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“The capacity to act effectively and in time as lender of last resort in a crisis...depends on the Bank’s commercial intelligence system. The roles of prudential supervision and operational surveillance are closely linked, but they are not the same thing, and they are now to be separated, leaving the Bank with responsibility for operational surveillance but stripped of its powers for supervising prudential banking.
Will the Bank continue to have the same day-to-day knowledge of everything that is happening in the banking world when its supervision staff are transferred to the new Financial Services Authority? I doubt it, although it will retain responsibility for the stability of the financial system as a whole. I therefore predict considerable buck-passing in the years ahead between the Financial Services Authority and the Bank of England when anything goes wrong. The Bank of England will say, ‘We could not have known in advance that this would happen: we no longer supervise that institution, and the FSA never told us.’ That will be a source of great trouble”.—[ Official Report, 11 November 1997; Vol. 300, c. 761-62.]
Well, so it has proved. The institutional root cause of the Northern Rock disaster lies in that separation of powers by the present Prime Minister.
I happened to be in Tokyo when the news broke and, of course, any senior banker or businessman travelling
abroad—I have spent a great deal of my time doing that—spends most of his time in hotel bedrooms watching CNN. I was absolutely amazed to see queues of people waiting to draw their money out of Northern Rock. I happened to be in Tokyo to visit various banks, including the Bank of Japan, and the people there were exceedingly polite and hardly likely to raise the matter with me. The fact is, however, that it did a great deal of damage to the prestige of British banking. That is perfectly clear.
One of the people I visited while in Tokyo was the governor of the Bank of Japan when it went into its great financial crisis in 1985; he is an old friend of mine whom I have known for more than 40 years. He told me that he had to buy up the equity of almost all the leading Japanese banks. They were starting to sell that equity back at a considerable profit when I was there. It is worth noting, however, that it had taken them 15 years to reach a position where they could start to do that. We should not assume that this crisis over Northern Rock will be solved in a matter of weeks or months. It is going to take years to unravel.
The scale of the so-called credit crunch problem has yet to be fully revealed, and we might end up with the world’s major banks engaging in massive asset reductions. When Citibank, the largest bank in the world, has to borrow $7.5 billion from the Abu Dhabi investment fund at 11 per cent. interest, and has to offer that amount in convertible preference shares, it is a pretty serious situation. I was in Abu Dhabi when the then ruler, Sheikh Zayed, opened the new, rather modest, building to house the Abu Dhabi investment authority. Of course, it is now a building of almost unexampled magnificence, as Lord Curzon might have said. The fact is that Citibank is paying 11 per cent. for that money. We can just imagine the arguments that went on before it agreed to that rate of interest, which is more than double what the Fed was proposing as the present inter-bank rate in the United States.
The most dangerous aspect of this situation is the growing reluctance of banks to lend to one another. Inter-bank lending is a crucial and essential part of the banking system. Also, the central banks are in danger of losing monetary control if, when the Fed and the Bank of England reduce their bank rates, the inter-bank rate rises. That is what has been happening, and it sends a very dangerous signal. There are historical parallels, including what happened in Japan in the 1980s. Excess competition in the banking sector led to a huge property bubble and ended in one of the longest recessions in history. Japan is still technically in recession, 15 years later, and its interest rate is 0.25 per cent.
The resignation of a few prominent chief executive officers, accompanied by huge golden handshakes, will not satisfy public opinion. The fact is that we face a grave international situation. The largest bank in the world, Citibank, is borrowing billions of dollars at 11 per cent. This means that money power has moved out of western hands and into those of Russia, China, India and the middle east. Have I only got 17 seconds left? I cannot solve the world’s financial problems unless I am given another half hour.
Mr. Deputy Speaker: Order. I commend the hon. Gentleman on his timing.
6.24 pm
Jim Cousins (Newcastle upon Tyne, Central) (Lab): There were two important points in that last contribution—among the travel adverts. One was that this problem in Northern Rock is going to take some years fully to resolve, and a certain amount of patience is going to be required to resolve it. The other was that the Northern Rock problem is a problem not just for one small English region, but for the whole British financial community and for London’s standing in the world. It would be sensible to bear both those points in mind in dealing with this issue.
Today, five central banks, including the Bank of England, have announced that they will work together on ways of putting far more cash into the international banking system. That will only increase the growing anger in places such as Newcastle, Sunderland and Durham about this whole situation. If the same arrangements that were announced today had been in place four or five months ago, the Northern Rock collapse would not have occurred. There might still have been problems at Northern Rock, but the collapse would not have occurred. There is a far bigger problem out there than Northern Rock itself, and one bank in the north of England has now become a scapegoat for a much wider set of problems.
In August, the Governor of the Bank of England presented himself to us as the hard man who would face the markets down. Where is that policy today, and where would Northern Rock and the City of London have been if his judgment of the situation at that time had been rather better?
When we come to questions of judgment, we must also look at the contributions made on this issue by the hon. Member for Twickenham (Dr. Cable). Northern Rock is now trying to rebuild its deposit base. It is advertising attractive savings at attractive rates, which is the proper thing to do to rebuild that base, and it is trying to retain its existing deposit base by offering incentives to some of the savers who have stayed with it. What does the hon. Gentleman say? What did he say this very afternoon in this place? He said that the workers are doing no work, and that the default rates at Northern Rock—they are one of its real market strengths, and they give its workers not just a great deal of pride but market value in the financial sector—were not genuine. Previously in this House, he described the mortgage practices of Northern Rock as being
“little short of a...scam.”—[ Official Report, 11 October 2007; Vol. 464, c. 468.]
All these statements are profoundly unhelpful in resolving this problem. They are extraordinarily damaging to the workers and savers at Northern Rock.
Mr. Kevan Jones: I listened in horror to some of the things that the hon. Member for Twickenham (Dr. Cable) said, as well. Did it not also alarm my hon. Friend that the hon. Gentleman did not provide one shred of evidence to back up some of his outrageous statements?
Jim Cousins:
There were shreds of evidence, but not shreds on which one would build the kind of case that the hon. Gentleman was making. I also draw
attention—this is a very important point—to the hon. Gentleman’s very negative comments about the preferred bidder that Northern Rock has selected.
Steve Webb: One thing that my hon. Friend the Member for Twickenham did say that could be tested against the factual record is that the bank is today lending up to 125 per cent. of the value of a property, near the peak of the housing market, on four or five times people’s earnings. Does the hon. Gentleman think that that is wise practice today?
Jim Cousins: I come back to this point. One of the real skills built up by Northern Rock’s workers is making mortgage lending available to the lower end of the income scale and making those mortgages work in a sustainable way. So far, the published record indicates that the bank has been very successful in doing that. That set of skills is of enormous value to our current housing market and it would be sensible not to downgrade those skills and destroy that reputation, which would make that work impossible.
Jim Cousins: I will give way, but I hope that the hon. Lady will acknowledge my situation.
Julia Goldsworthy: I am grateful and I will be brief. Does the hon. Gentleman agree with Citizens Advice, which highlighted this issue today, saying that many people on low incomes are taking on too much debt and that the banks should be acting more responsibly? That was raised as a general issue.
Jim Cousins: But it is precisely that general underlying point—a sound one—that reinforces the value of Northern Rock’s lending practices in being able to make lending available to workers on lower incomes and to make it work on a sustainable basis. Northern Rock’s default rates were among the lowest of the big mortgage lenders—a point that needs to be repeated time and time again, because it is part of the real hidden value in the Northern Rock business, which must not be thrown away for nothing in our debates.
The hon. Member for Twickenham also sought—I return to the point—to downgrade the preferred bidder. He referred to Richard Branson, the gentleman who runs the Virgin consortium. I freely acknowledge something that is not widely known—that the name Virgin has everything to do with tax and very little to do with sex. It is a reference to the British Virgin islands, which were the original tax location of that particular business. All that is fair stuff and fair copy. That is why the hon. Member for Twickenham should have acknowledged the significance of the Government’s requirements, set out clearly in a letter of 25 November, which is available to the House. It states that
“returns on equity investments made by members of the Virgin Consortium and other holders of ordinary shares must be restricted until the public sector loans have been paid back with interest and all other public sector commitments are at an end.”
That was a requirement set out by the Government on 25 November and it has been accepted by the preferred bidders. These are important points to bear in mind; we must not write down the value of this business.
Now we come to the question that I asked the hon. Member for Twickenham in an intervention: what is the point of nationalisation? Is it to secure Northern Rock’s future as a growing business, headquartered in the north-east? The hon. Gentleman was not very clear in his answer, but the real answer appears in his motion, which refers to
“temporary public ownership as the only action that will guarantee the loans are paid back in full as soon as possible at the lowest risk to taxpayers.”
It could not be clearer that the purpose of nationalisation is to put the Government at the head of the queue of creditors in getting their money out. Those are the worst possible conditions in which to be considering the bank’s future. That is a profoundly irresponsible policy. It is nationalisation for fire sale and nationalisation for break-up. Nationalisation for sustained recovery and growing on the business would be a different proposition, but that is not the proposition that the Liberal Democrats are putting forward.
I return to the heart of the matter. The north-east of England does not want to exist for ever as a welfare-dependent region. My hon. Friend the Member for Blaydon (Mr. Anderson) pointed out that we have in Northern Rock an important business, in a growing part of the British economy, headquartered in our region, which few big businesses are now, whose lending practices have been a success. That is part of the new economy of which the north-east of England wishes to be part. The Question before the House is: how do we secure the future of Northern Rock, so that it can play its part in the wider recovery of the north-east economy? If Northern Rock goes down or is broken up, made bankrupt or run off, as the right hon. Member for Wokingham (Mr. Redwood) mentioned, that would be a disaster for the north-east. It would do psychological damage to the north-east, just as the first Thatcher recession did between 1980 and 1981. Yet that is the hidden meaning of the policy of nationalisation that has been put before the House today. It must be rejected.
There is a wider point, however. If Northern Rock goes down—broken up in a fire sale, nationalised with the Government putting themselves at the front of the queue of creditors—that will do enormous damage to the City of London’s reputation not only in this country and Europe, but throughout the world. That is not a policy that can be contemplated. How will the Government deal with other banks in order to make arrangements for the run-off of sub-prime mortgages, of which Northern Rock has very few, if they are themselves the owner of a bank? It is a ridiculous—
Madam Deputy Speaker (Sylvia Heal): Order. The hon. Gentleman’s time is up.
6.37 pm
Mr. Philip Dunne (Ludlow) (Con): It is a pleasure to follow the hon. Member for Newcastle upon Tyne, Central (Jim Cousins), given his experience of the circumstances surrounding Northern Rock on his constituents. I should like to focus on the Government’s decision making throughout the process and conclude with some comments on nationalisation, following up on what the hon. Gentleman said.
It is clear that the origins of the crisis extend way beyond this country and the confines of Northern Rock, and lie in the difficulties in global credit markets and the inability of Northern Rock in particular to achieve its regular securitisations in order to provide funding. However, the problem was identified in January this year by the FSA in its remarks on the state of credit availability and the implications for liquidity around the world. They were also endorsed by the Bank of England in its quarterly review in April, yet individual financial institutions in this country were slow to react, to put it mildly.
Northern Rock continued with, and in some areas even increased, its pace of lending, increasing its share of the mortgage market in the first half of the year to 20 per cent. There are many reasons for that, which we could go into. It is fitting that we are having this debate on the day when Northern Rock is being removed from the FTSE 100 index, to mark its demise from its previous position in our financial services sector. The business model was clearly flawed, and the executives in the bank were carried away, partly as a result of their lack of experience.
Northern Rock’s board appeared before the Treasury Committee, and it is notable that the chairman, who was acknowledged not to be a banker and who had quite properly offered his resignation to the senior non-executive when the crisis struck, has been replaced by somebody else who is not a banker. He has recently been non-executive director of a major bank, but his entire career was spent in the oil industry. The chief executive of the bank, who was responsible for the rapid growth in its lending, is still there, as we heard earlier. The chairman of the audit committee—the same person as the chair of the risk management committee—who oversaw the explosion of lending was the only member of the board who was a recognised banker. As emerged earlier today, he was Sir Derek Wanless, the man who was appointed by the Prime Minister to review the finances of the national health service.
Mr. Charles Walker (Broxbourne) (Con): A track record of success.
Mr. Dunne: A curious track record, although I believe that his role in banking preceded his role in advising Government.
When the crisis hit, how did the Government react? They reacted through the tripartite arrangements that had been established by the Chancellor as Chief Secretary to the Treasury 10 years ago, and by the present Prime Minister when Chancellor. It is now clear as day that the tripartite arrangements had not been stress-tested when they were put in place, and it was therefore not at all clear how decisions would be made, and by whom, during a crisis. That fundamental uncertainty about where responsibility lies and decisions are made in the depths of a crisis lies at the heart of the Government’s reaction to this crisis and some of the false moves that they have made. The first real test of the tripartite arrangements has failed.
In her chronology of events, the Economic Secretary omitted the first key decision that the Government got wrong in the crisis. The Chancellor failed, in fact, to make the right decision over the offer for Northern Rock that was on the table from Lloyds TSB.
Mr. Colin Breed (South-East Cornwall) (LD): I know that hindsight is an inexact science, but will the hon. Gentleman offer a view on whether it might have been better to lend £30 billion to Lloyds TSB or to Northern Rock?
Mr. Dunne: That is precisely the point that I was about to make. With the benefit of hindsight, it is undoubtedly clear that had the Government decided to advance the facility to Lloyds TSB, it would have done so on terms that would have been commercially more attractive to the bank. That would have meant that the bank would not have had to pay the penal rate of interest that is causing part of the problem to the profitability of the remaining part of Northern Rock. I shall say more about that shortly.
Much has been made of the fact that what was on the table was not a firm proposal. Indeed, the Chancellor told the Treasury Committee that there was no firm proposal. However, my research makes it clear that Northern Rock ran a competitive bidding process among institutions that might have been in a position to make a bid, that the process began on 20 August, and that by Friday 7 September Lloyds TSB had concluded that it would proceed with an offer, but only on condition that the Government facility of £30 billion was made available at LIBOR flat, a commercial but not penal rate of interest. That offer would have been via a scheme of arrangement, a court procedure, and would therefore not have been conditional on shareholder consent, which would potentially have frustrated the bid.
The offer was there. It was not completely unconditional, but had the Government accepted it, confidence would have been provided for Northern Rock’s funders and much of the present mess would have been avoided. Had a different decision been made it would undoubtedly have attracted political flak at the time, and there would have been difficulty, but it would have been nothing compared to what we have now.
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