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The second element of support is the Bank of England loan facilities. It is important to remind ourselves of why this support was provided in the first place. Northern Rock got into difficulties because it was almost totally reliant on getting very substantial sums from the securitisation and money markets on a continuous basis
to do its business. When that lending became ever more difficult, it had no option other than to go to the Bank of England. Because of the possible impact on the stability of the wider financial system, it was right that I authorised the Bank of England to intervene. That, too, had cross-party support.
While international financial markets have shown signs of improvement since the sharp credit squeeze in August and September, following the problems that arose in the American housing market in the summer, there clearly remains continued uncertainty in the markets. The rates at which banks are willing to lend to each other also remain high in all the major currencies. It is therefore vital that we do everything we can to maintain stability internationally, as well as here at home. As the House knows, we are taking steps at an international and domestic level to improve the regulatory regime and to provide greater transparency. That was the subject of the discussions of G20 Finance Ministers that I attended in Cape Town over the weekend.
The continuing support of the Bank of England has also given Northern Rock an opportunity to consider its strategic options. I am very clear that this is also the right thing to do and, indeed, when I announced this, it enjoyed support from both sides of the House. I know that there has been interest in how much support the Bank of England is giving. The Bank publishes its balance sheet every week. However, in common with other central banks, it does not provide details of any operations because it believes that doing so would undermine its ability to provide such support. I understand the frustrations that that can sometimes cause, but to provide what would, in effect, be a running commentary on any operations would be likely to have adverse affects that none of us would want.
Having said that, I can tell the House that Bank of England lending is secured against assets held by Northern Rock, which include high-quality mortgages with a significant protection margin built in and high-quality securities with the highest quality of credit rating. The Bank is the senior secured creditor. The Financial Services Authority has said before, and continues to say, that Northern Rock’s main asset base—its mortgage book—is strong and sound.
As with any lender on this scale, we have ensured that the Bank’s lending is subject to significant conditions and controls to ensure that our interests are protected, and, in return for that facility, Northern Rock has agreed a number of controls, including not declaring, making or paying any dividend without the prior written consent of the Bank of England, and not making any substantial change to the nature of its business.
I now turn to the next stage. It is in the interests of everyone that the situation with regard to Northern Rock is resolved as soon as possible. That was why Northern Rock asked for expressions of interest in purchasing the business. As the company announced earlier today, as part of its review of its strategic options, it has received indicative expressions of interest, covering a range of options for the business. It currently expects to receive further expressions of interest in the next few days.
It is essential that the public interest is protected. That is why I have published today the principles that will underpin the Government’s approach, when
assessing proposals from Northern Rock regarding its future. As I have already said, the Government have to agree to any such proposals. The principles make it clear that the Government have a clear duty to protect the public interest, and we will do so. However, I think that the whole House, and particularly Members representing the north-east, will want us to do everything we can within the constraints on us to resolve a very difficult position for Northern Rock.
Let me therefore set out our approach. First, we must protect the interests of the taxpayer. Substantial sums have been lent, and that money has to be repaid at an appropriate time and rate. The Government will consider proposals with a view to reaching the best outcome for the public purse. Secondly, we want to protect depositors. It is essential to do everything we can both to safeguard their interests and to maintain the service provided to them. Thirdly, we will maintain wider financial stability.
As I have made clear all along, the Government will now assess proposals from the company consistent with the approach that I have set out, and we remain closely engaged with the company as the best outcome for its future is assessed. As the company has acknowledged today, any proposals would have to be approved by the Government and, importantly, any proposal can be vetoed by the Government. In that way, the Government can ensure that the public interest is safeguarded. As I have told the House on previous occasions, any outcome must meet EU state aid rules.
It would be quite wrong to dismiss any option now without proper consideration, as some have suggested we do. I continue to believe that it is right to use this time to explore the best outcome for the company and the public interest. I agreed to Bank of England support because I believed it was right to do so. I agreed to continue support to allow Northern Rock the time it needs to consider its strategic options because it was right to do so.
I have set out today the approach that the Government will take as they assess proposals from the company to ensure that we will approve a solution only if it safeguards both the public interest and the specific interests of the taxpayer. That work is being done now and will be concluded as quickly as possible. I will, of course, continue to keep the House informed in the coming weeks. I commend this statement to the House.
Mr. George Osborne (Tatton) (Con): The fallout from the first bank run in 140 years gets worse each week, and today has been another day of weakness and confusion from the Chancellor of the Exchequer. Of course, we all hope that a buyer can be found who will save the jobs at Northern Rock and repay the taxpayer. [Hon. Members: “No you don’t.”] I am sorry that Labour Members are not interested in jobs in the north-east or in the future of Northern Rock. Perhaps they will pay attention, because we are conscious of the impact of this in the north— [ Interruption. ]
Mr. Speaker: Order. Let the hon. Gentleman ask his questions.
Mr. Osborne: The question we now ask of the Chancellor is simple: has he been honest with taxpayers about the risks that they face, and has he told the whole truth? First, let us look at what he has announced today. He announced that what was supposed to be a short-term emergency facility for Northern Rock may now be extended beyond February and could last for years. Thank you, but we already knew that because it was in a memo from the company’s advisers that was leaked last week. Indeed, throughout the crisis we have learned more from media leaks than we have from the Government.
The Chancellor will not tell us the size of the facility, when he expects it to be repaid or the terms of the repayment, even though much of that information is an open secret in the City. Indeed, the Governor of the Bank of England wants to publish the letter that he sent to the Chancellor to set out those terms. He told the Select Committee that he wanted to do so, but the Chancellor refuses to publish the letter and simply says that it is in the public interest that he should refuse. Clearly, the Governor of the Bank of England disagrees. Will the Chancellor explain in greater detail why he will not publish that letter?
This is not about the commercial interests that the Prime Minister spoke about last week, but about the public interest and the £900 that has been pledged on behalf of every taxpayer in Britain. The Chancellor talks about the Government’s liabilities being secured against £100 billion of Northern Rock assets, but he does not say that many of the assets are already promised to other creditors. Will he confirm that the free assets at Northern Rock could be closer to £40 billion and that total Government liabilities, through both the facility and the deposit guarantee, might now be approaching the total of the available assets, putting the taxpayer further at risk?
“Authorities expect the costs and risks associated with Northern Rock to be borne to the greatest extent possible by the current and future private sector providers of capital.”
So do we, but has the Chancellor given a general guarantee to cover the £13 billion or so lent by medium-term note holders—the large institutions that lent money with their eyes open? Has the Chancellor considered reducing the risk to taxpayers by announcing a cap on the guarantee offered by the Government so that only individual savers are fully protected? Of course, we need to get the depositor protection legislation right, but we now know from the Governor of the Bank of England that he has been pressing the Chancellor to do that for a considerable time.
The Chancellor has failed to address today the two things that he appears so far to have kept secret from Parliament and from the taxpayer. First, will he tell us whether it is true that the Treasury, as well as the Bank of England, has lent money to Northern Rock? He mentioned only the Bank of England in his statement, but today we are told that the Treasury has also lent so-called subordinated term debt, which does not have to be paid for five years, comes at the back of the queue and is in most danger of default if the bank is wound up. If that is true, taxpayers have been exposed to an extraordinary long-term risk, yet we have been told about that Treasury loan by the BBC’s business editor rather than the Chancellor of the Exchequer. If it is
true, the Chancellor is surely deliberately withholding information from Parliament and the public. Will he confirm the existence of that Treasury loan?
The second thing that has become clearer today is that the Chancellor cannot be sure of keeping the promises that he and the Prime Minister made to the taxpayer. He said to the Select Committee that
“we fully expect to be able to get that money back.”
“any money that the Government makes available”
“we can recover from its assets”.
The Prime Minister said at the Dispatch Box last week that the money from the taxpayer was
“guaranteed against Northern Rock assets.”—[ Official Report, 14 November 2007; Vol. 467, c. 660.]
Today, the Chancellor merely says that he wants the best outcome for the public purse. Will all the money lent by the taxpayer be repaid with interest—yes or no? Let us hope that the answer is yes and that, in the final reckoning, the taxpayer will not have paid a heavy price for the Government’s incompetence. Let us hope that the Chancellor can be honest today about the risks to the taxpayer and about the existence of the secret Treasury loan.
We are considering a tale of incompetence and weak leadership from a Government who now reel from one disaster to another. We have a Chancellor who appears to have made secret loans from the Treasury, who has made guarantees to the taxpayer that he cannot be sure of honouring and whose weakness contributes to the instability of the financial system. That is why the Chancellor’s job is now on the line.
Mr. Darling: I am sorry that the hon. Gentleman was unable to make any constructive proposals. He supported the decision that I made at the start to enable us to provide lender-of-last-resort facilities to the bank. He also supported providing a guarantee, yet he now tries to give the impression that he does not agree with any of those things.
On the many questions that the hon. Gentleman asked about future proposals, he knows full well that, until we have had a chance to assess the proposals that the various financial institutions have presented and reach a view about what would work, it is impossible for me to state precisely the arrangements that we expect for Northern Rock in future. However, it is right to spend time assessing the proposals that the various institutions have made and then come to a view about what is best to ensure that we secure a future for Northern Rock and protect the wider public interest, especially the taxpayers’ money that has been lent to the bank.
It is hardly a secret that we have made facilities available to Northern Rock—I have informed the House at each and every stage of events, as hon. Members would expect. Furthermore, we were absolutely right to take such actions because the consequences of letting the Northern Rock bank fail, as the hon. Gentleman now appears to suggest that we should have done, would have been immensely damaging to this country’s financial institutions.
The hon. Gentleman asked several questions. First, he asked about the deposits that we are guaranteeing. As I told him, they remain in the bank, so there has
been no cost to the taxpayers. The money is there; people can take it out if they wish. However, the guarantee exists, and it is not, therefore, necessary for people to take out the money. There has not been a cost to the taxpayer because the money is in the bank.
The hon. Gentleman asked about lending to the Northern Rock bank. The lending of last resort and the lending that started in the week beginning 9 October has been by the Bank of England. He asked especially about a story that appeared on the BBC this morning on the element of the loan that represents the penal rate of interest that the Bank of England normally charges. The sum concerned is nothing like the figure about which Mr. Peston speculated on the radio. It is a small amount of money, which will be recovered from Northern Rock. It is due to be recovered by Northern Rock as and when we move to the next stage. There is, therefore, nothing secret about it. It is a perfectly normal lending operation by the Bank of England that is necessary to secure the future of Northern Rock.
The hon. Gentleman asked about the letter that the Governor of the Bank of England sent. I repeat what I said when he asked that question last week—the Treasury Committee asked the same question. On the evening before the lender-of-last-resort facilities were announced, both the Governor of the Bank of England and the chairman of the FSA wrote letters advising me to authorise such facilities. The letters must be seen together. It is true that the Governor of the Bank of England told the Select Committee that he had no objection to publication. However, the chairman of the FSA most certainly objects to the letters being published. As I said to the Treasury Committee, I do not say that we will never publish them—I believe that, given time, it may be appropriate to do so. However, it would not be in the public interest to publish them now. I have consistently taken that position with the Select Committee and in the House last week and today.
I believe that what I did in respect of Northern Rock at the start was right. I believe that it is right now to give the bank the space that it needs to consider its strategic options. Anything else, I believe, would be grossly irresponsible, and I am sorry that the hon. Gentleman has chosen to follow that path.
Mr. Doug Henderson (Newcastle upon Tyne, North) (Lab): May I say to my right hon. Friend that, contrary to the view expressed by the hon. Member for Tatton (Mr. Osborne), his proposals have been rightly welcomed so far in my constituency, where Northern Rock has its head office, and in Newcastle in general? He said that he would outline the principles on which the Government would act in the coming weeks, and I am pleased that the public interest was put at the forefront of those principles. In defining the public interest, is he prepared to look at the question of employment, not only at this time but at the time that any bid might be successful, and for a five-year period afterwards? Will he ask any bidder to itemise its employment plans, both at the time of sale and for a period of five years afterwards?
Mr. Darling:
I am grateful for my hon. Friend’s support. As he rightly says, there is a great deal of understandable interest in the issue in the north-east,
because of the impact on jobs and on the wider economy there. As I have said on previous occasions, I hope that we can do everything possible to allow the Northern Rock to continue to do business. As he knows, many hurdles must be crossed, but we will do everything we can to help. That is why it is so necessary to provide Northern Rock with a breathing space, and it is deeply regrettable that some people, particularly Conservatives, now seem to be suggesting that that is wrong.
Dr. Vincent Cable (Twickenham) (LD): I do not know whether the Chancellor has been singing in the bath, but he does bear an increasing resemblance to the former Conservative Chancellor, Norman Lamont, who presided over a comparable financial disaster.
I want to focus on the £24 billion loan—£900 for every taxpayer—which is over and above the £18 billion deposit guarantee, which is less controversial and which we all support. The former Prime Minister, Tony Blair, was widely criticised for advancing £800 million for the millennium dome. In the past few weeks, the Government have provided the equivalent of 30 millennium domes to this bank, without even the prospect of a decent pop concert at the end of it.
The key question, which I put to the Prime Minister last week, is this: is the lending secured? He said that it was. Will the Chancellor confirm, however, that that is not the case? Of the loan, £13 billion has a first charge security, although at a more relaxed standard than is normal; £11 billion, however, is wholly unsecured. Half the assets of the bank have been packaged up by a company called Granite, which is registered in the Channel Islands and has the first claim on the assets. The remainder is a collection of mortgages, many of which were advanced at the peak of the property market and are now of declining value. I therefore return to the question that I put to the Prime Minister, and that has been partially put to the Chancellor already. Will he stand up and give an absolute guarantee that the loan will be repaid in full, with full interest, within the lifetime of this Parliament?
Will the Chancellor also comment on the management of the company? Does not Mr. Adam Applegarth, who has just been dismissed, now have a pension pot of £2 million and various bonuses, which are underwritten by the taxpayer? Will the Government explain how they got into a position in which they have entrusted £24 billion to a management team that was discredited, that led the bank into its present crisis, and whose chief executive showed such contempt for his own bank that he sold his own shares to invest in a country estate and a Ferrari for his wife?
That is not the only conflict of interest. An attempt is being made to sell the bank, led by the company. The company has a clear conflict of interest. It is in the interests of the directors and the management to maximise the taxpayer’s contribution. The taxpayer’s money is being used to prop up the bank, and to provide a profit opportunity for spivs in the City.
Let us consider the alternatives. The ideal outcome— [Interruption.]
Mr. Speaker: Order. The hon. Gentleman must be allowed to ask his questions.
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