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21 Jan 2008 : Column 1208

Despite intensive efforts over the last few months, and as a result of uncertain market conditions across the world, it has proved impossible for Northern Rock to find a purely commercial solution. In the autumn, market conditions were such that banks became increasingly reluctant to lend on terms that would have been acceptable. As the House will be aware, banks right across the world are having to make substantial provisions. While conditions are better now than they were before Christmas, they remain difficult, and the Government’s financial advisers believe that there is no chance of achieving a private sector deal backed entirely with private finance in the near future.

Before I turn to my proposal, let me first deal with the question of putting the company into administration, as some have suggested. Administration would mean that control would immediately pass to an administrator who would look to realise the value of the company’s assets, which, under current market conditions, would amount to a fire sale. It could also exacerbate current market turbulence, and costs would be significant. I have therefore rejected such a proposal.

My proposal today is one in which Northern Rock is owned and run in the private sector as a commercial bank, and where the Government provide a backstop guarantee to make private financing possible in the current market conditions. I believe that this company should be managed within private sector disciplines and management, provided that we can do so on terms that properly protect taxpayers’ interests.

Let me now set out in greater detail how this proposal will meet our objectives of protecting the taxpayer, protecting consumers and promoting financial stability. Northern Rock would raise the funds that it needs from investors by selling assets. The Treasury would guarantee payment to those investors in the event that the assets were insufficient to meet its obligations, for which Northern Rock would pay the Treasury a fee. In this arrangement, shareholders and other providers of capital in Northern Rock accept the first risk, with the Government acting as a backstop. According to the Financial Services Authority, Northern Rock has a good quality loan book. In normal market conditions, such a guarantee would be unnecessary. However, in the current circumstances, to attract a wide range of investors on acceptable terms that protect the public interest, a guarantee is necessary. If this proposal is accepted, it would mean that all of the Bank of England’s current loan facilities for the company are repaid in full, with interest, up front, upon completion of the transaction.

Our willingness to put this support in place depends entirely on the terms on which a deal can be struck. I will authorise support for the private sector only if the public interest will be better served than through taking the company into temporary public ownership. In addition to this, any acceptable proposal would need to comply with clear conditions. The company will need to demonstrate how it can operate sustainably in future without Government support, and we will favour proposals that reach that point quickly. New private sector capital will be needed, so that the private sector—not the taxpayer—takes the burden of risk for commercial success or failure. So long as the Government continue to provide a backstop guarantee, we will require restrictions on any sale of the company and on dividend payments.

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To allow this financing structure to be explored, the Treasury and the Bank of England will make arrangements to extend the Bank of England’s loan facility until 17 March, by which time we must submit a restructuring plan to the European Commission. The proposals would involve private sector participation in the financing of Northern Rock and would also provide the taxpayer with the ability to share in the potential upside returns, as business conditions improve, in return for the financial support provided to the company.

The Government will make their decision as to which proposal we can, as provider of support, accept, and with the Bank of England and the FSA, we will consider proposals received by 4 February from potential interested parties, including the company itself. Any proposals, either as a result of this support or public ownership, are highly likely to need state aid clearance and will therefore be dependent on approval by the European Commission.

The Government have already started discussions with the company and with the two parties that have publicly stated an interest in the company. The Government are also ready to have discussions with any other interested parties.

Let me make it clear that if the solution I have outlined proves not to be possible on terms that protect the public interest, then a temporary period of public ownership will be necessary. Legislation is being prepared, should it be necessary, and would make provision for an independent valuer to decide on the level of compensation to be made to shareholders. The principles for assessing that compensation would be based on the company’s not receiving public support and on all specific financial assistance from the Bank of England or Government having come to an end. This is set out more fully in the statement to the markets issued earlier today.

It is for the independent Office for National Statistics to determine whether Northern Rock is classified to the public sector in the national accounts. Any liabilities classified to the public sector would be temporary and backed by significant assets, and do not represent any meaningful measure of fiscal sustainability. The code for fiscal stability, underpinned by legislation passed by this House, provides for such situations. We would also address the future of the Northern Rock Foundation in the event of temporary public ownership.

The proposal that I have outlined today meets our stated objectives of protecting the taxpayer, protecting depositors and maintaining financial stability.

Northern Rock got into the difficulties it faced because of global market conditions. The Government agreed to Bank of England support for Northern Rock because of the destabilising risk to the rest of the financial system and also provided guarantees to protect depositors. Both of those objectives have been met. We now need to reach a solution that leaves the greatest risk with the company, yet will allow taxpayers to profit from any future sale.

Ideally, the best solution would have been a private sector one without any Government support, but in the current uncertain market conditions, that is not possible. Administration, with the resulting fire sale of the company’s assets, would not be in the public interest. Temporary public ownership—nationalisation—remains an option, however even those who advocate it now see it as a
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stepping-stone to the return of Northern Rock to the private sector, which would involve Government support. In the meantime, the company would require continuing financial support, which would leave the public sector bearing all of the risk.

The proposal I have outlined today is the right one. It provides a Government guarantee that enables a commercial solution in which the private sector raises finance and bears risk. It also offers the prospect of withdrawing Government support more quickly and is therefore most likely to meet our stated objectives and conditions. I commend this statement to the House.

Mr. George Osborne (Tatton) (Con): May I thank the Chancellor for finally telling Parliament what the Prime Minister told his press pack, and apparently Richard Branson, on his way to China last Friday? Nothing of substance that the Chancellor said today is not already plastered over this morning’s newspapers and blogs, once again reminding us of how marginal a figure the Chancellor now cuts in this process. Let us also remind ourselves of the huge damage that the first bank run for 140 years has done to Britain. The Chancellor prayed in aid in his statement the advice of his financial advisers, Goldman Sachs. This is what Goldman Sachs is advising its other clients:

I welcome the fact that the right hon. Gentleman now implicitly agrees with me that full nationalisation would destroy that reputation altogether. To use his own language, I am glad that what looked like the Chancellor’s plan A just a week ago has, after Prime Minister’s questions, become the Government’s plan B.

The Chancellor should be more straight with people about the real consequences of his latest attempt to get out of the mess created by Labour’s economic incompetence— [ Interruption. ] Can he confirm that he wants the taxpayers of Britain to provide— [ Interruption. ]

Mr. Speaker: Order. Let the shadow Chancellor ask his question.

Mr. Osborne: Can the Chancellor confirm that he wants the taxpayers of Britain to provide a £25 billion mortgage to Northern Rock for years to come? Add in the guarantees to depositors and that figure comes to £55 billion. That is £2,000 for every family in the country: a second mortgage on every home to rescue the reputation of this Government. No British Government have ever provided taxpayers’ support on this scale to a private company. It is bigger than British Leyland, bigger than British Steel—this is back to the 1970s. Life in Brown’s Britain is like an episode of “Life On Mars”.

Can the Chancellor answer questions on these three specific issues? First, will he stop pretending that this is, as he said in the final paragraph of his statement, a commercial solution? In truth, it is a part-nationalisation because the Government take the bulk of the risk and the private sector takes the bulk of the upside. Alliance and Leicester has gone into the market and borrowed at 7 per cent., but thanks to the taxpayer, Northern Rock’s new owners will be borrowing at Government rates. If it goes under, of course, it will be the British taxpayer who
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pays the price. It is no wonder that Northern Rock’s shares have soared 40 per cent. on a day on which the stock market has fallen.

The second issue I want to press the Chancellor on is the growing risk to the taxpayer that this deal represents. Will he confirm that the difference in the cost of capital means that Northern Rock will be getting an effective Government subsidy for years to come? Some estimate that the subsidy is worth more than £1 billion in total. That is more than 20 times the cost of funding this year’s police pay settlement in full. What is his estimate? How much will the fee that he mentioned recoup of that £1 billion subsidy? Will he confirm that buried away in his statement is the proposal that the bonds issued by the Government can be used not just to repay the Bank of England loan, but to provide adequate liquidity for the company? How much could that cost?

What does this whole deal mean for public finances? We already have the worst budget deficit in Europe, and we have learned from today’s dismal public finance figures that the Treasury has borrowed £44 billion so far this year, exceeding the estimates given by the Chancellor to this House. Will he confirm, as he admits, that if the ONS treats the Government as the true economic owner of the liabilities, he will shatter the sustainable investment rule? He says that the measure is only temporary, but the whole point of the deal is that it could be permanent. As ever, the Government’s answer to every economic problem is further debt.

The third and final issue for the Chancellor to consider is how long the Northern Rock saga will go on. The right hon. Gentleman’s statement made no mention of the length of term of the bonds, yet the press have been briefed by the Prime Minister’s travelling entourage that they will last for five years. Which is it? Will the Chancellor tell Parliament what someone else is telling the press on the other side of the world? What will the time scale be?

In September, the Chancellor said that he was providing a little short-term support to help Northern Rock get through its difficulties. Since then, we have had five months of dithering. Today, the taxpayer could possibly be in hock for five years. The Government could have secured a private sale before the bank run. They could have done today’s deal back in September, if they were so keen on it, at a much cheaper price. They could have passed legislation to protect retail depositors, as we proposed, back in October. They could have considered the options of a Bank of England-led reconstruction. Labour Members dismissed that, but when the Chancellor unveils his plans next week he will suggest that in future crises the FSA has the powers to take organisations such as Northern Rock into an effective form of administration. Labour Members will all be voting for that in a couple of weeks’ time.

Of course, the Chancellor did none of those things. He dithered and delayed. The result is that the British taxpayer is being asked to lend billions of pounds for years to come to salvage the reputation of the Prime Minister and his Chancellor. Labour is saddling
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everyone in Britain with a second mortgage, and that is the price that we are all now paying for its economic incompetence.

Mr. Darling: Listening to the shadow Chancellor, it is clear that he has not a clue what he would do. He has no constructive policies to offer. At least the hon. Member for Twickenham (Dr. Cable), who speaks for the Liberal Democrats, has a statable case and a policy. The principal Opposition party has no policy whatsoever. Indeed, ever since Northern Rock got into these difficulties, it has been clear that the official Opposition’s position has been completely incoherent and inconsistent.

Last September, when we offered Bank of England support to Northern Rock, the Leader of the Opposition said that he wholeheartedly supported it. Two days later, he said that he backed the guarantees and supported the Bank of England action. However, all last autumn, at every opportunity, the official Opposition sought to run away from the consequences of making that decision. Even last weekend, the Leader of the Opposition said that he ruled out nationalisation, but on Monday, when he was asked about nationalisation and administration, he said that he needed to consider both options. Far from ruling out negotiation, he was ready to consider both options.

On the subject of administration, it is interesting that last week we heard day after day that the Conservatives had two policies. The first was that the Governor of the Bank of England should restructure the bank—by the way, the bank would have to be nationalised to allow the Bank of England to have the necessary control to do that. The alternative policy was to put the bank into administration—in other words, to bankrupt the thing. It is interesting that the shadow Chancellor should talk about administration last week, because two months earlier he said:

That was his position in November, but it is completely different today.

On the subject of the shadow Chancellor’s questions, I have set out my proposals, which will form the basis of negotiations in the discussions with both the bidders who have expressed an interest in acquiring the bank or in being part of its future as well as with the board. Obviously the terms and conditions clearly need to be discussed and negotiated. I shall continue to report to the House to ensure that it is kept fully informed.

I have to tell the shadow Chancellor—I appreciate that he is starting from a position where he has no position—that it would be ideal if we could find a purely commercial solution to the problem. However, in the current conditions, there is no way that that will be possible in the foreseeable future. One could put the bank into administration, but that would happen at a considerable cost and could exacerbate market conditions.

One could take the bank into temporary public ownership, but, during that period, the Government would continue to be at risk and public support would be needed to get the bank out of temporary nationalisation into a commercial future.

Alternatively, we could pursue a chance of getting commercial money, whereby people can invest in the bank and bear the first risk and the taxpayer can gain
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when market conditions improve. I believe that that is the right thing to do, and that my position is properly thought out and worth exploring. The Opposition have shown that they are bereft of ideas.

Mr. Doug Henderson (Newcastle upon Tyne, North) (Lab): Unlike the shadow Chancellor, the people of the north-east of England recognise that, first, the Government’s first responsibility is for the stability of our financial markets in this country and, secondly, the long-term interests of Northern Rock and the consequential jobs are also key issues. Contrary to the views that are likely to be expressed by Liberal Democrat Members, people in the north-east do not perceive premature nationalisation as a way forward that will meet either principal objective.

Will my right hon. Friend agree to meet a delegation of workers’ representatives from the bank so that they can express their concerns and hear more about the Government’s proposals?

Mr. Darling: I am grateful to my hon. Friend. Of course, I would be happy to meet him and representatives of the bank’s work force. I fully understand that it is an uncertain time for them. I therefore hope that the Government’s proposals today will enable an acceptable solution to be found. As I said to hon. Members, there are many difficulties to overcome and we must proceed cautiously, but I believe that we are doing the right thing.

My hon. Friend is also right that the Government’s objective throughout has been to ensure stability. In the past 10 years, there has been sustained growth in the wider economy, with historically low interest—and, therefore, mortgage—rates, and record numbers of people in work. That has been reflected in the financial markets. We had to respond to difficult circumstances, which started in the United States sub-prime market and have affected markets throughout the world. As all hon. Members concede, we are going through a difficult period. Everything we do should be geared towards greater stability. The Conservative party’s proposals would not add to that.

Dr. Vincent Cable (Twickenham) (LD): I congratulate the Chancellor on brilliant originality. The Government, through their bond guarantees, are solemnly undertaking to repay the Government. The taxpayer is standing behind the taxpayer and we have a private sector solution without private money as well as nationalisation of liabilities and losses and privatisation of profits. It requires a special sort of genius to dream up such an idea and I hope that the Government’s financial advisers have been well rewarded.

I am tempted to recall the Danish economist, Hans Christian Andersen, who told the story of the two conmen who visited a particularly credulous king to sell him an imaginary suit of gold to cover his nakedness. We have a naked King Gordon, desperately trying to cover his embarrassment over the “n” word “nationalisation”.

It was said this morning in the City that the financial value in the insurance markets of the guarantee of the bonds was £2 billion. Since the private buyers are not providing that money, where will it come from? Are we talking about a guarantee of a guarantee? How else will it be funded?

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