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12 Dec 2007 : Column 378

The question I have been asking throughout is a “what if” question. We do not know the answer to it in reality, but it is an important question. What if the property market were to crash? I ask that because for some years before I came to this House, I worked in the oil industry. The question that was always asked by my prudent managers was, “What if the oil price were to fall drastically? What would then happen to our profits and our company?” Because they were always asking that question, they always hedged, diversified and prepared, and they saved themselves in difficult periods. What is amazing about this episode is that nobody at the top of the bank, nobody in the Financial Services Authority and none of the clever double-firsts in the Treasury ever seemed to have asked this basic question: what would happen to the value of these mortgages and of domestic property if the market fell heavily?

Rob Marris (Wolverhampton, South-West) (Lab): May I turn the hon. Gentleman’s “what if” question around? What would happen if there were such a property crash where there had been a nationalisation of Northern Rock? How many more nationalisations of banking institutions would the Liberal Democrats want in that “what if” disaster scenario?

Dr. Cable: We are dealing with a very specific case where the Government have already advanced £30 billion, and I am concerned with how that enormous investment by the taxpayer should be protected.

To pursue the argument—I am just raising a possibility; we do not know that it will happen, and we hope that it will not—let us suppose that property prices fall very substantially. Twice in my working lifetime, domestic property prices have fallen in real terms by more than 25 per cent. It could happen again. We have been at the peak of an unprecedented bubble, the largest in the developed world. If it were to happen again, the obvious question is: what would happen to the value of the security that the Government have been given by the bank?

One person understood this all along: Mr. Applegarth, the chief executive. He is still there, sitting in his chair at the bank. He understood all this and, at the peak of the market, he sold his shares. He was urging the small investors—to whom the hon. Member for Hexham (Mr. Atkinson) has rightly drawn our attention—to invest in his bank while he was selling up. We all know what happened. He invested his money in a very large country estate and bought a fleet of sports cars for his wife. That person is still at his desk at the Northern Rock bank; he is directing its affairs and is responsible for taxpayers’ money. That is one of the unbelievable aspects of how this whole affair has been managed.

Mr. Alan Beith (Berwick-upon-Tweed) (LD): My hon. Friend is underlining the tragedy of Northern Rock. Traditionally, it was based on the relatively limited lending base of the borrowers in the region, which placed a constraint on what it could do, and on the housing market in the region, which is nothing like as volatile as that in the rest of the country, and into which Adam Applegarth took Northern Rock in his reckless expansion of the company.

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Dr. Cable: My right hon. Friend is absolutely right. His intervention underlines why, historically speaking, Northern Rock was so highly regarded, particularly as a building society but later also as a bank. The chief executive exploited that reputation to run it into a very dangerous situation. I am not blaming him alone, however. The regulators should have seen the dangers.

I want to turn now to the different options available, and to where things stand in regard to the proposed private sale. There seem to be two serious offers, although others come and go. There is the offer by Branson, and that by Luqman Arnold’s Olivant group. They differ in that Branson’s consortium wants a takeover and is willing to trade on the basis of the Virgin reputation as a way of attracting new deposits, while Luqman Arnold is not interested in a takeover. He wants a minority stake and to run the bank properly while restoring it to its purpose as a responsible bank.

In normal circumstances, I am sure that either of those proposals would be an interesting proposal to be treated with the market. This is an extraordinary situation, however, and it is becoming increasingly apparent that neither of those two, or any of the others, will be remotely able to raise the amount of money required to take over the bank as a going concern and give the Treasury the guarantees that it requires. Of course, they say that they can guarantee the first half, the £15 billion. What they cannot guarantee is the next £15 billion. That will be the difficult bit, because that is where the lack of security is.

Nor should we be under any illusions about the motives of the people who are bidding. I have never met Mr. Branson, but he seems to be an engaging character who has had some successful ventures. He is, however, a front man for a consortium of hedge funds and private equity operators whose aim is to make a killing. He is proposing to invest about £200 million in a company whose gross assets will be more than £100 billion, and he will be hoping to sell it on in due course and make a large capital gain that, as he is registered overseas, might well not attract UK taxation. So we are not talking about Mother Theresa here; we are talking about some very tough short-term financial investors.

As I talk about the bidders, it is coming back to me that the Government have made a bad mistake—even within their own policy—in giving preferential status to one of the bidders, the Branson group. The other bidders have discovered, as they enter the early stages of due diligence, that the Government—and the taxpayer—are paying the legal fees of the Branson consortium but they are not willing to pay theirs. Understandably, they are aware that they are not operating on a level playing field.

I do not want to run Mr. Branson down, but it is a matter of fact—of which I was previously unaware—that he has a criminal record for tax evasion. There is therefore good reason to believe that the people who have to stump up the money for his consortium may well not regard him as a fit and proper person to run a public company, let alone a bank, and let alone as someone responsible for £30 billion-worth of taxpayers’ money. So there are real questions about whether this private bid is ever going to succeed.

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In the context of the private bid, one must also ask—this goes back to the question about private shareholders—

Mr. Henderson: I am not taking sides regarding which bidder is best— [ Interruption. ] I am not. However, does the hon. Gentleman not recognise that someone with the reputation of Sir Brian Pitman—the ex-chairman and chief executive of Lloyds bank, who is part of the Virgin Group’s bid—is serious about what they are doing?

Dr. Cable: I am sure that Sir Brian Pitman is absolutely admirable. He is a 75-year-old ex-banker with a formidable history and I am sure that he is serious. I have talked to some of those associated with both the people in question, and they are serious people. That is not the problem—the problem is how they are going to raise, in markets that are now almost closed, the staggering amounts of money that they need to realise their bid. That is the issue—it is not about their character or their history in running banks.

The private sale is becoming increasingly problematic, so we effectively have two options. One is to put the bank into administration, which is probably what everybody would regard as the “nuclear” option. Under those circumstances, not only are the shareholders in the north-east wiped out, but there are question marks over what happens even to the guarantee deposit. It would take a long time for those guarantees to be fed back to the depositors, and there would be continuing questions about deposits in other banks because of the difficulties. How would the public loan be retrieved? It would be retrieved either by a very slow run-off as the mortgages were redeemed, or through a fire sale in what is currently a very depressed market. Administration thus presents enormous problems, which is why we Liberal Democrats are suggesting that a period of temporary nationalisation is the least worst of the three basic options available: nationalisation, private sale or administration.

Of course we recognise that, in practice, civil servants are not the best people to run a commercial bank. Professional management would have to be hired, and they would have to get to the root of what is going on at this bank. It might prove to be a very sound institution deep down, with a lot of very good assets; we do not know. However, if, having dug down, those managers establish that that is so, they can re-launch it in future years and there would be a substantial upside for the taxpayer that would not result from a private sale. On the other hand, they might discover that it is a can of worms—we do not know—and if so there will have to be a gradual run-off in what is a very difficult environment.

Jim Cousins: Is the hon. Gentleman’s purpose in advocating nationalisation to enable Northern Rock to survive as a growing business—a locally based, locally headquartered company in the north-east, of which we have very few in the growing sectors—or simply to put the Government at the head of the queue of creditors to get their money out?

Dr. Cable: I very much hope that the first proposition is indeed realised. That would be the most desirable outcome, and it might well be possible to
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achieve it. Frankly, however, the Government have an overriding responsibility to protect the interests of taxpayers, who have put £30 billion into this bank already. These objectives are not fundamentally incompatible, but it will be difficult. There are precedents for such an approach succeeding, although not many. In the United States, the Federal Reserve took over Continental Illinois bank, which was in a comparable position. It was not done for ideological reasons; I think that a Republican Administration were in power. The bank was turned round and eventually sold, so there are precedents.

Mr. Dunne: I recognise that the hon. Gentleman’s preference, like ours, is for a private sale. However, in advancing his case for nationalisation over administration, what analysis has he done that leads him to suggest that taxpayers, whom he has just identified as the primary beneficiaries of either of these routes, would do better out of nationalisation—given that they would potentially be taking on all £110 billion of liabilities, plus redundancy liabilities that we have not even calculated yet—than administration, through which they are currently exposed only to £30 billion-worth of liabilities?

Dr. Cable: None of us knows exactly what would happen because none of us has been exposed to the details of the bank’s position. The Bank of England will not tell us and we do not have the resources to carry out the due diligence on the company. There is, of course, the possibility, which I have just alluded to, of temporary nationalisation—as has happened historically and as occurred with a small national mortgage bank that was temporarily nationalised and resold very successfully under the Major Government. It was a small enterprise, but it did happen. The whole point is to provide some legal and institutional stability in the hope that, in the end, not only will the taxpayer be repaid but any increase in the value of the bank from its currently depressed market conditions will accrue to the taxpayer. That is the objective.

Mr. Redwood: Why does the hon. Gentleman ignore the fourth option, which involves the Bank of England acting as a tough but fair bank manager with repayment schedules and proper cash-flow monitoring of the bank’s progress? It would then be for the bank to work out whether it needed to put itself into a kind of voluntary run-off and do it in an orderly fashion or whether it could actually grow the business. Would that not be the best option?

Dr. Cable: It is partly what the Bank of England has been trying to do, albeit not very successfully. If the Bank of England were good at running a commercial bank as opposed to a central bank, it would have taken some elementary precautions like insisting on conditions for its loan, but it has shown itself to be incapable of doing that.

My final point—I am conscious that other Members on both sides wish to speak—is that speed is of the essence. We are now in the position where the patient is in the operating theatre and, frankly, bleeding to death while the Government surgeon-general is sitting around saying that we need a full health check before anything
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can be done. That is not very sensible. Urgent action is required. I hope that I have made the case that public ownership is the least worst option. If it is, the Government will need to act very quickly and will need enabling legislation in order to do so. It is better that it is done now than in two months’ time when the position may be infinitely worse.

Dr. Roberta Blackman-Woods (City of Durham) (Lab) rose—

Dr. Cable: I am rounding off.

Finally, there is a strong additional reason for wanting to park the problem of Northern Rock in the solution that I have described. There well be much worse to come. We may well have had the first of a tsunami wave with others behind it. We know what they are; we can see them. One of the problems that arises is that other banks—even very sound banks—are running into serious difficulties in raising capital from the markets. We know that there may well be a very nasty shock in the domestic property market. It is absolutely essential that the Treasury and the Bank of England are totally focused on how to deal with these emerging problems. At the moment, they are totally preoccupied with the problem of the Northern Rock bank, getting the wider problem of the emerging financial crisis completely out of perspective. The Government have failed so far, so they should pick themselves up from the floor, act quickly, take the bank into temporary public ownership and, we hope, limit some of the damage that has already been caused.

5.8 pm

The Economic Secretary to the Treasury (Kitty Ussher): I beg to move, To leave out from “House” to the end of the Question, and to add instead thereof:

I am looking forward to the debate and particularly to the contributions of Back Benchers, but I thought it might be helpful if I made three main points. I shall talk about: first, the wider context to the events of the last few months; secondly, the current position with Northern Rock; and, thirdly, any lessons to be learned for the future from what has happened.

The UK entered the recent period of turbulence in the global financial markets in a very strong position. The UK economy has seen 61 consecutive quarters of growth—the longest period since records began—and we are growing faster than any other G7 nation this year and will continue to grow next year.

Several hon. Members rose

Kitty Ussher: I will give way later, but not now.

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The banking sector also entered this period on the back of a period of rapid growth with well capitalised balance sheets. Both the UK economy and the banking sector remain strong.

However, this has clearly been a testing time. The disruption to global financial markets that we have seen over recent months was triggered by problems in the US sub-prime mortgage market, as hon. Members will know. When the markets realised the extent of the problems in that market, they began to have doubts about the value of other asset-backed securities. Uncertainty about which institutions were exposed and to what extent meant that institutions lent to each other at much higher rates or not at all. The result was a large reduction of money in the market generally and an increase in the cost of borrowing not just for those with exposure to sub-prime mortgages, but for all institutions.

In those circumstances, Northern Rock faced specific difficulties, not because of direct exposure to sub-prime mortgages, but because its business model depended on securing substantial sums from the securitisation and money markets. In September, it became clear that Northern Rock was having severe difficulty in accessing the financing that it needed and that it had no option but to go to the Bank of England. On 13 September, the Chancellor, on the advice of the Governor and the chairman of the Financial Services Authority, authorised the Bank to provide special liquidity support.

Mr. Geoffrey Clifton-Brown (Cotswold) (Con): Was not the real cause of Northern Rock’s problem that whereas the Federal Reserve and the European Central Bank were pumping liquidity into the world’s banking systems, the Bank of England sat back and did nothing, refusing in September to pump in any such liquidity?

Kitty Ussher: The hon. Gentleman is entitled to his view, but most people feel that the real problem with Northern Rock was that its business model was over-dependent on accessing and rolling over finance from the wholesale markets, which then dried up.

Stewart Hosie (Dundee, East) (SNP): The Economic Secretary’s answer to the hon. Member for Cotswold (Mr. Clifton-Brown) was not wholly satisfactory. On 14 August, the Bank of England became aware of the credit crunch hitting Northern Rock. A month down the line, on 12 or 13 September, the Bank was still refusing to pump in extra cash, which is what the European Central Bank and the Fed did. Does the Bank of England not have some responsibility for the lack of liquidity in the market during that period, when everybody knew that the credit crunch was affecting Northern Rock?

Kitty Ussher: I refer the hon. Gentleman to the reply that I have just given. He is entitled to his view, but I believe that something fundamental about Northern Rock’s business model led to its difficulties.

We could, of course, have let Northern Rock go down, but that would have had serious consequences for the banking system, including likely knock-on
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effects for other financial institutions, in which confidence would inevitably have been shaken, and for the British economy.

Dr. Blackman-Woods: Does my hon. Friend accept that the comments made by the hon. Member for Twickenham (Dr. Cable), in running down the bank, will make it much more difficult to secure a viable future through the private sector for it?

Kitty Ussher: I am grateful for my hon. Friend’s intervention. I have been slightly confused by the Liberal Democrats’ comments throughout. On the one hand, they seem to want a sale to the private sector; on the other, they seem to want to nationalise Northern Rock in order to get that sale. However, I shall come to that shortly.

Mr. Dunne: Will the Economic Secretary give way?

Kitty Ussher: I should like to make a little more progress, and then I shall give way.

Our intervention was widely supported at the time, including by some who now imply that it was the wrong thing to do or who are now not prepared to accept the consequences of that support. All the lending that the Bank of England has provided is secured against assets held by Northern Rock, which include high-quality mortgages and securities. The Bank is the senior secured creditor. The Financial Services Authority has said, and continues to say, that Northern Rock’s main asset base—its mortgage book—is strong and sound.

Mr. Philip Hammond (Runnymede and Weybridge) (Con): Will the Economic Secretary confirm that all the lending is secured by a fixed charge over such assets?

Kitty Ussher: All the lending is secured against the assets of Northern Rock. That is my understanding of the situation.

Mr. Alan Beith (Berwick-upon-Tweed) (LD) rose—

Kitty Ussher: I should like to make a little more progress, and then I shall give way to the right hon. Gentleman.

We have also ensured that the Bank’s lending is subject to the normal conditions and controls for a creditor of our scale, to ensure that our interests are protected. In return for that facility, Northern Rock has agreed a number of controls, including not declaring, making or paying any dividend without the prior consent of the Bank of England, and not making any substantial changes to the nature of its business.

Mr. Dunne: Will the Economic Secretary confirm that the security package includes Northern Rock’s seller’s share in Granite—in which case it ranks behind all the mortgages used by Granite to secure its securitisation issues?

Kitty Ussher: The assets against which the Bank of England’s loan to Northern Rock was secured include a number of assets on its balance sheet, which themselves include the portion of Granite that is on the balance sheet.

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