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The next piece of indecision from the Government occurred when someone—it is not certain who, but the finger of suspicion clearly points towards the Treasury, as the hon. Member for Newcastle upon Tyne, Central suggested—decided to brief the BBC on the extent of the problem surrounding Northern Rock on Thursday 13 September. The lender of last resort facility was announced the following day. A decision was made to leak some information—I am not accusing the Chancellor directly, but someone made the decision—and the next day, when the announcement was made, Northern Rock made a statement about its financial prospects. The failure on the part of Government was that no joint decision was made by the parties involved, the three members of the tripartite arrangements and the company. Nor was the decision made at the same time to extend the deposit guarantee, as has been referred to. Had both guarantees been announced together, and had there been a common statement from those concerned, considerable confidence would have been given to the market, we would not have had a run on the bank, and we would not be in the mess we are in. Furthermore, it now seems that the Government were taking all these decisions about critical aspects of market practice without any external advisers. Goldman Sachs was appointed
only a week after the guarantee was provided. That is another example of poor decision making at the heart of Government.
The next poor decision was the security package that the Treasury and the Bank of England negotiated for their facility. The Bank of England is a bank so it understands security and it appears that it took security over the best assets available, which is good for the Bank of England. The Treasury is not a bank and did not take such good security. What package of security has the Treasury taken? The Economic Secretary gave us a clue; it seems that it does include the seller’s share owned by Northern Rock in the mortgage collateral within Granite. The seller’s share is, I believe, £7 billion of the worst tiering of security within the Granite structure, which effectively means that if the Granite mortgages start to default that will come out of the Government’s security package first—in other words, it is the weakest form of security.
What will happen if either of the current offers are pursued? It will be interesting to hear from the Economic Secretary in her winding-up speech what security the Bank of England and the Treasury will be encouraged to surrender. Will they share in the risk with the bidding group, or will—as would be more normal practice—new money coming into the business require priority in security, in which case the Government would be left with even lesser quality assets?
Philip Davies (Shipley) (Con): My hon. Friend is making a thoughtful speech. Does he agree that it is difficult to know what is the best future for Northern Rock unless the precise terms of the arrangements of the Bank of England and Treasury loans are disclosed?
Mr. Dunne: That would be helpful not only to those of us who are trying to understand what has gone wrong, but to the bidders to get some idea of the details of the security package.
As my hon. Friend the Member for Fareham (Mr. Hoban) said, the Chancellor has confirmed that taxpayers’ money is safe and will be repaid. That puts the Chancellor’s position and credibility firmly on the line in the context of the Northern Rock situation and its resolution. I very much hope that taxpayers will receive all their money back—that is the outcome we all want—but it is hard for me as a former banker to see how that can possibly occur. While the chairman of the Financial Services Authority confirmed yesterday to the Treasury Committee that he regards Northern Rock as solvent, that is due only to the Government facility, since it has not been able to meet its debts as they fall due since mid-September, which is why it went to the Bank in the first place. We now know from the Economic Secretary that the security package includes Northern Rock’s residual share of the mortgage held in Granite, ranking behind £48 billion-worth of security, at the last count, in Granite. It is composed of unsecured lending and home-equity release mortgages, which are the UK equivalent of sub-prime mortgages. It also rests on a portfolio of traded securities—some £15 billion according to the last balance sheet we saw—issued by others. Given what is happening in the credit environment and to the valuation of traded
securities around the world, whether that is of par value is somewhat doubtful and an open question.
Let me conclude on nationalisation and pick up on Members’ observations on that. Nationalisation is not a solution that protects the taxpayer. It could do so only in the event of benign market circumstances and over a prolonged period, with the bank being run as a business in competition with every other financial institution that is in the mortgage business around the country by a Treasury that, frankly, is not equipped to do so. It is highly unlikely that those circumstances will prevail. The other circumstance in which it might possibly work is as a facilitation of a back-to-back deal with a private sector purchaser. As I pointed out in an intervention, nationalisation places the Government in the position of being a 100 per cent. equity owner responsible for meeting all £110 billion of liabilities that might fall due. Is that a responsibility that the Liberal Democrats really want the Government to undertake?
6.49 pm
Mr. Quentin Davies (Grantham and Stamford) (Lab): I do not know how much light this evening’s debate has been able to throw on the problems in the inter-bank market or the problem of Northern Rock. It has shed a lot of light on the state of the Front-Bench teams of the Conservatives and Liberal Democrats. Once again, it has shown that the Conservatives have no original ideas. As has become blatantly apparent this evening, they are not even prepared to answer their own questions. They are in the business of saying contradictory things to different people, of gesticulating in different directions, and of hinting that their policy line is one thing and then, when that becomes inconvenient, simply saying that it was not party policy when it was stated after all. We have seen through them this evening.
The Liberal Democrats, who called for this debate, have also shown that they are all over the place, even though they have a concrete proposal in the form of nationalisation—it is surely the wrong one. It makes no sense for the hon. Member for Twickenham (Dr. Cable) to say that he is extremely worried about the exposure of taxpayers’ money through the Bank of England deposits with Northern Rock and a second later to say that he thinks the taxpayer should not just have the deposit risk of a defined amount of money, but should take on the equity risk too by nationalising the bank. That equity risk will not only be the existing equity risk, because, as has been pointed out by the right hon. Member for Wokingham (Mr. Redwood), who made a sensible intervention for once, future liabilities in the form of redundancy liabilities and so forth can crystallise subsequently.
The hon. Member for Twickenham said two other odd things this evening. One was that there has not been a comparable banking collapse since Creditanstalt in 1931. A range of banking collapses have occurred since then—there were a number in the 1970s involving the secondary banking crisis. One such collapse happened to London and County Securities bank, which had as its director at the time Jeremy Thorpe, then leader of the Liberal party. It is little wonder that the hon. Gentleman does not want to remember that one. That situation had to be solved by the famous lifeboat, which turned out to be a successful support
operation. The leader of the Conservative party is even more ignorant than the temporary leader of the Liberal Democrats, because he said, at Prime Minister’s questions, that there had not been a comparable bank crisis or run on a bank for 140 years. He was even further from the mark than the Liberal Democrats are.
Another extraordinary thing took place. The hon. Member for Twickenham knows quite a lot about economics, but he allowed himself to be completely seduced into demagogy of the most irresponsible and superficial kind this evening. He started comparing £30 billion-worth of deposits placed by the Bank of England with Northern Rock—if that is what the real figure is—with the cost of high-speed trains or hospitals. He knows as well as anyone, and perhaps better than most, that if one buys high-speed trains or hospitals, one loses the cash because it will have been definitively given away. If one places money on deposit with a bank, one has it there. Unless any further write-offs, in addition to existing provisions on the book of Northern Rock, prove to be more than the value of the equity, all the deposits will be repayable, and it is inconceivable that more than a very small proportion of those would be the target of subsequent provisions. The hon. Gentleman knows that. He was merely trying to play to the gallery and to be demagogic when to do so is thoroughly irresponsible.
What should we do in this situation? The Government are doing the right thing. It was right for the Bank of England to intervene, because that is what lenders of last resort are for. It would be disastrous to have a banking collapse when the inter-bank market is in a considerable psychological crisis, and we are right to prevent that from happening. We should continue with the present arrangements—that may be for much longer than next February, and that does not matter—until we can find a suitable trade sale. Ultimately, if that did approach not work, we would have to opt for administration.
I hope that the Government bear one point in mind: the enormous moral hazard involved if there were any attempt—I am sure that the Government would not be tempted to do this—to bail out shareholders. That would be wrong. They bear the equity risk of the business and they would have been the beneficiaries had the high-risk strategy of funding the bank up to 70 per cent. on the inter-bank market worked, so they must take responsibility for that strategy that their management adopted. We cannot have the moral hazard of shareholders in that situation being bailed out, otherwise every bank will think that it can adopt the highest-risk strategies, whether on the asset side or the liabilities side, because if it works they will get the reward and if it does not, the taxpayer will pick up the tab. The result of that would be corruption of good banking standards throughout the country.
I welcome today’s important news that the regulators and lenders of last resort here in the European Union and in the United States have got together to provide liquidity for up to three months for the world banking system. What we need in this crisis is exactly what the Government have displayed—calmness, strong nerves and consistency. It is clear that the only Front Benchers displaying those qualities tonight are my right hon. and hon. Friends.
6.55 pm
Julia Goldsworthy (Falmouth and Camborne) (LD): I had hoped for a greater welcome in the House for this debate, because this is the only opportunity we have had since the issue blew up to discuss points that so many hon. Members from Newcastle and the surrounding north-east area have raised about what should happen to the employees of Northern Rock. The Conservative Front-Bench spokesman said that his party had called for a statement on the issue, but that would not have allowed a full discussion. As my hon. Friend the Member for Northavon (Steve Webb) said, the fact that the Conservatives did not even feel it necessary to table an amendment that could have outlined some of their views shows how little they have to contribute.
Today has been an opportunity to raise wider issues about the run on the bank and allow parliamentary time to discuss, and possibly express our preference for, some of the options on the table. Whatever the final outcome, it is clear that there will be a human cost to this episode, although the Minister explicitly did not mention that in her remarks. It was raised by hon. Members with constituents who work for Northern Rock, and we heard some valuable contributions from my right hon. Friend the Member for Berwick-upon-Tweed (Mr. Beith), and the hon. Members for Newcastle upon Tyne, North (Mr. Henderson), for Blaydon (Mr. Anderson) and for Newcastle upon Tyne, Central (Jim Cousins), who rightly raised the uncertainty that the staff face. We do not wish to criticise that uncertainty and we share their pain, but they face a difficult and challenging future whether a private buyer takes it on, or the bank goes into administration or is taken into public ownership.
We cannot expect a private buyer to be Mother Theresa or a knight in shining armour. There are difficult times ahead, and our argument is that taking the bank into temporary public ownership would be a way to provide some stability and a platform for progress. If hon. Members have any criticisms, they should be for the people who devised Northern Rock’s business model, which, the Minister acknowledged today for the first time, had a major role to play in the downfall of the bank. However, I would ask who was responsible for supervising that business model and who set up the circumstances that enabled it.
The focus of the anger of all the hon. Members who spoke so passionately about the effects on their constituents should be Adam Applegarth and the board of directors who so aggressively pursued an expansion plan that relied heavily not on retail deposits—the heritage of the bank—but on borrowing on the wholesale markets. Those hon. Members should also be angry with the Government for setting up the tripartite arrangement.
The hon. Member for Louth and Horncastle (Sir Peter Tapsell) raised the issue of what happened when the Bank of England was made independent. However, the issue that he raised was not to do with that, but with who took on oversight of the banks. Perhaps if that had stayed with the Treasury, the tripartite arrangement might have been slightly clearer. Early warning signs were not picked up and acted on and the legislative framework was inappropriate. There was a delay in guaranteeing deposits, which stoked public concern, and some of the responsibility, ultimately, has to go back to the Government.
Of course, the impact will be felt far more widely than simply in the north-east and among the beneficiaries of the Northern Rock Foundation and employees of Northern Rock. Every single taxpayer has made a commitment. Labour Members said that it is about putting the Government first, but it is actually about saying that the taxpayer should be put first.
It being Seven o’clock , the debate stood adjourned.
Motion made, and Question put forthwith, pursuant to Standing Order No. 15 (Exempted business),
That, at this day’s sitting, proceedings on the Motions in the name of Dr Vincent Cable may be proceeded with, though opposed, until a quarter past Seven o’clock.— [Alison Seabeck.]
DEFERRED DIVISIONS
Motion made, and Question put forthwith, pursuant to Standing Order No. 41A(3)(Deferred d ivisions),
That, at this day’s sitting, Standing Order No. 41A (Deferred divisions) shall not apply to the Motions in the name of Mr Secretary Hain relating to Pensions; Mr Jim Murphy relating to the Funding of Political Parties; and proceedings on the Motions in the name of Dr Vincent Cable.— [Alison Seabeck.]
Northern Rock
Question again proposed, That the original words stand part of the Question .
7 pm
Julia Goldsworthy: I was talking about the impact on taxpayers of the Government loan of some £30 billion. That equates to a loan from every taxpayer in the country of £820. Again, that is only an assumption, which we can make because the Bank of England publishes its balance sheet. We have not had explicit information from the Treasury on the terms of the loan or the amount of money that it expects to loan—either up until now or in the future.
People have a right to know the extended terms of the loan. I ask the Minister to state explicitly the security. Is it based on the fixed or floating assets? If she can give a clearer answer than she did earlier, I shall be grateful. What can she do to ensure that people are reassured that the Government will seek full repayment of the loan as soon as possible and that a clear time frame will be set out? That information has been far from forthcoming and needs to be provided. Ultimately, if taxpayers are providing this money, they have a right to know that information.
Of course, it has been a tough time for shareholders, too. Many small shareholders benefited by becoming shareholders when Northern Rock demutualised in 1997, as has been mentioned, and they own about 25 per cent. of Northern Rock’s shares. As always, there is a risk in trading stocks and shares. Financially, it is more— [ Interruption. ]
Madam Deputy Speaker: Order. Will hon. Members who have just come into the House please keep the conversation low?
Julia Goldsworthy: The shareholders are also taxpayers. If the average shareholding for a small shareholder is about £600 and the average tax contribution is £800, they are still net out of pocket. Their anger should be directed at those people who were delivering the business model.
It is worth pointing out that the majority of shareholders are hedge fund traders, who do not invest in the long-term security. They invest in the short term, which does nothing to benefit the long-term viability of the bank. For many people, and potentially for the wider economy, there have already been significant consequences of the run on the bank. That raises two fundamental questions. Have lessons been learned, and could the Government have done anything better? There has been some acceptance of failure in the tripartite arrangements and in the regulatory framework. The Government sought to address some of that in the Queen’s Speech.
However, there are key issues where the Government still deny that there has ever been a problem. We just need to look at the loan. The Government are not following the principles laid out in their legislation on credit and savings that mean that the terms of the loan need to be laid out clearly. There has been no public debate on the interest rate, on how punitive it is, on
how it has changed and on how it compares with the inter-bank lending rate. There has been nothing on the security of the loan.
Another key area of failure has been the Government’s delay in reaching an agreement on a private sale. The longer the debate goes on, the more public money is invested in Northern Rock and the less likely it becomes that there will be a viable takeover by a private organisation at the end of the process. Will the Government accept that they are undermining the viability of a private sale? Will they accept that they are in an incredibly weak negotiating position? Essentially, they are taking part in a poker game where they are showing their opponent the cards and playing with an unlimited number of chips provided by the taxpayer.
Every week that goes by, the crisis is costing the taxpayer more money, there is less chance of a proper recovery, and it becomes more probable that the bank will have to end up in public ownership. The position is unsustainable, and that is why we say that the Government must bite the bullet. The least worst option is to take Northern Rock into temporary public ownership, with a view to selling it off later. That would surely be better than the proposition—which the Conservatives seem to support—that the Government would write unlimited blank cheques merely to avoid the dogma involved in taking the bank into public ownership. In fact, the tales of Rolls-Royce or the public mortgage bank that was referred to earlier show that the Conservatives have a record on these matters.
Finally, why is the problem so urgent? All the options are on the table, but the Government must act quickly. If the bank has to be taken into public ownership, that has to happen quickly, perhaps over the recess, and that is why we suggest that enabling legislation should be brought forward now. Will the Minister who winds up the debate confirm that her officials have drafted that legislation, on the assumption that it will be needed sooner rather than later?
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