Northern Rock

Orders of the Day – in the House of Commons at 10:01 pm on 31st March 2008.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 10:01 pm, 31st March 2008

I beg to move,

That an humble Address be presented to Her Majesty, praying that the Northern Rock plc Transfer Order 2008 (S.I., 2008, No. 432), dated 21st February 2008, a copy of which was laid before this House on 21st February, be annulled.

The timely publication this morning of Northern Rock's business plan and accounts again calls into question the Government's decision to nationalise the bank. As one reads through the documents, the gamble that the Prime Minister and the Chancellor took by nationalising Northern Rock last month becomes clearer and clearer. Whether we get back all the money lent by the taxpayer depends on Ron Sandler's being able to turn around the business, shrink the mortgage book and rebuild the deposit base.

Yet it has taken the Government since September to get us to this point and it took them five months to decide the future of Northern Rock—five months from when Northern Rock was offered emergency funding to the point of nationalisation and five months of uncertainty for its employees, customers and the business. Although the problems at Northern Rock were a consequence of the management's strategy, it is clear that the Government exacerbated the problem through their handling of the crisis.

Let us look at the way the Government handled the decision to provide Northern Rock with emergency funds. The announcement triggered a run on the bank, which could be stemmed only by a guarantee of retail deposits, but as the Treasury Select Committee made clear in its excellent report "Run on the Rock":

"The cumulative effect was... to make the run on the deposits of Northern Rock more prolonged, and more damaging to the health of the company, than might otherwise have been the case."

It will therefore be harder for Ron Sandler and his team to rebuild the vital retail depositor base, which will play an important role in refinancing the business on more conventional lines and also in repaying the loans to the taxpayer.

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Photo of John Redwood John Redwood Conservative, Wokingham

Does my hon. Friend agree that there is a contradiction in that rapid repayment of the Treasury money requires contracting the business, whereas fattening the business up for resale requires growing it? It is quite difficult to understand how the management can do both.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Indeed. My right hon. Friend identifies an important issue at the heart of the matter. The business plan before us today in the form of the Chancellor's written ministerial statement talks about repayment of the loan, but does not provide a date by which Northern Rock will exit public ownership. There is a contradiction there, but the first priority must be to repay the loans to eliminate the taxpayer's exposure.

Of course the problem that Northern Rock will have after the five months of dither and delay is that the business itself has made no progress in that time, as the interim management waited for the Treasury to decide what it would do with Northern Rock. The way in which the Government handled Northern Rock stands in stark contrast to the prompt action on Bear Stearns by the US authorities, which were able to organise a private sector solution over a weekend. Of course, we know from the Treasury Committee report and elsewhere that a private sector solution was on the table for Northern Rock before September, but it is clear that the Government turned it down. I wonder how much the Chancellor regrets making the decision back in August, when he washed himself of all sorts of problems, not to accept the offer that was apparently on the table at the time.

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

I share the hon. Gentleman's frustration about the use of the weekend takeover as an excuse not to act earlier. I think that I share his frustration that a Lloyds TSB bid was not accepted. I certainly share the frustration of many people that the Bank of England did not increase liquidity late last summer, when it could have done so. I understand what the Opposition are trying to do with the annulment motion today, but does he not feel that, if they annul the order, it might further weaken confidence in the banking sector, which is—how can I put this gently?—rather brittle at the moment?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

It would be to the benefit, because there are better solutions to Northern Rock's problems than the one before us today. We have argued that case for some time, and I shall touch on that briefly towards the end of my speech.

To go back to the comparison with the US, Bear Stearns shareholders now have certainty over the value of their shares—unlike Northern Rock shareholders, who have to wait until the independent valuer tells them how much their shares are worth. Of course, JP Morgan Chase will pay for the compensation and buy the shares, not the US taxpayer; whereas, in the UK, the UK taxpayer will have to compensate Northern Rock shareholders for the nationalisation.

In reality, although for some people nationalisation was the end of the story and the solution to the problem, it is not an end in itself and the publication of the business plan and accounts today demonstrates that. The two documents clearly point out the risks that the taxpayer has assumed as a consequence of nationalisation. The order transfers ownership of Northern Rock from its shareholders to the taxpayer, but it transfers the risks, too. The regulatory impact assessment published alongside the order gives no assessment of the risks assumed by the taxpayer. When the Chancellor signed off the RIA, he said that it represents a reasonable view of the likely costs and benefits, yet no numbers were attached to the RIA to back up that assertion, whereas the accounts and the business plan make plain the scale of the challenge that faces Northern Rock and therefore the risks borne by the taxpayer.

The Chancellor in his written statement today supports the objective that Northern Rock repay its loan to the Bank of England by 2010 and release guarantees by 2011, so we know that taxpayers' exposure to Northern Rock will continue beyond the next general election. But as the business plan makes clear on page 8, the repayment of the loans by 2010 is an assumption that is part of the base case of the management's plans. I wonder whether the Chief Secretary can tell us how long it will take to repay the loans using the management's worst case scenario? The Treasury has access to the forecasts that the management prepare, so she should be able to tell us the worst case scenario for repaying the debt.

Yet even the statement that the debt will be repaid by 2010 is at odds with the views of Ron Sandler, who wrote to Northern Rock customers—I have here a letter that was passed to me by a mortgage holder at Northern Rock—about repaying the bank's debt in full and said:

"We aim to achieve this over the next three to four years".

That is by 2011 or 2012—a much more pessimistic assumption than the line that the Treasury has been spinning today. Can the Chief Secretary explain the discrepancy between the Treasury line put out today and the line that the man whom they handpicked to run Northern Rock has taken in talking to customers?

Let us be clear: we want the loans to be repaid as soon as possible. We expect the Government to stand by the commitment that the Chancellor gave on 19 November:

"we fully expect to get" the money

"back."—[ Hansard, 19 November 2007; Vol. 467, c. 972.]

However, we recognise that the changes that need to be brought about to achieve that will lead to job losses in the north-east. They will come about as Northern Rock wants to shrink its mortgage book over the next three years. In 2011, its share of the mortgage market is forecast to be about 2.4 per cent. compared with 7.5 per cent. last year, and its assets will shrink from £107 billion to £49 billion.

To achieve that, Northern Rock customers coming to the end of their fixed terms will need to be encouraged to move to other providers. In the current circumstances, that will be relatively straightforward for customers who present a low risk, who have low loan-to-value ratios on their mortgages, or who have good credit histories. Is there not a danger, however, that the more risky customers will have to stay with Northern Rock, thereby reducing the overall quality of its loan book and exposing taxpayers to greater risk of defaults—and defaults would, of course, be a cost we would pick up? The overall quality of the loan book will deteriorate as people who cannot find an alternative are forced to stick with the standard variable rate that Northern Rock offers. Therefore, there is a risk to the value of the assets.

Will the Chief Secretary clarify what the table on page 10 of the business plan means? It refers to net assets before fair value adjustments. Is that to do with further write-offs of structured investment vehicles, or is it to prepare us for the write-off of further Northern Rock assets? If there are further write-offs, will the taxpayer not have to pick up the tab?

In our debates on Northern Rock, the Chancellor has always reassured us about the quality of the loan book, yet the accounts that were published today present a much less rosy picture. Northern Rock's impairment figures have deteriorated between two and three times the average of the Council of Mortgage Lenders figures for residential mortgages. The accounts also make it clear that the more aggressive approach to arrears that Northern Rock has introduced has led to a fourfold increase in the number of homes that it owns through repossession. Are the Government content with the practice on repossessions that Northern Rock has instituted?

Despite the Chancellor's reassurances about the quality of the loan book, we see in the accounts published today a rapid deterioration in the loan book and a sharp increase in repossessions. Is the Chief Secretary prepared to reiterate the confirmation the Chancellor has given on the quality of the loans that the taxpayer has, in effect, taken on through the nationalisation of Northern Rock?

Another aspect of the recovery plan—and justification for nationalisation—is the proposed build-up of retail deposits from about £10 billion at the end of 2007 to £20 billion in 2011. That depends on Northern Rock's ability to rebuild depositor confidence. However, there is a challenge here, because we are now entering into a more competitive phase for deposits as a consequence of the closing off of wholesale markets to financial institutions. What assessment have the Government made of the likelihood of Northern Rock doubling its deposits by 2011, and what will be the impact on achieving the 2010 deadline if it does not?

Will the Chief Secretary also confirm that the commitment given in the appendix to the business plan that Northern Rock will rank outside the top three in any one of the "Moneyfacts" retail deposits categories for the remainder of 2008 extend beyond then? One of the concerns raised when this House and the other place discussed the Banking (Special Provisions) Act 2008 was the impact that the Government guarantee arising through nationalisation could have on competition for both loans and savings. People are rightly concerned that Northern Rock might take advantage of its privileged status as a Government-backed bank to offer better rates than its competitors. Will the commitment on savings extend beyond 2008?

The taxpayer's exposure to Northern Rock will depend not only on the loan book and the ability to rebuild customer deposits, but on the operating results of the company in public ownership. In 2007, it made a loss of £141 million. The business plan predicts that it will make substantial losses in 2008 and will return to break-even only in 2011. How much will Northern Rock cost the taxpayer over the next three years, simply in terms of its operational results? In deciding to acquire Northern Rock, did the Treasury understand that it would be loss-making from 2008 onwards?

My next point refers back to one made by my right hon. Friend Mr. Redwood. The plan sets out a timetable of the repayment for the taxpayer-backed loans and releasing the guarantee, but contains nothing to indicate when either the Government or Northern Rock expect the bank to return to the private sector. Will the Minister tell us whether privatisation will happen as soon as the loans are repaid? Have other conditions been set that will trigger the bank's privatisation?

Notwithstanding this evening's proceedings, the business plan is still subject to approval by the EU, and it could, of course, ask Northern Rock to revise its business plan. That could have an impact on how quickly Northern Rock's strategy would be effective in reducing the level of the taxpayer loans and so on. Will the Chief Secretary tell us when she expects to receive the Commission's approval of Northern Rock's business plan? Until that clarification is received there will clearly be an important uncertainty that affects the way in which the business is run. There are potential risks in respect of the objective that the taxpayer-backed loans will be repaid by 2010. Tonight's debate gives the Chief Secretary the opportunity to confirm, without qualification and caveat, that the taxpayer will pay not one penny towards the cost of rescuing Northern Rock, and I hope that she will take it.

There were some unfinished pieces of business from our debate on the Banking (Special Provisions) Act 2008, one of which has now been clarified with the publication of today's accounts and is crucial to understanding the liabilities that will be assumed by the taxpayer through this Order. On Second Reading and on Third Reading some debate took place between the Chief Secretary and my Conservative colleagues and some Labour Members about Granite. It is clear that the risks associated with Granite will be borne by Northern Rock. Today's accounts make a statement about Granite being

"regarded as legal subsidiaries under UK companies legislation. This is because they are principally engaged in providing a source of long term funding to the Group, which in substance has the rights to all the benefits from the activities of the SPEs. They are effectively controlled by the Group."

The Office for National Statistics said in its evidence to the Select Committee on Treasury that the risks and rewards of Granite accrue to Northern Rock and thus to the taxpayer.

Does the Chief Secretary now accept that she was wrong in a response that she gave to an intervention from my hon. Friend Mr. Dunne during the debate on the Act? She said:

"We have also repeatedly made it clear that the Government guarantees apply to Northern Rock and not to Granite."—[ Hansard, 21 February 2008; Vol. 472, c. 631.]

The reality of the accounts today is that the taxpayer bears the risk. The risk is not being ring-fenced, kept to one side or kept offshore. The risks and rewards of Granite accrue to Northern Rock, and they will be borne by the taxpayer.

The other matter that we debated as the Act was going through Parliament was the framework agreement. It was deposited in the Library today, yet as Northern Rock's report makes clear, the agreement was in place from 22 February—the day that Northern Rock was nationalised. Can the Chief Secretary tell us why Parliament was not presented with the document earlier? Why did we have to wait until today's debate and the publication of today's accounts for the document to be placed in the Library? Is that not another example of the Government riding roughshod over Parliament?

Although our debate focused primarily on Northern Rock, it is worth remembering that the Act enables the Government to nationalise any other bank where lender of last resort status has been given and that the taxpayer assumes an open-ended commitment without effective parliamentary scrutiny. Today's debate seeks to annul an order that had been made last month. Parliament should be given the right to approve nationalisation before it takes place, rather than debate it retrospectively. Parliament should have the power to veto these proposals, rather than be treated as a doormat by an over-mighty Executive. The Prime Minister talks about strengthening Parliament, but he undermines its authority through measures such as this.

The publication of the accounts and business plan today makes it very clear that nationalisation is not the end of the Northern Rock story. The Government's mishandling of the Northern Rock crisis has led to the risk that taxpayers will not get back all the money we have lent to the bank. The repayment depends on the bank's ability to manage down the mortgage book and to rebuild customer deposits and the viability of the remaining business, EU state aid approval, and the state of the housing market. The Government have gambled our money on Ron Sandler and his management team, but we know it need not have been like this. As the rescue of Bear Stearns shows, private sector solutions can be found to the problems created by the credit squeeze.

We also believe that nationalisation was not the only alternative. The Chancellor proposed that in future failing banks could be dealt with through a form of administration. We believe that that could have been the answer to the question. It would have presented a better deal for the taxpayer and the assets could have been realised in a way that protected the interests of taxpayers, rather than exposing them to ongoing continued risk until 2010-11. The Government rejected that course of action despite endorsing it for the future.

The Northern Rock story will run on and on. Even based on today's announcement, the liability of the taxpayer will run beyond the next general election, leaving another problem for the next Conservative Government to sort out.

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Photo of Yvette Cooper Yvette Cooper The Chief Secretary to the Treasury 10:20 pm, 31st March 2008

We are debating the transfer order to take Northern Rock into temporary public ownership. I am disappointed that Mr. Hoban and his party have chosen to pray against it. This morning, Northern Rock published its annual accounts for 2007 and a more detailed business plan. I shall refer to them in responding.

We need to be clear about the purpose of the order. It will take Northern Rock into temporary public ownership in order to safeguard the financial stability of the banking system and the financial interests of the taxpayer. The Chancellor set out three objectives that have guided everything that we have done in relation to Northern Rock: maintaining financial stability; protecting consumers; and protecting the taxpayer. The decisions that we have made have shown how seriously we take the financial stability of the banking system. The Government are prepared to take strong action and make difficult decisions in order to safeguard that financial stability. Given the turbulence in the financial markets in the summer, the ongoing credit squeeze and the series of problems with Northern Rock's business model in the autumn, it is clear that without intervention Northern Rock would have gone down. That would have had serious risks not only for depositors and creditors but for the stability of the banking system. That would not have been in the public interest. That is why we took action and why it was right to do so. That is why we authorised the Bank of England to provide support and stepped in with the Government guarantee arrangements last autumn. That was supported by hon. Members from both sides of the House at the time.

We have searched for alternative options, including private sector takeovers. In trying to ensure that we protect the taxpayer, we have made it clear that temporary public ownership is the best deal. That is in part because of the state of the market. The alternative deals were simply not good enough for the taxpayer.

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Photo of Philip Dunne Philip Dunne Conservative, Ludlow

Will the Chief Secretary enlighten the House on whether the Chancellor took advice or was given guidance during his discussions with the US Secretary of State, Secretary Paulson, on his experience in securing a rapid decision-making process to take a bank that was getting into difficulty into private sector ownership? What lessons did the Chancellor learn from those discussions?

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

Interestingly, the experience on the other side of the Atlantic has shown that banks across the world are facing serious pressures as a result of global economic and financial market turbulence. In many ways the situation with Bear Stearns was very different from that with Northern Rock. Bear Stearns is not a retail bank and does not have retail deposits, and so the implications for depositors as opposed to creditors were very different. There is a different legal framework and the situation was different as there were viable private sector offers on the table.

Clearly, decisions have to be made about what is the best alternative in the circumstances faced in particular financial markets at particular times. Equally, it is important that we do not simply pretend that there are alternatives when they do not exist. That is why Opposition Members need to take a bit of responsibility. The decision was taken last autumn to support Northern Rock, through the Bank of England's loans and through Government guarantees. I reiterate my view that that was the right decision to take at the time, and it was supported in all parts of the House. Once it was taken, there were knock-on consequences that had to be faced up to. Opposition Members have repeatedly refused to do so.

The hon. Member for Fareham repeatedly raised his concern that it was the decision to take Northern Rock into temporary public ownership that created exposure for the taxpayer. That is not the case. The taxpayer's exposure was created by the decisions that were taken in the autumn on both the Bank of England loan and the guarantees that were put in place. Having done that, and been clear that that was the right decision in the interests of protecting the financial stability of the banking system, it was then important that we ensured that the taxpayer's interest was protected. The options of insolvency, administration, Bank of England-led administration and wind-down, which were put forward by Opposition Members, would all have been a worse deal for the taxpayer than temporary public ownership and the business plan that we have now set out.

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Photo of John Redwood John Redwood Conservative, Wokingham

Surely the Chief Secretary can see that, if the Bank of England had simply acted as bank manager, and provided tough love to Northern Rock and managed it through it, we as taxpayers would not have had to absorb all the responsibilities and potential losses of sacking staff and losing on current trading. Will she confirm that she is accepting a business plan that means that the taxpayer will have to pay the losses in 2008, 2009 and 2010? Why do we need those as well?

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

The right hon. Gentleman describes what he says would have been "tough love" by the Bank of England in managing it through. I presume that he is talking about the proposal, which Opposition Members have described, of a Bank of England-led administration. That would effectively use powers that do not currently exist. We think that there is a strong case for introducing a new special resolution regime, and that that would be the right thing to do. However, it would involve major changes to the law and the current approach to insolvency and failing or troubled banks. It is right that such proposals should be consulted on seriously and introduced through legislation. For Opposition Members to pray in aid powers that simply do not exist on the statute book, and think that they would somehow magically come to the rescue of Northern Rock, is pie in the sky and irresponsible. They are simply not facing up to the serious problems that Northern Rock faced.

As hon. Members know, Northern Rock's new management team has presented the Government with a detailed business plan for their approval. It details how the new board intends to repay the Bank of England's loan, release the Government guarantee arrangements and return the business to the private sector. It is based around four strategic priorities: to contract into a smaller, sustainable business, reducing the asset base; to repay the Bank of England loan by the end of 2010, while increasing the level of retail deposits, although keeping them below 2007 levels; to restructure the organisation and its operations; and to strengthen risk management in key areas. The bank envisages repaying the loan by 2010, and £2.5 billion has already been repaid since the end of 2007.

The business plan also addresses a concern that has been widely raised about Northern Rock's business model—its excessive dependency on the wholesale funding markets—and addresses that over-reliance by reducing the size of Northern Rock's asset base and by increasing its retail deposit base. It is important, and we have stressed throughout, that Northern Rock should not cause unfair competition in the rest of the financial markets. The business plan recognises that. Although the retail deposits will increase over the next three years, both Northern Rock's level of retail deposits and its share of the retail savings market will remain lower than at the start of last summer. The competitive framework that Northern Rock published as part of its business plan also commits it to not appearing in the top three of the best-buy tables for the rest of 2008. The framework will be kept under review and will remain subject to the requirements of the European Commission.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Will the Chief Secretary give a commitment that Northern Rock will not appear in the top three best-buy tables beyond 2008? Can she tell us what the total loss forecast for Northern Rock will be between now and 2011 in the business plan that the Treasury will approve?

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

As I said 10 seconds ago, the competitive framework that Northern Rock published today as part of its business plan also commits it to not appearing in the top three of the best-buy tables for the rest of 2008. The framework and the overall approach will be kept under review, as is right. I remind Members that we have always said that we would engage in detailed discussions with the European Commission to make sure that we are compliant with the state-aid approach. With regard to the overall financial position for Northern Rock and for the taxpayer, we have made it clear that such an approach gives us the best deal for the taxpayer, who already had exposure as a result of the Bank of England loan and the guarantees that were put in place.

Had we taken the approach that Opposition Members set out, and tried to go for the fire sale of the assets that they proposed, there would be considerable risk to the taxpayer, and to the Bank of England loan, which as a result of the business plan is now being repaid.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Will the Chief Secretary tell the House what the predicted losses are in the business plan that the Treasury will approve? It is clear that there will be substantial losses next year, in 2009 and 2010, with break-even in 2011. What will the losses be? The taxpayer will have to stump up for them. We need to know what they will be.

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

Today, Northern Rock set out in its accounts what its financial position was for 2007, and it has set out its business plan for the next few years. It has set out a clear framework as part of the business plan, which involves repaying the loans from the Bank of England. It is important for the taxpayer that the loans are repaid, and we should be clear that under the approach repeatedly proposed by Opposition Members those loans from the Bank of England would be at stake—they would be put at risk. Opposition Members have never faced up to the fact that their completely incoherent and all-over-the-place approach would seriously put at risk not only support from the taxpayer as a result of the guarantees, but the approach taken by the Bank of England.

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

I shall give way once more, but I am conscious of the fact that Members from other parties also want to contribute to the debate.

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Photo of Graham Stuart Graham Stuart Conservative, Beverley and Holderness

My question is simple. What will the cumulative losses be before 2011?

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

I say again that Northern Rock has set out its business plan; it has set out the series of actions it will take. Opposition Members have to recognise that to protect taxpayers we have ensured that their interests are safeguarded by a responsible approach to temporary public ownership, which they have rejected time and again. They seriously seem to think that getting the Bank of England or another organisation to sell off the assets would somehow result in a better deal for the taxpayer. However, the consequence would be to put the taxpayer at risk.

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

I want to make some progress.

Opposition Members have referred to the level of arrears as a result of Northern Rock's decisions. The level of arrears for Northern Rock has increased, just as it has across the market. However, it is still significantly below the Council of Mortgage Lenders average, so Northern Rock is in a very different position compared with other banks across the market. We know that Northern Rock had an unsustainable financial model; the bank needs to change its approach and it is right that it should do so. That is what the business plan does.

In the end, the transfer order is about the decision to transfer. It is right to reflect on whether alternatives were available and whether they are still available. Opposition Members have asked us to oppose the transfer order, as they believe that the decision should be reversed—an utterly irresponsible approach at a time when the financial markets continue to be in global turbulence and when we face a continued credit squeeze in the markets. It was right to seek private sector alternatives, and we made no secret of the fact that we would have preferred such an alternative. We were not prepared to go with a private sector bid at any price—we were determined to protect the taxpayer—and that was the right thing to do.

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

The Minister said that she was not prepared to accept a deal at any price, and that is rather sensible. If all the stories are to be believed, however, early in the process it was going to be £2 a share from Lloyds TSB with a £10 billion credit line, which is a far better deal than £110 billion of potential liabilities should it all go wrong. Surely to goodness, £2 a share and a £10 billion credit line is a much better deal than a potential liability of £110 billion, which we are sitting on today.

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

I caution the hon. Gentleman against making decisions on the basis of speculation about different alternatives. The clear view of the tripartite authorities was that there was not a viable private sector alternative, and we spent time seeking such an alternative and seeking private sector bids. However, we have not received an appropriate private sector bid that meets the terms that we require to ensure that we get a good deal for the taxpayer. It is right that we should make such a requirement. Transferring Northern Rock into temporary public ownership, by contrast, means that the taxpayer will receive any upside from a future sale of the business, which better aligns risk with reward.

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Photo of John Redwood John Redwood Conservative, Wokingham

Does that not mean that, as the business will lose money for the next three years, it will receive a Treasury subsidy to compete against others in the market that will not have that luxury?

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

Once again, I have to remind Opposition Members that the decision that they supported in the autumn to support Northern Rock through Bank of England loans and Government guarantees exposed the taxpayer. Those decisions were supported by hon. Members at the time, and there are consequences that flow from that. As a result of those decisions at the time, it is important to ensure that the taxpayer's exposure is limited and their interest is protected. Opposition Members have singularly failed to make any proposal that would protect the taxpayer's interest as a result of those decisions.

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Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington

We have heard a lot about the taxpayer's potential losses, but before my right hon. Friend concludes will she say something about potential job losses? We understand that 2,000 jobs are at stake. From the evidence available to the Government, are wider job losses possible, or are we consolidating at this point in time? She mentioned responsibilities, so would she comment on the responsibilities of the previous chief executive and the directors? The chief exec, we understand, is to receive a payout of £750,000, despite the folly of the investment strategy that he pursued that resulted in significant job losses.

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

My hon. Friend makes an important point. The proposals set out in the business plan are for the contraction of the overall Northern Rock business, returning it to its more modest roots and putting it on a more sustainable footing. As a result, it is proposed that staffing should be reduced by about a third. We have had discussions with One NorthEast, and Northern Rock has had discussions with Unite trade union, to consult on job losses and make sure that people receive proper support to find new jobs. There are vacancies in the financial sector in the north-east, and it is important, when there are job losses on such a scale in a particular area, that serious support is available to help people find new jobs. Had we not stepped in in the autumn, which was the right thing to do to protect the financial stability of the banking system, we would have seen job losses across the board. We would have seen Northern Rock go under, so it would not have continued to be a significant employer in the north-east. The business plan envisages that Northern Rock will continue as a significant employer in the north-east, with a viable future for the operation.

My hon. Friend also raised the issue of remuneration. He will appreciate that it is not for the Government to set the remuneration of banks. The remuneration of the previous chief executive was set while Northern Rock was in the private sector. However, my hon. Friend is right that staff, depositors and shareholders will all look at those arrangements with some concern, and he is right that remuneration committees in future should reflect on those arrangements.

Opposition Members have proposed a series of alternatives and it is right to consider them seriously. However, it is also right to point out that at no stage have the Opposition suggested how any of them would work in practice. They proposed putting Northern Rock into administration. That would have made it impossible to reconstruct the bank. It would have triggered insolvency processes, depressed the price that would have been obtained on any sale of assets, and forced the sale of assets into a market in which a credit squeeze is continuing. It would not have been a good deal for the taxpayer.

The Opposition say that the new powers proposed under the special resolution regime should be used. Those powers do not yet exist and Northern Rock needs to be dealt with now, not in 12 months when a new banking Bill has been introduced. It needs to be dealt with now. That, in the end, is the problem with Opposition Members. They will not face up to the consequences for Northern Rock, which need to be dealt with now. They hop about from one position to another. None of them makes sense. How on earth can they promote financial stability in the banking system when they cannot establish stability even in their own policy?

Northern Rock got into trouble last year as a result of its business model and the serious turbulence in the financial markets at the time. The Bank of England and the Government stepped in. Now we have to see it through. Temporary public ownership was the right decision for the taxpayer, for financial stability and for consumers. It has provided Northern Rock with the chance to restabilise and to restructure itself at best value to the taxpayer so that it can be returned at the earliest possible opportunity to the private sector. The decision to bring Northern Rock into temporary public ownership was the right way to meet the objectives that we set out, and right for financial stability for the taxpayers and consumers. The Opposition were wrong to oppose it and they would be wrong to vote against the transfer order today.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury) 10:42 pm, 31st March 2008

I shall not repeat all the arguments about the history of the nationalisation of the bank, which we have heard several times before. I simply reiterate our basic position. We believed from the outset that temporary public ownership was necessary and inevitable once the Government had made large-scale loans and guarantees, and it was certainly preferable to a bad private sale, which is what was on offer.

On that point, I noted from several interventions from those on the Conservative Benches flattering reference to the Bear Stearns arrangement as a private sector solution. It was not a private sector solution at all. It is underwritten by $30 billion of American Government guarantees. What was impressive about it was the speed with which it was negotiated, but it was a public sector solution to a private sector problem and it remains so, albeit under private ownership. If people are looking to the United States for inspiration, the extent of the taxpayer commitment in the United States in underwriting mortgage securities is far greater than any that has been undertaken in this country. We can admire the speed with which the crisis was handled, but let us not try to pretend that it was in any sense a private sector solution. It was not.

Because of the time constraints and because we have been over the historical ground before, I shall pick up a few points that are relevant from today's information from the accounts of the company, and make some reference to the business plan, which we have in rather skeletal form, and some brief reference to the quality of the assets of the company. I agree with the point that Mr. Hoban made. I have for a long time shared his doubts about the quality of the loan book. Now we are hearing anecdotes about it, although we have no hard and fast evidence on that subject.

One thing to emerge clearly from the balance sheet is the very rapid expansion of lending last year, from £87 billion to £99 billion. We now have that in black and white. Much of it was undertaken in the earlier part of last year; there was a rapid spurt in mortgage lending growth at the approach to the peak of the market. That, of course, is the source of all the problems that the bank subsequently got itself into.

There is a link between that and the issue raised by John McDonnell in an intervention about the remuneration of the senior executives responsible for that spurt in lending, which was the source of the problem. I note that the accounts refer to the fact that Mr. Applegarth's payments are substantially less than what he would otherwise have been due on the termination of his employment. I would love to ask him what on earth he would have been paid if the thing had turned out well—he has got £750,000, plus a cheap loan, plus a £2.5 million pension pot as reward for failure of the most abject and embarrassing kind. The Minister is right: not a great deal can be done about something that was undertaken when the bank was under private ownership and that is now subject to contractual arrangements. However, it sends the most appalling signal—not just to the work force, but to the shareholders who have lost everything. We need at least to record that.

The other thing that the balance sheet brings out is the size of the Bank of England loan, which is £28.5 billion. It is the first time that I have seen the figure in black and white. One of the problems has been that in the past we have had to deduce the figure indirectly from the accounts of the Bank of England. It is very odd that the Bank refuses to disclose that important information and that we have eventually got it in precise terms from the balance sheet of the company. That is an odd approach to freedom of information, and I hope that it will be rectified.

The other issue, which has already been touched on several times, is the profit and loss account, the summary and the operating and financial review, and the deterioration that took place between the £626 million profit and the £167 million loss. Several items are worth commenting on. For the most part, we are talking about exceptional items. There is a very large sum—£127 million—for non-recurring administrative expenses, and a large chunk of that is for professional fees. I do not know whether the Chief Secretary is responding to the debate, but if she is, will she explain the process by which the professional fees of the lawyers and advisers have translated through to the bank?

As I understand it, the Treasury was given bills of about £75 million from the various bidding parties—Goldman Sachs and others. Some of those have been accepted and some rejected, but it seems that as much as £50 million may well have made its way to the company. It would be useful to have some reassurance that the more outrageous claims have been pruned out—because some of them were outrageous. The largest quantitative sums were the impairment charges, which were £658 million. That sounds like an awful lot of money, but it is a great deal less than 1 per cent. of the assets. Given the doubts that are now beginning to creep in about the quality of the assets, the figure strikes me as conservative rather than very large.

A second set of questions relates to the business plan. The hon. Member for Fareham made the right points on that: there is clearly a tension between the attempts to get taxpayers' money back as quickly as possible and preparing the company for eventual sale. If the two objectives are not in direct competition, they are certainly in tension. I understand that the current management are redeeming mortgages and realising cash from that, and also trying to sell them on to other banks; inevitably, the better-quality mortgages are being sold on. That raises the issue of whether the latter stages of the repayment of the taxpayer will be achieved. The question that we need to answer is about not merely whether there is a general commitment to repay the taxpayer by 2010, but what the specific staging posts are, and how much we can expect to be repaid and when.

The third set of points relates to the quality of the assets. My understanding of this has advanced a little since our previous debate, much of which centred on Granite. There was concern that the Granite mechanism potentially transferred into the Granite vehicle the bank's better-quality mortgages. When I talked to the new chairman about this—I think it is public knowledge and I am not breaching any confidentiality in the conversation—he sought to reassure me that there is a computer model at the bank that ensures that the mortgages that go into Granite are chosen entirely at random, so they are a mixture of good and bad. If so, there may well be problems with Granite but they will not result in the sort of cumulative impairment that we were worried about. None the less, there are clearly problems with many of the mortgages that were advanced last year, and I would expect the repossession problem and the difficulties flowing from that to get progressively worse over the next year or so.

Let me say a little about a controversial matter. Several of us have had e-mails during the day from shareholders who see this transfer order as a mechanism for raising again the issue of compensation. I support the Government's view that the argument that there needs to be some kind of fair settlement in the direction of generous compensation is unrealistic. The simple fact is that the valuation of the shares before nationalisation was based almost entirely on artificial Government support, and it is unrealistic to expect substantial compensation in those conditions. The hon. Member for Fareham talked about the helpful certainty of the Bear Stearns compensation. I am sure he followed that as closely as I did, but my understanding was that the shareholders were offered about 2 per cent. of the value of the shares and, after a lot of negotiation over a two or three-day period, that was increased to about 10 per cent. However, it was virtually wiped out. It is unrealistic and unfair to imagine that such rescues can be accompanied by generous compensation of shareholders.

Last week, we had an indication of continuing problems in the financial markets. This is clearly not just a Northern Rock problem; many of the other banks are rocky as well. As has happened in the United States, we will get continuing pressure from the rest of the banking system for the public sector to take over the risks and for it to retain the potential upsides of any improvement. The Governor of the Bank of England is under a lot of pressure from the City and financial commentators to take over poor assets and poor mortgages in return for liquidity. He is absolutely right to take a strong line on that. I believe that the Bank of England's position has changed slightly and it is now willing to accept mortgage assets in return for liquidity while insisting that they are of very high quality.

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

I am just drawing my remarks to a conclusion.

The Governor is absolutely right to defend the public interest, which goes much further than the narrow issues of Northern Rock.

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Photo of Richard Spring Richard Spring Vice-Chair, Conservative Party 10:53 pm, 31st March 2008

This afternoon, there was an announcement on the home page of the Northern Rock website saying:

"Due to essential maintenance, access to our Tracker Online and Silver Savings Online services will be unavailable between 20:00 and 21:00 hours today, Monday 31st March. We apologise for any inconvenience this may cause."

We can only hope that that was not a bad omen of what lies before us. It does not bode well on the very day that Northern Rock is putting its best foot forward, announcing its business plan and setting out its future, with much publicity surrounding its full-year results for 2007.

In view of Northern Rock's declining mortgage book, the order before us deals with the transfer of shares to the Treasury solicitor, the possible hiring and firing of directors, and administrative changes surrounding shares. I want specifically to consider the regulatory aspect of this exercise, because that is at the heart of the problem. Section 2 of the Banking (Special Provisions) Act 2008 requires the Treasury to consider the desirability of making the order for two reasons. The first is to protect

"the public interest in circumstances where financial assistance has been provided by the Treasury to the deposit-taker for the purpose of maintaining the stability of the UK financial system."

The other is to maintain

"the stability of the UK financial system in circumstances where the Treasury consider that there would be a serious threat to its stability if the order were not made".

That is the exact point made by the Chief Secretary, and it is the heart of what is before us this evening.

In a letter sent to MPs by the chief executive of the Financial Services Authority, the internal audit identified a number of key failings. Before we can agree to any order, therefore, we have to be satisfied that the arrangements will be satisfactorily monitored by the FSA. I should add in passing that Northern Rock will not be a publicly owned company for the purposes of the Freedom of Information Act—a key element in the whole Northern Rock picture. After the regulatory failure of Northern Rock as a public company, is the Minister satisfied that there the FSA will adequately resolve that issue with regard to Northern Rock in its new state? It is worth remembering that the reliance on wholesale markets helped to bring Northern Rock down when banks became reluctant to lend to each other.

The interest rate offers on the website that I mentioned are pretty generous. Despite the modifications to the business plan, we must consider what is happening in the marketplace today. For example, LIBOR, which is the interbank lending rate, is back over 6 per cent.—its highest level since 27 December. That indicates the real nervousness among financial institutions, despite the additional liquidity provided by the Bank of England. In the build-up to the situation that confronted us, we saw the failure of the tripartite system introduced by the Prime Minister. Given the poor regulatory performance of the FSA, what assurances can we get that it will meet regularly and monitor lending and borrowing practices carefully? Given the clear illiquidity I referred to in the wholesale markets—and there is real pressure out there—will the FSA work closely with the Bank of England? There is no easy divide between liquidity, compliance and solvency. Last summer, the FSA presumed that the Bank of England would provide sufficient liquidity to bail out failing banks. We have to see the order in that context.

As far as Bear Stearns is concerned, it is not a question of it being some sort of pure exercise—I refer to the comments of Dr. Cable. Of course, a credit facility was provided by the Federal Reserve, but the real point is not so much the way in which Bear Stearns was handled by the Federal Reserve, but the speed of the action. That was the key.

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

I went through the argument about Bear Stearns with some of the hon. Gentleman's colleagues earlier. Is he arguing that a Conservative Government, had they been in place last September, would not have made every effort to explore a private sector solution to the problems faced by Northern Rock? If he agrees that they would have done that, does he accept that it would take time to work through such an option?

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Photo of Richard Spring Richard Spring Vice-Chair, Conservative Party

Of course, the Bear Stearns exercise was encouraged and helped by the Federal Reserve, and I know that the hon. Gentleman would agree with me about that, but the point is that the process took place very rapidly. Let us remember the situation in which we found ourselves. There were queues of people outside the banks—it was a terrible indictment of our financial services industry. Of course, the Americans, seeing the potential for equivalent disasters in the United States, moved very quickly to ensure a private sector takeover of Bear Stearns with the support of the Federal Reserve. The point for us to consider when comparing Bear Stearns with the fiasco of Northern Rock is simply this: it is impossible to discern, because we cannot get a clear answer, what the Lloyds TSB offerings happened to be. However, we know enough to know that something could have been worked up to ensure a satisfactory takeover, but something called "the general election" intervened. I fear that the decision was ultimately political, and its consequences have been the dithering and backsliding of the past few months, which have had a devastating impact on the reputation of our financial services industry.

The order demands assurances on transparency and good management. Northern Rock made a great impact on the reputation of our financial services industry and our regulatory oversight. The price to earnings ratio of UK domestic banks is now the lowest in Europe. The market is taking a view of us and our country, even though the financial services industry in this country is probably the most important such industry, relatively speaking, in Europe. That view flows partly from the Government's incompetence and their handling of Northern Rock.

The solution had better work this time. However, I am afraid that, given the way the Government handled the issue, we can have little confidence that a Government so marked by indecision and procrastination, perfectly illustrated by the Northern Rock fiasco, will ever enjoy the fullest confidence of the banking and financial services industry in this country or internationally again.

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Photo of John Redwood John Redwood Conservative, Wokingham 11:01 pm, 31st March 2008

It was a great pity that the Chief Secretary decided to devote so much energy to rather silly and clumsy partisanship and to claiming that we do not have any better ideas about how to tackle the position, instead of doing what the House expected of her and telling us a little about the challenges and difficulties that lie ahead if the business stays in the public sector. It probably will if we are unsuccessful in persuading the Government otherwise.

The Chief Secretary constantly asks, "What was the other option?" There was an easy other option, for which I have argued throughout the crisis, from when it broke in the summer. Of course, the Bank of England had to step in when there was a run and act as lender of last resort. However, the Bank of England—and, if necessary, the Treasury, working with it—should subsequently have been the intelligent bank manager of the business. It had a natural relationship with Northern Rock as its banker.

As a banker, it could have taken all the collateral it needed to ensure that taxpayers' money would never be at risk. It could have guided and influenced the business plan so that it had an impact on phasing the repayments and the way in which they would be made. It did not have to take over the bank's ownership, with all the other liabilities and risks. It did not have to take responsibility for the staff or future trading. It should have concentrated on lending the least amount needed to get the bank through the immediate problem, and having the best possible security for the taxpayer and the best possible supervision and management overlooking the board, as a bank manager should do, to ensure that the money would be repaid in good time. That was the obvious thing to do.

The problem with the current model is that the Government are trying to do two contradictory things. Of course, the Chief Secretary is right to tell the House that she views getting back the £24 billion—the remaining outstanding loan, we were told tonight—as an urgent priority. I suspect that she can do that and I wish her every success. We all represent taxpayers and it is important that we get the money back. It is also important that the Bank of England gets its money back as quickly as possible because it is a small bank trying to deal with a large and complex system. All the time that it is so committed to Northern Rock, it does not have the firepower that it needs to deal with the obvious imperfections and difficulties in the money market.

How can we get the money back? The Government and the bank's recently appointed management admit that the money will be repaid—we trust in reasonable time—by squeezing the business, perhaps halving it, getting people to repay their mortgages early because they remortgaged with someone else and making sure that new advances are not made through Northern Rock to replace advances that are maturing as people pay them off, so that business can be transferred to other organisations in the financial world, and some of the assets can perhaps be sold on, as appropriate.

That is a perfectly good working model for getting the Treasury money back, but it is not what the owners of a bank would be doing if they were trying to sell it on to someone else for maximum value. Indeed, doing so will diminish the value of the assets under control, because the bank will have to battle constantly to cut its costs, by sacking its staff and reducing its administrative overheads, to bring it closer to the reality of the falling revenue. Instead of having one or two years of rising profits before returning the business to the private market, which would be best for securing a good price, we have been told tonight that it will definitely have three years of losses. We know, too, that it will have a much smaller business, so it will be quite difficult for it to explain how it can suddenly turn all that round.

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

Does the right hon. Gentleman accept that the logic of what he is saying points to a longer period for the repayment of the bank's loan than the period to 2010 and to putting less pressure, by the reduction of business, on the rest of an already struggling mortgage market?

Photo of John Redwood John Redwood Conservative, Wokingham

I do not think that the circle can be squared. If the loan were made permanent for, say, 10 years, it would give the business more chance, but there would then be enormous competition issues with the European Union, which might prevent it from exploiting that chance. Indeed, my next point is that given that the Government are forecasting perhaps three years of quite serious losses, they will have to argue hard to our bosses in Europe that they are not making a direct Treasury subsidy to allow unfair competition, even though the business is slimming itself down.

My hon. Friend Mr. Hoban has already put his finger on the issue, which is that although it would be quite easy to defend ourselves against a charge of anti-competitive practices in making new advances, because the business would be shrinking its advances portfolio, it would be more difficult to defend against that charge on the deposit front. I looked at the Northern Rock site today, as many others preparing for this debate no doubt did too, and saw offers of 6 per cent. with the full Treasury guarantee. That seems a pretty attractive rate, but a justification will need to be made to the competition authorities in Brussels if such rates are supported by direct Treasury subsidy, because the company is a loss-making business offering those rates to collect capital to replenish its capital base.

We have a business with two conflicting aims. I trust that the repayment of the moneys will be completed before the next general election—it would be a neat order to do so—but the Government will then have a weakened, loss-making business with far fewer staff and an unpleasant impact on the north-east, which is one of the tragedies of the situation that they have created, that will be quite difficult to return to market for a sensible price. Ministers must accept that they are responsible not just for getting back the £24 billion that has been lent, but for getting a fair value for the assets that they have taken over, rather than going through three of four years of writing them down, showing that they are impaired, losing lots of money on them and ending up with a second set of losses for the taxpayer, in addition to the running annual loss that will have to be paid for out of taxpayers' money, as the Chief Secretary knows but will not admit, because once someone owns 100 per cent. of the shares, they are clearly responsible for paying the losses.

There are other oddities. It is interesting that Northern Rock appointed new non-executive directors on £90,000 a year, plus £10,000 for every committee, shortly before the nationalisation went through. Will that become the standard level of remuneration for such posts in the public sector, or will an attempt be made to bring Northern Rock into line with the more normal public sector levels? That is an issue for Ministers, who have naturally been telling the public sector that they want good wage and salary control, because they are worried about the inflationary effects of doing otherwise.

One interesting point to emerge in the business plan is that there is to be a continued transfer of new money into the Northern Rock Foundation. We have been promised a minimum of £15 million, but we have to ask whether that has been through the proper public expenditure assessment processes and whether other parts of the country would be eligible for such treatment, as we are now talking about a public subvention to a particular part of the country for particular purposes.

If Ministers are to have their way in the Division, as they often do, what we need above all is a bit more explanation of how they will satisfy themselves that Northern Rock's business plan will lead in due course to resale to the private sector on terms that are satisfactory to the taxpayer, and how they will satisfy themselves that they can do that without falling foul of competition rules, while still getting the repayment within a reasonable period. I think that they have set themselves an impossible task.

Ministers are in this situation because they dithered and made mistakes at every twist and turn of this awful story. They did not keep markets liquid enough in the summer to head the problem off. They did not understand how to organise a lender of last resort, in secret or with the involvement of all the banks, so that there was no great shock to Northern Rock that brought it down. They delayed when the run on the Rock began, and greatly increased the cost of the rescue by not making an immediate statement, as they should have done. They spent too long lecturing banks for making all sorts of mistakes and not enough time understanding that there was a crisis in the credit markets, and that bad credit and good credit were both going down at the same time in a way that would undermine good as well as bad institutions. They delayed too long when trying to put together a private sector bid, even though many people told them that that was not likely to be productive, given the delays and difficulties that the Government faced.

The Government have come up with the worst of all possible worlds, which is to nationalise all the assets and liabilities of Northern Rock. I fear that those in the north-east will grow to dislike the policy because it will mean redundancies, closures and a squeeze on the bank, and I fear that taxpayers will come to loathe the policy because it will mean endless losses and a very bad final result if the Government try to sell the bank.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow 11:11 pm, 31st March 2008

It is a great pleasure to follow my right hon. Friend Mr. Redwood, whose closing remarks form a précis of the calamitous state of affairs regarding the nationalisation of Northern Rock that economics students will, in years to come, turn to first to get a proper understanding of what went wrong. The Chief Secretary to the Treasury has unfortunately again left the Chamber. It seems to be becoming a habit that whenever I stand up she goes off, perhaps to get help. I shall start my remarks by explaining to her colleague, the Exchequer Secretary to the Treasury, why the parallel with Bear Stearns is so pertinent; Ministers seem to have failed to pick up on that. I am pleased to see the Chief Secretary return. I should tell her that I am trying to explain why the parallel with Bear Stearns is so clear and direct.

Last August, the financial authorities were made aware of the problem with Northern Rock and tried to put together a private sector rescue. They received an indicative proposal that was dependent on substantial, Government-guaranteed financing. If the authorities had sat round a table in the same room as the financiers, just as Secretary Paulson did with JPMorgan Chase, a deal would have been done over the weekend, and the Government would have avoided all their subsequent problems. It is for the Government to reflect on why that did not happen, and to repent for years to come.

I should like to pick up on one or two of the revelations in Northern Rock's annual report and business plan, published today, which allow us a glimpse of why the Government were so reluctant to disclose what is happening in the bank. Consistently over a period—ever since he first discussed the issue with us—the Chancellor has told the House and the public at large that he is confident that Northern Rock's asset book is good, and that Northern Rock was solvent. He was confident about that because he had been told by the Financial Services Authority that that was the case. One of the final notes of the accounts—note 41(B) on capital management, on page 99—says that on 19 April 2007, the FSA was told that

"Northern Rock's regulatory capital was below the capital requirement imposed by the FSA by £85.5m".

As long ago as last spring, months before the problems emerged in the credit markets, the FSA was aware that Northern Rock was operating outside its capital regime. However, it did little about it—so little, indeed, that despite its having identified Northern Rock as one of the so-called high-impact firms, its regulatory regime was so lax that its own internal review, published last week, describes it as being

"at the extreme end of the spectrum" of regulation.

The FSA's decision that, alone among 38 high-impact firms, Northern Rock did not need a risk mitigation programme implies considerable scrutiny during "close and continuous" meetings. However, it is clear from the FSA's commendably frank and candid appraisal of its own performance that the number of such meetings held by the FSA in the three years from 2005 until 2007 amounted to none in 2005, one in 2006 and seven in 2007. Of the seven, five took place on the same day—I would describe that as a single meeting—and two took place by telephone. I calculate that that represents an average of less than one day of meetings per year during the three years in which Northern Rock was supposedly a high-impact firm. The organisation in which the Chancellor has placed such confidence said repeatedly that Northern Rock was a good bank, solvent and with good assets. It beggars belief that the Chancellor can have placed such trust in the regulator, given its performance over that period.

Let us examine the asset quality revealed elsewhere in the accounts, which has already been mentioned by other Members tonight. A most revealing statistic is the proportion of residential mortgages—the primary and most secure category of assets held by the bank—which are at the

"extreme end of the spectrum", as the FSA put it. Page 92 of the annual report reveals that in 2006-07, the proportion of mortgages with a loan-to-value ratio in excess of 100 per cent.—in other words, the loans were greater than the value on which they were secured—rose from £110 million, in round figures, to £432 million. That £432 million is now guaranteed by the taxpayer, although the company itself admits that the loans were greater than the security on which they were pledged. As for the second-worst-secured assets, those with a 95 to 100 per cent. loan-to-value ratio, the figures are remarkable. Since the end of 2006 the amount lent increased from £2.1 billion to £4.1 billion, an increase of £2 billion.

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

I happen to have the table in front of me. Does it not also show that the best-quality mortgages, those with a loan-to-value ratio of less than 70 per cent., rose by a figure three times as great as the one that the hon. Gentleman has given?

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I readily agree that the overall book has increased substantially, which means that all categories of loan have increased. My point is that the risk of the book has increased significantly over the year—and this is the book that the Chancellor keeps telling us is of very high quality. The least-high-quality lending has risen by nearly £2.5 billion, and that is the part that is most at risk, not least given what is happening in our present housing market.

Photo of John Redwood John Redwood Conservative, Wokingham

Perhaps my hon. Friend will remind Labour Members that there are a good many unsecured loans as well. People were being lent 125 per cent. or so of the value of the houses involved, including the top-up unsecured loans, and I believe that the 2007 accounts show particularly large increases in provision against those unsecured loans.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I am very grateful to my right hon. Friend for reminding me of that. Indeed, the unsecured lending book is of the order of £7.7 billion as at the end of 2007, and the impairment charge was in excess of £200 million, much of which was secured against that portfolio.

Hometrack, which provides one of the widest analyses of the housing market, published some statistics today confirming that we have entered the sixth month in a row of declining house prices. The increase in high-risk residential mortgages places a sharper focus on the Chancellor's confidence that the book will be good and that taxpayers' money will be secure. I wish I could share his confidence.

In an earlier discussion of the possible consequences of administration, the Chief Secretary referred to its leading to fire sales of assets. Of course, we have been in a state of uncertainty over this company since mid-September, and the company has successfully sold a portfolio of assets—its commercial loans—for a premium over the book value at a time of considerable uncertainty for the company as a whole. That firmly demolishes the argument that an administration would have somehow made it more likely that losses would have been incurred on the sale of the loan portfolios. Good assets will sell for a good price in these circumstances irrespective, as has just been proven, of whether the company is in distress.

That brings me on to my main point, which also comes out of a reading of the accounts. Much was made in earlier debates about Granite of whether or not the business plan will feed the beast. Enough has already been said about that this evening. However, Northern Rock established another financial vehicle, which has not been referred to in previous debates. I refer to the Saphir Finance vehicle, a special purpose vehicle, which issued £400 million in tier 1 notes; they were issued against the £400 million of preference shares issued by Northern Rock. The preference shares were provided as collateral to the holders of the notes issued by Saphir Finance.

The preference shares in Northern Rock, given that they are preference shares, rank ahead of all the ordinary shares, including the ordinary shares to which the foundation trust shares will be converted through the transfer order. Oblique reference is made in the order to the preference shares, but I would ask the Chief Secretary, even in the few minutes remaining in our debate, to help us to determine whether in the compensation payments made to shareholders of Northern Rock, if there are any, the Government will observe the traditional capital ranking rights of securities and ensure that preference shareholders are paid out in preference to ordinary shareholders. I am not sure whether she is able to give us that assurance now. I am more than willing to give way to her— [Interruption.] She indicates that she is not in a position to do so, so perhaps she will be kind enough to write to me— [Interruption.] Once again, she is not indicating either way.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

She will be happy to write to me about that. I am very grateful because the issue is causing concern outside this place. Given the lack of information about how the Government intend to implement the transfer order and compensate shareholders if any compensation is due, if the Government choose to ignore the standard ranking of securities, it will blow another hole in the confidence of financial institutions in the Government's respect for the ordinary workings of the market. I am not arguing that preference shareholders should necessarily receive anything, as that will come down to a judgment on what compensation should be paid at all; but if any compensation is due, it is due first to the preference shareholders, and if that does not happen, I would urge the Chief Secretary to think very carefully, as it will raise ripples right across the financial sector. The House will be pleased to hear that that brings me to my final point.

My right hon. Friend the Member for Wokingham asked a question about the business plan objectives that are set out quite succinctly in the annual report, both in the executive chairman's statement and in the operating financial review, where the company's objectives are referred to as, first, the repayment of the Bank of England debt; secondly, the release of Her Majesty's Treasury's guarantee; and, thirdly, a successful return of the company to the private sector. Where within those objectives sits the priority donation out of income—by the way, the company is generating none at the moment—of £15 million to good causes? Of course, we would all like to give plenty of money to good causes, but it is not within the company's objectives. The company is not generating a profit at the moment, so out of what pot of reserves will it make such a payment for 2007 and subsequent years if profits are not made?

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

Perhaps the hon. Gentleman could make it clear whether the Conservatives' position is that those moneys should not be made available to the Northern Rock Foundation. If so, does he recognise the consequences for many causes in the north-east? Does he also recognise that making those contributions might well be a pretty clever marketing stroke on behalf of Northern Rock, on whichever constitutional basis it is formed—currently under the public sector?

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I understand the hon. Gentleman's enthusiasm for spending money in his region, but that is not the point. I am trying to make a point not about whether a company should distribute money that it does not have, but about the fact that the Government have made a determination that Northern Rock, which is being nationalised and is owned by the Government, will make that payment—but from where? It must come from the taxpayer in the first year, because the company is not generating the profit that it would have distributed under the previous arrangements.

In conclusion, I urge the Chief Secretary to think again, before we vote on this issue, about whether or not the Government are really in a position to allow taxpayers' money to be put at risk in the way that they have. I urge her to think again about the prospect of introducing a banking reform proposal that would have allowed an orderly administration to take place under Bank of England supervision, which is what will happen if another bank gets into difficulty next time.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 11:27 pm, 31st March 2008

We have had a very full debate on the order. I was a little disappointed in the Chief Secretary's speech. I expected that she would set out very clearly the rationale for the Government nationalising Northern Rock, that there would be some substance to her arguments and that we would not have to rely on the vague assertions that this represents a better deal for the taxpayer, without some information to prove that that was so. She gave us no comfort on the quality of assets that the taxpayer will acquire. Northern Rock's payment ratios are deteriorating faster than those of the industry as a whole. She gave us no comfort that taxpayers would get all their money back. She said that this was the best deal possible, without providing the substance to demonstrate that it is the best deal possible.

On the specific losses that Northern Rock will incur in 2008, 2009 and 2010, despite being presented with the opportunity to give the House the figures, the Chief Secretary sought to avoid giving the House and the taxpayer that information, despite the fact that the Treasury must know what the figures are. The Treasury has access to all the financial information that supports the plan, and I am disappointed that she chose not to share those figures with the House, because that indicates that a significant loss could occur over the next three years. Ron Sandler refers to a substantial loss. The taxpayer would be right to be concerned about their exposure as a consequence of the transfer order before us. The Chief Secretary talks about there being no alternative, but the reality is that the Government have yet to prove the case for nationalisation, have yet to make the substantive arguments that this House deserves to hear, and have yet to be fulsome in disclosure of information about Northern Rock's financial position in their forecasts and projections. They are just hoping that the money will be repaid by 2010. Even Ron Sandler is not giving Northern Rock customers that same degree of assurance.

That is why we will pray against the order. We believe that the taxpayer has been exposed to significant risk as a consequence of the way the Government have handled the fallout from Northern Rock, and the Northern Rock situation over the past six months. The taxpayer deserves better answers than they have had tonight from the Chief Secretary.

It being one and a half hours after the commencement of proceedings, Mr. Deputy Speaker put the Question , pursuant to Standing Order No. 16 (Proceedings under an Act or European Union Documents) and Order [26 March.]

Hon. Members:

No.

Division deferred till Wednesday 2 April, pursuant to Standing Order No. 41A (Deferred divisions).