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Northern Rock
3.30 pm
The Chancellor of the Exchequer (Mr. Alistair Darling): With permission, Mr. Speaker, I would like to make a statement on Northern Rock.
I hope that the House will understand that it was necessary for me to issue a statement yesterday, ahead of the markets opening, so that trading in Northern Rock shares could be suspended this morning. It was also essential to allow the management of Northern Rock time to tell its employees what was happening so that the bank could open as normal this morning.
As I said yesterday, the Government have decided to introduce legislation to take Northern Rock into a period of temporary public ownership. I took this decision after full consultation with the Bank of England and the Financial Services Authority. The draft Bill has been available in the Vote Office and the House of Lords since this morning to provide as much time as possible for right hon. and hon. Members, as well as the other place, to examine its provisions. If the House agrees, the Bill will begin its parliamentary passage tomorrow. I have also arranged for the principal Opposition spokesmen to be briefed by Treasury officials today.
It is important for savers and depositors to be reassured that their money remains safe and secure. Northern Rock will continue to operate as a bank on a commercial basis, and it is open for business as usual today. The Government guarantee arrangements that I announced last year remain in place and will continue to do so. Borrowers will continue to make their payments in the normal way.
I have appointed Ron Sandler as the executive chair. He is in Newcastle today and has had meetings with the company and its employees. The new board and the bank will operate at arm’s length from the Government with commercial autonomy for their decisions. I will publish shortly the framework agreement that will outline how the relationship between the Government and the Northern Rock board will work.
As I said yesterday, the board’s proposals will also cover the Northern Rock Foundation, which is very important to the north-east. The board will commit to guaranteeing a minimum income of £15 million per year in 2008, 2009 and 2010. That will be paid directly by Northern Rock, as now, and would be a condition of any sale, if it were sold in that time. The new board will be asked to identify a long-term future for the foundation.
I want to set out the reasons for the decisions that I made and to outline what the new legislation will do. Before that, let me remind the House that last September there was almost universal agreement that the Government were right to intervene to save this bank to stop its problems spreading to the wider banking system. There was also agreement that, ultimately, the long-term future of the bank must lie in the private sector. Even those who advocated nationalisation in the autumn did so on the basis that it could be only a temporary step—a stepping stone—to return the bank to the private sector when market conditions made that possible.
Throughout last autumn, and from the start of this year, the Government wanted to test all the options
and to give the shareholders and the management time to find a solution that was acceptable and that met the three principles that I set out last year: to support financial stability; to protect depositors’ money; and to protect the interests of the taxpayer. I said throughout that all options, including a period of temporary public ownership, remained on the table.
As the House will know, the Government had two private sector bids to consider. Each was tested against the option of a temporary period of public ownership to see which met our objectives and principles, including best value for the taxpayer. Both proposals involved a degree of risk for taxpayers and a very significant implicit subsidy from the Treasury, involving a payment below market rate to the Government for continuation of our guarantee arrangements and for the financing that we would put in place.
Each proposal had its pros and cons. The Virgin proposal, for instance, would have brought in a new brand and management. However, the taxpayer would have received a share of the private sector return only if the business’s value to its investors reached at least £2.7 billion. The board’s proposal would have involved a similar level of subsidy, but it had other disadvantages compared with Virgin’s. It would have brought in less new capital, and the business would have depended longer on Government guarantees for new retail deposits. A subsidy on the scale required would not have provided best value for the taxpayer. The private sector rather than the taxpayer would have secured the vast majority of the value created, and that would have been a poor reflection of the balance of risk borne by the two sides. By contrast, under public ownership, the taxpayer will secure the entire benefit and proceeds from the sale of the business in return for bearing the risks during this period of market uncertainty. That is why we made the decision that we did. We made the decision to protect taxpayers having weighed up the various competing considerations. In deciding which was the best option for the taxpayer, it was clear that a temporary period of public ownership was the better option.
I will go through the contents of the Bill in more detail on Second Reading tomorrow. We have deliberately drafted it to ensure that a bank can be acquired only in certain tightly defined circumstances, and the power to do so will last for only 12 months. I have already announced a consultation that will lead to permanent legislation to deal with such situations in future. The Bill potentially applies to a range of financial institutions, but I want to make it clear that the Government have no intention at present to use it to bring any institution other than Northern Rock into temporary public ownership.
The Bill also provides for appropriate compensation to shareholders. As I explained on 21 January, those provisions are on the basis that all financial assistance provided by the Bank or the Treasury, including guarantee arrangements for depositors, had been withdrawn and that no further financial assistance, apart from ordinary market assistance from the Bank, would be provided to the deposit taker. I believe that that is fair both to shareholders and to the taxpayer. The Bill makes provision for transfer of the bank or parts of it to the private sector.
I remind the House that following the problems that started in the United States last summer, Northern
Rock was unable to raise the billions of pounds that it needed to stay in business. We were right to save the bank and to do everything we possibly could to find a private sector buyer on terms acceptable to the taxpayer. Because of current market conditions, we are now right to take over the bank on a temporary basis, because that is what is in the best interest of the taxpayer. There were choices to be made. We could have let the bank go under, but the risks to the wider financial system, for savers and for the general public were not acceptable. Having made the decision to save the bank, maintain financial stability and protect savers, we are now taking this decision to protect the taxpayer. I commend this statement to the House.
Mr. George Osborne (Tatton) (Con): Never before in the long history of his office has a Chancellor had to come to Parliament to announce the nationalisation of a high street bank. For months, the Prime Minister dithered and delayed, doing everything he could to avoid the very course of action that he now recommends to Parliament. We know why. As the Chancellor acknowledged at the Dispatch Box, nationalisation means the
“slow lingering death”
“and Britain’s reputation as a major financial services centre”,
“cast in the role of undertaker”.—[ Official Report, 19 November 2007; Vol. 467, c. 968.]
I have three sets of questions to ask that self-confessed undertaker. First, will he reaffirm that nationalisation means that the taxpayer is
“bearing all of the risk”?—[ Official Report, 21 January 2008; Vol. 470, c. 1210.]
That was the phrase that he himself used last month in the House when he argued against nationalisation. Nationalisation means that the taxpayer’s risk has doubled to £110 billion, or £3,500 for every family in Britain. Every family in Britain will now own the high street bank that wrote more mortgages at the top of the housing market than any other. Every time a home owner fails to meet a mortgage payment, every family in the country will bear the cost. That is what this nationalisation means.
Can the Chancellor tell us about the state of the £100 billion mortgage book that he wants the taxpayer to own? How many bad loans are there? The credit rating agencies now say that the losses are rising at Northern Rock. Is that true? Before we debate the Bill tomorrow, we are entitled to a full statement of the financial position of the company that we are being asked to buy. We are entitled to see the advice from Goldman Sachs that we have all paid for.
Secondly, will the Chancellor agree that it is totally unacceptable for Northern Rock to continue with business as usual? This is now a Government bank; it can borrow and lend more cheaply than any of its high street competitors. Indeed, today it is still offering some of the best savings deals out there—it is still offering the 125 per cent. mortgages that it wrote last year. That is politically and economically unacceptable. Nationalisation can never mean business as usual. The Chancellor said in his statement that the management would be at “arm’s length”. Why is there nothing in the Bill to prevent political interference?
Thirdly, will the Chancellor confirm that he is actually introducing unprecedented, sweeping, draconian powers that will let him nationalise any other bank or deposit-taking institution in Britain by ministerial fiat? [Interruption.] The Lord Chancellor should pay attention; he keeps talking about strengthening the powers of Parliament, but he is about to give the Chancellor of the Exchequer the power to nationalise any bank in Britain without coming to Parliament—not even Michael Foot dreamed of that. It will create further uncertainty in financial markets and do further damage to Britain’s reputation. If the Chancellor is giving himself those sweeping powers only to get round parliamentary procedures for hybrid Bills, he should give himself them for a week or a month, not for a whole year.
The Chancellor had opportunities to avoid the disaster of nationalisation last autumn, and he missed them. He has the opportunity now to avoid the disaster of nationalisation by opting instead for a reconstruction led by the Bank of England, and he will not take it. It would mean £55 billion less exposure for the taxpayer, and none of this farce of business as usual; it would be like the approach that the Chancellor himself recommends for future bank rescues. But instead, the Prime Minister and his Chancellor have dithered their way to disaster. Now what they call the “temporary nationalisation” could, in the words of Ron Sandler, “last years”.
In uncertain economic times, the British people have a right to expect decisive and strong leadership from their Government. Instead, this Chancellor has given us weakness and indecision, with humiliating reversals over capital gains tax, then non-domiciles and now Northern Rock. He has taken Britain back to the 1970s and the failed policies of Labour’s past. We can safely say that he will never recover his reputation for competence. He is now politically a dead man walking and if the Prime Minister could make a decision, he would move him. What matters to the rest of us is that the British economy and its reputation abroad recovers from the Chancellor’s disastrous time at the Treasury. Nationalising a high street bank is not the way to begin, and we will oppose it tomorrow.
Mr. Darling:
The shadow Chancellor is increasingly someone who conceals cynical opportunism with a pretty thin veneer of abuse. One would have thought that he might rise to the occasion rather than playing petty politics with the serious matter of the stability of the banking system in this country. He has never had a consistent policy on what to do with Northern Rock—every day brings a new policy and a new stance. Last September, he and the Leader of the Opposition said that they wholeheartedly supported what we had done and that they recognised we were right to take the action that we did to stop the problem spreading into the wider financial system. But when things got difficult for them, they ran away from that support. They were in favour of administration, despite the fact that that could have provoked a fire sale with a huge loss to the taxpayer. They said they were against nationalisation, yet two days later the Leader of the Opposition said yes, he would have to consider all the options, including nationalisation. Their policy today appears to be nationalisation followed by some ill-designed plan to sort out the future of the bank. They have absolutely no coherent view about what to do with this problem. They also fail to recognise the
problems that have caused the bank’s underlying difficulties in the first place—the problems that arose in the American housing market that have spread to the financial markets right across the world, making it necessary for us to take the action that we have.
The hon. Gentleman criticises the decision that I have taken today. He is entitled to take that view, but he might want to have a word with the shadow Chief Secretary, who said on television this morning:
“The Chancellor is quite right; if the private sector isn’t willing to pay an appropriate value for a business then it would be wrong to hand it over at an under value.”
I am deeply grateful to him for his support.
It is clear that the Conservatives have absolutely no idea how to deal with this problem—all they can do is to come up with proposition after proposition showing their cynical opportunism. Rather than dealing with a serious problem, they have absolutely no answers whatsoever.
John McFall (West Dunbartonshire) (Lab/Co-op): I welcome the Chancellor’s statement on the basis that it protects the interests of taxpayers, which the Treasury Select Committee identified in its report. Given the arm’s length management that will operate under Ron Sandler, no doubt the Committee will want to receive regular updates from him and his colleagues to ensure for ourselves that accountability is the key here. Given the unique position of Northern Rock as a nationalised institution, does the Chancellor agree that accountability is extremely important in to ensure that it does not distort the financial markets at any time?
Mr. Darling: First, I thank my right hon. Friend and his colleagues on the Treasury Select Committee for the very thorough investigation and piece of work that they did in relation to Northern Rock.
It is important that the management team led by Ron Sandler has the opportunity to make its decisions, first, to come up with a business plan, which we need to submit to Europe as part of the state aid approvals process, and then to be allowed to get on with the job. Yet again, I profoundly disagree with what the shadow Chancellor said. He seems to imply that it would be better for the bank to go bust rather than to allow it to trade and get through the difficulties that it faces. We will be in some difficulty if we go down the road of holding the management team to account for every single thing that they do. I am sure that the Select Committee will want to know about the business plan and want to discuss these things, but it is important that the management team gets to operate at arm’s length from the Government and gets on with running the company, because that is the best way of ensuring that it can be restructured and refocused and can then be returned to the private sector when it is appropriate and right to do so.
Dr. Vincent Cable (Twickenham) (LD):
After five months, the Government are now in the best position to ensure the repayment of the taxpayer’s money. They were right to decide that temporary nationalisation is a better option than a bad private sale whereby the taxpayer would have underwritten the risks and the private buyer would have acquired the profits. I am
tempted to say, “I could have told you so”, but this is too important for that. I will content myself simply with making this comment: when the Chancellor receives a large multi-million-pound invoice from Goldman Sachs for its financial advice, could he perhaps return it politely with a little note saying that he received rather higher quality advice free of charge from me and the Liberal Democrats?
The Conservative spokesman talked about the dark satanic socialism of the 1970s, but will the Chancellor confirm that the last time a private bank was nationalised in Britain was in 1994, when the last Conservative Government acquired National Mortgage bank, paying its owners a total of £1? And was not the last major bank nationalisation in the western world undertaken by that loony left-wing Trotskyite President Ronald Reagan, when he acquired Continental Illinois bank, which was subsequently returned at a profit to the American taxpayer by the Clinton Administration?
Clearly, choices have to be made. The Government have made theirs and we have made ours. Until today, the Conservatives had no alternative. I think that they are now suggesting public administration under a publicly owned Bank of England. What is that but nationalisation in all but name? The hon. Member for Tatton (Mr. Osborne) is so determined to keep one foot on either side of the fence dividing the public and private sector that he is in imminent danger of being castrated by the serrated edge.
However, there are questions for the Chancellor. What sort of undertakings did he give to Sir Richard Branson and others to pay their fees for private bids? When will he commission a fully independent audit through the Bank of England to establish the quality of the assets—the loan book for which this enormous sum of public money has been advanced? When will there be democratic scrutiny of the new business model, which could involve contraction or expansion of the bank? I hope that the changes will put an end to the extreme loans to which the hon. Member for Tatton rightly referred, which lent more than the value of property.
In general, the Government have to face some difficult decisions. The bank will have to contract and there will be job losses. We all recognise that, but at least the bank and the north-east have some long-term hope. For that reason, we shall support the measures in Parliament, while giving constructive criticism. That is the right thing to do.
Mr. Darling: I agree with a lot of what the hon. Gentleman says. He is quite right to remind the House that there have been many occasions when Governments have thought it right to intervene to take action to preserve stability or, in some cases, to preserve vital industries. He will remember what happened in the 1970s because I seem to recall that he was in the Labour party then. He is also absolutely right in his description of the Conservatives’ policy. Their policy is nationalisation. It involves nationalisation, but the hon. Member for Tatton (Mr. Osborne) has the gall to say that he is going to oppose the Bill that will bring that about. The only way he could deliver his policy—in as much as it is understandable and that it will last for the next day or so—would be to nationalise, so it seems extremely odd that he intends to oppose the legislation tomorrow.
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