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The third interest on which we must focus is that of consumers. It must be made clear that the consumers who matter are all consumers, not just those who have accounts or mortgages with Northern Rock. In the long run, the interests of all consumers will be best served by a competitive and properly regulated banking system. We must be alert, as I am sure the European Commission will be, to the danger that Northern Rock will distort the financial markets. Such a distortion would jeopardise the long-term interests of consumers and the financial system. At times of economic uncertainty other financial institutions do not need a new heavyweight competitor, numbed to the pain of competition by the anaesthetic of state aid.

As has been mentioned, Northern Rock is a high loan-to-value lender. I believe that its average loan to value is more than 60 per cent., compared with percentages in the low 50s in the rest of the industry. That makes Northern Rock more risky. Probably a gratuitous request to the new management is for it to ensure that the together mortgage, with a 125 per cent. loan to value, is no part of the company in the future. A statement to that effect from the management would reassure the rest of the market.

To satisfy myself and others that a nationalised bank will not distort competition, four conditions must be met. First, as the Chancellor has acknowledged, the terms of the agreement between the Government and the new management must meet the Commission’s state aid rules. I trust that the way in which that is done will be made public. Secondly, given the state guarantee, a nationalised Northern Rock must continue to pay a penalty for attracting new depositors, as the private Northern Rock has done since last October under the terms of guarantee in paragraph 303 of the 9 October extension document. I hope that, when she replies to the debate, my right hon. Friend the Chief Secretary of the Treasury will confirm that the penalty charge will continue when the bank is in public ownership.

Thirdly, there must be proper accountability and transparency of the new management’s business decisions. When it is a public entity operating in the private sector, the Treasury Committee and the House will want to be assured that Northern Rock’s business plan is good for the bank, its employees and its customers and for the taxpayer, the consumer and the wider financial services market. I welcome the appointment of Ron Sandler as chief executive. As I have said, he has form in the financial services sector: he was called in by Lloyds in the mid-1990s when there was chaos there, and served the interests of Lloyds and the financial community well. However, it is important that his incentive plan is examined. The incentives should focus on the appropriate size of the company rather than on growth objectives. It was the incentives and growth objectives in the old Northern Rock that led it into such trouble with its extreme business model.

Another question is, what is the disclosure regime for Northern Rock? There must be a focused retention package for Northern Rock employees, particularly those in IT and product design. I well remember the comments of the Governor of the Bank of England telling the Select Committee that Northern Rock’s middle management had done its job in exemplary fashion, and that if the
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senior management—the board—had followed the lead of middle management and the rest of the work force the company would not have found itself in this position.

There must be a commitment to the principle that state ownership is temporary. The decision to nationalise must have been difficult, but the judgment of when to privatise will be just as difficult, and of crucial importance.

Mr. Djanogly: I thank the right hon. Gentleman for giving way. He said that he believes that nationalisation is in the best interests of the taxpayer. How does he know what is in the best interests of the taxpayer? What due diligence information has he received on the assets and liabilities of the bank? What information have we Members received on the bank, on which we must make this decision today after one day’s notice from the Government?

John McFall: If the hon. Gentleman had read the newspapers yesterday, he would have seen that although the top headlines were critical of nationalisation, almost every writer on the inside pages said that nationalisation is the best alternative to protect taxpayers’ interests. It is folly for the hon. Gentleman to consider otherwise, and to think that we should accept a bid from Virgin or others on the basis that the share price will double and they will then start paying money back in 10 or 20 years. Is that a good deal? Of course it is not. We only need two clear eyes to see that.

In due course, the Government must spell out the criteria they will use in judging when to privatise Northern Rock. I expect that the Treasury Committee will continue to monitor that when Ron Sandler and others appear before us, and we will try to make sure that the Committee carries out its objective, as laid down by the House, of ensuring true accountability.

5.27 pm

Dr. Vincent Cable (Twickenham) (LD): I made it clear yesterday that we support the decision and the Bill, and I fully understand the Government’s need to move quickly; the bank is paralysed, so we must help to pass the Bill this week. That said, the Government seem to have an extraordinary search engine for finding banana skins to slip on. It was announced this afternoon on the BBC, which I presume is right, that Mr. Ron Sandler, who has been appointed as the chief custodian of taxpayers’ money, is a non-dom. It seems that all the Government’s favourite businessmen, including Sir Richard Branson and now Ron Sandler, have so little commitment to the country, let alone the Government, that they prefer to pay their taxes elsewhere. I presume that Ron Sandler will now become the second best-paid person in Newcastle after Michael Owen, but at least Michael Owen pays his taxes here. [Interruption.] Yes, we think so.

Clearly, there is scope for improving the Bill. As the Conservative spokesman, the hon. Member for Tatton (Mr. Osborne), rightly said, important challenges need to be made, particularly on parliamentary accountability, and we shall support his and other amendments designed to strengthen the Bill in that respect.

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Mr. Redwood: Should we welcome the idea that taxpayers’ money could help to pay Michael Owen’s salary through the sponsorship deal that I believe is already in place?

Dr. Cable: The right hon. Gentleman is one step ahead of me on that.

We can continue to debate the argument that has been going on for several months about the pros and cons of nationalisation, but we have passed that point; the decision has been made, and the nature of the question has now changed and is to do with what kind of bank we are now talking about.

Mr. Cash: The hon. Gentleman might not know this, but in the draft order to which my hon. Friend the Member for Tatton (Mr. Osborne), the shadow Chancellor, referred there is a remarkable provision that says that no director of Northern Rock shall be liable for any act or omission of theirs that occurs while Northern Rock is wholly owned by the Treasury and, accordingly, no proceedings may be brought. Would the hon. Gentleman and his party approve of a provision that exempted directors of Northern Rock—being paid more than £1 million a year—from any liability for anything they do as directors?

Dr. Cable: The hon. Gentleman has an eye for legal detail, but I am not clear about whether he is talking about Crown immunity and civil servants’ status.

Mr. Cash: I am talking about a specific provision, which the hon. Gentleman will doubtless alight upon when he has a chance to examine the draft order. Does he approve of it in principle?

Dr. Cable: I shall alight upon it and then decide whether I approve of it in principle.

May I return to the central question of what kind of bank will now operate? Will it be built up or run down? The hon. Member for Newcastle upon Tyne, Central (Jim Cousins), with whom I have had several exchanges in the past few weeks, put it rather well yesterday when he asked whether this is the end of the beginning or the beginning of the end of this bank. That question is crucial. It is at the heart of the argument about the business model, on which Ron Sandler will presumably be asked to decide. It is not clear to me which of the two approaches is the better. A wide range of options exists, so one can envisage a kind of continuum, at one extreme of which the bank would be run off and would have no new business. The other extreme might involve a highly expansionary strategy—a kind of publicly owned Virgin or “the people’s bank”, as somebody called it yesterday. Alternatively, something between the two might happen.

At some point, there must be a proper debate about which option will be chosen. This is a political issue; it is not just a technical issue for the man who has been appointed to chair the company. It is not obvious to me which is the best approach. My instincts suggest that given the excesses of the past, the bank is probably best run on a more conservative basis, but there is an argument for saying that if the primary concern is repaying the taxpayer, that could be done in two different ways. The assets could be run off to realise cash or the bank could be built up to sell it at a large profit. It is not clear which of those approaches is the better.

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There is an issue to address in respect of the staff, who are important in themselves. If large numbers of them are laid off, one must deal with not only the redundancy bill, but problems of retention, management and keeping the bank going effectively. A crucial human resource issue is involved, and somebody has to decide on it. The matter is political as well as administrative.

The Conservative spokesman rightly mentioned the nature of competition and unfairness, and that is clearly important. It is complex, because the banking industry is not a normal one—Cruickshank reported on that several years ago—and other banks have lender of last resort privileges. A few moments ago, I saw the former chairman of Lloyds complaining on television that it was very unfair that Northern Rock would be the only bank that could not go bust. That is not true, because his former bank could not go bust either. The national savings bodies have complex competition arrangements. Insurance companies may well say that Aviva does not have lender of last resort facilities, but where an insurance company is owned by a bank, the parent company does. This is a messy area where competitive principles are very unclear, so there must be proper, publicly accountable discussion about which of the options will be taken.

I want to discuss a second set of questions, relating to the inheritance from the pre-nationalisation stage. This is not the point at which to have an inquest or post-mortem on what has happened—the Treasury Committee and the Public Accounts Committee will have plenty of opportunity to do that. Some questions about the past are highly relevant to what happens now, the first of which was posed by the Conservative spokesman—how sound is the bank?

An important contribution was made yesterday by the right hon. Member for Hitchin and Harpenden (Mr. Lilley). He reminded us of the scale of the repossessions that are now taking place. They run wholly contrary to everything we had previously been told about the bank’s soundness. I began to become concerned about that matter about a year ago, possibly because of my particular personal interest—some would call it an obsession—with problems of personal debt and the housing market. It was clear that something very strange was happening with this bank and its performance. I questioned it, but the Financial Services Authority was completely blind to it. I recall being telephoned by the FSA’s chairman on the day the crisis originally broke. He said that I was being irresponsible in talking about the bank and criticising its management. He said that it was a very well run bank with an exemplary loan book, and he asked what my problem was. Unfortunately, his position was undermined by the fact that at the same time a press conference was being held in the City explaining how Northern Rock’s management had taken on rather a lot of the sub-prime mortgage liabilities in the US. None the less, that remains the official view, and as far as I know the Chancellor still subscribes to that description of the bank. However, we have had plenty of evidence to the contrary, including not just the evidence given yesterday, but serious brokers’ reviews. For example, Panmure Gordon has said that bad debts were systematically hidden.

There were therefore all sorts of problems with the bank and the next step—which I advocated yesterday and on the day of the announcement, and which has been taken up today—is for a proper, independent
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audit under the supervision of the Bank of England, and not carried out by the FSA, to investigate how sound the bank and its mortgage book are.

The second inheritance from the past is the costs of delay. What were they? We have had questions already about the costs of financial advice, but there is a potentially much bigger cost, which is the cost to the bidders. Who has paid the bills for Sir Richard Branson and other bidders for due diligence and other costs, which have been formidable? I was alerted to this problem at the outset when it was said that 10 companies were interested in bidding. I happened to talk to someone from one of those companies and he said, “We are not going any further with this, because we have discovered that the Branson consortium has preferred bidder status and the Treasury is paying all its bills. Why should we compete on that basis?” A few days later, the other companies were told that the Treasury had changed its mind and would cover everybody’s bills. I do not know what happened, but since last October bidders’ costs have been paid by the Government. What are those costs? I suspect that they are a lot more than the Goldman Sachs bills.

The question of costs is important not simply because we want to rake up the past but because if the bank is to be sold again we need to know the principles on which it will be done. That is why the status of the bidders and who covers their costs is important.

A third question from the past is precisely how the Government came to make the decision to nationalise, which they announced formally on Sunday. Strategically, they made the right decision, but what steps led them to that conclusion? That is important, because if the bank is to be privatised eventually, the potential bidders need to understand the criteria that will be used. It has emerged in the press—we have no other source on this—that what seemed to have tipped the Government’s decision were the scale of the fee offered for the security, the length of time of repayment of the taxpayer and what the professionals call the equity kicker for the Government. But there were many other issues involved that were not discussed.

I wrote to the Chancellor and Sir Richard Branson about those other issues. They include, for example, the nature of the security that was being offered for Northern Rock assets, and the tax status of the bidders and their vehicle. Those issues have never been discussed publicly and, at some point, we will have to have a proper explanation of the process by which the Government reached that decision to ensure that when the eventual sale takes place there is complete clarity about the criteria.

My final question is about Government debt. We all understand that by nationalising the bank the Government are taking on its full liabilities. Some of the newspapers yesterday, including the Daily Mail in its headline, assumed that nationalisation would increase the Government’s liability from £50 billion to £110 billion. That is wrong, because the Office for National Statistics classified the bank a week ago as a public company, under which all or most of the debt became public. I am not sure that that is the case either, as there may well be new commitments that have been taken on, and it would be useful to have an explanation.

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My questions relate to the Bill, to what it says and to how its provisions can be strengthened. The first issue, compensation, has been touched on already. The Conservative spokesman put it clearly and correctly: although we would all like to make a sentimental distinction between the hedge funds and the £100 shareholding grannies in Newcastle, it is not possible legally to do so. The practical, painful reality is that without Government support the shares would be worthless. Any independent valuer is bound to have to come to that conclusion, I would have thought—but those involved obviously need to fight their legal corner.

The second issue relates to competition and how the competitive process will now be dealt with. I think the right questions have already been asked. Other banks will certainly make several points, such as about the deposit interest rate that can be offered by the new Northern Rock bank. Will it offer a higher rate of interest in attracting deposits, or the same rate of interest? How will it be constrained? What will its lending practices be? We know that in the past those practices have been extremely aggressive to expand market share. Will the bank be allowed to do that, or will it be constrained in some way? A more important question for competitors will be what will happen when the wholesale markets open. Will the Northern Rock bank be able to access them much more easily than other banks? A lot of questions will be asked about the fairness and appropriateness of competition.

It is right to say that although the EU has rules, it also has a lot of state banks—in Sweden, France and elsewhere—that are accommodated in a fairly permissive way. It is not entirely clear that European rules meet our requirements. I support the measures to build in a role for the Office of Fair Trading.

The Bill inadvertently opens up the whole question of the banking system in general, because it is about banks in general and not Northern Rock. We understand the parliamentary procedural reasons for that, but the Government have inadvertently brought forward an argument that we were going to have in six months’ time about the nature of bank rescues, bank nationalisation, intervention and how it all happens. They have therefore brought to the fore an argument that was originally made by Cruickshank in 2000. The former chairman of the stock exchange made the point that this is a strange industry that has what it calls regulatory privileges. It pretends that it is operating as a normal commercial operation and the bankers claim to be buccaneers who are out there competing in the market, when of course they are not—they are ultimately underpinned and protected by the Government.

The logic of Cruickshank’s argument points in one of two ways. Either the industry must be much more tightly regulated against excess profits, as he put it—or, in some instances, companies should be nationalised—or it has to be fundamentally reformed so that new companies can come into banking much more easily and those that perform badly can go bust. One of the unexpected outcomes of the debate might be that we will go through the first approach, but finish up with the second. Eventually, the cosy little set-up in British banking and the pretence at having a competitive industry will be broken. The industry will have to become genuinely competitive, like others are. Perhaps the Chancellor will be the author of a much more radical set of reforms than even he yet appreciates.

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