Banking (Special Provisions) Bill

Orders of the Day – in the House of Commons at 4:07 pm on 19th February 2008.

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[Relevant document: The Fifth Report from the Treasury Committee of Session 2007-08, The run on the Rock, HC 56.]

Order for Second Reading read.

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer 4:23 pm, 19th February 2008

I beg to move, That the Bill be now read a Second time.

As the House knows, the powers in this Bill are necessary to take Northern Rock into a period of temporary public ownership and the Bill is a general one. The reason for its being general is that it contains provisions that could be applicable in other circumstances, but I made it clear yesterday, and I make it clear today, that it is being introduced now only because there is a need to enable the Government to take Northern Rock into that temporary period of public ownership and it is essential that we proceed quickly.

Mr. Hammond asked why the Bill was urgent. I listened to the Opposition complaining yesterday that we should have introduced this legislation some time ago, so for them now to say that it is not urgent and that we do not need to make any haste seems complete nonsense, although it is in line with the attitude that they have taken on every other aspect of Northern Rock so far.

It is an obvious point, but now that the Government have made their intentions clear, it is important that legal ownership and certainty of authority is given to the board as quickly as possible, which is why we need Royal Assent to the Bill—[Hon. Members: "Why?"] It is because it is impossible to run a bank, let alone any other company, unless it is clear who is in charge of that bank and who is running it— [ Interruption. ]

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

Shouting is all they are good for at the moment: they certainly have not come up with any good ideas.

Several hon. Members:

rose—

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I will, as I usually do, give way to as many Members as possible, but because this is a timetabled debate I intend to make progress so as not to detain the House too long.

Photo of John Redwood John Redwood Conservative, Wokingham

Can the Chancellor give us an indication of how long it will take to value the bank and therefore how long it will take to transfer the shares if the Bill goes through this week?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

If the Bill is approved, the necessary order will be laid to make that transfer. As I shall say when we reach the relevant part, the Bill makes provision for compensation to shareholders under the terms and conditions that I made clear. In addition, the timing is clearly laid out.

Photo of Bill Cash Bill Cash Conservative, Stone

Will the Chancellor deny that in clause 2 there is an attempt to override challenge in the courts? The provision that "it appears...to be" necessary for the Treasury to take certain actions seems to be an attempt to bypass the courts. Does he agree?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

No, I do not.

The hon. Member for Runnymede and Weybridge also made the point that the Government are consulting on longer-term legislation to make more substantial reforms to the banking system, and I believe that that has general support in the House. We are consulting on that because it is important that we get the detail right. Legislation will be introduced thereafter. Some clauses may be closely followed in that future legislation, and they are necessary not only to allow us to acquire the shares in the bank, but to deal with it after acquisition, with a view to returning it to the private sector.

Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

The Chancellor makes the point about consultation on changes to the banking regulatory framework generally. He has said that that would require primary legislation and take some months. Does he not think that it is odd that we will nationalise Northern Rock if this Bill is passed in the next few days, but the framework that allowed its collapse is still in place? Should he not have taken emergency measures to bring forward more quickly the changes to the banking regulatory framework, perhaps at the same time as this legislation?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

If I had included in this Bill legislation to amend the Financial Services and Markets Act 2000, it would have been a formidable Bill indeed, because that is a very long piece of legislation. It is important that we continue with the consultation that we launched in January on some of the more far-reaching and radical reforms to the regulatory and supervisory system of banks and other financial institutions, with a view to introducing legislation in the remaining part of this parliamentary Session, so that we can get it onto the statute book as soon as possible. Today's legislation, which is being introduced now because of the particular circumstances that we face, is necessary, as I hope to be able to demonstrate when I get to the detail of the provisions. I wish to say a word about competition, because that issue has been raised by Members on both sides of the House, and it is a perfectly legitimate concern.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

The Chancellor has just referred to the consultation document that he published only last month, which referred to the Government's proposals to bring forward legislation after consultation to cope with financial stability. What perplexes Opposition Members and those watching from outside the House is that the legislation that we are discussing, particularly clause 2(2), covers the maintenance of stability in the UK financial system. It goes far wider than the narrow issue of Northern Rock. Is that not in direct conflict with the document that he published last month, which will require extensive public consultation?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

It might have been tempting to have a Bill that simply had one clause saying, "Let's nationalise Northern Rock." It is just not possible to do that. As hon. Members are aware, the procedures of this House require that for a specific Bill on one institution we adopt a procedure that can take some years rather than a matter of days. It is because of the urgency of establishing the certainty that the board needs in order to run the bank—it is a bank and it is important that the board has that authority and certainty—that we need that legislation. I have said on previous occasions that I think that we need to make more substantial reforms to the banking and supervisory system. We also need to learn from what is happening in different parts of the world, as systems in many countries have been found to be in need of reform. To carry on with that consultation is important.

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

Let me say what I have to say about competition, and we will then see what the hon. Gentleman has to say. I think that he raised the matter yesterday.

I recognise that banks and building societies want to be assured about the impact on competition of taking Northern Rock into public ownership. We intend to hold discussions with the British Bankers Association, the Building Societies Association and the Council of Mortgage Lenders before the final business plan is submitted to the European Commission for state aid approval.

Just as protecting the taxpayer has been one of the key principles of our actions and decisions over the past few months, one of the key features must be to ensure that we have the proper approach to Northern Rock in future. Although we will not be involved in the day-to-day management of Northern Rock, we will need to approve its business plan, as I said yesterday. We want to ensure that it is prudent and sensible and that it protects the interests of the taxpayer. We also want to ensure that it avoids distortions.

If the business plan were built on taking advantage of the temporary Government support, it would not be consistent with our general aim of running the bank so as to reduce and remove that level of support. I hope that that provides the House with some reassurance that we do not want the bank to compete unfairly or distort competition. As I say, we will have discussions with some of the banking and building society associations before we submit the proposals for state aid approval, which we have to do by the middle of the month.

Photo of John Greenway John Greenway Conservative, Ryedale

I am grateful to the Chancellor for giving way, and I am particularly grateful that he is addressing the question that I put to him yesterday. There is concern and nervousness in the banking and building society community, and I am sure that what he has just said will be studied carefully. May I link this point to the one that he was making about the need for supervisory reform? Between now and the reform of the Financial Services and Markets Act, the Financial Services Authority will have to monitor the solvency of all the smaller lenders. Will he therefore ask the FSA to monitor the impact on the market of any commercial or competitive advantage that accrues to Northern Rock as a result of nationalisation? Whatever reassurance he gives the House, the public might have a different view.

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I appreciate the hon. Gentleman's point. That is a concern that we need to address. I met the chief executives of some of the major banks fairly recently and they expressed that concern. They recognise that the Government have to ensure that Northern Rock can continue to trade and conduct business. The alternative to managing it through the proposed process is to wind it down. As I said yesterday, it would be far better to allow it to carry on trading. That means that it has to be able to compete, but it would obviously be wrong if it did so unfairly, taking advantage of the support that it has. As I have said, our aim is to reduce the amount of support. It will eventually be removed, but that has to be consistent with the business plan that Ron Sandler, as executive chairman, is working up.

Photo of Doug Henderson Doug Henderson Labour, Newcastle upon Tyne North

The whole House will appreciate that there is much less uncertainty in the city of Newcastle today than there was three days ago, especially among the work force, but a lot of anxiety remains. My right hon. Friend mentioned the business plan, but people who work for Northern Rock, and others, have asked me the following question: what will be the public sector company's repayment schedule to the Treasury on loans that have been issued? If he cannot answer me today, will my right hon. Friend say when people in Newcastle can expect to know, at least in broad terms, what the Government's expectations will be?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

My hon. Friend is right to ensure that we keep the concerns of people employed by Northern Rock at the front of our minds. It is an uncertain time, and has been since the company got into difficulties last September. Ron Sandler and his team will be drawing up a business plan which, among other things, will look at how the business can be managed so that the sums due to the Government, and in particular the lending supplied by the Bank of England, can be repaid.

I understand people's frustration, and that they want to make progress as quickly as possible, but that is all the more reason to get the authority that the new team need. However, as I have said, the business plan has to be ready for submission to the European Commission by the middle of March. It will have to be prepared in fairly short order, but we will be able to address the implications with a bit more certainty when that work is completed.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central

I want to pursue the point raised by my hon. Friend Mr. Henderson. The Chancellor has made his position very clear, but less than a fortnight ago the Government were saying that the bond issue that they were then considering to support the private sector options would have to be repaid within one to three years. Will that limitation stake out the terms for Mr. Sandler's work, or will he be able to come up with some different options?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

We will have to see what he proposes and why, but one hurdle to be overcome is the fact that whatever we do must comply with European rules on state aid. In general terms, and for understandable reasons, those rules mean that state aid support cannot be carried on indefinitely. The EU is also dealing with the actions that have been taken by other member states—for example, Germany has also been helping its banks—and will want to ensure that the rules are applied consistently. Such matters will be dealt with in the business plan. As I said, we will not have to wait too long for it, as we have to submit it by the middle of March.

I want to add one other thing, in anticipation of what Opposition Members may say about the board. The hon. Member for Runnymede and Weybridge made a remark about a civil servant who is a member of the board, but we have appointed Ron Sandler because of his formidable experience, much of it gained when he restructured Lloyd's of London. He in turn appointed Stephen Hester, who was chief officer of the Abbey National building society. Philip Remnant is chairman of the Shareholder Executive, which advises the Government on their remaining shareholdings, and so his appointment is not surprising. Mr. Scholar will be on the board for an initial transitional period. It is proposed that the Treasury will have the option of appointing two people, but that is not surprising when one considers Northern Rock's indebtedness to the public purse. It is important that the Treasury has that option, but the full board membership will be announced in the next couple of days or so. I believe that the board will be able to restructure and refocus the bank in the way that is necessary.

As for the Bill, clause 1 defines the class of institutions that could be acquired. In practice, it means that they have to be incorporated here or regulated by the Financial Services Authority. However, the powers can be exercised only in what I regard as exceptional circumstances and a pretty high hurdle has to be passed. Those circumstances, which are set out in clause 2, include a serious threat to the financial system—so serious that the Treasury considers that the exercise of the powers is necessary—or conditions under which significant financial support has had to have been provided beyond the Bank of England's lender of last resort functions. The Treasury has had to have underwritten that support and notified it to Parliament under the existing conventions. Both of those conditions were met in the case of Northern Rock, but they are exceptional. There must be a serious threat to the stability of the financial system before the powers are exercised. That is a high test to be met, and the action must be proportionate. The Treasury must consider alternatives. The circumstances go way beyond simply a threat to depositors.

In relation to public support, the scale of assistance necessary has to be such that it could not be met by the Bank of England in the normal course of its support operations. It would have had to be underwritten by the Government and then reported to the Public Accounts Committee and the Treasury Committee, which is what we did in relation to Northern Rock. I assure those Opposition Members or any Members of the House who are concerned that the Bill gives us the arbitrary power to act that it does not do so. Only in defined and what I regard as exceptional circumstances would it be possible to use the power in the Bill to acquire the shares or other assets of a financial institution. Clause 2 is important because it erects what I regard as a high hurdle that the Government must cross before they can proceed further.

Photo of Edward Leigh Edward Leigh Chair, Public Accounts Committee, Chair, Public Accounts Committee

The Chancellor may recall that when I informed him that the Comptroller and Auditor General was instituting a review of the costs of the rescue, he assured me that fees paid to Goldman Sachs and other advisers would be covered by Northern Rock. As Northern Rock is effectively now to be nationalised, will not those fees now be paid by the taxpayer? According to The Times, the total fees could amount to £100 million.

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

As I think I also said to the hon. Gentleman, and if I did not I will say it now, when we know the total costs that we have to deal with, we will report them to the House in the normal way. It has been necessary in the exceptional circumstances of Northern Rock for us to take advice. People would expect us to do that, especially in relation to Goldman Sachs, in trying to find a private sector—

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I would like to finish answering the first question before I go on to the next one, and I do not think it is unreasonable to do so.

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I will give way to the right hon. Gentleman and then I will make some progress.

Photo of Stephen Dorrell Stephen Dorrell Conservative, Charnwood

The Chancellor has laid great stress on the fact that the circumstances have to be exceptional to satisfy the tests set out in clause 2. Can he confirm, however, that in clause 11 the Bill gives him the power to grant financial assistance to building societies independently of the exceptional circumstances on which he has just laid such stress?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

The right hon. Gentleman is right. I will come on to clause 11, which deals with a different issue. Clause 2, which is the precursor to the exercise of powers under clauses 3 or 6, presents a significant hurdle that must be overcome, as I hope that the right hon. Gentleman will accept. Clause 11 deals with a slightly different set of circumstances, and I will explain why.

Several hon. Members:

rose—

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I will give way to Mr. Atkinson and then I will make some progress. I may well be able to take the other interventions as well.

Photo of Peter Atkinson Peter Atkinson Conservative, Hexham

Can the Chancellor explain something to me? Why was it not possible to introduce a one-clause Bill because it might be hybrid, when it was possible to introduce a short Bill in 1971 called the Rolls-Royce (Purchase) Bill?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I am not immediately acquainted with the rules and procedures of the House of Commons back in 1971. I do know the rules and procedures in 2008. I am endeavouring to explain by going through the Bill in some detail why we need its clauses. Of course it is open to the House to decide that we do not, but we need to make sure that we have adequate provisions to take over this bank, operate it and transfer it back into the private sector. That is what we want to do.

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I am going to make some progress and then I will take some further interventions.

Clauses 3 and 6 will give the power to transfer shares, property or other securities. Clause 3 deals with the transfer of securities. Securities can be transferred to the Bank of England, to a nominee of the Treasury or Treasury solicitor or to another private sector body—in other words, another bank or building society. The power is extremely important, and a similar power may well find its way into future legislation, because it allows us either to take the shares into Treasury control or to transfer them to another private sector body.

Clause 6 will allow the transfer of property rights and liabilities in cases where one wants to remove part of a bank that has got into difficulties and transfer it to another bank. It is the sort of bridge facility that the Governor of the Bank of England has mentioned on many of the occasions when he has appeared before the Treasury Committee. Clauses 3 and 6 contain precisely the sort of power that the Opposition seek to promote, in so far as I understand their position. I therefore hope that they can support those two clauses at least. Clause 8 provides for further transfers following a transfer to the public sector, and is designed to give some flexibility in restructuring the business.

All the powers are necessary. No matter where parties or individual Members of this House stand on the question of public ownership, there is nearly universal agreement that it can be only a stepping-stone to transferring the business back into the private sector. The clauses to which I have referred are necessary to transfer ownership from Northern Rock and clauses 8 and 9 allow transfer back to the private sector. Opposition Members such as Mr. Atkinson have asked, "Why can't you do it all in one clause?" The answer is that we need to provide powers to acquire the bank, to run it and then to transfer it back into the private sector. That is how the Bill is structured.

Photo of Hugo Swire Hugo Swire Chair, Speaker's Advisory Committee on Works of Art

Is the Chancellor exposing the Government to a legal challenge by existing shareholders if the compensation offered to those shareholders by the Government is at variance with the price achieved by the Government—and, effectively, by the nation—once the bank is re-privatised?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I will come to compensation shortly, but first I will conclude my point about how the Bill is structured. If it had been possible to have fewer than 17 clauses, there are many reasons why the Government might have tried to ensure that, but it is necessary for the Bill to contain powers not just to acquire Northern Rock but to run it and then transfer it back into the private sector.

On the question of compensation—

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

If it is a question on my previous point, I am happy to answer it before I go on to compensation.

Photo of Greg Clark Greg Clark Shadow Minister (Cabinet Office)

As we now know that the cost of the advice received by the Government is likely to fall on the taxpayer, will the Chancellor undertake to publish that advice so that we can judge its quality?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

The Government have received all sorts of advice on the matter. As I said at the weekend, I will consider when and how it is appropriate to put the right information in the public domain.

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

No, I am going to discuss compensation, because hon. Members have asked about it.

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I am not giving way; I do not know how to put it more clearly. I want to turn to the question of compensation. If there is time at the end, I will give way to the hon. Gentleman, as he is a regular attendee at such debates.

Compensation is provided for in clause 5. As I said yesterday and in my statement to the House on 21 January, compensation will be decided by an independent valuer. The Bill provides for the appointment of that valuer, but it does so on the basis that the valuer must assume that financial support provided by the Bank of England and the Treasury has been withdrawn and that no further public financial support will be given, apart from the ordinary market support that banks may receive from the Bank of England.

The reason for that is simple. If we had not intervened last September, the bank would have gone under. It would have gone bankrupt. It would be unfair to the general taxpayer, therefore, to calculate compensation on the basis that the bank is continuing as a going concern purely because of public support. We have to strike the right balance between what is right for individual shareholders and what is right for the general taxpayer. I think, though I may be wrong, that there is all-party support for that.

Photo of Graham Brady Graham Brady Conservative, Altrincham and Sale West

The Chancellor makes the important point about achieving fairness for the taxpayer. Obviously that will be achieved only when the bank is transferred back into the private sector. What are the criteria that he would expect to be fulfilled for that to happen?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

Again, much depends on the business plan that is to be prepared. As the business plan progresses, the Government will have to reach a judgment as to when it is right—when it is the best value for the taxpayer in terms of getting the Bank of England money repaid—to do so. That judgment will have to be reached further along the line. I cannot tell the hon. Gentleman when exactly that will be. I have made it clear, however, that the business plan will need to set out the direction in which the company is to proceed. I have also made it clear on many occasions that the measure can only be a stepping stone before the company is returned to the private sector.

Photo of Christopher Chope Christopher Chope Conservative, Christchurch

Does the Chancellor accept that if the board of Northern Rock had known the terms on which the Government are setting out compensation back at the time that it received Treasury and Bank of England assistance, it might well have declined that assistance because it thought that it would lead to confiscation of shareholder value?

D

So - a company fails? Why do we get involved, other than for the political advantage of the Labour Party?.

Submitted by Douglas White

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I do not know on what basis the hon. Gentleman can make that claim. The board's position last September was rather more stark. It had reached a situation where it could not continue because it could not raise the billions of pounds that it needed in order to continue trading. That is why the board came to the Bank of England for lender of last resort support. That was in the forefront of its minds. The then board would have taken legal advice as to what it ought to do and what its options were. That is a matter for the board, but as I have said on many occasions, by the end the company did not have much choice because it was so exposed. When the difficulties arose in the financial market, the board had little alternative but to come to the Bank.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

Clause 9(7), dealing with provisions for compensation, includes

"power to make different provision for different cases or circumstances".

Is it the intention of the Chancellor that different classes of shareholders might be compensated differently?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

That might be difficult. Shareholders are shareholders, and it is difficult to discriminate between one and another. What we want to do is to try and put in place a compensation scheme that allows as much fairness as possible, consistent with the problem that the bank had run out of money and is trading today only because of Government support. We hope that as it is restructured and refocused, it can recover its position. At this stage, in the absence of the business plan, we must wait and see what the new management proposes.

Photo of Kevan Jones Kevan Jones Labour, North Durham

My right hon. Friend will be aware that many of the small shareholders are former employees of Northern Rock who saved in the company savings plan at their retirement. If the Government had not interceded last September, is it not the case that those shareholders would have got nothing, and that they would likewise have got nothing if we had followed the barmy suggesting of putting the bank into administration?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

My hon. Friend is right. Had the Government not agreed to the Bank of England intervention last September, Northern Rock would have gone under. It had simply run out of money; it could not raise the money that it needed. If that had happened, not only would employees and shareholders have been affected, but depositors would have been put at risk. We have always made it clear that the reason why we intervened was, first, to ensure financial stability—the first and foremost duty of any Government—and, secondly, to assure the savers and depositors. We also had to have regard, quite rightly, to the interests of the taxpayers, and we have been doing that.

I have said on many occasions that to have put the bank into administration would have been a huge mistake. It would have crystallised the losses, which would have had to have been met by the taxpayer, and it could have provoked a fire sale. I am not alone in thinking that; Mr. Osborne said something very similar last November.

Photo of Hugo Swire Hugo Swire Chair, Speaker's Advisory Committee on Works of Art

I am grateful to the Chancellor for giving way again. What discussions did he have at the time with Paul Thompson on the new management proposal? He and his team had raised £700 million—£500 million from existing shareholders, and another £200 million from the Tyne consortium in the United States. What discussions did the Chancellor have with them at the time?

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I do not think that I have had any discussions with Mr. Thompson. In relation to the Northern Rock board and the Virgin consortium, they had discussions with Treasury officials and others about their proposals. As I said in my statement yesterday, both their proposals were considered and both were judged against the option of a temporary period of public ownership. As I said yesterday, the best value for money is the course of action that I am putting forward today.

Photo of Alistair Darling Alistair Darling The Chancellor of the Exchequer

I shall not give way; I have done so fairly generously.

I hope that I have outlined to the House the way in which the Bill is structured. I readily recognise that no matter what I or anyone else might say, the Conservative party is against this proposal. I am not entirely sure, and I do not think many people outside the House are, about what exactly its proposal is. Its whole approach throughout this whole affair has been muddled, confused, opportunistic and without any solution whatever.

We are proposing a course of action that will maintain financial stability. It will support the savers and give a chance for the company to be refocused and restructured. However, above all it is a proposal that supports the interests of the taxpayer, which must be first and foremost. I commend the Bill to the House.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer 4:57 pm, 19th February 2008

Thank you, Mr. Deputy Speaker [Interruption.] Mr. Campbell should calm down.

Today we debate all stages of a Bill that will give the Government, for the next year, unprecedented powers to take into public ownership any bank or building society. We are also to debate the particular application of the Bill to Northern Rock. Having listened to the Chancellor for the last half hour, one could forget that for five months he and the Prime Minister had done everything possible to avoid the course of action that the Chancellor is recommending this evening. Even after his half-hour speech, we still do not know the simplest things about the Bill. For a start, we do not know how much we are buying the bank for. We do not know what we are buying in terms of its assets and liabilities, nor how long we are buying it for. What do the Government plan to do with it once it has been bought?

I know that the Prime Minister has a long record of doling out public money with no regard as to how it is spent, but even by his standards this is a huge blank cheque. Let us go through the questions in turn. First, what are the Government going to pay for Northern Rock? We are told that that will be decided after we have bought it, which is certainly an unusual approach to buying something. The Chancellor hopes—I stress "hopes"—that the shares will be valued as all but worthless. However, as he knows full well, the hedge funds will fight tooth and nail through the courts for £4 a share, which would leave the taxpayer with a bill just shy of £2 billion. He can give the House absolutely no assurance that he will be successful in persuading either an independent valuer or the courts to agree with his valuation. When the House passed the British Leyland Act 1975, the cost to the taxpayer was limited in the Bill to £265 million. There are precedents in nationalisation Bills for putting a limit on taxpayer exposure in terms of the amount of money that the taxpayer will pay for initial purchase of the company.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I give way to the right hon. Gentleman, who probably remembers the British Leyland Act.

Photo of Frank Dobson Frank Dobson Labour, Holborn and St Pancras

Would it be the policy of the Conservative party to support a court action by the hedge funds to get compensation that they do not deserve?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I certainly would not support such a court action. I personally believe, as indeed the Chancellor believes, that the shares are virtually worthless, and without the Government support in September they would not be worth anything.

I hope that the Chancellor succeeds in achieving this objective, but he has no way of assuring us that he can do so. Let us be clear; some of the hedge funds that we are dealing with specialise in taking Governments through the courts for years in order to achieve the maximum return. I was told a story about one of the hedge funds involved, which finally ended up seizing the aircraft of the Argentine state airline in lieu of defaulted Argentine Government bonds that it had bought on cheaply from other banks. We are dealing with a lengthy process; this is the beginning of a long period rather than the end of one.

Photo of Edward Leigh Edward Leigh Chair, Public Accounts Committee, Chair, Public Accounts Committee

Will not the courts take the view, sadly, that the shares have an obvious value, which is the value that was proposed by Virgin, so the figure of £2 billion that my hon. Friend mentioned is quite possible?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

My hon. Friend is right. A whole range of different sums could be agreed on by the independent valuer, and I am sure that my hon. Friend's Committee will want to take a close look at this matter given its concern for the use of public money. The key point is that we do not know how much we are buying the bank for and how much we are being asked to shell out at the end of this debate.

Photo of Geoffrey Robinson Geoffrey Robinson Labour, Coventry North West

The whole House will be pleased that the hon. Gentleman has put a value of precisely zero pounds sterling on the shares of Northern Rock—we have heard that very clearly from the Conservative Front Bench. Is that the value at which, in his nutcase scheme, he would transfer them to the Governor of the Bank of England so that he could conduct a fire sale for him?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I know that the hon. Gentleman is an expert on giving mortgages to people who cannot get them through normal channels. However, let me deal with his first point. I agree with the Chancellor of the Exchequer and, I think, with the deputy leader of the Liberal Democrats, that we have to accept, I am afraid—it is not a happy story for many small shareholders, particularly those in the north-east of England who received shares when the bank demutualised—that the value of the shareholders' shares is very low, and they would be worthless without the Government support back in September.

Let me be clear about our proposal for a Bank of England-led reconstruction, which the hon. Gentleman mentioned in derogatory terms. That is exactly the procedure that we are all going to be asked to vote on for future bank rescues. I make a heady prediction that he will be trooping through the Lobby to support Bank of England-led reconstruction, which, by the way, would not double the liabilities of the taxpayer, as nationalisation will, would mean that the taxpayer comes first in the queue rather than last, and would not mean that the rest of the world looks to Britain and says, "This is the country where they have nationalised a high street bank."

Photo of Kevan Jones Kevan Jones Labour, North Durham

I am listening closely to the hon. Gentleman. Is he saying to those small shareholders in the north-east that he would give them no compensation whatsoever?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I am saying that I agree with the hon. Gentleman's Chancellor of the Exchequer that the value of those shares is, I am afraid, very small. It will be a decision for the independent valuer, but I am afraid that they would not be worth a great deal without the support that the Government gave in September. I am afraid that the hon. Gentleman had better break the news that this is the approach that the Government have taken. By the way, Bank of England-led reconstruction would mean that at the end of the process, once the taxpayers got their money back, there was at least a possibility that something would be left for the shareholders. I suspect that that will not be the case if we go down the route that he will vote for tonight.

Not only do we not know what we are paying for this bank, but we do not know what we are buying into. We know that nationalisation will double the exposure of the taxpayer from £55 billion to £110 billion—£3,500 for every taxpayer—but the Government simply refuse to tell us how risky that exposure is. The Chancellor did not tell us today, either. All he says is that the FSA judges the bank's loan book to be of good quality. He said that last September, and says the same thing now, even though the prospects for the housing market have deteriorated markedly since then.

We know, however, that the independent rating agencies disagree with the Chancellor's assessment. Standard and Poor's says of Northern Rock's mortgage securitisation that the losses are rising and repossessions are on the way up. We also know that Northern Rock wrote more mortgages than any other bank in Britain at the top of the housing market. We know that it offered 125 per cent. mortgages when most of its competitors thought that such mortgages were too risky. We are told that, as a result, Northern Rock is repossessing more homes than any other major bank in Britain. The least we should have from the Government before we vote on this Bill is an honest and independent audit of what we are being asked to buy.

Will the Chancellor tell us how many bad loans there are? What is the default rate? What is the pension fund deficit? The private sector bidders know those things; they were told. But the public sector and Parliament, which are being asked to buy the bank, know none of those things. Surely that is not an acceptable state of affairs. We are entitled to know what we are buying.

Photo of Henry Bellingham Henry Bellingham Shadow Minister (Justice)

My hon. Friend is making an absolutely vital point. Does he agree that it is strange, to say the least, that the Chancellor did not tell the House the level of Northern Rock's unsecured debts? Surely he should have told the House that, because we do not have a figure for it.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

My hon. Friend is right in the sense that we have not heard anything from the Chancellor about the general state of Northern Rock's mortgage book beyond his bland assessment, repeated month after month, that it is in a good state. That is not what the credit rating agencies are saying.

My hon. Friend Mr. Leigh, the Chairman of the Public Accounts Committee, said that we do not know how much we will be paying for the various City fees that have racked up while we have been waiting for the Prime Minister and the Chancellor to make a decision. We know that Mr. Sandler is going to be paid more than £1 million a year, but we do not know what the total bill for the advisers will be. I think that the Chancellor said, in answer to my hon. Friend the Member for Gainsborough, that he would publish the fees at some point—I hope that he did; I shall have to check Hansard tomorrow. I hope that that is the case, and that he does not just publish the fees for Goldman Sachs; hon. Members may not realise it, but we are paying the banking fees of Olivant, Virgin and Northern Rock. Once they became preferred bidders, Northern Rock agreed to pay their advisory fees, and that is how we get to the £100 million figure on the front page of some of the newspapers.

Let us be clear: the consequence of nationalisation is that the risk of every Northern Rock loan defaulted on, of every Northern Rock mortgage that cannot be repaid, of the pension deficit and of those City fees will now be borne by the taxpayer.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

Would my hon. Friend agree that the fees incurred so far would be dwarfed by the litigation fees that may arise if the shareholders are not sorted out quickly?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

As my hon. Friend is a very successful solicitor, I am sure that he did not need to declare an interest. He well knows the substantial fees we all have to pay for good legal advice. I now give way to my hon. Friend Mr. Cash, who also has some expertise in this area.

Photo of Bill Cash Bill Cash Conservative, Stone

I do not know whether my hon. Friend will reach clause 10, which is entitled "Tax consequences", but does it worry him that the arrangements that it sets out constitute carte blanche, especially given the width of the orders,

"in connection with...or in consequence of" the transfer of property and so on, and the fact that the

"provision that may be made by the regulations includes provision for or in connection with...a tax provision not to apply"?

In other words, clause 10 could lead to no tax being paid and total tax relief being given in all the circumstances that the provision outlines.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I think that my hon. Friend's interpretation of clause 10 is right. When we went through the technical details of the Bill, we asked Treasury officials about the clause and we were told that the reason for it was to avoid any perverse tax consequences of nationalisation and that it was an insurance policy against taxpayers losing out unexpectedly. However, my hon. Friend makes a good point. I suspect that we may not even reach clause 10 in the couple of hours allowed for the Committee proceedings, but if we had longer, the points could be explored in more detail and we could hear Ministers' reasons for its inclusion.

Photo of John Hemming John Hemming Liberal Democrat, Birmingham, Yardley

Perhaps the hon. Gentleman accepts that the difficulty is that, as soon as the Government underwrote the Northern Rock depositors, they were in a position whereby, if the music stopped, they were responsible for all the remaining losses. The error was to incur all the due diligence costs of hundreds of millions of pounds rather than nationalising straight away so that the Government were in control and could act to minimise the losses for the taxpayer.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

The one point of agreement between the Conservatives and the Liberal Democrats on the substantive point is that, whatever the Government wanted to do, they should have done it earlier instead of dithering for four or five months. However, I am glad that we have Liberal Democrat support for some of the amendments, which we tabled with Liberal Democrat agreement. I therefore hope that there will be opportunities to vote on, for example, ensuring the public's right to know and fair competition. If there is no opportunity to vote tonight, there will be plenty of opportunities in the House of Lords, where circumstances mean that we may carry the day through working with the Liberal Democrats, and that we will come back on Thursday evening, perhaps late at night, to discuss those matters.

We do not know what we are buying or how much we are paying for it. We also do not know for how long we are buying it. The Prime Minister and the Chancellor keep telling us that there will be a temporary period of public ownership. They still cannot bear to utter the word "nationalisation". It has become the policy that dare not speak its name. How long could "temporary" be? The Chancellor and the Prime Minister refused to say. The Chief Secretary, whom it was enjoyable to watch on "Newsnight" last night, also refused to answer the question. However, Ron Sandler is not so coy. He said yesterday, "We're clearly talking about some years". Why did we hear that from Ron Sandler but not from the Chancellor of the Exchequer today or yesterday?

We know that, in private, the Chancellor tells journalists that "temporary" could be at least three years. That is reported as being said by authoritative sources in Government. Why does not he say that in Parliament and to the public instead of simply briefing the press?

The sorry history of nationalisation is littered with examples of companies that were taken into what was supposed to be temporary public ownership and stayed there for years. I repeat that we do not know what we are buying, how much we are paying for it and for how long we are going to own it. We do not know what the Government plan to do with that high street bank. The formal business plan will not be presented until 17 March. When it is, I understand from the Chancellor that it will be presented to the European Commission instead of the House of Commons. Are we in Westminster not entitled to know the plans for the bank that we are being asked to buy?

We will try to amend the Bill to require the new management of Northern Rock to explain to Parliament and the taxpayers' elected representatives the Government's plans for the taxpayer-owned bank.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I give way to one of the critics of nationalisation.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central

Perhaps I will have an opportunity to deal with that point later.

The hon. Gentleman has implicitly criticised Mr. Sandler's comments about the length of time it could take for the bank to remain in public ownership. Does he believe that a brief period of public ownership—days, weeks or months—would be in the taxpayer's interests?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I am not in favour of nationalisation, full stop. What I am pointing out is that it will take a long time; indeed, Mr. Sandler said yesterday that it would take several years. That is not something that has been heard from the Chancellor's lips—at least not in public—but it is something that Mr. Sandler says. The hon. Gentleman was fairly acute in pointing out the dangers of nationalisation, telling the House that

"the policy of nationalisation would lead to a slow lingering death for the jobs of the Northern Rock workers, its assets and Britain's reputation as a major financial services centre, with my right hon. Friend the Chancellor cast in the role of undertaker".—[ Hansard, 19 November 2007; Vol. 467, c. 968.]

I therefore look forward to the hon. Gentleman's support in the Division Lobby tonight.

The next point that I want to address is exactly what the Chancellor hopes to do to prevent the bank from unfairly competing in the market. He said yesterday that he wanted business as usual. However, he said at the beginning of his speech—this was when north-east Members suddenly woke up and paid attention—that there would be elements of the business plan that prevented the bank from competing on a commercial basis in a straightforward way and which prevented business as usual. We are talking about a Government-owned bank. It can borrow more cheaply than any of its competitors and can offer better savings rates and cheaper mortgages than any other bank.

If the bank is operating on a strictly commercial basis, which the Chancellor said yesterday— [ Interruption. ] I know that the hon. Member for Blyth Valley wants Northern Rock to use the fact that it is backed by the Government to undermine every other bank and building society in the country, but the rest of us are concerned about the other jobs in the financial services industry. The Chancellor said that he wanted the bank to operate on a commercial basis. However, anyone who visits its website today will find that it is offering the most generous savings rate in its class and a 0.5 per cent. bonus for existing savers, and it is still offering those 125 per cent. mortgages that people cannot get in most other places. There are no plans for that to change. Ron Sandler said yesterday:

"We will continue to operate on normal commercial principles, both as a deposit-taker and a mortgage provider. On a day-to-day basis, nothing will change".

But to allow Northern Rock to compete vigorously as a nationalised company in a fiercely competitive mortgage and savings market is completely unacceptable. It will cost jobs in other banks and building societies, and do more damage to Britain's reputation as a home for financial services.

Photo of Gavin Strang Gavin Strang Labour, Edinburgh East

Is there not a slight contradiction between that point and the hon. Gentleman's earlier statement, when he described what a poor state Northern Rock was in, citing the fact that many of the loans were no longer viable? I put it to him that either we want the firm to be successful and profitable, before going into the private sector, or we are going to cripple it, along the lines that he suggests, giving it no chance to achieve that. Surely the idea that a successful Northern Rock will undermine the rest of the financial sector is a bit overdone.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

The right hon. Gentleman should pay attention to what Mr. Sandler and the Chancellor are saying in briefings to the press, which is that they are going to shrink the bank to half its size and lay off many thousands of the work force. That is what we read in the newspapers, but not what we hear from the Chancellor at the Dispatch Box, when he is standing in front of his colleagues from north-east constituencies.

If the Chancellor were absolutely straight with us, he would tell us what he knows the business plan for the bank will be. If the plan is a managed run-off of the bank, let him tell us. He said yesterday that it would be business as usual. But business as usual for a Government-backed bank that can borrow more cheaply than any of its competitors means that other companies in Britain's financial services markets will be undermined and jobs will be lost in Edinburgh and every other part of the country.

Photo of Bill Cash Bill Cash Conservative, Stone

Has my hon. Friend noticed the consequential and supplementary provisions, which, under a Treasury order, would effectively give a power to disapply any statutory provision or rule of law, quite apart from the fact that the provisions also provide for indemnities to everybody for everything?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

My hon. Friend is persistent in making the point that clause 2 introduces general powers for the Government. We may actually reach clause 2 in the Committee stage, so I look forward to his contribution on that point.

Photo of Rob Marris Rob Marris PPS (Rt Hon Shaun Woodward, Secretary of State), Northern Ireland Office

I know what the hon. Gentleman says about unfair competition and the possibility of destabilising other financial institutions in this country. Following the logic of what he has said, would he be in favour of privatising the Royal Mail?

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

Royal Mail operates under a regulatory regime specifically designed to consider its impact on private competitors. We have tabled an amendment, and I know that the hon. Gentleman is assiduous in looking at amendments and taking part in the debate—

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I know that they are not, but we did try to change that.

We have tabled an amendment, with the support of the Liberal Democrats, that would allow the Office of Fair Trading to have a supervisory role, in order to ensure that we were not simply relying on the assurances of the Chancellor of the Exchequer—or, indeed, EU state aid rules—to protect other financial services and institutions from unfair competition from Northern Rock.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I will give way again to the hon. Gentleman, even though he keeps referring me to the Standards and Privileges Committee.

Photo of Kevan Jones Kevan Jones Labour, North Durham

I missed you but got your leader!

Following on from the question put by my hon. Friend Rob Marris, will the hon. Gentleman tell the House whether he would privatise National Savings and Investments or premium bonds? They are clearly investment vehicles that are in direct competition with other banks and savings institutions.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

First, they operate under a proper, statutory regulatory regime. That will not be the case with Northern Rock in these special circumstances. The hon. Gentleman can vote for our amendment tonight. Secondly, with the best will in the world, National Savings is not offering the extraordinary rates that are to be found on the Northern Rock website at the moment, which are better in their class than the savings rates of any other major institution in Britain.

Photo of John Greenway John Greenway Conservative, Ryedale

My hon. Friend knows from my interventions yesterday and today that I very much share his concerns. Has he also taken on board the fact that the likely offering of Northern Rock to depositors could have such wide implications that it could undermine the gilt market? That is undoubtedly the view in the City of London.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

That is a possibility, and it has been raised with me by various people in the City. It is another reason why I am against the nationalisation of Northern Rock. I shall be voting against the proposals later this evening, and I am sure that my hon. Friend will join me.

I should also say—as we might not get the chance to discuss these matters in Committee—that we shall be tabling a couple of other amendments. Labour Members might not be aware that article 18 of the draft order exempts Northern Rock from the Freedom of Information Act 2000, on the bizarre ground that it should not be treated as a publicly owned company. Royal Mail is not exempt. National Savings is not exempt, and neither is the Tote. Why should Northern Rock escape public scrutiny? We shall seek to amend the Bill so that members of the public can find out more about what they own.

We shall also table amendments to prevent our Prime Minister from interfering in the day-to-day management of Northern Rock. Only he could keep a straight face, after announcing yesterday morning that Northern Rock would be entirely at arm's length from the Government, when, yesterday afternoon, he appointed his former chief of staff to the board. We shall seek amendments to keep the Ministers out.

We will also try to reduce the extraordinary scope of this legislation, so that it will be exactly for the purpose for which we are told it is intended. If it is simply intended to bring about the nationalisation of Northern Rock and to get around the hybrid Bill procedures, the Government could easily reduce the length of time for which the legislation is to be active from one year to one month. We shall table an amendment to that effect. It is interesting that the British Bankers Association, which the Chancellor quoted in his speech, has said this afternoon that it is very concerned about the year-long period for which the provisions will be active. It believes that that will be "repuationally detrimental" to UK financial services.

We can only assume that the Government are taking on these sweeping powers to nationalise banks because they think that there is at least a possibility that they might have to exercise them. In that case, they should bring forward proper legislation at the proper time, which we can debate in the House.

Mr. Deputy Speaker, the correct way forward, I believe, is to follow the plan that the Chancellor is going to ask us all to vote on later this year for future bank rescues, which would minimise the already substantial exposure of the taxpayer: it would not double it, but ensure that the taxpayer comes at the top, not the bottom, of the list. We would also avoid the "nationalisation" word, which the Chancellor is so keen to avoid as well. That is the way to minimise the taxpayer's exposure. Instead, we are being asked to vote for something that the Chancellor did everything he possibly could to avoid for five months. The Chancellor did so because he knows that nationalisation will double the taxpayer's exposure; he knows that the public will bear all the risk; he knows that nationalisation means years of lingering uncertainty and no clear exit; he knows that nationalisation could do real damage to Britain's reputation as a home for financial services; and he knows that it will destroy the Government's reputation for economic competence as well as the Chancellor's own credibility. All those things are right, which is why we are going to vote against nationalisation tonight.

Several hon. Members:

rose —

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

Order. Hon. Members may have noticed that Mr. Speaker has placed a 10-minute limit on Back-Bench speeches, which operates from now.

Photo of John McFall John McFall Chair, Treasury Committee, Chair, Treasury Committee 5:25 pm, 19th February 2008

I am pleased to contribute to the debate on behalf of the Treasury Committee; our report, "The run on the Rock", is tagged to today's debate.

As the House will know, the Treasury Committee has undertaken a five-month inquiry into financial stability and transparency, which began with the taking of evidence from the Governor of the Bank of England on 20 September—within days of the announcement of the support operation for Northern Rock. Our report of late January covered the events leading to that support operation and the subsequent run, guarantees and proposed reforms, which the Committee believe will prevent a recurrence of these problems. I do not propose to talk about those aspects of our report today; instead, I want to concentrate on the proposals for public ownership and how they relate to the analysis in the final chapter of our report on Northern Rock since September last year.

The Bill allows a bank or building society to be taken into public ownership when there is a threat to financial stability or when state support has been provided. I realise that there are concerns that Northern Rock might set a precedent for other institutions, but it was clear during our inquiry that Northern Rock's excessive dependence on wholesale markets made it an extreme outlier among banks. Indeed, we were told by the European Central Bank in Frankfurt that no European bank had comparable exposure. I understand why the Bill is drafted so that it relates to deposit-takers in general and why there is no provision on the face of the Bill for a particular interest—thereby making it a public, not a hybrid Bill. I will confine my remarks to the case of Northern Rock.

On 11 October, my right hon. Friend the Chancellor of the Exchequer told the House that any proposals on the future of Northern Rock would have to be considered in the context of how far they, first, protected taxpayers; secondly, promoted financial stability; and, thirdly, protected consumers. He subsequently confirmed in an answer to my question that he viewed those three criteria as being of equal importance. My own assessment of the proposals for Northern Rock arising from this Bill relates to those three criteria.

On the first—the protection of taxpayers—I believe that the decision to nationalise Northern Rock is the right one. The taxpayer has been paying the piper since September and it is now rightly time for the taxpayer to call the tune. The Virgin offer seems to have been based on an optimistic view of the value that Virgin Money would bring to the table. I well remember the BBC reporting that Richard Branson was going to put in £200 million of his own money. When I spoke to people in the City, I discovered that Virgin Money was being sold to Northern Rock, and when I asked someone very close to Northern Rock what they thought the value of Virgin Money was, they said that it was not £100 million, but only £50 million. Hey presto—Richard Branson's personal contribution of £200 million from the sale of Virgin Money to Northern Rock! The £10 million to £11 million that was requested for the branding of the Virgin Money name did not strike me as a good investment.

Any private takeover would have posed the threat of taxpayers continuing to bear all the risk, with the bulk of any profits going to a private owner. The scandal that that might have created in due course, particularly if the profits were realised in a tax haven, could have been far more damaging than any difficulties associated with nationalisation.

Photo of John McFall John McFall Chair, Treasury Committee, Chair, Treasury Committee

I have only eight minutes left, and I want to put my views on record. If I have time at the end of my speech, I will give way to the hon. Gentleman.

On the second criterion of financial stability, the Treasury Committee concluded that the Chancellor's decision to make public support available to Northern Rock was the right one. For a time at least, there was political consensus on that decision. I have heard no convincing argument as to how, having embarked on providing taxpayer support, the Government could extricate themselves from their commitment without jeopardising financial stability. Under existing insolvency law, administration would mean deposits being frozen, and the expensive guarantees offered by the Government would be invoked. In modern circumstances, the difficulties of individuals with no access to their bank accounts, even for a short while, would undermine confidence in the whole banking system and jeopardise financial stability, and there would be multiple runs on banks. At least until there is a new legislative framework for handling failing banks, administration is not a realistic option.

The third interest on which we must focus is that of consumers. It must be made clear that the consumers who matter are all consumers, not just those who have accounts or mortgages with Northern Rock. In the long run, the interests of all consumers will be best served by a competitive and properly regulated banking system. We must be alert, as I am sure the European Commission will be, to the danger that Northern Rock will distort the financial markets. Such a distortion would jeopardise the long-term interests of consumers and the financial system. At times of economic uncertainty other financial institutions do not need a new heavyweight competitor, numbed to the pain of competition by the anaesthetic of state aid.

As has been mentioned, Northern Rock is a high loan-to-value lender. I believe that its average loan to value is more than 60 per cent., compared with percentages in the low 50s in the rest of the industry. That makes Northern Rock more risky. Probably a gratuitous request to the new management is for it to ensure that the together mortgage, with a 125 per cent. loan to value, is no part of the company in the future. A statement to that effect from the management would reassure the rest of the market.

To satisfy myself and others that a nationalised bank will not distort competition, four conditions must be met. First, as the Chancellor has acknowledged, the terms of the agreement between the Government and the new management must meet the Commission's state aid rules. I trust that the way in which that is done will be made public. Secondly, given the state guarantee, a nationalised Northern Rock must continue to pay a penalty for attracting new depositors, as the private Northern Rock has done since last October under the terms of guarantee in paragraph 303 of the 9 October extension document. I hope that, when she replies to the debate, my right hon. Friend the Chief Secretary of the Treasury will confirm that the penalty charge will continue when the bank is in public ownership.

Thirdly, there must be proper accountability and transparency of the new management's business decisions. When it is a public entity operating in the private sector, the Treasury Committee and the House will want to be assured that Northern Rock's business plan is good for the bank, its employees and its customers and for the taxpayer, the consumer and the wider financial services market. I welcome the appointment of Ron Sandler as chief executive. As I have said, he has form in the financial services sector: he was called in by Lloyds in the mid-1990s when there was chaos there, and served the interests of Lloyds and the financial community well. However, it is important that his incentive plan is examined. The incentives should focus on the appropriate size of the company rather than on growth objectives. It was the incentives and growth objectives in the old Northern Rock that led it into such trouble with its extreme business model.

Another question is, what is the disclosure regime for Northern Rock? There must be a focused retention package for Northern Rock employees, particularly those in IT and product design. I well remember the comments of the Governor of the Bank of England telling the Select Committee that Northern Rock's middle management had done its job in exemplary fashion, and that if the senior management—the board—had followed the lead of middle management and the rest of the work force the company would not have found itself in this position.

There must be a commitment to the principle that state ownership is temporary. The decision to nationalise must have been difficult, but the judgment of when to privatise will be just as difficult, and of crucial importance.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

I thank the right hon. Gentleman for giving way. He said that he believes that nationalisation is in the best interests of the taxpayer. How does he know what is in the best interests of the taxpayer? What due diligence information has he received on the assets and liabilities of the bank? What information have we Members received on the bank, on which we must make this decision today after one day's notice from the Government?

Photo of John McFall John McFall Chair, Treasury Committee, Chair, Treasury Committee

If the hon. Gentleman had read the newspapers yesterday, he would have seen that although the top headlines were critical of nationalisation, almost every writer on the inside pages said that nationalisation is the best alternative to protect taxpayers' interests. It is folly for the hon. Gentleman to consider otherwise, and to think that we should accept a bid from Virgin or others on the basis that the share price will double and they will then start paying money back in 10 or 20 years. Is that a good deal? Of course it is not. We only need two clear eyes to see that.

In due course, the Government must spell out the criteria they will use in judging when to privatise Northern Rock. I expect that the Treasury Committee will continue to monitor that when Ron Sandler and others appear before us, and we will try to make sure that the Committee carries out its objective, as laid down by the House, of ensuring true accountability.

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury) 5:27 pm, 19th February 2008

I made it clear yesterday that we support the decision and the Bill, and I fully understand the Government's need to move quickly; the bank is paralysed, so we must help to pass the Bill this week. That said, the Government seem to have an extraordinary search engine for finding banana skins to slip on. It was announced this afternoon on the BBC, which I presume is right, that Mr. Ron Sandler, who has been appointed as the chief custodian of taxpayers' money, is a non-dom. It seems that all the Government's favourite businessmen, including Sir Richard Branson and now Ron Sandler, have so little commitment to the country, let alone the Government, that they prefer to pay their taxes elsewhere. I presume that Ron Sandler will now become the second best-paid person in Newcastle after Michael Owen, but at least Michael Owen pays his taxes here. [Interruption.] Yes, we think so.

Clearly, there is scope for improving the Bill. As the Conservative spokesman, Mr. Osborne, rightly said, important challenges need to be made, particularly on parliamentary accountability, and we shall support his and other amendments designed to strengthen the Bill in that respect.

Photo of John Redwood John Redwood Conservative, Wokingham

Should we welcome the idea that taxpayers' money could help to pay Michael Owen's salary through the sponsorship deal that I believe is already in place?

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

The right hon. Gentleman is one step ahead of me on that.

We can continue to debate the argument that has been going on for several months about the pros and cons of nationalisation, but we have passed that point; the decision has been made, and the nature of the question has now changed and is to do with what kind of bank we are now talking about.

Photo of Bill Cash Bill Cash Conservative, Stone

The hon. Gentleman might not know this, but in the draft order to which my hon. Friend Mr. Osborne, the shadow Chancellor, referred there is a remarkable provision that says that no director of Northern Rock shall be liable for any act or omission of theirs that occurs while Northern Rock is wholly owned by the Treasury and, accordingly, no proceedings may be brought. Would the hon. Gentleman and his party approve of a provision that exempted directors of Northern Rock—being paid more than £1 million a year—from any liability for anything they do as directors?

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

The hon. Gentleman has an eye for legal detail, but I am not clear about whether he is talking about Crown immunity and civil servants' status.

Photo of Bill Cash Bill Cash Conservative, Stone

I am talking about a specific provision, which the hon. Gentleman will doubtless alight upon when he has a chance to examine the draft order. Does he approve of it in principle?

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

I shall alight upon it and then decide whether I approve of it in principle.

May I return to the central question of what kind of bank will now operate? Will it be built up or run down? Jim Cousins, with whom I have had several exchanges in the past few weeks, put it rather well yesterday when he asked whether this is the end of the beginning or the beginning of the end of this bank. That question is crucial. It is at the heart of the argument about the business model, on which Ron Sandler will presumably be asked to decide. It is not clear to me which of the two approaches is the better. A wide range of options exists, so one can envisage a kind of continuum, at one extreme of which the bank would be run off and would have no new business. The other extreme might involve a highly expansionary strategy—a kind of publicly owned Virgin or "the people's bank", as somebody called it yesterday. Alternatively, something between the two might happen.

At some point, there must be a proper debate about which option will be chosen. This is a political issue; it is not just a technical issue for the man who has been appointed to chair the company. It is not obvious to me which is the best approach. My instincts suggest that given the excesses of the past, the bank is probably best run on a more conservative basis, but there is an argument for saying that if the primary concern is repaying the taxpayer, that could be done in two different ways. The assets could be run off to realise cash or the bank could be built up to sell it at a large profit. It is not clear which of those approaches is the better.

There is an issue to address in respect of the staff, who are important in themselves. If large numbers of them are laid off, one must deal with not only the redundancy bill, but problems of retention, management and keeping the bank going effectively. A crucial human resource issue is involved, and somebody has to decide on it. The matter is political as well as administrative.

The Conservative spokesman rightly mentioned the nature of competition and unfairness, and that is clearly important. It is complex, because the banking industry is not a normal one—Cruickshank reported on that several years ago—and other banks have lender of last resort privileges. A few moments ago, I saw the former chairman of Lloyds complaining on television that it was very unfair that Northern Rock would be the only bank that could not go bust. That is not true, because his former bank could not go bust either. The national savings bodies have complex competition arrangements. Insurance companies may well say that Aviva does not have lender of last resort facilities, but where an insurance company is owned by a bank, the parent company does. This is a messy area where competitive principles are very unclear, so there must be proper, publicly accountable discussion about which of the options will be taken.

I want to discuss a second set of questions, relating to the inheritance from the pre-nationalisation stage. This is not the point at which to have an inquest or post-mortem on what has happened—the Treasury Committee and the Public Accounts Committee will have plenty of opportunity to do that. Some questions about the past are highly relevant to what happens now, the first of which was posed by the Conservative spokesman—how sound is the bank?

An important contribution was made yesterday by Mr. Lilley. He reminded us of the scale of the repossessions that are now taking place. They run wholly contrary to everything we had previously been told about the bank's soundness. I began to become concerned about that matter about a year ago, possibly because of my particular personal interest—some would call it an obsession—with problems of personal debt and the housing market. It was clear that something very strange was happening with this bank and its performance. I questioned it, but the Financial Services Authority was completely blind to it. I recall being telephoned by the FSA's chairman on the day the crisis originally broke. He said that I was being irresponsible in talking about the bank and criticising its management. He said that it was a very well run bank with an exemplary loan book, and he asked what my problem was. Unfortunately, his position was undermined by the fact that at the same time a press conference was being held in the City explaining how Northern Rock's management had taken on rather a lot of the sub-prime mortgage liabilities in the US. None the less, that remains the official view, and as far as I know the Chancellor still subscribes to that description of the bank. However, we have had plenty of evidence to the contrary, including not just the evidence given yesterday, but serious brokers' reviews. For example, Panmure Gordon has said that bad debts were systematically hidden.

There were therefore all sorts of problems with the bank and the next step—which I advocated yesterday and on the day of the announcement, and which has been taken up today—is for a proper, independent audit under the supervision of the Bank of England, and not carried out by the FSA, to investigate how sound the bank and its mortgage book are.

The second inheritance from the past is the costs of delay. What were they? We have had questions already about the costs of financial advice, but there is a potentially much bigger cost, which is the cost to the bidders. Who has paid the bills for Sir Richard Branson and other bidders for due diligence and other costs, which have been formidable? I was alerted to this problem at the outset when it was said that 10 companies were interested in bidding. I happened to talk to someone from one of those companies and he said, "We are not going any further with this, because we have discovered that the Branson consortium has preferred bidder status and the Treasury is paying all its bills. Why should we compete on that basis?" A few days later, the other companies were told that the Treasury had changed its mind and would cover everybody's bills. I do not know what happened, but since last October bidders' costs have been paid by the Government. What are those costs? I suspect that they are a lot more than the Goldman Sachs bills.

The question of costs is important not simply because we want to rake up the past but because if the bank is to be sold again we need to know the principles on which it will be done. That is why the status of the bidders and who covers their costs is important.

A third question from the past is precisely how the Government came to make the decision to nationalise, which they announced formally on Sunday. Strategically, they made the right decision, but what steps led them to that conclusion? That is important, because if the bank is to be privatised eventually, the potential bidders need to understand the criteria that will be used. It has emerged in the press—we have no other source on this—that what seemed to have tipped the Government's decision were the scale of the fee offered for the security, the length of time of repayment of the taxpayer and what the professionals call the equity kicker for the Government. But there were many other issues involved that were not discussed.

I wrote to the Chancellor and Sir Richard Branson about those other issues. They include, for example, the nature of the security that was being offered for Northern Rock assets, and the tax status of the bidders and their vehicle. Those issues have never been discussed publicly and, at some point, we will have to have a proper explanation of the process by which the Government reached that decision to ensure that when the eventual sale takes place there is complete clarity about the criteria.

My final question is about Government debt. We all understand that by nationalising the bank the Government are taking on its full liabilities. Some of the newspapers yesterday, including the Daily Mail in its headline, assumed that nationalisation would increase the Government's liability from £50 billion to £110 billion. That is wrong, because the Office for National Statistics classified the bank a week ago as a public company, under which all or most of the debt became public. I am not sure that that is the case either, as there may well be new commitments that have been taken on, and it would be useful to have an explanation.

My questions relate to the Bill, to what it says and to how its provisions can be strengthened. The first issue, compensation, has been touched on already. The Conservative spokesman put it clearly and correctly: although we would all like to make a sentimental distinction between the hedge funds and the £100 shareholding grannies in Newcastle, it is not possible legally to do so. The practical, painful reality is that without Government support the shares would be worthless. Any independent valuer is bound to have to come to that conclusion, I would have thought—but those involved obviously need to fight their legal corner.

The second issue relates to competition and how the competitive process will now be dealt with. I think the right questions have already been asked. Other banks will certainly make several points, such as about the deposit interest rate that can be offered by the new Northern Rock bank. Will it offer a higher rate of interest in attracting deposits, or the same rate of interest? How will it be constrained? What will its lending practices be? We know that in the past those practices have been extremely aggressive to expand market share. Will the bank be allowed to do that, or will it be constrained in some way? A more important question for competitors will be what will happen when the wholesale markets open. Will the Northern Rock bank be able to access them much more easily than other banks? A lot of questions will be asked about the fairness and appropriateness of competition.

It is right to say that although the EU has rules, it also has a lot of state banks—in Sweden, France and elsewhere—that are accommodated in a fairly permissive way. It is not entirely clear that European rules meet our requirements. I support the measures to build in a role for the Office of Fair Trading.

The Bill inadvertently opens up the whole question of the banking system in general, because it is about banks in general and not Northern Rock. We understand the parliamentary procedural reasons for that, but the Government have inadvertently brought forward an argument that we were going to have in six months' time about the nature of bank rescues, bank nationalisation, intervention and how it all happens. They have therefore brought to the fore an argument that was originally made by Cruickshank in 2000. The former chairman of the stock exchange made the point that this is a strange industry that has what it calls regulatory privileges. It pretends that it is operating as a normal commercial operation and the bankers claim to be buccaneers who are out there competing in the market, when of course they are not—they are ultimately underpinned and protected by the Government.

The logic of Cruickshank's argument points in one of two ways. Either the industry must be much more tightly regulated against excess profits, as he put it—or, in some instances, companies should be nationalised—or it has to be fundamentally reformed so that new companies can come into banking much more easily and those that perform badly can go bust. One of the unexpected outcomes of the debate might be that we will go through the first approach, but finish up with the second. Eventually, the cosy little set-up in British banking and the pretence at having a competitive industry will be broken. The industry will have to become genuinely competitive, like others are. Perhaps the Chancellor will be the author of a much more radical set of reforms than even he yet appreciates.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central 5:53 pm, 19th February 2008

The House is confronted this afternoon with a new and rather interesting situation. In front of the House is the question—in a sense, it has been there to be debated and thought about since last September—of what sort of bank this will be in the future. The reason why I have been very sceptical about nationalisation as an option is that the people who put forward the case for nationalisation, as I think Dr. Cable will be honest enough to acknowledge, clearly saw it as a transitional move—a more decent option than bankruptcy. They saw it as a kind of state-organised wind-down, with some of the less attractive features of bankruptcy removed.

The nationalisation that has been offered to the House by Mr. Sandler in Newcastle over the last 24 hours and by my right hon. Friend the Chancellor in the House yesterday and today may prove to be a different beast. That prospect gives me some optimism about the outcome of the affair. The Conservative Front-Bench spokesman's policy was clearly to have a rapidly managed run-down of the bank; I think that that was the phrase he used—"managed run-down". As I have discovered in the past couple of days, one has to check Hansard very carefully for the words that people use. Rapidly managed run-down is just about the worst possible outcome of the affair for the taxpayer, who will get less value out of the bank; for the jobs in Newcastle and in Durham, which will all be lost; and for the human resources that have been built up in the bank, which have proved quite remarkable and have sustained the difficult experiences of the past few months. Such action would fire into the markets at one of the most difficult moments to dump assets and to undermine savings. It is the worst possible course of action that we could adopt at this moment.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central

I hope that the hon. Gentleman will understand my situation.

Photo of John Maples John Maples Deputy Chair, Conservative Party

I completely understand the hon. Gentleman's situation with his constituency; in his position, I might think the same thing. However, I do not think that he can argue that putting the bank into liquidation, for instance, and freezing the situation as it is now—we are told the loan book is good—would leave the taxpayer in a worse position than letting the bank go on, making more and more unsecured loans at 125 per cent. loan to value on mortgages. I do not see how that would put the taxpayer in a better position than they are in now.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central

At least the hon. Gentleman has clearly stated what was implicit, although not so clear, in the comments made by those on his Front Bench—that they were, in fact, advocating bankruptcy. That would destroy the assets and the ultimate value in the business. Let us be clear: that is not a good course of action for the people of Newcastle or for the markets.

Photo of John Redwood John Redwood Conservative, Wokingham

As a local Member for the business, has the hon. Gentleman been given any assurances by the Chancellor that he is going for the growth model and not the wind-down model?

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central

No, I have had no such assurance; nor, at this stage, would I necessarily look for one. We have had from Mr. Sandler clear comments that he sees the business as a going concern and is preserving the option of growing it on. Let us be fair about this. Northern Rock was trying to be a big bank based in the north-east that could take on the big boys of the banking sector. That prospect, from the north-east's point of view, must be retained. It may not ultimately work out that way, but it must be retained.

My right hon. Friend the Chancellor has not ruled out that option, because 11,000 jobs in Newcastle now depend on the finance and business services sector. They are jobs that people were told were a modern economy into which they should put their aspirations and careers. Most of those jobs depend directly or indirectly on Northern Rock. Retaining the possibility that the good business that is still there in Northern Rock can be grown on is an important part of the proposals. It is clear that that option has not been ruled out. I did not quite understand the remarks made by the hon. Member for Twickenham on that issue. He was not clear. His phrase about whether this was the beginning of the end or the end of the beginning seemed to me to mean that the logic of what he went on to say was that this should be the beginning of the end. That is a matter that the House will have to consider in the future.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central

I am sorry; I cannot give way.

I must also take issue with my right hon. Friend John McFall. I do not think that it would be sensible to insist on the continuation of the penalty arrangements imposed on the bank in September. I do not think it would be sensible for the target of repayment of outstanding obligations to the Treasury and the Bank of England to be sought to be achieved in one to three years, as was the apparent position of the Government only a fortnight ago. Those matters must be reconsidered.

I agree that the business plan is the next step, which the House must consider, but it is extremely important that the work force, who have proved to be so steady and stable in what have been very difficult circumstances, are actively involved in its preparation. I look to my right hon. Friends on the Front Bench to give me clear assurances about that issue before the end of this debate.

The House must understand that mortgages are now not long-term products. The life of a mortgage is less than five years. If a mortgage business does not grow, it dies. Saying that Northern Rock in its present form cannot take on new business will kill it off, and again I look for further reassurances from my right hon. Friends on the Front Bench that none of the proposals in the Bill is predicated on the assumption that Northern Rock will be unable to take on new business. As Northern Rock's fixed-term mortgages become due, borrowers are already being directed back to the markets rather than to the bank's own mortgage review provisions. That policy has been pursued for the past two months, but if it continues for any length of time, it will mean certain death for the bank. I look to my right hon. Friends on the Front Bench, and to Mr. Sandler, for very clear assurances that it will be discontinued, so that Northern Rock has the option to construct new business.

Another important thing to understand is that there has been a significant change in the Liberal Democrats' thinking about nationalisation. They began by saying that nationalisation would be an almost momentary interlude, merely a phase in the transition to private ownership. Over the past few days, however, it has become clearly recognised in all parts of the House that the problems at Northern Rock will not be solved in a moment or two, and perhaps not even in a year or two. The sensible framework for the House's thinking is that we will have to deal with the situation at Northern Rock over a number of years. Moreover, in due course—I do not think that it would be reasonable for us to insist on their doing so this afternoon—the Government will have to consider how they discharge their obligations to Parliament in reporting on the management of a publicly owned bank that is likely to remain in public ownership for quite a significant period.

Another welcome aspect of the Bill is that it not limited to one line that deals with the specific problems posed by Northern Rock. Instead, it provides means of dealing with other problems that may exist and with which the House will have to deal. Northern Rock is not an isolated piece of rock in an otherwise quiet and calm sea. We are talking about a very turbulent market, and other unexpected things could happen. The Government have been right to use the Bill to provide a context for dealing with other matters if the need arises. In particular, I welcome the additional provisions that deal with problems that might affect building societies. They are especially helpful, as they will calm the markets and reassure borrowers and depositors until the Government can put longer-term legislation in place.

The Government have various other matters on their agenda at the moment. Affordable housing is one problem, and another is how higher levels of home ownership can be achieved among people whose incomes are neither great nor especially stable. Some of what Opposition Members have said about Northern Rock this afternoon leads us precisely to the debate about how the Government should deal with such matters, because the fact that there is a bank in public ownership means that they will be in the front line of providing housing finance.

Some of my other doubts centre around whether the Government, at this stage in their life, can take on such problems—

Photo of Stephen Dorrell Stephen Dorrell Conservative, Charnwood 6:06 pm, 19th February 2008

The matters that I want to cover in my remarks follow very directly from the comments made by the hon. Members for Twickenham (Dr. Cable) and for Newcastle upon Tyne, Central (Jim Cousins). However, I draw a conclusion that is almost precisely the opposite of the one drawn by the latter: my central concern about the Bill, and the reason why I believe that Opposition Front-Bench Members are right to say that it must be resisted, is that after virtually six months of indecision about Northern Rock's future we are being offered a mechanism but no clarity about the objectives that it is being put in place to achieve.

We are told that nationalisation will be merely a short-term phase, but we are given no clarity at all as to the objectives that management should follow in that supposedly brief phase, nor about the shape of a business that the Government hope ultimately to be able to move back into the private sector. The hon. Member for Twickenham touched on the fact that Northern Rock's new management have two alternative ways to discharge their responsibilities as a nationalised enterprise. In crude terms, he said that they had a build-up option or a realise-the-assets option.

The hon. Gentleman said that he could see arguments for both, but I find it rather more difficult than he appears to do to understand the arguments in favour of continuing to develop the business model that clearly failed very dramatically in the events of last September. Let us examine the two options that he rightly identified, starting with the build-up option, if I may use that shorthand.

In effect, the build-up option would involve using state support to back a business model that caused the bank to land up in the situation that it found itself in in September. The state would be used as a sort of turn-around venture capitalist, with Ron Sandler taking a business in trouble and making a success of the problem that he inherited. I am not a banker, and I would not try to second-guess bankers' views about the realism of that option, but neither would I seek to second-guess the results of what actually happened. Moreover, I do not think that the addition of the state in the role of venture capitalist does anything to make it more likely that the option would be more successful the second time around than it was the first.

Photo of John Hemming John Hemming Liberal Democrat, Birmingham, Yardley

The right hon. Gentleman is right that there is no certainty about the situation, but does he accept that the biggest uncertainty has to do with the quality of the loan book, the organisation's key asset? Markets sell uncertainty, so the faster one tries to solve the problem, the bigger are the losses that may arise, with the taxpayer picking up the ticket.

Photo of Stephen Dorrell Stephen Dorrell Conservative, Charnwood

The hon. Gentleman makes a different point, if I may say so. I agree that there is a benefit, if we are going for the run-down option, in an orderly run-down. I understand that, and I think that he is right. However, it is a different argument from saying, as the hon. Member for Newcastle upon Tyne, Central apparently believes, that the way to deal with the situation is to put more money behind the business idea that landed us in the circumstances that we found last September.

In the circumstances that Northern Rock is in now, the Government should be clear that they are not proposing support for another attempt to make the failed model work. But that is what the hon. Member for Newcastle upon Tyne, Central apparently wants the Government to do. It is on exactly that question that the Government are being studiedly vague.

May I pick up a specific term used earlier in interventions on the Chancellor? He took some comfort from the proposition that Northern Rock in public ownership, as he calls it—a nationalised industry—would be run on a normal commercial basis, as if that was a term of art capable of independent analysis. The whole point about a commercial market is that commercial players look for new ways of exploiting markets. They look for competitive advantage. Northern Rock thought until last summer that it had found a new model from which it could derive commercial advantage. It was therefore being run on a normal commercial basis. It is just that that normal basis of seeking to exploit a new business model did not work. To attempt to confine the scope of the new corporation by saying simply that it will be run on a normal commercial basis begs all the difficult questions and gives absolutely no comfort to me on behalf of my constituents as taxpayers.

So I oppose the Bill not because I deny the benefit of providing a period for orderly management of the company's affairs, but because the Bill fails to take advantage of the opportunity to clarify a series of objectives for new management, which in my view should clearly be the orderly realisation of the assets of Northern Rock. I believe that that is right from the point of view of taxpayers and of avoiding state-subsidised competition in the marketplace. I acknowledge that it will be difficult for those who have been employed in the building of a business model that ultimately did not work in the marketplace, but I believe that those people's futures will be far better secured by re-employing them in a business model that works than by trying to offer them a second round in a business model that did not work.

Photo of John Hemming John Hemming Liberal Democrat, Birmingham, Yardley

Does the right hon. Gentleman accept that the business model that did not work was not covering the loan book by deposits and that, whatever happens tomorrow, the loan book is not going to be covered by deposits, so the same business model is being maintained?

Photo of Stephen Dorrell Stephen Dorrell Conservative, Charnwood

It is a question of what the objectives are during an avowedly transitional stage. I do not want to repeat that point. If we are rejecting the option of building up the bank on the previous model, we also need to be clear what is the alternative set of objectives that we are holding out. I think that a period of orderly realisation of assets is required. The thing that gives me real concern in the statements that the Chancellor has been making is the apparent implication that the only form of orderly realisation that he envisages is the sale of a business called Northern Rock. It could very easily be—I hope that Mr. Sandler's business plan will include this as one of the options that he will explore—that the best way of realising the assets of Northern Rock is to do so in parcels: to sell parts of Northern Rock to different purchasers.

The idea that success in this set of circumstances is creating a new, profitable enterprise does not seem to be self-evident from the facts. What is important is that there should be, as John Hemming says, an orderly realisation of assets to secure the interests of taxpayers, to avoid subsidised competition in an already competitive market going through its own difficulties, as we all know, and to secure permanent, stable employment for the people who undoubtedly face uncertainty as a result of having secured employment in a business that ultimately, sadly, did not work.

Photo of Doug Henderson Doug Henderson Labour, Newcastle upon Tyne North 6:15 pm, 19th February 2008

There really is only one issue before the House this evening, and that is the question whether nationalisation of Northern Rock is appropriate at this time. There is a secondary issue if a decision is taken to nationalise—although it would have arisen whether the bank was nationalised or not—of what happens to Northern Rock in business terms in the future.

If the Government had announced in September in response to the difficulties of which they were notified by Northern Rock that nationalisation had to take place immediately, there would have been an outcry from the Opposition. They would have said that the Government had not given time to think about what the issues were, that the Government's action was ideologically driven and that it was a return not to the 1970s but to the 1940s. The Government were right to ask what were the issues before us.

The Government were clear, and they had the support of the British people—people in Newcastle, shareholders, workers and even the Conservative party—when they said that the issue was not only about Northern Rock. Northern Rock is an important issue—believe me, it is in my constituency—but it is also important for Britain's financial markets. From the Government's point of view—I say this coming from Newcastle—the key issue is the future of the financial markets in Britain. They are a massive employer, they make a massive contribution to our economic growth, and they are important to our reputation as a trading nation. The Government made the right decision, which was to say that if the problems of Northern Rock spilled over into other sections of the financial community there would be serious problems for everyone, including even worse problems for Northern Rock.

What the Government did then of course helped to bolster Northern Rock, and that was welcomed more by depositors than anyone else, as was shown by their response. I supported what the Government said then, which was that Northern Rock would not stay as it was. There were three ways forward: to close the business as quickly as possible and sell off any assets; to find a private sector solution that could lead the business forward; or to nationalise the bank, which is the third option that we are dealing with today. It was right to try to find a private sector solution, and that was supported by the trade unions in Newcastle because they know, as I know, that people who have experience of retail banking and the mortgage business realise the pitfalls and know what is necessary to make the business tick.

If we could have found as a nation a private bidder to take over Northern Rock in a sensible way, that would have been by far the most desirable outcome. I am pleased that we have the support of the Liberal Democrats today on nationalisation. They were somewhat premature in jumping to the conclusion that nationalisation was inevitable, but that in a sense is history; it is behind us now. I believe that today the House will be overwhelmingly in support of the nationalisation of Northern Rock because there is no alternative. If we do not nationalise, there will be immediate damaging consequences for Northern Rock and for the rest of the financial industry, even today. That is how we must go forward.

I must say that I am still not clear what the Conservative position is. I do not want to wind this debate up into a big rhetorical battle between us and the Conservatives, but I have listened to what has been said on the radio and in some media outlets, and the message being sent clearly to the British people is that the Conservative party is against nationalisation, full stop, and that whatever happens to Northern Rock, its shareholders and its workers as a result of no nationalisation just happens. According to the Conservatives, if the consequence is that the business goes bust, people are laid off and the shareholders get nothing because Northern Rock is a business without value—the Conservative Front-Bench team has confirmed it today—we as a nation generally, and those of us in Newcastle, who have a special interest, must all live with that. If that is not the Conservative position, I would be extremely grateful if someone could tell me what it is.

Photo of George Osborne George Osborne Shadow Chancellor of the Exchequer

I am not sure whether the hon. Gentleman is aware that what he will vote for tonight could lead to very substantial job losses at Northern Rock. What the Chancellor of the Exchequer said at the beginning of his speech implied that the bank would not be able to operate in an aggressively commercial way, as Ron Sandler suggested it should. The Chancellor's view, by the way, is that the shareholders should get nothing. That is what the hon. Gentleman will be voting for tonight.

Photo of Doug Henderson Doug Henderson Labour, Newcastle upon Tyne North

I know what I am voting for tonight, and I think that my constituents will know, but even after the hon. Gentleman's intervention, I am not sure that my constituents or even his will know what he is voting for. If he is not voting for nationalisation, what is he voting for? We cannot just leave Northern Rock in abeyance, floating through some land where no one knows the terrain. People want to know the terrain. The people who work in the business want to know what the different political parties are saying and what Parliament will do about their jobs.

Photo of Doug Henderson Doug Henderson Labour, Newcastle upon Tyne North

I am taking up other people's time if I give way, but I will do so.

Photo of Andrew Love Andrew Love Labour, Edmonton

My hon. Friend asked what the Conservatives propose. They propose the direct loss of 5,000 jobs in Newcastle, and probably 6,000 other associated jobs. I read in my newspapers that the Conservatives have set up a committee to try to make inroads in the midlands and the north of this country. As long as they have that cavalier attitude towards jobs, it is unlikely that they will make any progress.

Photo of Doug Henderson Doug Henderson Labour, Newcastle upon Tyne North

I am grateful to my hon. Friend. It is not just in the north that they will make no progress; they will make no progress elsewhere, because people throughout the country will see what is going on. There is plenty of spin and the suggestion that the Conservatives are now a new party and all the rest of it, but when it comes to policy positions on things that affect people's lives, they do not make the tough decisions. We do not get much advice from the Conservative party these days.

I move to the second question: the future of the business. The Chancellor said in his statement yesterday that a framework agreement would be published shortly, and that we would then know the parameters for the relationship between the Government and the new board of Northern Rock. That is very welcome, but of course it is not a business plan. It is a framework between the Government and the board. The business plan concerns what employs people, creates wealth and gives the business a future.

Photo of Doug Henderson Doug Henderson Labour, Newcastle upon Tyne North

I am sorry; I cannot give way any more.

The business plan is the key issue. We as politicians have offered the country some advice in this debate, but I do not think that we are the best ones to judge what the business plan should be for Northern Rock. Others who are more qualified and know the details of running a business—the risks, the responsibilities and the rewards—are far better placed to make recommendations about the future business plan for Northern Rock. I hope that when the board does so, it will hold close consultations with the workers and their trade unions. The workers have been remarkably loyal over the past five or six months, during a period of great uncertainty. The workers still have huge anxiety about their future, so I hope that there will be no great delay, and that we will move forward quickly on that issue.

I have said that I do not think that politicians should outline the business plan, so I will not do so, but one of the key questions that has to be taken up by the board is: what is the marketplace? There is no easy answer to that, because the board has to judge not the marketplace of the past—which it could look back on—or that of today, next month or even next year. It has to take decisions on a much longer term. Mortgages last a long time, and they have to be financed. That is a key issue for the board, and there is no clear-cut plan.

Mr. Dorrell said that there was not enough clarity, but I do not think that we can have that clarity. In some senses, we have to take it on trust that the board will come up with commercial thinking, balanced against the principles of accountability—for which, of course, the Government are responsible, as there are vast amounts of public money at stake. The board cannot even say, "If we take out this mortgage book, this is how it will be financed." It cannot say whether such a book will be financed entirely from deposits, or from a mixture of deposits and other loan finance, because it does not know what the international wholesale money markets will be like in future. It will therefore have to plan conservatively, using an option that allows it to develop the business if the markets change. It will have to face up to that key issue. There is no certainty for the board in the decisions that it will have to reach.

The board will have to decide on the shape of the business, based on the long-term future. It will have to consider how many retail units it needs, whether high street retail banking will be the way forward or whether internet banking will take off to a greater extent, and whether it wants to be in the internet banking sector. It will have to consider what sort of back room it needs. For example, will it need large numbers of people working in call centres, or are there other ways in which the business can be developed? Those are crucial decisions for the future of the business, and there are no clear-cut or certain answers at the moment.

The board will have to decide on the number of people whom it needs to employ. Again, that will be a difficult issue for it to face up to. Northern Rock has grown at a remarkable pace in employment terms; it has gone from 4,000-odd members of staff in 2003 to more than 6,000 today. That was during a period of growth. I discussed the issue with the trade unions at lunch time, and they are aware of all those considerations. The board will have to decide on its staffing requirements for the longer term.

Earlier in the debate, I raised with the Chancellor the issue of the repayment terms that the Government can expect, and the period over which repayments will be made. It is almost impossible to answer that question with great precision. One could make a political statement and say that the repayments would be made over a certain period, but if that was not in line with the commercial operation of the business, there would be severe consequences, so there has to be some flexibility. That is why the business is in the public sector at this stage—so that the repayments that must be made, and made with interest, can be made over a period. That is vital, not only for the taxpayer, but for maintaining the business as a going concern. Hopefully, the business will go forward in a positive way, as was said by my hon. Friend Jim Cousins, who represents a constituency that neighbours mine.

Photo of Peter Lilley Peter Lilley Conservative, Hitchin and Harpenden 6:28 pm, 19th February 2008

The Government spent five months or more in prevarication before putting a Bill before the House. In so doing, they were primarily driven by political considerations. They were determined to avoid the current outcome if possible—and not simply because they thought that it would be bad as far as managing Northern Rock was concerned. Above all, they thought that it would be bad for the Labour party's image to be associated with nationalisation, hence the fact that even now they try not to use the word. That is a bad reason for long delay, but the Government are making a virtue of the delay, saying that it was good to consider all options, and that essentially there was no hurry.

There was no hurry until Sunday. Suddenly, on Sunday, it was essential to do everything in a day. Why? Again, I suspect, it was not because of any need on the part of the company. No detailed indications have been given by Ministers as to why the rush is necessary. The real reason is political. Because of the huge embarrassment of a Labour Government—a supposedly new Labour Government—reverting to the mechanism of nationalisation, they have decided to ram the Bill through in a day and minimise any discussion that we can have and the ensuing publicity in the press.

Was that necessary? No, as we know from the experience of Rolls-Royce. The Rolls-Royce Bill was more specific, and although it did not take a hugely long time to complete its passage through Parliament, it took longer than the Banking (Special Provisions) Bill will take. It was not necessary for the then Government to dress it up as a Bill to take over the whole of the aerospace industry; they made it a two-clause Bill to take over Rolls-Royce. There has been no explanation from Ministers about why a similar procedure has not been followed today.

Those were five wasted months because all that time Ministers could and should have been planning the tentative business model that would be adopted under nationalisation, administration or a Bank of England-led reconstruction. We are not told what the business model will be, not even in the broadest outline—whether it is one of growth or contraction, consolidation or business as normal. Nor have the Government spelled out how they will deal with the problems of competition and competition law. So we have had five wasted months, then suddenly one shameful undemocratic day of ramming the Bill through Parliament.

I shall say a little about the lessons in prevention and regulation that emerge from the issue. The problem arose because of the marketing of sub-prime mortgages through special investment vehicles. That triggered the closing of the market on which Northern Rock relied, and raised fears about Northern Rock itself because it was thought to be involved to some degree in that business. When such problems arise, we ought always to look elsewhere and see where they have not arisen and why.

Spain is a notable exception. No Spanish banks have any of the problems that I described. No Spanish banks have reported losses from sub-prime loans. Despite the fact that the Spanish property market is overheated and will probably cause problems of its own, Spanish banks did not suffer from the problem. Why? It is because Spanish banking law, as a consequence of past problems of failure to consolidate off-balance sheet debt, insists that all such debts and obligations are consolidated and revealed. There is a lesson for us there, but nothing in the Bill learns from that and makes sure that we do not suffer from those problems in the future.

The regulatory approach adopted by the FSA appears to need to change. There are two possible approaches for a regulatory body. One is to be essentially routine—to consider every case in the same way and adopt a box-ticking approach to regulation. That is what regulators will do if they are left to their own devices. What they ought to be doing, however, is focusing the bulk of their effort on areas where there is some reason for concern.

There was some reason for concern in Northern Rock. It was pursuing a very unusual policy. It increased its loan book by 50 per cent. in a year at the peak of the market. It offered the lowest mortgage rates and some of the highest interest rates. It offered 125 per cent. mortgages. It has, I believe, £1 billion of unsecured debt on its balance sheet. We are assured none the less, on the say-so of the FSA, but with the endorsement of the Chancellor, that it has a fine, high-quality loan book. I wonder whether he stands by that. In response to my question yesterday about why, if Northern Rock has a high-quality loan book, it is the most active in the field of repossessions, he failed to restate his assurance that Northern Rock has a high-quality loan book.

We ought to be examining the regulatory procedures and learning from abroad. One of the lessons from the Continental Illinois problem was the diagnosis that the regulator had relied on the information and procedures supplied by the bank for auditing its loans. I rather suspect that the FSA did much the same and the Chancellor no better, but we ought to establish procedures that look for a problem, rather than ask for reassurance from the management.

Photo of John Redwood John Redwood Conservative, Wokingham

Was it not an international and global problem and was not the regulatory failure the failure of the Basel agreement, which said to every bank, "Go for growth off-balance sheet. Go to growth by securitisation", in order to ensure less regulatory capital for that route?

Photo of Peter Lilley Peter Lilley Conservative, Hitchin and Harpenden

I am sure that my right hon. Friend is right, but it was possible to stand out against that, as the Spanish authorities did, and all credit to them.

We need to know more from the Government about the quality of the loan book and about the reason for the relatively high level of repossessions by Northern Rock compared with any other high street bank before we go ahead and authorise the public sector to take on huge obligations permanently through nationalisation.

The Conservative party is clearly opposed to nationalisation as the normal way of running large businesses. We are not absolutist about that. I revealed to the House the other day in another debate that I was probably the last Minister to nationalise anything. I had to do so after Saddam Hussein invaded Kuwait. I nationalised all the Iraqi Government-owned assets in this country. It took me five minutes to make the decision, not five months, and I was dealing with the problems created by the leader of an enemy Government rather than the leader of my own, which I appreciate is the problem that the Chancellor has had to put up with.

There is not a strong case for the nationalisation to which the Government have finally resorted, because it gives rise to inevitable conflicts. With ownership come responsibilities, and the Government as owner will not be able to escape those responsibilities. [Interruption.] My hon. Friend Mr. Osborne in an admirably clear and forensic speech spelled out what we would do and why we would not do what the Government are doing, and I support him.

I would be extremely reluctant to put myself in the position that the Chancellor will be in when it comes to the issue, for example, of repossessions. When he was in opposition and there was a serious level of repossessions in the 1990s, he urged institutions to exercise social responsibility. As owner of a bank that is most active in the field of repossessions, will he require his managers to exercise social responsibility? Yesterday he said no—he was going to take on the role of Pontius Pilate and tell the management to carry on.

Severe conflicts of interest are created. The Chancellor is paying Mr. Sandler £1.2 million a year—the two top people between them £2 million a year—and asking them none the less to get rid of that profitable way of life rapidly. Will they really have an incentive to bring the bank back to private ownership speedily? Unless they think that they will continue in their role when it is privatised, perhaps not. Many conflicts will arise from the decision, which the Government have not thought through, which they are not giving the House the opportunity to consider, and which will mean that in the long run Northern Rock moves from being Northern Rock to a national millstone.

Photo of Frank Dobson Frank Dobson Labour, Holborn and St Pancras 6:39 pm, 19th February 2008

I support the Bill because there is clearly no sensible alternative. I shall address the principal Tory objection to it, which is their objection to the concept of nationalisation, and their assertions that it will damage Britain's reputation for financial services, and that the fault for all that lies with the Government. Nothing is further from the truth.

The original mess at Northern Rock was caused by the irresponsible and stupid policies of its private sector bosses. When they got into that mess, they turned to other private sector banks and asked them for additional loans. Those banks refused to give Northern Rock those loans because it was such a bad risk. In other words, there was a market failure.

Northern Rock turned to the state and taxpayer to bail it out; to say that that was ironic would be an understatement. It was hypocritical as well. The bank was chaired by Matt Ridley—an old Etonian, like the leader of the Tory party. He is on record as saying

"it is vital we reduce the power and scope of the state."

When his bank needed bailing out, the first thing he did was turn to the state. He had to, because his enterprise-culture, old Etonian friends in the City had turned him down in the marketplace.

Photo of Kevan Jones Kevan Jones Labour, North Durham

Does my right hon. Friend agree that the chairman's only qualification for his job and salary of some £300,000 was that his name was Ridley?

Photo of Frank Dobson Frank Dobson Labour, Holborn and St Pancras

That may be the case. It brings to mind the time of the Oxford martyrs, when Cranmer, Latimer and Ridley were facing the Catholic experts. It was said at the time that in the arguments, Master Cranmer leant on Master Latimer, who leant on Master Ridley; Master Ridley leant on the singularity of his own wit. It is a pity that the Oxford fire snuffed out the wit in the Ridley family.

We need to come to the wider question of why the other banks turned down the request for help. The answer is that irresponsible banks in the United States, Britain, Switzerland, France and Germany had all lost fortunes on what they call "sub-prime mortgages" in the United States. Other people call that lending money to people who could not pay it back.

It was not just that the banks gambled and lost billions of dollars. None of them could trust what any other bank said about its potential losses. Some were making false statements and others refused to reveal what their losses were, so the banks cut down on their lending to each other, and none was in a position to bail out Northern Rock. The situation was not just the result of a failure of a single bank—it was due to the failure of the whole market. Those losses and that distrust have also stymied the Government's efforts in the past five months to get a private sector solution to the Northern Rock crisis. If the sub-prime mortgages crisis had not occurred, the chances are that there would have been a private sector solution to the problem, and everybody would have welcomed that.

On top of all that, the Tories and their friends in the news media go on and on about how nationalisation has damaged Britain's financial reputation in the eyes of the world. However, it cannot do such damage in a substantial part of western Europe, where there are publicly owned commercial banks.

In whose eyes do the Tories and their friends believe that Britain's reputation has been damaged? Is it in the eyes of Citigroup in the United States? It lost $24 billion in the sub-prime crisis. Merrill Lynch lost $22 billion, the Bank of America lost $5 billion and JPMorgan lost $3 billion. Has our reputation been damaged in the eyes of France, where Crédit Agricole lost $5 billion, Société Générale lost $3 billion and BNP Paribas lost $1 billion? Has it been damaged in the eyes of Germany, where Bayern LB lost $3 billion, Commerzbank lost $1 billion and Deutsche Bank lost $3 billion? Perhaps the Tories and their friends think that Britain's reputation has been damaged in the eyes of the Swiss, but UBS lost $18 billion, Swiss Re lost $1 billion and it has been revealed today that Crédit Suisse lost $3 billion.

Photo of Frank Dobson Frank Dobson Labour, Holborn and St Pancras

No, I have given way already.

Goldman Sachs, which has been advising the Government, says that it is concerned about Britain's reputation as well. Apparently, its representatives are patting themselves on the back because they lost only $1.5 billion in the sub-prime scandal—they were stupid, greedy and short-sighted. Mr. Lilley would agree that the institution was not properly supervised by the regulatory authorities in its country.

This morning, I had the pleasure of listening to Howard Davies of the London School of Economics, formerly of the Financial Services Authority—one would have thought that he would have been on the ball as far as making sure that things are properly regulated. He is a director of Morgan Stanley, which lost $18 billion as a result of its stupidity over the sub-prime scandal. Such people say that there is something wrong with the Government—it is an understatement to say that that is the pot calling the kettle black.

Photo of Frank Dobson Frank Dobson Labour, Holborn and St Pancras

No, I shall not.

Who else's concern should we fear, according to the Tories? Should we fear the concern of the bond credit rating companies—including Standard and Poor's, which gave triple-A ratings to sub-prime borrowing? The agency has been quoted with approbation by Tory Front Benchers this very day. Perhaps we should fear the concern of monoline insurers in the United States. Their normal business is, apparently, bordering on collapse because they have been insuring speculators who got their speculations wrong.

I have been talking about all the people who were apparently very concerned and bothered about the state of the British financial services industry—entirely as a result of the Government's action. I should like to ask Mr. Osborne, who clearly does not like the truth, a question. When he and his mates were in Davos, were they sticking up for Britain on this issue, or were they talking Britain down? That is what they do most of the time on radio and television these days.

Photo of Frank Dobson Frank Dobson Labour, Holborn and St Pancras

No, I really need to get on.

The Government have had to act to preserve the integrity of the financial system and public trust in banks, and to protect the depositors and staff involved at Northern Rock. They have bailed out a bank that failed because of the greed and stupidity of its top management. That bailing out by the public sector was necessary because the private sector was in such a state of distrust that it would not or could not help. That was a consequence of the greed and stupidity of the lending policies of international banks on sub-prime mortgages.

Instead of criticising the British Government, the Tory party and the ill-informed alleged financial experts who come on radio and television—and get a creepy response from the interviewers that no politican, not even a Tory, would get—should accept that the Government are the only ones in the whole affair who acted responsibly when the market failed. This is a market failure, not a Government one, and that is why we have had to introduce the Bill today.

Photo of John Maples John Maples Deputy Chair, Conservative Party 6:48 pm, 19th February 2008

Frank Dobson should applaud all the losses, because they have been a gift of billions of dollars from big international banks to poor people who could not otherwise have got mortgages; I would have thought that he would be in favour of such Robin Hood-ery.

I want to make a couple of points. If a bank were not involved, we would not be talking about a rescue operation at all. Such an operation was put in place to save not Northern Rock, but the banking system—it was to stop there being system failure. We should not be concentrating on that particular company and why it is good for Newcastle, for the north-east, for jobs, or whatever. That is not why the Government stepped in to save it—they did so because of the threat of system failure. In any other circumstances, that would not be the case at all. If some of the Labour Members who have spoken substituted any other industry for the word "banking" in their speeches, they would find that they sounded pretty old-fashioned.

By any standards, £100 billion is a huge amount of money—about 22 per cent. of annual Government spending, or four times the defence budget—and the Government's strategy should be to recover that money for the taxpayer as soon as possible and with as little risk as possible. If that involves some redundancies and the north-east's favourite building society not turning into a big international bank, then I am sorry, but that is what happens in business. The Government dithered around unnecessarily for six months. When they found that Lloyds bank—one of the biggest banks in the country—could not take on Northern Rock without a Government guarantee or loan of £25 billion, they must surely have realised that the chances of any of the other people who paraded their interest doing so were negligible. They gave credence to a possible bid by Richard Branson, whose company, which had never run anything of such size or scale before, planned to put in a bit of new management and £200 million of new equity—a lot of money, but negligible in the context of a £100 billion balance sheet—and fiddled around with bidders who never had the equity to do the deal. The Government either did not recognise the realities of the situation or did not have the courage to make the decision then that they have found themselves forced to make now.

I ask the Chief Secretary to deal with the question of nationalisation versus administration. Nationalisation will give the Government a huge amount of headaches. They will become a debt collector on a massive scale; if they have never been in the debt collection business before, they have some nasty shocks in store. On Northern Rock's 2006 balance sheet, there were £8 billion of unsecured loans, which I suspect will be difficult to collect. There are 125 per cent. mortgages, which must inevitably involve a bit of unsecured lending as well. Repossessions are running at 50 a week and will probably step up as the economy slows down, as looks likely. The Government have taken on all the bank's liabilities, and they have almost inevitably taken on the necessity to make thousands of redundancies—not all 6,000, I guess, but certainly many of them—as well as an unknown and unquantified pension fund deficit. If the bank had gone into administration, that would have provided far greater flexibility to deal those matters without taking on those responsibilities. That alternative would also have had the great advantage—I hope that the Chief Secretary will deal with this point—of avoiding the need to deal with shareholders' compensation, because they would merely have got what was left at the end, probably nothing. Nationalisation means having to deal with compensation, and, given that there are some pretty tigerish hedge funds out there, I suspect that there will be some lengthy and expensive litigation.

A casual glance at Northern Rock's balance sheet makes one wonder how good is the security for taxpayers' money. I mentioned the unsecured loans; there are also some derivatives and intangibles, and a lot of the good mortgages are already securitised at a loan-to-value in excess of 100 per cent. The ability to recover all its assets to satisfy the taxpayer seems to be limited, which is why I worry about the idea of continuing to run it as a business.

I checked Northern Rock's website today. Even with a Government guarantee, it offers a better savings rate, by nearly 1 per cent., than Cheltenham and Gloucester. I use that comparator because it happens to be where my own mortgage is, but it is owned by Lloyds bank and is a long-standing and very reputable lender and savings institution. One of my richest friends in the City told me the other day that he and all his friends had put all their money into Northern Rock, because where else could one get 6.5 per cent. with a Government guarantee? It is ridiculous that it is being allowed to do that. That arrangement is not only uncompetitive—it encourages the company to make more unsecured and 125 per cent. loans in what looks like a dodgy and difficult housing market. If it is allowed to carry on doing that, we will find that it is harder to recover our money than it is now, and it will take longer. If it goes on making new loans, the recovery from cash flow of the Government's money and guarantee will inevitably take longer. The first thing that the Government should tell Ron Sandler to do is to stop making risky loans. We want the credit criteria under which Northern Rock lends to be tightened up considerably so that they are the same as those of other lenders. If that results in a run down in the size of the business, that is probably a good thing.

Moreover, the bank cannot be allowed to distort the market by offering above-market interest rates with the backing of a Government guarantee. The Government guarantee ought to mean that people are willing to save at National Savings and Investments or gilt rates, not that they need a premium. Whether it is in administration, liquidation or a nationalised state, we must instruct that the company be run for the benefit of the taxpayer and instruct it to recover the loan and the guarantees that are outstanding, which now, in aggregate, must amount to more than £100 billion. That must be its objective in any of those formats; the one that the Government have chosen is nationalisation. If one puts other political objectives into the mix, the Government will risk huge sums of money. In the context of jobs alone, we are talking about £15 million per job.

Photo of John Hemming John Hemming Liberal Democrat, Birmingham, Yardley

Given the expensive loans from the Bank of England and the high rates of interest that are being paid, if Northern Rock were in administration, where would it get the money to pay the phone bills and wages?

Photo of John Maples John Maples Deputy Chair, Conservative Party

It has a cash flow from mortgage repayments and interest payments. Serious consideration should have been given as to whether the bank should just sit back, make no new loans, collect the interest and repayments on debts as they flow in, and, if and when the market recovers, perhaps securitise and sell off some of the other mortgages. That would be the fastest and probably the most secure way for the taxpayer to get their money back.

If the Government had taken the administration route they would not have needed to deal with compensation. The shares were worth nothing without the Government's guarantee. I hope that they are going to hang tough and not pay compensation, despite feeling sorry for the small shareholders. Having said that, most of the shareholders seem to be people who were given their shares on demutualisation or big City operators who bought the shares in the distressed circumstances thinking that they might be able to railroad the Government into some kind of rescue. They are not little old ladies in tennis shoes with their life savings in the bank.

Photo of Jim Cousins Jim Cousins Labour, Newcastle upon Tyne Central

Does the hon. Gentleman acknowledge that almost half the assets of Northern Rock are in a securitised vehicle that has several more years to run? If we attempt to realise those assets in the short term, we will dump them at far less than they are worth—or we have to live with this until that securitised vehicle comes to the end of its life.

Photo of John Maples John Maples Deputy Chair, Conservative Party

Yes, of course I understand that. It may be possible, if market circumstances change, to refinance those vehicles and the other mortgages that are not within them. However, I still think that the securest way of the taxpayer getting their money back is for the company to stop doing new business, stop making new loans and just collect the cash flow as it comes in. That would pay off the securitised creditors and the taxpayer.

I have not been a Member of this House for as long as some of the people sitting in here—actually, that does not apply to many; I think that Frank Dobson is one. There has been a banking crisis every 10 years since I came here, and there was one in the 10 years before that. They come along at fairly regular intervals. They take different forms, but they are usually the result of over-exuberance on the part of the management, and the Government end up having to do something to bail those companies out. In the case of this crisis, we have found that the Bank of England cannot organise a rescue for a modest-sized mortgage bank. In the past, that has not been the case. With Johnson Matthey and with County bank, the Bank of England was able to organise a rescue.

We must face the fact that in future even such modest-sized institutions will have an implicit Government guarantee. That encourages irresponsible behaviour. If someone can get 6.6 per cent. from an institution that is taking greater risks than one that will pay 5.5 per cent. but also has a Government guarantee, why should they worry? That is bad business for the Government, because it will encourage people to save with the marginal and more risky operators. That is not only unfair on the people who operate in a safer environment but stores up trouble for the Government in future, because banking crises may come along more frequently than once every 10 years. That is one of the aspects of moral hazard, which gets discussed every so often. If we are, in effect, standing behind the liabilities of the British banking system, then we as the taxpayer need to know that the Financial Services Authority is regulating banks much more closely, and particularly watching those that are paying high rates of interest and making risky loans.

I end by referring to a point that I made in a previous speech on this subject. When the Bank of England was given independence to set interest rates, the Government made a mistake with regard to the regulatory system. I understand why they did it, but taking bank regulation away from the Bank and giving it to the Financial Services Authority was a mistake. First, as lender of last resort, the Bank needed to know, and did know, a huge amount about different banks. I experienced that myself when I was a Treasury Minister in a very junior capacity when the Bank of Credit and Commerce International was in trouble. The Bank of England's intimate knowledge of the banking system was extraordinarily valuable in that situation. At that point, we also had two people talking to each other: the Governor of the Bank of England and the Chancellor of the Exchequer. We now have three, and I think that having three makes things twice as complicated as they used to be. I urge the Government to look again at how the system is regulated because giving bank regulation back to the Bank of England would be a better way of doing things.

In future, once we have given an implicit guarantee on the liabilities of all the banks, we will be in a different ball game from the one we were in before—one where we cannot organise rescues. We will have to take banks into public ownership, make loans and give guarantees. In the past, we were able to organise rescues, but if that is not possible, we will be in a different ball game. There will be a different attitude to regulation, which demands a greater level of risk-averseness on the part of the Government.

Several hon. Members:

rose —

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

The time remaining for this debate is somewhat limited, and I can see a number of Members hoping to catch my eye. May I please ask Members to reduce their contributions voluntarily so that more Members will be successful?

Photo of Phil Wilson Phil Wilson Labour, Sedgefield 7:01 pm, 19th February 2008

Speaking as a north-eastern MP, I believe that, on Northern Rock, the Government have taken the hardest and most difficult of decisions, but none the less, the right one. I support the Bill. The Government did not rush to take this decision, and they have found themselves dealing with a problem that is not of their making. It would have been a mistake to act in haste. If the Government had opted for temporary public ownership five months ago, the Opposition would no doubt have said that they should have looked for a private buyer first.

The Government's approach has been consistent in its aim of achieving the best possible outcome for the country. The Government were guided by the need to maintain financial stability, to safeguard depositors and to protect the interests of the taxpayer. The decision to take Northern Rock into temporary public ownership was not ideologically driven, but unlike the Conservatives, my party knows that from time to time it is right for the Government to intervene to protect the best interests of the country, to save jobs and, on this occasion, to promote the economic well-being of a region that suffered so much under the Opposition.

Photo of Rob Marris Rob Marris PPS (Rt Hon Shaun Woodward, Secretary of State), Northern Ireland Office

Would my hon. Friend agree that just one measure of the acceptance of the nationalisation of Northern Rock is that the FTSE yesterday—the day after the announcement was made—was up 2.8 per cent.? I believe that it has gone through 6,000 today.

Photo of Phil Wilson Phil Wilson Labour, Sedgefield

My hon. Friend makes a good point. Yesterday, a lot of the editorials in the newspapers in the northern region, as well as the one in the Financial Times, were very much in favour of the Government's decision.

The dividing factor between the Government and the Opposition is that my party has a policy on this issue. The Opposition started with at least four—from nationalisation to administration, from private sale to restructuring by the Bank of England, which seems to me to be a kind of nationalisation in itself. They started with four, dithered from one to the other, and have ended up with none. To lose one policy can perhaps be excused, but to lose four is rather careless.

On this issue, it is the Opposition's claim to economic competence that has dithered into oblivion, not the Government's. Northern Rock and the Northern Rock Foundation are institutions that employ thousands in the north-east and in supporting communities throughout almost every constituency in the northern region. As an MP in the north-east, my concerns are the local economy, the effect of any job losses at Northern Rock and the future of the foundation. I am pleased that the foundation is being funded to the tune of £15 million per year for the next three years, and that the board is being asked to look into the long-term future of the foundation as well.

Northern Rock employs about 6,000 people, and I know that Ron Sandler is drawing up a plan that will better define the future of Northern Rock. I urge him and the Government to work closely with the trade unions, such as Unite, which represents Northern Rock staff, to ensure that jobs can be protected and employment terms promoted.

Any crises faced by Northern Rock that were left to the Government to sort out were not of the Government's making. Under these circumstances, temporary public ownership of the bank was the best way of securing the future of Northern Rock, its employees and the regional economy. Instead of carping from the sidelines, the Opposition should join us in the Lobby tonight to help to secure a future for Northern Rock, and to help to build the economic base of the north-east, which has thrived under this Government during the past 10 or 11 years. But they will not do that. If they had their way, there would be no bank—

Photo of Phil Wilson Phil Wilson Labour, Sedgefield

I am just coming to the end.

If the Opposition had their way, there would be no bank and no jobs. We know about the Tories and the north-east of England. They have a long history of having no empathy with the people of my region, and unlike their policy on Northern Rock, that approach has remained consistent.

Photo of John Redwood John Redwood Conservative, Wokingham 7:05 pm, 19th February 2008

I have declared my interests in the register.

I want to see this business survive, recover and flourish. I quite understand its importance to the north-east. I do not think that the nationalisation model on offer is the way to do that. Indeed, as those on my party's Front Bench have made clear, it could well be that given the constraints on competition policy and the uncertainty of the Government over the business plan, nationalisation will mean substantial redundancies and a winding down and a scaling back of the business—the very opposite of what Members in the north-east want.

I propose, as I have consistently advised the Government, that the Government and the Bank of England should act as an intelligent and tough bank manager to this business. They are the bank manager, because they are the lender of last resort, and they gave a large loan to the bank when it was in difficulties. What they should have done was taken enough asset protection for the taxpayer so that there was no argument about getting our money back. They should now secure what assets they can, which they need to give us protection, and then agree a timetable for the repayment of the money. They should agree a timetable that makes sense for both parties. Of course, if the parties cannot agree it, they can dictate it because the Bank of England is the only bank that will lend to this business, but it is better to agree it. It should be tough; there should be exacting targets to get the money back.

Under such a course of action, Northern Rock has all sorts of options. It has the opportunity to get money back if the markets get freer and it can refinance. It has the opportunity to get money back through cash flow, profits and the success of its business. If it cannot do either of those things, it can always pay the money back—assuming that enough asset cover has been secured, as we were told originally—because it can sell assets. The pace of the sale and the cash generation should be agreed between the bank manager and the business. The bank manager should lean on the bank to go further and faster, should watch inappropriate spending and should ensure that the bank is not spending unnecessarily on capital expenditure, high wages or elaborate bonuses. People should not be earning bonuses in a business that is under this much pressure. I submit that that is a far better model than the nationalisation model, with all its uncertainties.

As someone who has spent time in business and has, from time to time, bought a company, what I find breathtaking about the business before the House is the lack of the information that a buyer of any size of business would wish to have, let alone the purchaser of the biggest business, in cash terms, ever bought on behalf of the taxpayer. But we do not know the price. We are told that the Government have decided to buy the business without negotiating the price with the sellers—or without deciding what price they are going to impose on the sellers. We are told that we have to rush the legislation through in a week, but the Chancellor cannot even tell us how long it will take the Government to work out the price to complete the deal. It is obvious that they cannot complete the deal until they know the terms of transfer for the shares. Why the rush? Why can we not do some due diligence on the business first, as they will have to, when trying to work out a price for the compensation, so that the House knows what it is buying?

As the shadow Chancellor said, we do not know about the quality of the assets we are buying. There is no analysis of the repossession rate, past and future, or evidence about the quality of the lending made. There is no evidence about how many of the loans are at the 125 per cent. rate and no analysis of the unsecured loans. Such things are the first things someone would ask about if they were thinking of buying such a business. We have no analysis of the properties and the branch network. We have no idea whether there is surplus property, or whether the business needs to carry on with its big capital programme to build new property. There is no environmental report on the state of the properties and no report on the leases, or on the commitments to those property leases. Are they long leases? What would be the cost of paying some of them off if they are on inappropriate property?

There is no duty of due diligence on the people whom we will employ on behalf of the taxpayer. There is no human resource report, or report on the contracts of senior executives. We have no idea of the cancellation costs for senior executives if some proved not to be wanted in future by the new executive team. We have no idea of the number of write-offs and losses that the new executive team will want to record in the first set of accounts to clean everything up and make the task a bit easier. Somebody coming in on a salary of more than £1 million would be unlikely to want to accept everything as a given and to make no adjustments to the accounts.

We do not know from the Treasury what the impact on public borrowing will be. We do not know what the capital expenditure programme is and how much will have to go into public accounts because it cannot be funded out of the cash flows of the business. We know nothing about virtually anything that we are buying or about the risks that we are taking on.

There is no pensions report. We do not know the impact of the pension regulator's latest idea that pension funds have been understating the longevity of the people in their funds and that the allowance made for that must be increased. The pensions liability, like contracts with the staff and any redundancy payments, will now rest with the taxpayer.

It is a disgrace that no normal financial and due diligence information is available on the business before we commit that huge sum of money. My hon. Friends have been generous in saying that the commitment is £110 billion. It could be more than that sum, which is the stated liability on the balance sheet, but does not include the pension, redundancy, property and environmental liabilities and all the other things that might come out of the woodwork. When one buys a business, one normally agrees a price in principle, fulfils due diligence requirements and either decides that the price is right or agrees a revised price in the light of what one has discovered.

Will Ministers please think again? Will they perform some due diligence duties for the taxpayer? If not, they will rue the day because they will lose us a huge sum of money and end up making unpleasant decisions, which will not suit the north-east.

Photo of Mark Todd Mark Todd Labour, South Derbyshire 7:11 pm, 19th February 2008

I support the Bill, but with considerable concerns. For me, the measure is emphatically the least bad option. I have listened carefully to the option that Conservative Members presented and it held some appeal for me. However, the Bill offers greater control over the process of realising the assets that we require to get back the loans that we have made to the business. Control makes the difference, enabling us to manage matters to achieve the outcome that we seek. I shall consider that outcome shortly.

First, I want to list some of the reasons for my considerable hesitation. Many have already been covered, so I shall deal with them in shorthand. We do not know whether we will survive a shareholder court challenge. As has been said, the companies involved are well resourced and had thought their way into the outcome when they bought into the business. I am optimistic that we will survive, but there is nevertheless a risk.

Competition is a predictable concern in the marketplace and I have some sympathy with it. I expect dealing with challenges from competitors to occupy a significant amount of the business's resources, if it is run in a particular way.

Staffing has been mentioned. The state will now be responsible for retaining staff and maintaining the morale of those employed in the business, as well as for some of the redundancies that are likely to befall under any business model.

We do not know the company's asset base. Mr. Redwood was accurate about that. We know neither the assets thoroughly enough to decide whether we are buying what we are told is as good as any mortgage-lending business in the land nor the liabilities that we are taking on. I doubt whether I have bought businesses on the scale that the right hon. Gentleman has handled but I have dealt with business acquisitions and I would expect to know a great deal more about a business that I was acquiring than the information that we have been offered to date.

We will have to take on running a bank at a time—though I have not followed the shares in the past couple of days—when banks' values have been hit hard in the past month or so and I would expect competition to be vigorous. I cannot say with certainty that the business will thrive in that environment. We do not know.

We also have the task of clearly communicating our limited purpose. Nationalisation can suggest greater state engagement in the financial services sector than is perhaps intended by the move.

Accommodating the governance of a retail bank into a state system will be uncomfortable and provoke difficulties, such as dealing with repossessions and other matters that colleagues have mentioned. I have plenty of anxieties about what may lie ahead.

We desperately need clarity of purpose. My purpose is risk limitation. From a business perspective, we are taking on many unknowns. I therefore look to holding our risk to the absolute minimum. I am worried about how easy that will prove. The most obvious strategy for achieving that is, as several Opposition Members said, to pursue an ordered—or, I suspect in some instances, less ordered—run-down of the business and basically farm money from the existing loan book as far as possible and look for buyers at appropriate times. The debate has shown the difficulty of doing that—I put it gently—when the bank is in political hands.

My hon. Friend Jim Cousins spoke powerfully for his community and I suspect that many would have done the same. There will be challenges from those who perceive other perspectives and purposes in the state owning the bank. It will be difficult in a political context to maintain a focus on the narrow objective of returning to the state the assets that the bank has temporarily held. I am worried about that.

Some of the remarks made in the first few days conveyed inappropriate signals. Suggestions were made of the possibility of aggressive strategies by the bank as well as understandable assertions of support for the Northern Rock Foundation. Again, that is an indication of a wider purpose beyond the narrow issue of recovering our resources, and it should concern us. I am worried about the mixed messages and I want reassurance that we have a firm purpose of recovering the assets loaned to date as rapidly as is reasonably possible. The advantage of state ownership is that it at least allows us to dictate the timetable in a more ordered way, and more sensitively to the communities that are involved. I firmly believe that a clear statement of that purpose is required as early as possible.

I support the Bill, but the critical questions are why we are taking such action and how we intend to achieve the outcomes. Let us clearly express the answers as early as possible. That would be easier for the communities involved than maintaining perhaps an illusion that we will build some great financial institution in the north-east. I do not perceive that as a reasonable purpose for Government or a reasonable use of the risks that we have deployed today.

Photo of Michael Fallon Michael Fallon Chair, Treasury Sub-Committee 7:19 pm, 19th February 2008

That was easily the most realistic speech that we have heard from the Government Benches in this debate.

I have learned two things about temporary legislation introduced over the years. The first is that it is rarely temporary. In the end, it is usually extended or converted into a more permanent form, which is why we need to consider the Bill carefully. The second thing is that temporary legislation is usually bad legislation, drafted too quickly, scrutinised too little and with implications that are not easily understood. We already know that the Bill has a life beyond 12 months. We have been told by the Chancellor, quite openly, that some of its provisions may be translated into the major banking reform Bill, which will be presented to us after Easter. We know, too, just how loosely drafted the Bill is, thanks to the excellent speech by the shadow Chancellor. We see the wide-ranging powers that are being taken, not simply over banks, but over building societies.

The key to the Bill is clause 2(2), under which the Chancellor is taking formidable powers to nationalise any bank and prop up any building society, which can be exercised for two purposes. The first is for

"maintaining the stability of the UK financial system" where there is

"a serious threat to its stability", while the second is for

"protecting the public interest in circumstances where financial assistance has been provided".

We have spent too little time in the Chamber talking about this, because we have had so little time, but nowhere in the Bill are those terms defined. What do we mean by "financial stability"? How do we define a "serious threat to financial stability"?

That takes us back to the untested premise of the Government's original authorisation of an operation of lending of last resort. The Chancellor concluded that there was systemic risk. He did not show us what that risk was, he did not define it and he did not have it externally validated. Indeed, he did not do anything to allay the suspicion that some of the systemic risk was to the Government's political stability in the run-up to a general election.

We have had endless discussion about systemic risk without any of us being clear about how we should measure the threat. We need that clarity; otherwise any bank with a significant number of UK customers or any building society will come hammering on the door, saying that there is a threat to the UK financial system. We need to be clear about what that threat is. Is it a series of bank failures—a domino effect through a range of building societies—or a threat to the integrity of the clearing system? We need to be much clearer.

We also need to be clear about who decides whether there is a systemic threat. Under the Bill, it is simply for the Chancellor to decide, all on his own. That is wrong. As the Treasury Committee concluded, the Bank of England should advise the Chancellor. Of course he has to authorise public money to support a particular operation, but he should have to do so on the advice of the Bank of England.

The other thing that I want to concentrate on is the extraordinary provisions in clause 11, which I asked the Chancellor about yesterday. I asked him what a clause enabling him to give any amount of money to any building society that might need financial assistance was doing in the Bill. He said that he thought it "prudent" to include such a clause. That was the only explanation that we had. He said that he would speak about clause 11 today, but he skipped it altogether. Clause 11 is the most extraordinary clause. It empowers the Chancellor to alter any enactment, without any restraint or definition of terms and conditions, and simply to apply public money to any building society that he deems ready to receive it. There is no explanation for that.

This is a bad Bill, for three reasons. First, it says that it is temporary, but it is not going to be temporary—on that, at least, I can agree with Jim Cousins. The Swedish had their banking crisis in 1991, when they nationalised the biggest bank in Sweden, which is still partly publicly owned today, 16 years later. British Leyland was publicly owned for 13 years. We are going to be stuck with Northern Rock for a great number of years, but we have seen no timetable either for the repayment of the money that we have lent or for managing the exit. Indeed, shareholders have seen no timetable for paying them the compensation that they look forward to.

Secondly, the Bill is not a specific measure—a fact that my hon. Friend Mr. Osborne brought out so clearly. It takes general powers, but I am not at all persuaded that hurrying to do that is a good thing. If there is a specific problem that has to be dealt with in an emergency, let us deal with it, rather than taking such sweeping general powers in such a rush.

The third reason I oppose the Bill is that it sends out the most appalling message from the British financial system, which is that any bank or building system, however incompetent its directors or however great the regulatory failure of its supervisors, will now come to the door of the Chancellor and ask to be bailed out. This is bad legislation.

Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury) 7:25 pm, 19th February 2008

I would like to make a couple of preliminary remarks. The first is that the Bill is intended to allow for the nationalisation of Northern Rock, which will then operate at arm's length from the Government, with commercial autonomy for its decisions. However, that will be predicated on a framework agreement covering the relationship between Northern Rock and the Government that is yet to be published. My second remark is that the nationalisation expected to flow from the Bill has apparently been tested against the two private sector bids and deemed to represent the best value for taxpayers' money. I would like briefly to test that assertion.

On 23 September last year, only a week or so after the Northern Rock crisis broke publicly, the BBC reported that at least 12 of the UK and Europe's biggest banks had declined to buy the bank. It quoted The Sunday Times as saying that the

"banks have estimated that it would require...capital" of

"as much as £20 billion...to successfully refinance Northern Rock."

Given that that figure was likely to have been the maximum taxpayer liability, should everything have been sought from a private sector concern, and given that it may well have been lower, in loans and guarantees facilitating a private bid, I am curious to know how the Chancellor and those on the Treasury Bench can argue, five months down the line, that a £110 billion liability for the taxpayer represents better value for money than a rather more modest contribution in loans and guarantees last autumn.

I said that the framework agreement between Northern Rock and the Government has not been published. In addition, the new framework to regulate banking in the UK and protect depositors is out for consultation. The Chancellor said that that would take some months and require primary legislation. There are a number of questions about the Bill and the sweeping powers that it contains. Given that the bank will operate at arm's length from the Government, why should we pass the Bill in the absence of the framework document?

There are other questions to do with why we should support the Bill, given that we are to have a nationalised bank, with £110 billion of taxpayers' money, operating within a tripartite arrangement that many believe is not fit for purpose and which the Government intend to replace anyway. That tripartite arrangement not only is not fit for purpose, but may have been at least partly responsible for stopping or not facilitating a quick and early private sector takeover of Northern Rock last year, because of the confusion among the FSA, the Treasury and the Bank.

Clause 3(1), entitled "Transfer of securities", says that the Treasury may by order transfer securities to

"(a) the Bank of England;

(b) a nominee of the Treasury;

(c) a company wholly owned by the Bank of England or the Treasury;

(d) any body corporate not within paragraph (c)."

However, clause 8 says that if securities have been transferred to a specific named person under clause 3(1)(a) to (c) following nationalisation, provision can be made for further transfers—that is, transfers back—to the private sector. However, clause 8 seems to exclude any reference—I will stand corrected if I have missed it—to a body corporate that is not a company owned by the Bank of England or the Treasury. If that is the case, primary transfers of assets can be made to that body, but on my reading of the Bill there is no ability to transfer them back to the private sector later.

Clause 4, on the "Extinguishment of subscription rights", allows the Treasury, where it has made an order providing for the transfer of securities from a deposit-taker, to acquire the securities not only of the deposit-taker, but of any of its subsidiaries,

"whether the rights have been granted by the deposit-taker or otherwise."

That provision seems extraordinarily wide, and I am concerned that it might preclude the breaking up of a group that is in trouble, where subsidiaries could be sold as going concerns to raise cash. It does not seem to place any restriction on securities from a subsidiary being acquired, even if they are worth more than the indebtedness of the principal deposit-taker, which could be the reason for the necessity for assistance in the first place. If that is the case, I suggest that this is a gaping hole in the Bill.

The Bill is also riddled with terms such as

"where the Treasury make...an order" and the Treasury

"may by order make provision for".

In the absence of detailed orders or a framework agreement between the bank and the Government, however, it is difficult to know precisely what the Government intend the Bill to do.

The Bill is doubly confusing because clause 13(2)(a) states that orders and regulations

"may make different provision for different cases or circumstances".

The Government are expecting us to vote for a pig in a poke, because the provisions are so wide and utterly undefined, and the secondary information that we need is simply not available.

We are certain that everything that should be done to preserve the integrity of the banking sector must be done, not least because of the 127,000 jobs in Scotland that depend on banking and finance. However, the Bill before us tonight should have been a Northern Rock emergency nationalisation Bill, containing only a few clauses. We have yet to determine whether we will support the provisions at the end of the day, and we will look at the amendments that have been tabled, but we are dreadfully disappointed by the generality of the Bill, by its extremely wide scope, and by the ability of the Government to do almost anything by order, when we should have had a much tighter and more focused emergency nationalisation Bill.

Photo of Richard Spring Richard Spring Vice-Chair, Conservative Party 7:31 pm, 19th February 2008

This is called the Banking (Special Provisions) Bill, but it should really be called the Banking (Pig in a Poke) Bill. We do not know the price, or the cost, of the whole exercise. We do not know what we are buying into, or for how long.

The demise of Northern Rock arose out of the sub-prime mortgage crisis in the United States. However, it happened specifically in this country because of the national situation here. Of course there was managerial excess, but it was the asset-based, overspend economic policies pursued by this Government, and the regulatory system instituted by the Government, which failed. We did not see queues of people in Paris, New York, Sydney or Beijing concerned about their deposits. We were in a unique situation.

We have before us no clear business plan, either for our benefit or for that of the European Commission—it will have to wait another month—so we are being asked to sign a blank cheque. What on earth have Ministers been doing? Why did they not develop some sort of plan B over the past five months in case they had to go down the route of nationalisation, when such a huge sum of taxpayers' money is clearly at risk? Now we understand that the very details of how the bank will be faring are to be denied to us through an exemption from the Freedom of Information Act 2000. That is an absolute disgrace.

The Chancellor has been tilting at City bonuses recently, yet a whole series of bankers and lawyers will be rejoicing at the opportunity that has now been presented to them. When will we know exactly when fees are being dispensed, and how much they will be?

My hon. Friend Mr. Osborne has dealt with the crucial element in the Bill, which is the right being given to the Government to nationalise other financial institutions. The excuse for this has been hybridity. On a moment's reflection, however, does it not become clear that to keep the power to nationalise in reserve, even if for supposedly technical reasons, sends out a truly incredible message to the outside world? It is no wonder that the Chancellor finds it impossible to say the word "nationalisation". Now that depositors are fully protected by the state, will Northern Rock draw savings away from other financial institutions? How will the Financial Services Authority monitor this? The consequences for other financial institutions could be dire. What will they be able to do about it?

We have come full circle because of the failure of the regulatory system. We have heard much about the arm's length relationship between the Government and the new management of Northern Rock, but that has come from a Prime Minister whose micro-management is famous. We leave the debate today with myriad questions about how Northern Rock will be run, and about what information will be made available to Parliament, when the situation is at present beyond opacity. Despite the dithering and delay, the fiscal excesses, the regulatory failure and the massive risk to the taxpayer, we can only hope that Ron Sandler and his team will salvage something of the impaired reputation of this country, which has been so brutally and incompetently tarnished by this Government.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow 7:35 pm, 19th February 2008

The reason we are here today is that, uniquely among any of the 192 countries in the world affected by the credit crisis, we have suffered a run on a bank. The banking supervisory regime failed to spot the risks posed by the reckless business model of Northern Rock, and when the risks were finally spotted, the tripartite authorities failed to act decisively—mainly because no one was clearly in charge.

The reason for that is the failure of the present Prime Minister and Chancellor—when, as Chancellor and Chief Secretary, they introduced the new banking supervisory regime—to anticipate what might happen in a significant financial crisis. No stress testing was carried out for the possibility of a major bank getting into serious difficulty. That barely seems credible now, but that is what we established through the Treasury Select Committee.

We are now presented with a Bill that, according to the Chancellor, will give the Treasury the power to determine threats to the financial stability of individual institutions. As many Members have pointed out, this will apply not only to Northern Rock but across the banking and building society sectors. The Chancellor's arguments for the Bill, and his recent actions, show that he is obviously confused. He says that the Bill is needed to provide for clear management accountability at Northern Rock, but he also says that he wants to consult in the coming months on the regime to improve the management of financial stability in the UK economy. Why, then, is he pre-empting his own review by using the Bill to give the Government wide-ranging powers that go way beyond the problems of Northern Rock and will extend to all deposit-takers?

The Chancellor is ignoring the recommendations of the Treasury Committee's report—and pre-empting his own response to the report, which has not yet been published—by giving powers not to the Bank of England, as the Committee recommended, or to the Financial Services Authority, as he had flagged up in speeches last month, but to himself and the Treasury. What confidence can we have in the ability of Treasury Ministers to take the necessary decisions provided for in the Bill? One of the Ministers now sitting on the Treasury Bench appeared before the Treasury Committee the other day, and when she was asked what experience she had in financial matters, gave the extraordinary response that she had a big overdraft. It is barely conceivable that we should place responsibility in the hands of Ministers who have little, if any, experience of handling banking matters, rather than in those of the professionals whom they pay—through the Bank of England or the FSA—to take such responsibilities.

This nationalisation raises a host of questions about the role of banking supervision and the relationship between the FSA, the Bank of England and the Treasury. Given the way in which the Chancellor is taking such peremptory powers for himself, he owes it to us during the course of this debate to answer certain key questions. Is there any longer any credence in the independence of the Bank of England? What should the Bank of England be responsible for, operationally, if not for the provisions in the Bill? Can the UK regulatory structures cope with the complexities and rates of change in the modern financial world? What is the role for the Bank of England? And where is the experience among those in the Treasury to exercise the powers that they are giving themselves in the Bill?

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 7:39 pm, 19th February 2008

At the end of this debate, perhaps we could take a few moments to remind ourselves why we are here. We are here because of a failure of the banking regulation system that the Prime Minister introduced in 1997 to notice a bank with what the Chancellor has subsequently described as a "fundamentally unsound" business model expanding its market share to become the provider of one in five of Britain's new mortgages; because of a dithering by the Government when they were presented with an opportunity to explore a private sector solution before the crisis broke in September; because of incompetence in handling the crisis between Thursday 13 September and Monday 17 September 2007, when the Government finally put guarantees in place, which stopped the run on the bank; and because of the rejection of what we now know was very expensive advice, telling the Government to act quickly and decisively in the days and weeks after 17 September.

At the end of that catalogue of mishandling, we have finally arrived at a Government decision—nationalisation, the solution that they have sought to avoid for five months, and with good reason. Nationalisation does not achieve anything that could not be achieved outside public ownership. It does not in itself provide a solution to the problems of Northern Rock's flawed business model, as my right hon. Friend Mr. Dorrell pointed out in his contribution. Nationalisation also comes with clear downside risks—risk to the reputation of the UK's already battered reputation as an international financial centre; risk in extending the taxpayer's liability to include instantly full responsibility for every penny of Northern Rock's balance sheet; and the risk of political interference.

We have heard plenty of warm words from the Chancellor about the arm's length management that Northern Rock will have. Forgive me for being a little cynical, Madam Deputy Speaker, but Conservative Members have seen nothing in our Prime Minister to lead us to believe he does "arm's length". I would have said that he was more a "fingertip" man, myself, and we have already seen the evidence with the appointment of his former chief of staff to the board of Northern Rock. I think that Jim Cousins tonight unwittingly provided in the starkest possible terms a perspective on the kind of political pressure that the Chancellor will be under with regard to Northern Rock; he has conceded that the period of public ownership will not be temporary at all, but may last for many, many years.

As my hon. Friend the shadow Chancellor has pointed out, we are being asked to buy a pig in a poke. That was a new phrase when I wrote it down, but two people have used it in the last 10 minutes. We do not know the price that we, the taxpayers, will pay for this business. We do not know exactly what the assets and liabilities of the business are and we do not know how long the commitment will be made for, although we note the discrepancy between the Chancellor's "temporary" period and Ron Sandler's "some years". We do not know what they plan to do with the business—not even whether the plan is to double or halve it in size. We are being asked to buy an unqualified liability for an unspecified price over an as yet undefined time period and for a completely undetermined purpose—and we will not find answers by looking in the Bill, because none of those issues is addressed by it and none of the Chancellor's warm reassurances is enshrined in it.

The meat is in the order, and the order is unamendable, so let me try one more time to tempt the Chief Secretary to give us a commitment when she replies to provide at least one full day's debate on the Floor of the House to debate those orders when they are laid. None of the assurances on arm's length control or on competition are meaningful when even today 125 per cent. mortgages and best-in-class deposit rates are still available from Northern Rock.

What little we do know is not very promising. We know that we are buying a bank that wrote more mortgages at the top of the market than any other and that it is now repossessing more homes than any other. We know that the Prime Minister appointed his former chief of staff to the board and we know that the Government have spent nearly £100 million on advice, most of which they have clearly ignored. We know that the Government have appointed an executive chairman and a chief financial officer, both of whom, according to the BBC's website this afternoon, are non-domiciled for tax purposes and will between them be paid £160,000 a month. I wonder how the champions of the people's bank below the Gangway feel about that. This afternoon, Downing street could not even confirm that those payments would be made onshore in the UK—and that, Madam Deputy Speaker, is just week one of the Northern Rock in public ownership saga.

We will now have to try to amend this flawed Bill to give legislative muscle to the commitments that we heard the Chancellor give yesterday and today, but the situation is worse than that. Looking at the draft order, it is clear that the Government want to exempt Northern Rock from the freedom of information obligations of a publicly owned company. They want to allow Ministers and civil servants to act as shadow directors, but not to be liable to the risks and penalties that shadow directors face. Indeed, they want to exempt all directors of Northern Rock from any legal action whatsoever, putting them in a unique position. So we will have to seek not only to enshrine the shadow Chancellor's warm words in primary legislation, but to amend the primary legislation to prevent these extraordinary measures from being slipped through in unamendable orders.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

No, I will not; I must complete my remarks.

So is it inevitable? No, it is not. There is a better way. Indeed, the Government have hinted at it in their own consultation document on the future of the banking regulatory system. They call it a special resolution regime. However, Conservative Members, contrary to the Chancellor's repeated assertions, have been entirely consistent in our opposition to nationalisation and in our support for a private sector solution, if it were possible to find one—although it is increasingly obvious that the Government should have concluded some time ago that it would not be. Before the Chancellor came out with his consultation document, we had proposed a regime of Bank of England-led protective administration—this was not dissimilar to the proposals in his consultation paper—to allow the resolution of a major business failure in a single banking institution.

I ask the Chief Secretary this question: if the Chancellor's plans and proposals are good enough for a future failed bank, why are they not good enough for Northern Rock today? We could have used this legislative opportunity to pass an emergency amendment to the Enterprise Act 2002 to create a special protective administration regime for banks in difficulty—a regime that would allow the Bank of England to oversee a reconstruction of a bank first and foremost in the interests of maintaining the stability of the UK financial system, and then in accordance with the priorities laid down in the Insolvency Act 1986.

The Chancellor and the Prime Minister have been fond of repeating that any kind of administration or bank-led reconstruction would amount to a fire sale of assets, but the website of the Government Insolvency Service makes it absolutely clear that the first duty of an administrator is to try to salvage the business as a going concern and rescue it so that it can emerge from administration. If that is not possible, getting the best possible deal for creditors is important. In the case of Northern Rock, although the Chancellor, with his facile "business as usual" slogan, cannot bear to bring himself to say it, that almost certainly means a reduction in the size and scale of the business and an orderly realisation of some of the mortgage book in order to deliver a business based on a different and sounder business model—a financeable business model which may be capable of being made viable for the future and, ultimately, saleable back to the private sector.

Despite the five months that the Government have had to prepare for this moment, they have no answers to any of the important questions. Nationalisation is a mechanism—the wrong one, in our view—not a solution. This kind of non-specific and enduring nationalisation power is the worst of all outcomes, tarnishing Britain's reputation as a financial centre for the year of its lifetime.

Perhaps this debate is best ended with the words of the hon. Member for Newcastle upon Tyne, Central, who may well be vindicated by history in his prediction a few days ago that nationalisation would deliver

"a slow lingering death for the jobs of the Northern Rock workers, its assets and Britain's reputation as a major financial services centre".—[ Hansard, 19 November 2007; Vol. 467, c. 968.]

I urge my right hon. and hon. Friends to deny the Bill a Second Reading.

Photo of Yvette Cooper Yvette Cooper The Chief Secretary to the Treasury 7:50 pm, 19th February 2008

In general this has been a thoughtful debate, to which wide-ranging contributions have been made.

My right hon. Friend Frank Dobson pointed out that the Government had to step in because of market failure, because of the problems created by a global credit crunch and United States sub-prime lending, and because of Northern Rock's particular business model, which put a United Kingdom bank at risk and posed a potential risk to the rest of the banking system. The Government acted in the autumn to keep Northern Rock running, in order to save the bank and also to prevent the risk from spreading.

I agree with Mr. Maples—if it is possible to agree with him and with my right hon. Friend the Member for Holborn and St. Pancras at the same time—that the most important aspect is the wider stability of the banking system. That is why we were right to intervene, but it is also why we are right to decide to continue the guarantees and ongoing support for Northern Rock in a way that will secure the best possible deal for the taxpayer, safeguarding both the taxpayer's interests and the wider interests of the financial system.

Photo of Yvette Cooper Yvette Cooper The Chief Secretary to the Treasury

I want to make some progress, as I have only a short time in which to speak. I shall be happy to take interventions later if there is enough time.

I pay tribute to my right hon. Friend John McFall for his thoughtful speech, and for the work that he and his Committee have done in examining not just the position of Northern Rock but the possibility of wider reforms in the banking system. That has fed into our broader programme and our consultation on future reforms. My hon. Friends the Members for Sedgefield (Phil Wilson), for Newcastle upon Tyne, North (Mr. Henderson) and for Newcastle upon Tyne, Central (Jim Cousins) drew attention to the importance of Northern Rock in their constituencies, and also to the fact that Northern Rock would not be running now had it not been for the Government's decisions.

Several Members raised concerns about the scope of the Bill, which extends beyond Northern Rock. It was suggested that we could have simply followed the model for Rolls-Royce. The Rolls-Royce (Purchase) Act 1971 is, obviously, several decades old and precedes my memory, but its purpose was to vote money to purchase a company from a liquidator. The present circumstances are completely different. Northern Rock is not in liquidation, and we do not want it to go into liquidation. That is the point of the kind of intervention that we have already put in place and will continue to put in place for the future.

Some Members seemed to be calling for a hybrid Bill. I do not consider that to be the right way to deal with the time pressures that we face, and the need to secure certainty for Northern Rock. Mr. Lilley, on the other hand, seemed to criticise the Bill for not covering all the wider issues connected with banking reform. We are deliberately not doing that in this Bill. We will do it as part of a consultation, and in a Bill that will deal much more broadly with the lessons we must learn and the action we must take in order to deal better in future with the kind of problems experienced by Northern Rock, which may include wider reforms.

Hon. Members raised important questions about unfair competition. My right hon. Friend the Chancellor has already addressed many of them. In particular, Mr. Dorrell expressed such concerns. It is important to ensure that there is no inappropriate unfair competition as a result of the arrangements that are introduced. The bank must and will be subject to European Union state aid restrictions and also to United Kingdom competition law, and Ron Sandler has already made it clear that he has no intention of running the bank in a way that would abuse its temporary public ownership position.

I do not think that Ministers should be taking decisions on individual products—something for which some Members seemed to be calling. I do not think that that approach would be appropriate, but Northern Rock's business plan will need to be agreed with the Government. The overarching plan will need to be published and agreed in terms of the strategic aims that we have set for the management. They include removing all forms of public support for the bank, including Government guarantees, as soon as possible. A business plan built on abusing temporary public support would clearly not meet that strategic aim, as it would not be sustainable.

Several hon. Members:

rose —

Photo of Yvette Cooper Yvette Cooper The Chief Secretary to the Treasury

I must make progress if I am to deal with all the points that have been made.

No one expects Northern Rock to operate the aggressive strategy that it operated before the summer, which was clearly unsustainable. Its market share has already dropped. However, the right hon. Member for Charnwood and the hon. Member for Stratford-on-Avon were concerned about the very principle of Government guarantees, or of allowing a Government-supported business to operate in the market at all. The logical conclusion of their argument is that there should be no Government guarantees, and the logical consequence of having no Government guarantees, given the current state of the market, in which banks are not lending to each other in normal circumstances, the global credit crunch, and the history of difficulties at Northern Rock, would be for the bank to go under. That is why we do not support that course of action, and that is why Opposition Members are in fact calling for the bank to go under. They are calling for it to be wound down, with all the problems that that would create for the wider stability of the financial system. It is clear that unfair competition is not in the interests of the consumer or of other banks, but nor is it in the interests of consumers throughout the country and of other banks for Northern Rock to go under, and for us to risk wider instability in the banking system.

Taxpayer exposure was mentioned by a number of Members, including Dr. Cable. He raised some important issues and I welcome his support for the Bill, but I should make it clear that our action has not been at a cost to the taxpayer. The Bank of England has lent money to Northern Rock which is secured against its assets, and we expect that money to be repaid in full and with interest. We have provided further guarantees that have not been called: the taxpayer has not paid any money. The guarantee arrangements have not been changed as a result of the Bill, and transferring ownership of Northern Rock's shares does not mean taking on legal responsibility for the full liabilities. The Government are simply becoming the shareholder. Granite remains a separate legal entity. It is not owned by Northern Rock, it is not being taken into public ownership, and it has not been guaranteed by the Government. The exposure for the taxpayer remains unchanged.

Mr. Osborne has said that he and his party oppose the Bill because they have set out an alternative. The rest of us are struggling to understand quite what that alternative is, not least because it seems to change from day to day. Indeed, the director general of the CBI has said that

"the Conservatives have been banging on about Northern Rock and what a disaster it is, but they haven't told us what they would have done."

Exactly so. The Conservatives have said that they want administration by the Bank of England. They variously claim that it would keep Northern Rock running, and that it would run it down. They call it administration, but they say that it is not a sell-off or a fire sale of the assets. They say that it would mean taking over shareholders' rights, but that it would not be nationalisation. They are all over the place.

The Conservatives say that they want a special form of administration. Let me tell the hon. Member for Stratford-on-Avon that administration would trigger a series of claims from creditors with claims on the collateral of the bank. Putting Northern Rock into administration and triggering insolvency would make it impossible to reconstruct the bank. It would mean selling off assets at the bottom of the market—and we all know the present condition of the market—leaving the Bank of England and the taxpayer with potentially hefty bills. It would be a really bad deal for the taxpayer.

Today Opposition Members offered us a new idea. They said that they wanted to adopt our proposals for longer-term reforms in the banking system. I welcome their support, but what they have produced is a set of principles for consultation. Where is the detailed set of powers that the hon. Member for Tatton wishes to use to perform this magic? How would he introduce the necessary safeguards? What provisions would the Conservatives introduce to ensure that property rights were dealt with properly? They have mentioned none of the serious measures that would be necessary to bring about Bank of England administration in the way that they propose. In the absence of such powers, what are they really calling for? They are calling for the Bank of England to take over the decision-making and ownership rights of shareholders, and that sounds a lot like nationalisation to me.

What the Opposition are saying is incoherent nonsense. They oppose public ownership, and then propose a policy that requires it; they say that they want to protect the taxpayer, then propose a policy that would rip the taxpayer off. It is shameless opportunism, shameless stupidity, or both. They should drop their opportunism and back the Bill.

It being Eight o'clock, Madam Deputy Speaker put the Question already proposed from the Chair, pursuant to Order [this day].

The House divided: Ayes 367, Noes 164.

Division number 81 Orders of the Day — Banking (Special Provisions) Bill

Aye: 367 MPs

No: 164 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly agreed to.

Bill read a Second time, and committed to a Committee of the whole House, pursuant to Order [this day].

Further proceedings stood postponed, pursuant to Order [this day].