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12 Dec 2007 : Column 372

That leads me to a key aspect of the argument: we are talking about not just money, but people. I have been to Newcastle several times in the past year to talk about its economic situation. Northern Rock is a major employer in north-east England. I understand that it has about 3,500 employees in Newcastle and about 1,500 in Sunderland. In addition to that employment, it has been an important part of the repositioning of the north-east of England from manufacturing towards financial services.

In addition, the Northern Rock Foundation makes an important charitable contribution. It has spent some £175 million over 10 years, but it does not just spend a lot of money. As I discovered when I walked along Hadrian’s Wall last summer, an enormous number of local charities rely on the foundation for obtaining charitable money quickly and effectively. They receive the money from the foundation much more effectively than they do from the national lottery.

Before Ministers stand up and pose as angels of the north, it would be worth while for them and their Back-Bench colleagues— [ Interruption. ] I entirely understand why Labour Back Benchers will quite reasonably wish to speak up on behalf of their constituents and their constituents’ jobs. If I was in their position, I would do exactly the same. However, if they have not already done so, I urge them to study the document on the principles for assessing Northern Rock proposals, which is the basis for the Government’s sale. Those who have studied it will realise that it says absolutely nothing—not one word or one syllable—about either employment in north-east England or the Northern Rock Foundation.

Jim Cousins (Newcastle upon Tyne, Central) (Lab): I have studied that document, too. Has the hon. Gentleman looked closely at the last part of it, which refers to a long-term recapitalisation of the business and a sound business plan in the medium term? Will he bear it in mind that that statement of principles was put out on behalf of not only the Government, but the Bank of England and the Financial Services Authority, which can hardly deal with the matters about which he is thinking?

Dr. Cable: If the hon. Gentleman is basing his hopes on a sound business plan from the private bidders, I fear that he may well be disappointed. I will come to the details of the private bids in a moment.

A couple of days ago, I had a long session with one of the bidders, who had just come back from a tour of Northern Rock’s north-east facilities. He said that he did not know whether to laugh or cry. He had been round the call centre, where every single employee was reading books and magazines because there was no work to do. Any Labour Member who imagines that some of the vulture investors who are part of Mr. Branson’s consortium have the slightest interest in preserving that employment are labouring under an illusion. I do not know whether they realise, for example, that one of his largest investors is a gentleman called Wilbur Ross, who made billions of pounds in the United States smashing trade unions and ripping away company pension schemes. My starting point is that the employees of Northern Rock and the people of north-east England deserve rather better than that, which is what is likely to come out of the private bidding process.

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Mr. Kevan Jones (North Durham) (Lab): Is the hon. Gentleman at one with the leader of the Liberal Democrats on Newcastle city council who, along with the majority of elected politicians in the north-east, supports efforts to get a solution for Northern Rock? Is he not in danger today, with the emotive language that he uses, of running down the company and making matters worse?

Dr. Cable: I am a strong fan of the leader of Newcastle city council. The Liberal Democrat group runs that city admirably. He has been endeavouring on an all-party basis both to honour the 100-year history of the bank and to find a solution to it. I have discussed it with him several times. He understands that the options are running out and that the solution that I am proposing—temporary public ownership—will probably serve the interests of the people who live in that region better than the hopeful venture being promoted by the Government.

Mr. Jones: One thing that Councillor John Shipley is not doing is talking the bank down or trying to talk the region down. He is trying to work with other people to support it. The Liberal Democrat council even gave the freedom of the city to Northern Rock a few weeks ago.

Dr. Cable: The council did that on an all-party basis and was right to do so, given the bank’s past contribution. I have never run down the employees of the bank, with the exception of the chief executive, whose role in all this I will come to shortly.

What amazes me is that had we not initiated this Opposition day debate, there would have been no discussion of this massive problem before Christmas. The Conservatives have had three Opposition days and have chosen not to take the subject on any of those occasions. They seemed to think it was more important to discuss a £950 gift to a third division Scottish politician called Wendy than to have a debate on what has happened to £30 billion of taxpayers’ money.

I have been trying to establish what the leader of the Conservative party thinks about the matter. He followed me on the “Today” programme yesterday and denounced nationalisation as a matter of principle, but as far as I could establish, and no doubt we will hear more in a few minutes, his only solution seemed to be to follow the Government and keep an open cheque book.

Mr. David Drew (Stroud) (Lab/Co-op): I, for one, congratulate the hon. Gentleman on calling the debate. Did he consider another option—the possibility of remutualising Northern Rock? Some of us feel strongly that one of the great problems of demutualisation is that it was predictable that some companies, because of the nature of the marketplace in which they operate, would overstretch themselves. Is it not time we looked at the strength of mutuals again?

Dr. Cable: That is a helpful intervention, with which I have a great deal of sympathy. I used to be involved in an organisation called Save Our Building Societies, which campaigned against the original demutualisation of Northern Rock for precisely that reason. After a period of temporary public ownership, that might be
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one of the options that appear viable, but rushing into a sale now would preclude it. The hon. Gentleman is absolutely right.

Steve Webb (Northavon) (LD): Reflecting on the constructive contribution of the official Opposition, what conclusions has my hon. Friend drawn from the fact that they had no opinion on the Order Paper and tabled no amendment to the debate?

Dr. Cable: My colleague reinforces my point. I am sure we shall hear what the official Opposition have to say. I imagine, by default, that they want to see the company put into administration, its total closure, and the wiping out of the company without any opportunity for it to be relaunched. I assume that that is their default position, but no doubt we will hear from them.

Mr. Doug Henderson (Newcastle upon Tyne, North) (Lab): I understand theoretically some of the points that the hon. Gentleman is making, and I have read the motion. Is he aware that Northern Rock employees do not want nationalisation? If it is difficult now to sell the business as a going concern, they wonder how much more difficult it will be to do so in future. The small shareholders, some of whom I see in the Gallery, oppose nationalisation because they would lose any value that they have.

Dr. Cable: I will come to those points. However, I should say in passing that there is an issue with the small shareholders; I understand that. Many of them, of course, acquired their shares free on demutualisation. Many of the people who call themselves “small investors” are not small; I believe that Lord Stevens is a large investor who bought into the company quite recently in order to make a killing from it. The key shareholders, of course, are the hedge funds, whose role I shall deal with shortly.

Mr. John Redwood (Wokingham) (Con): As one who has set out a positive alternative if the bids do not produce a satisfactory result, may I ask the hon. Gentleman how he can believe in the idiocy that taking on more than £100 billion of Northern Rock’s liabilities—all its liabilities—would be good for the taxpayer? Why should the taxpayer have to pick up the bill for any losses, redundancy payments and other problems that nationalisation would bring?

Dr. Cable: Taxpayers are already committed to the hilt; they have already advanced staggering sums. In normal circumstances, I would not dream of recommending my solution, but we are in an extremity—and in an extremity we have to look at the options. The one that I propose is the least undesirable; I shall come to the reasons for that.

Mr. Peter Atkinson (Hexham) (Con): The hon. Gentleman has been dreadfully dismissive of the small shareholders, of whom there are 140,000. Yes, some acquired their shares on demutualisation and have been counting them as their savings for retirement. Many others, including people in my constituency, bought small quantities of shares because they wanted to support
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a good local business. They are the ones who will suffer. They should not be dismissed and put out of the picture.

Dr. Cable: I am not being in the least dismissive of small shareholders. However, when people buy shares, they take a risk. They understand that; it is in the nature of investing in risk equity. Is the hon. Gentleman seriously suggesting that taxpayers’ money should rank behind risk investment by private individuals in the stock market? That is the implication of his remarks.

Mr. Atkinson rose—

Dr. Cable: May I move on? I have been generous with interventions.

At this point, it will be useful to summarise why the Liberal Democrats have taken the position we have. I shall then develop in more detail comments on the financing of the company as it now is and discuss the options.

Of course it would be desirable for us to start from somewhere else. The financial shock that hit the markets a few months ago was unprecedented and unexpected, but that does not excuse the Financial Services Authority, the regulator, which should surely have spotted the high risk associated with Northern Rock’s reckless expansion. None the less, the event was unexpected. We reacted to it by supporting what the Government did to stop the run—that is, guarantee deposits. That was a sensible reaction.

At the time, I opposed an open-ended unconditional loan to bail out the banks. Ever since the Government made that decision, they have been digging a deeper and deeper hole for themselves. There is nothing wrong in principle with exploring the idea of trying to get a private bidder, and that is why I do not fundamentally quarrel with some of the interventions from Labour Members. However, it has become painfully and increasingly apparent that, with the money markets now largely closed, it is simply impossible for any of the bidders, however credible or reputable, to raise the amount required, including the money necessary to guarantee the full repayment of the taxpayer. That is our position now.

Mr. Fraser Kemp (Houghton and Washington, East) (Lab): Presumably, the hon. Gentleman has done some calculations on his proposal for nationalisation. What is his best estimate of the potential liability for the taxpayer in the next two to five years?

Dr. Cable: The taxpayer is already heavily implicated in the company. Its liabilities include the deposits, which are already guaranteed, and they would include the loans that are rolled over but are not being rolled over at present because the market will not do it. In practice, the taxpayer is 100 per cent. liable for all these liabilities as they come due. If it was a nationalised company, temporarily, the Government would have some control over the process instead of being an entirely passive spectator. Let me retrace the steps to some of the key decisions that the Government have made. In September, there was a key decision to provide what was said at the time to be unlimited support. The question that needs to be asked—it relates to the intervention by the hon.
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Member for Houghton and Washington, East (Mr. Kemp)—is what estimate was made of the likely deposit withdrawal and the extent to which commercial loans would have to be replaced? At about that time, Lloyds bank made a proposal that involved £30 billion-worth of Government loans. The Chancellor, as we understand from the records, personally rejected that option on the grounds that the commitment of Government money was too large. We now know that £30 billion has already been advanced in Government loans without resolving the problem, so somebody made a horrendous miscalculation about the sums that were going to be involved. We need to know how that happened.

A second basic question that I have been asking throughout is: why was this loan advanced in a completely open-ended and unconditional way? The Government, as the major creditor, could have said, “We will advance credit to the bank subject to the removal of the chief executive and others who were directly responsible for getting the bank into trouble in the first place.” Any major creditor could reasonably insist on conditions, but the Government said, as did the Chancellor, rather pathetically, on several occasions in the Chamber, “We can’t do anything about this because we don’t own the bank.” We now have an extraordinary situation whereby the chief executive of the bank, Mr. Applegarth, who drove the bank on to the rocks, is still sitting in the chief executive’s chair driving the company and managing the Government’s taxpayers’ money. It is an extraordinary situation for the Government to have allowed to arise.

Another fundamental question that I have asked is: when the loan had been advanced, what security did the Treasury or the Bank of England, or both, insist on in return for taxpayers’ money? One would have thought that that was a reasonable, prudent provision to request. I have been writing letters to the Governor of the Bank of England to ask him what security was available, and he has written me a letter that is so shameless that even Sir Humphrey would have been embarrassed to sign it. There are no figures in it, nor an explanation of what happened to the rolled-up interest on the loan. It is completely and utterly uninformative and, frankly, borders on the impertinent, because the Bank of England and its Governor are saying that elected representatives have no right to know what happens to public money. That is a completely unacceptable position.

We can infer—we do not know it because it has never been confirmed—that roughly half the funding of the bank loan is secured pretty solidly against the assets of the bank, but the other half is not. Most of it is secured against what are called the free assets of the bank; in other words, it takes a secondary role to that of secured creditors such as Granite, which accounts for about half of the balance sheet. It is argued that that is fine because the money is secured against the bank’s mortgage book. However, it has emerged that among the assets of the bank against which the Government loan is secured are £8 billion-worth of unsecured loans. It appears never to have occurred to anybody in the Treasury or the Bank of England to ask how secure those assets were.

The confidence of the Government and the Bank of England was based upon a belief that Northern Rock had a very good repayment record from its borrowers.
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On paper, that looks perfectly true. However, people have now started digging—notably Panmure Gordon, one of the brokers, which has established that a lot of bad debt is actually being hidden because the Northern Rock bank did not employ the sort of rigorous practices employed in other institutions such as Alliance and Leicester and Bradford and Bingley. However, whether or not that is the case, there was an underlying optimism, all based on the strength of the mortgage book and on the value of the domestic property that underlies those assets.

John Thurso (Caithness, Sutherland and Easter Ross) (LD): My hon. Friend has already highlighted the executive failings. Before he leaves the assessment of the debt, will he say whether he agrees that a major cause of the failure of Northern Rock was insufficient corporate governance by non-executives, and the failure of the audit committee and the risk committee to dig properly into these matters?

Dr. Cable: The directors who were directly responsible for those functions have now been removed, but that was well into the process.

Mr. Philip Dunne (Ludlow) (Con): In relation to the risk committee and the audit committee, is the hon. Gentleman in a position to confirm whether the individual who had that responsibility was none other than Sir Derek Wanless?

Dr. Cable: I believe that that was indeed the case.

The optimism that I described rests upon the fact that the assets of the bank primarily consist of mortgages, many of which were obtained at the peak of the housing market in the earlier part of this year. There was an extraordinary explosion of growth in the Northern Rock bank—it grew by about 55 per cent. and took 20 per cent. of the market in the earlier part of this year. That growth was not backed up by deposits, and it accounted for the fact that the bank had to borrow heavily in the wholesale market, which then seized up. As I told the House a few weeks ago, it was possible then to go to the Northern Rock bank and obtain a mortgage of about 125 per cent. of the value of a property, and of four to five times a person’s income. That was the sort of frenzied borrowing that took place at the peak of the market. I checked yesterday, and those loans are still on offer. This is a supposedly responsible lender in the middle of a banking crisis, dependent on loans from the Government.

Mr. Kevan Jones: I am very interested in what the hon. Gentleman is doing. He is continuing to run down the bank, which I do not think is a very clever thing to do. Anyone who has a mortgage with the Northern Rock bank or who has applied for one—in the north-east, traditionally—will know that it was a damned hard building society, then bank, to get a loan from. The traditional, old loans are quite secure.

Dr. Cable: The hon. Gentleman will have to explain how the bank managed to expand its business so rapidly in the earlier part of this year.

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