Second Reading

Part of the debate – in the House of Lords at 7:03 pm on 16th December 2008.

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Photo of Lord Selsdon Lord Selsdon Conservative 7:03 pm, 16th December 2008

My Lords, I have stood from these Baron Benches, as they are called, for many years and spoken on similar subjects. It always gives me really great pleasure when the professors and economists buzz off. If the accountants could only go as well, life would be much easier. Banking problems only began when economists arrived within government departments—237 within one year, over half from eastern Europe. It was only when people relied upon accountants that things began to go wrong. These Benches are where the Barons sit. Noble Viscounts such as my noble friend on my left should normally sit a bit nearer the front, and the Earls sit on the very front.

I am rather pleased that I have two speeches today. I was always told that I should have three.

The bankers are now here. There is the noble Lord, Lord James—Lloyds from 1959 to 1964—and the noble Lord, Lord Stewartby, then Ian Stewart, working for my cousin Giles Guthrie and Brian Shipley, a really great name. The noble Lord, Lord Oakeshott, was in Warburg Investment Management, known for being able to take a risk on absolutely anything and to give odds on any financial subject in the world. These were great people.

Me, my Lords? I was in industry—asbestos. I then went into economic forecasting. I was the only non-economist to be employed because I was meant to know about industry. Thereafter, I thought that everything I did went well, but it steadily collapsed. I joined Singer and Friedlander and yesterday the legislation came in effectively to abolish it. It was a great entrepreneurial bank set up by two arbitragists, Mr Singer and Mr Friedlander—one Austrian and one South African—at the start of the war. That was arbitrage, which gradually became acceptable. When it merged with the Bowring Group, it became an accepting house. The reason I felt confident to join was that CT Bowring was the only person to pay out in the San Francisco earthquake disaster, as a fund. You knew, therefore, that you were with someone who was undoubted. From there, I moved to Samuel Montagu, which was owned by Midland Bank.

I want to try and explain how a bank works. It does not need all these outside regulators. It needs supervision. When you really have a fear of the chief inspector coming to look in your fridge to make sure whether you have any wine illegally on the bank, you then start to get nervous. Midland Bank, for which I worked, was the biggest bank in the world. It was known as the farmer's bank and was an industrial bank, but gradually it fell and fell. It trained every bank in the world and every banker. You could recognise one, because if he crossed his hand over his chest and seemed a bit deferential, you could ask if he was trained in the Midland Bank and if it was Sheffield or Haslemere and they would say yes.

Every single head of finance in the country had been trained in the Midland Bank. Unfortunately, things gradually went wrong. When we had a credit committee it was a nightmare. First, I was a director of international banking at Samuel Montagu. We wanted to get use of our parent company's balance sheet and that needed craftiness beyond belief. We knew that if we worked with Warburg, it had that amazing ability to unlock money from any bank in the world—it was called placing power. It never put any of its own money in; it just wanted to use other people's balance sheets, and it was clever. In Morgan Grenfell, where the noble Lord, Lord Smith of Kelvin, was, there was a wonderful man, probably the best investment merchant banker in the world, Bill Mackworth-Young. When he spoke to Luke Meinertzhagen at Cazenove's—Luke was called the man with the golden telephone—they could place anything in the world and anything they placed never went wrong.

On the other hand, at Midland—if you were in Samuel Montagu—you had to go across the road to the international credit committee and present yourself, as a director, in front of 20 people, with someone standing with a brown telephone in the corner to say what the committee had done direct. It would go out by texted telex, wherever it was. I was quite nervous because I did not understand this. They were all slightly bureaucratic. In the merchant banking side you could be called an "esq"—I was known as "Lord Esq"—but you had to be a "mister" in the bank; you could not be an esquire because you were not landed. These people knew their job. You would be asked, "Have you been there?". That meant that you could not lend to anybody unless you had been to the country in the last 90 days, or unless you or the manager had visited the client in the last day. You had to know thy customer. Then, if they were not sure about it, they would introduce a strange phrase. I thought I should know all these initials like SIVs, but they did not turn up. "Committee, I think we are not sure enough. I think it should be an FFW". I did not know what an FFW was and I did not dare go and ask other people. Quietly, I asked how long we had been using the term "FFW". "Oh, before my time, my dear chap, way before my time".

I then found out that only Midland had it. It was a "fair following wind". It meant that, if the project stacked up, the agreement, in principle, would follow. That FFW would read as Project MJ223B and so on, FFW-ed. The governor of the central bank of wherever it was in the world knew that he had got Midland on side. That was almost like the traditional handshake.

That was not the end of it. The proposals then had to go back to head office in Poultry, to the fourth floor where the gold was actually gilt, not gold paint as on the other floors. If you ever went before the Midland board—some of my noble friends have been directors—you were told to go into the office, wait and then take three steps before the board, and you had to describe the project, as a director.

Only once did I beat the system. The noble Lord, Lord Whitty, who is not here, would enjoy this. I dealt with the more difficult countries because I was not important enough to deal with the easy countries. I was asked to help Bhutan. Bhutan wanted a new aircraft. As our esteemed customer was Hawker Siddeley, where the noble Lord, Lord Whitty, worked, I suggested that it should have an HS125. When I put forward the proposal to the credit committee, I was asked whether we had been to Bhutan. We had not, but by chance, the night before I had met the Queen of Bhutan in Fulham and helped to push-start her MG. So I said, "I have met the Queen of Bhutan". The committee said, "Hmm. Perhaps. FFW-ed", and Bhutan got the plane.

The supervision was from within and you were so frightened of letting down your own colleagues that you did not need outsiders, but of course you constantly had to walk across the road to the Bank of England, particularly when you handled the exchange control.

Sadly, Midland Bank, with 333 branches, employing 33,000 people and getting 330 applications for charity, one from each branch, every day, thought it could expand. It owned Northern Bank and Clydesdale Bank and had a 20 per cent stake in Standard Chartered Bank and lots of joint ventures. It then decided it must move with the new world, open up another time zone and get involved in America. It bought a company called Crocker which was in the sub-prime mortgage market—all that time ago—and it was accused of red-lining. That cost Midland Bank $800 million, the same amount as the total budget of Afghanistan today.

I learnt very quickly that if an investment bank or any bank does not have a balance sheet, it is not allowed to lend more than 17 or 20 times the share capital in reserves. I thought, "How much can you lend?". I did not think about what would happen if you lost $20 million and that you would have to reduce your lending by that much. Nor did I realise the pain when inflation came in. With interest rates so high, we found that big companies would not pay early and suppliers would pay late; you then found that the pressure was on lending.

That is the present situation. Every one of us needs Joe the plumber. I have lots of "Joe the plumber"s. This morning it was Steve the laundryman. He is a really good, right-wing chap who believes in his children being properly educated. He works his heart out and does the best shirts in London at the cheapest price. This morning, I said to Steve, "What shall I tell them today?". He said, "Tell them to take over the banks, nationalise them all, and give us the money without interest until they bring down the amount of interest they are getting in from everyone else. It's not fair. They're coining it in". I said, "They made a mistake. Do you need any money?". He said, "No, except that you are not doing as many shirts". For economic reasons, I thought I might wear one shirt for two days; for noble Lords sitting close to me, I should say that this is actually a new shirt today. Steve pointed out that many people are thinking of economising.

The banks and the Bank of England are the best people to supervise their business, provided they know what they are doing. Now we come to the problem: no one doubted the four clearing banks, but we have too many banks. I shall not bang on too long about the rating industry, but maybe we should introduce our own rating system. Let the Bank of England introduce a rating system for banks. There would be no triple A-rated banks at the moment; there may not be many double-A banks, but we could devise our own rating system which would give people confidence in banks. If the rating was sufficiently good, people would stand behind it.

I end on a slightly sad note. Everything is about trade and I was in trade. Lombard Street was about trade. Our worry today is that we are misrepresenting things. The noble Lord, Lord Myners, has heard me bang on about the balance of payments. We will have a balance of payments deficit of £100 billion on visibles this year. The surplus on invisibles will fall away naturally because the financial services market is down a bit. We have only 11 countries in the world where we have a surplus in trade. As our currency has gone down by 20 per cent, so the cost of our imports, which are many times more than our exports, will go up. We may have a currency crisis and we may, one day, think back to exchange control.

I am optimistic because we are still one of the most international countries in the world and the Bank of England is one of the most respected banks. We should not just count our blessings, but when there is a problem we should look at our future trading strategy and the advice we give to help it to trade out of it. We have some problems and the only way we can get out of them is to trade out of them.