have had since the issue blew up to discuss points that so many hon. Members from Newcastle and the surrounding north-east area have raised about what should happen to the employees of Northern Rock. The Conservative Front-Bench spokesman said that his party had called for a statement on the issue, but that would not have allowed a full discussion. As my hon. Friend Steve Webb said, the fact that the Conservatives did not even feel it necessary to table an amendment that could have outlined some of their views shows how little they have to contribute.
Today has been an opportunity to raise wider issues about the run on the bank and allow parliamentary time to discuss, and possibly express our preference for, some of the options on the table. Whatever the final outcome, it is clear that there will be a human cost to this episode, although the Minister explicitly did not mention that in her remarks. It was raised by hon. Members with constituents who work for Northern Rock, and we heard some valuable contributions from my right hon. Friend Mr. Beith, and the hon. Members for Newcastle upon Tyne, North (Mr. Henderson), for Blaydon (Mr. Anderson) and for Newcastle upon Tyne, Central (Jim Cousins), who rightly raised the uncertainty that the staff face. We do not wish to criticise that uncertainty and we share their pain, but they face a difficult and challenging future whether a private buyer takes it on, or the bank goes into administration or is taken into public ownership.
We cannot expect a private buyer to be Mother Theresa or a knight in shining armour. There are difficult times ahead, and our argument is that taking the bank into temporary public ownership would be a way to provide some stability and a platform for progress. If hon. Members have any criticisms, they should be for the people who devised Northern Rock's business model, which, the Minister acknowledged today for the first time, had a major role to play in the downfall of the bank. However, I would ask who was responsible for supervising that business model and who set up the circumstances that enabled it.
The focus of the anger of all the hon. Members who spoke so passionately about the effects on their constituents should be Adam Applegarth and the board of directors who so aggressively pursued an expansion plan that relied heavily not on retail deposits—the heritage of the bank—but on borrowing on the wholesale markets. Those hon. Members should also be angry with the Government for setting up the tripartite arrangement.
Sir Peter Tapsell raised the issue of what happened when the Bank of England was made independent. However, the issue that he raised was not to do with that, but with who took on oversight of the banks. Perhaps if that had stayed with the Treasury, the tripartite arrangement might have been slightly clearer. Early warning signs were not picked up and acted on and the legislative framework was inappropriate. There was a delay in guaranteeing deposits, which stoked public concern, and some of the responsibility, ultimately, has to go back to the Government.
Of course, the impact will be felt far more widely than simply in the north-east and among the beneficiaries of the Northern Rock Foundation and employees of Northern Rock. Every single taxpayer has made a commitment. Labour Members said that it is about putting the Government first, but it is actually about saying that the taxpayer should be put first.
It being Seven o'clock , the debate stood adjourned.
Motion made, and Question put forthwith, pursuant to
Question agreed to.