Banking (Asset Protection Scheme)

Part of Cafcass – in the House of Commons at 4:14 pm on 9th March 2009.

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 4:14 pm, 9th March 2009

I thank the right hon. Gentleman for his statement and for his courtesy in allowing me to see a copy of it in advance.

The right hon. Gentleman explained to the House that the Chancellor is travelling to Brussels for a meeting tomorrow, but I think that the House will none the less be disappointed that we have apparently reached the point where the assumption by the taxpayer of an additional £250 billion-worth of contingent liabilities is not considered a sufficient reason to reschedule one's travel arrangements. There will also be disappointment that a Treasury Minister is before the House for the first time since the momentous decision last Thursday to begin quantitative easing, and has not taken the opportunity to update the House on that decision and its far-reaching implications for Britain.

This massive second round of banking bail-outs is proof that the Prime Minister's first bail-out last October failed. The test of it will be whether credit actually begins to flow through our economy again, not what promises of more lending the Government say they have secured. The £14 billion of lending commitments that the Government claim to have extracted from Lloyds Banking Group is less than half of the total taxpayer investment in Lloyds, and less than 5 per cent. of the total taxpayer exposure to Lloyds HBOS. Will the Financial Secretary confirm that the additional promised lending will be subject to the group's prevailing commercial terms and conditions, including on pricing and risk assessment, and, in relation to mortgage lending, that it will be subject to the group's standard credit and other acceptance criteria? If that is the case, is not this pledge just more simple rhetoric?

It is now clear that the merger of Lloyds and HBOS was a bad deal, put together without full and proper understanding of the state of the HBOS book, certainly on the part of Lloyds and possibly on the part of the Government. Until last October, Lloyds had stood aloof from the chaos engulfing the banking sector, as a sound, somewhat old-fashioned bank with a reputation for caution that attracted small investors and drove to distraction those in the City who preferred riskier plays. In the space of a few weeks, that sound, solid bank, which would have been quite capable of prospering without the support of the taxpayer, has been transformed into a banking behemoth that is incapable of surviving without these huge infusions of taxpayer funding. I ask the Financial Secretary whether the Government really believe that the creation of this crippled giant at the heart of our banking system is the best outcome if the objective is to maximise the flow of credit from the banks to Britain's recession-hit businesses and households.

Back in October we were told that the merger was a commercial deal put together by the managements of the two banks, and that all that the Government were doing was removing the competition barriers that would have prevented it from going ahead. However, there were persistent stories at the time, promoted by those close to the Prime Minister, that in fact the Prime Minister had brokered the deal and driven it through to completion.

Now that the taxpayers' total exposure to Lloyds HBOS is approaching £300 billion, will the Financial Secretary explain why neither the Government nor the Prime Minister realised at the time that, far from rescuing HBOS, the merger would drag Lloyds down the path of taxpayer bail-out and part nationalisation? Is the Financial Secretary sure that, of all the options available to them, the route that the Government have chosen—insuring assets within the banks—is the best way to get credit flowing at the minimum long-term cost to the taxpayer? Can he look the House in the eye and tell it that the guarantee option has been chosen on the basis of the economics and long-term best value for money for the taxpayer, not simply because, alone among the alternatives, it keeps the cost to the taxpayer off the balance sheet and out of sight until the losses crystallise?

The Prime Minister's mantra is that the crisis was made in America and blew in on the wind to afflict a blameless Britain. He paints a picture of toxic assets, which comprise US sub-prime mortgages, complex derivatives and impenetrable credit default obligations. However, will the Financial Secretary confirm that more than a quarter of the toxic assets that the Government are guaranteeing in the deal are plain, old-fashioned UK mortgages, lent by HBOS in a bout of over-exuberance, which testifies to the failure of the Prime Minister's tripartite regulatory system? In effect, is the taxpayer not taking a £75 billion bet on future house prices not falling by more than 10 per cent. from 31 December 2008? Perhaps the Financial Secretary has not noticed that they have already fallen by 3.3 per cent. in the first two months of the year. I do not know of a single commentator who does not believe that they have further to go.

Let me consider fees. The Financial Secretary set out in his statement, and Lloyds set out in its statement to the stock exchange, the fees payable by Lloyds Banking Group to the Treasury. However, the end of the Lloyds announcement refers to "certain interim arrangements", agreed between the Treasury and Lloyds and relating to the management of the assets in question. I imagine that the right hon. Gentleman knows that, in the deal between the Dutch Government and ING, as well as the fee payable by the bank to the Government for the guarantee, a fee is also payable by the Government to the bank for managing and financing the assets that the guarantee covers to maturity. Will he give hon. Members a categorical assurance today that no fees whatsoever are payable under the deal by the Treasury to Lloyds Banking Group? Will he confirm that the ban on cash bonuses that he announced for this year will extend to future years? Will he adopt, at least for Lloyds Banking Group, our policy of a £2,000 permanent limit on cash bonuses? Will he also tell the House what steps the Government have agreed, as part of the deal, about executive and director pensions in Lloyds Banking Group?

For the size of the British economy, we have committed more than any other country to bailing out our banks—approximately £1.2 trillion—and we have precious little to show for it so far. The first banking bail-outs failed to get lending flowing again, requiring taxpayers to stump up hundreds of billions of pounds in further guarantees and capitalisations. The temporary VAT cut has failed to stimulate consumer spending and the stamp duty holiday has failed to stop house prices nosediving. The Government have made a plethora of announcements of support for business and home owners, many of which have been shown up as hollow rhetoric, with most schemes not yet operational and none delivering measurable assistance to the front line.

Hard-pressed businesses, families and home owners throughout the country have had enough of the rhetoric, the endless announcements and the activity for activity's sake. They want normal credit conditions to be restored—that will be the test of today's announcement, and the very least that taxpayers should expect in exchange for the £1,200 billion that the Government have pledged on their behalf to the banking system.

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