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19 Feb 2008 : Column 210

I have been talking about all the people who were apparently very concerned and bothered about the state of the British financial services industry—entirely as a result of the Government’s action. I should like to ask the hon. Member for Tatton (Mr. Osborne), who clearly does not like the truth, a question. When he and his mates were in Davos, were they sticking up for Britain on this issue, or were they talking Britain down? That is what they do most of the time on radio and television these days.

Rob Marris: Will my right hon. Friend give way?

Frank Dobson: No, I really need to get on.

The Government have had to act to preserve the integrity of the financial system and public trust in banks, and to protect the depositors and staff involved at Northern Rock. They have bailed out a bank that failed because of the greed and stupidity of its top management. That bailing out by the public sector was necessary because the private sector was in such a state of distrust that it would not or could not help. That was a consequence of the greed and stupidity of the lending policies of international banks on sub-prime mortgages.

Instead of criticising the British Government, the Tory party and the ill-informed alleged financial experts who come on radio and television—and get a creepy response from the interviewers that no politican, not even a Tory, would get—should accept that the Government are the only ones in the whole affair who acted responsibly when the market failed. This is a market failure, not a Government one, and that is why we have had to introduce the Bill today.

6.48 pm

Mr. John Maples (Stratford-on-Avon) (Con): The right hon. Member for Holborn and St. Pancras (Frank Dobson) should applaud all the losses, because they have been a gift of billions of dollars from big international banks to poor people who could not otherwise have got mortgages; I would have thought that he would be in favour of such Robin Hood-ery.

I want to make a couple of points. If a bank were not involved, we would not be talking about a rescue operation at all. Such an operation was put in place to save not Northern Rock, but the banking system—it was to stop there being system failure. We should not be concentrating on that particular company and why it is good for Newcastle, for the north-east, for jobs, or whatever. That is not why the Government stepped in to save it—they did so because of the threat of system failure. In any other circumstances, that would not be the case at all. If some of the Labour Members who have spoken substituted any other industry for the word “banking” in their speeches, they would find that they sounded pretty old-fashioned.

By any standards, £100 billion is a huge amount of money—about 22 per cent. of annual Government spending, or four times the defence budget—and the Government’s strategy should be to recover that money for the taxpayer as soon as possible and with as little risk as possible. If that involves some redundancies and the north-east’s favourite building society not turning into a big international bank, then I am sorry, but that
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is what happens in business. The Government dithered around unnecessarily for six months. When they found that Lloyds bank—one of the biggest banks in the country—could not take on Northern Rock without a Government guarantee or loan of £25 billion, they must surely have realised that the chances of any of the other people who paraded their interest doing so were negligible. They gave credence to a possible bid by Richard Branson, whose company, which had never run anything of such size or scale before, planned to put in a bit of new management and £200 million of new equity—a lot of money, but negligible in the context of a £100 billion balance sheet—and fiddled around with bidders who never had the equity to do the deal. The Government either did not recognise the realities of the situation or did not have the courage to make the decision then that they have found themselves forced to make now.

I ask the Chief Secretary to deal with the question of nationalisation versus administration. Nationalisation will give the Government a huge amount of headaches. They will become a debt collector on a massive scale; if they have never been in the debt collection business before, they have some nasty shocks in store. On Northern Rock’s 2006 balance sheet, there were £8 billion of unsecured loans, which I suspect will be difficult to collect. There are 125 per cent. mortgages, which must inevitably involve a bit of unsecured lending as well. Repossessions are running at 50 a week and will probably step up as the economy slows down, as looks likely. The Government have taken on all the bank’s liabilities, and they have almost inevitably taken on the necessity to make thousands of redundancies—not all 6,000, I guess, but certainly many of them—as well as an unknown and unquantified pension fund deficit. If the bank had gone into administration, that would have provided far greater flexibility to deal those matters without taking on those responsibilities. That alternative would also have had the great advantage—I hope that the Chief Secretary will deal with this point—of avoiding the need to deal with shareholders’ compensation, because they would merely have got what was left at the end, probably nothing. Nationalisation means having to deal with compensation, and, given that there are some pretty tigerish hedge funds out there, I suspect that there will be some lengthy and expensive litigation.

A casual glance at Northern Rock’s balance sheet makes one wonder how good is the security for taxpayers’ money. I mentioned the unsecured loans; there are also some derivatives and intangibles, and a lot of the good mortgages are already securitised at a loan-to-value in excess of 100 per cent. The ability to recover all its assets to satisfy the taxpayer seems to be limited, which is why I worry about the idea of continuing to run it as a business.

I checked Northern Rock’s website today. Even with a Government guarantee, it offers a better savings rate, by nearly 1 per cent., than Cheltenham and Gloucester. I use that comparator because it happens to be where my own mortgage is, but it is owned by Lloyds bank and is a long-standing and very reputable lender and savings institution. One of my richest friends in the City told me the other day that he and all his friends had put all their money into Northern Rock, because where else
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could one get 6.5 per cent. with a Government guarantee? It is ridiculous that it is being allowed to do that. That arrangement is not only uncompetitive—it encourages the company to make more unsecured and 125 per cent. loans in what looks like a dodgy and difficult housing market. If it is allowed to carry on doing that, we will find that it is harder to recover our money than it is now, and it will take longer. If it goes on making new loans, the recovery from cash flow of the Government’s money and guarantee will inevitably take longer. The first thing that the Government should tell Ron Sandler to do is to stop making risky loans. We want the credit criteria under which Northern Rock lends to be tightened up considerably so that they are the same as those of other lenders. If that results in a run down in the size of the business, that is probably a good thing.

Moreover, the bank cannot be allowed to distort the market by offering above-market interest rates with the backing of a Government guarantee. The Government guarantee ought to mean that people are willing to save at National Savings and Investments or gilt rates, not that they need a premium. Whether it is in administration, liquidation or a nationalised state, we must instruct that the company be run for the benefit of the taxpayer and instruct it to recover the loan and the guarantees that are outstanding, which now, in aggregate, must amount to more than £100 billion. That must be its objective in any of those formats; the one that the Government have chosen is nationalisation. If one puts other political objectives into the mix, the Government will risk huge sums of money. In the context of jobs alone, we are talking about £15 million per job.

John Hemming: Given the expensive loans from the Bank of England and the high rates of interest that are being paid, if Northern Rock were in administration, where would it get the money to pay the phone bills and wages?

Mr. Maples: It has a cash flow from mortgage repayments and interest payments. Serious consideration should have been given as to whether the bank should just sit back, make no new loans, collect the interest and repayments on debts as they flow in, and, if and when the market recovers, perhaps securitise and sell off some of the other mortgages. That would be the fastest and probably the most secure way for the taxpayer to get their money back.

If the Government had taken the administration route they would not have needed to deal with compensation. The shares were worth nothing without the Government’s guarantee. I hope that they are going to hang tough and not pay compensation, despite feeling sorry for the small shareholders. Having said that, most of the shareholders seem to be people who were given their shares on demutualisation or big City operators who bought the shares in the distressed circumstances thinking that they might be able to railroad the Government into some kind of rescue. They are not little old ladies in tennis shoes with their life savings in the bank.

Jim Cousins: Does the hon. Gentleman acknowledge that almost half the assets of Northern Rock are in a securitised vehicle that has several more years to run? If we attempt to realise those assets in the short term, we
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will dump them at far less than they are worth—or we have to live with this until that securitised vehicle comes to the end of its life.

Mr. Maples: Yes, of course I understand that. It may be possible, if market circumstances change, to refinance those vehicles and the other mortgages that are not within them. However, I still think that the securest way of the taxpayer getting their money back is for the company to stop doing new business, stop making new loans and just collect the cash flow as it comes in. That would pay off the securitised creditors and the taxpayer.

I have not been a Member of this House for as long as some of the people sitting in here—actually, that does not apply to many; I think that the right hon. Member for Holborn and St. Pancras (Frank Dobson) is one. There has been a banking crisis every 10 years since I came here, and there was one in the 10 years before that. They come along at fairly regular intervals. They take different forms, but they are usually the result of over-exuberance on the part of the management, and the Government end up having to do something to bail those companies out. In the case of this crisis, we have found that the Bank of England cannot organise a rescue for a modest-sized mortgage bank. In the past, that has not been the case. With Johnson Matthey and with County bank, the Bank of England was able to organise a rescue.

We must face the fact that in future even such modest-sized institutions will have an implicit Government guarantee. That encourages irresponsible behaviour. If someone can get 6.6 per cent. from an institution that is taking greater risks than one that will pay 5.5 per cent. but also has a Government guarantee, why should they worry? That is bad business for the Government, because it will encourage people to save with the marginal and more risky operators. That is not only unfair on the people who operate in a safer environment but stores up trouble for the Government in future, because banking crises may come along more frequently than once every 10 years. That is one of the aspects of moral hazard, which gets discussed every so often. If we are, in effect, standing behind the liabilities of the British banking system, then we as the taxpayer need to know that the Financial Services Authority is regulating banks much more closely, and particularly watching those that are paying high rates of interest and making risky loans.

I end by referring to a point that I made in a previous speech on this subject. When the Bank of England was given independence to set interest rates, the Government made a mistake with regard to the regulatory system. I understand why they did it, but taking bank regulation away from the Bank and giving it to the Financial Services Authority was a mistake. First, as lender of last resort, the Bank needed to know, and did know, a huge amount about different banks. I experienced that myself when I was a Treasury Minister in a very junior capacity when the Bank of Credit and Commerce International was in trouble. The Bank of England’s intimate knowledge of the banking system was extraordinarily valuable in that situation. At that point, we also had two people talking to each other: the Governor of the Bank of England and the Chancellor of the Exchequer. We now have three, and I think that having three makes things
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twice as complicated as they used to be. I urge the Government to look again at how the system is regulated because giving bank regulation back to the Bank of England would be a better way of doing things.

In future, once we have given an implicit guarantee on the liabilities of all the banks, we will be in a different ball game from the one we were in before—one where we cannot organise rescues. We will have to take banks into public ownership, make loans and give guarantees. In the past, we were able to organise rescues, but if that is not possible, we will be in a different ball game. There will be a different attitude to regulation, which demands a greater level of risk-averseness on the part of the Government.

Several hon. Members rose

Madam Deputy Speaker (Sylvia Heal): The time remaining for this debate is somewhat limited, and I can see a number of Members hoping to catch my eye. May I please ask Members to reduce their contributions voluntarily so that more Members will be successful?

7.1 pm

Phil Wilson (Sedgefield) (Lab): Speaking as a north-eastern MP, I believe that, on Northern Rock, the Government have taken the hardest and most difficult of decisions, but none the less, the right one. I support the Bill. The Government did not rush to take this decision, and they have found themselves dealing with a problem that is not of their making. It would have been a mistake to act in haste. If the Government had opted for temporary public ownership five months ago, the Opposition would no doubt have said that they should have looked for a private buyer first.

The Government’s approach has been consistent in its aim of achieving the best possible outcome for the country. The Government were guided by the need to maintain financial stability, to safeguard depositors and to protect the interests of the taxpayer. The decision to take Northern Rock into temporary public ownership was not ideologically driven, but unlike the Conservatives, my party knows that from time to time it is right for the Government to intervene to protect the best interests of the country, to save jobs and, on this occasion, to promote the economic well-being of a region that suffered so much under the Opposition.

Rob Marris: Would my hon. Friend agree that just one measure of the acceptance of the nationalisation of Northern Rock is that the FTSE yesterday—the day after the announcement was made—was up 2.8 per cent.? I believe that it has gone through 6,000 today.

Phil Wilson: My hon. Friend makes a good point. Yesterday, a lot of the editorials in the newspapers in the northern region, as well as the one in the Financial Times, were very much in favour of the Government’s decision.

The dividing factor between the Government and the Opposition is that my party has a policy on this issue. The Opposition started with at least four—from nationalisation to administration, from private sale to restructuring by the Bank of England, which seems to me to be a kind of nationalisation in itself. They started
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with four, dithered from one to the other, and have ended up with none. To lose one policy can perhaps be excused, but to lose four is rather careless.

On this issue, it is the Opposition’s claim to economic competence that has dithered into oblivion, not the Government’s. Northern Rock and the Northern Rock Foundation are institutions that employ thousands in the north-east and in supporting communities throughout almost every constituency in the northern region. As an MP in the north-east, my concerns are the local economy, the effect of any job losses at Northern Rock and the future of the foundation. I am pleased that the foundation is being funded to the tune of £15 million per year for the next three years, and that the board is being asked to look into the long-term future of the foundation as well.

Northern Rock employs about 6,000 people, and I know that Ron Sandler is drawing up a plan that will better define the future of Northern Rock. I urge him and the Government to work closely with the trade unions, such as Unite, which represents Northern Rock staff, to ensure that jobs can be protected and employment terms promoted.

Any crises faced by Northern Rock that were left to the Government to sort out were not of the Government’s making. Under these circumstances, temporary public ownership of the bank was the best way of securing the future of Northern Rock, its employees and the regional economy. Instead of carping from the sidelines, the Opposition should join us in the Lobby tonight to help to secure a future for Northern Rock, and to help to build the economic base of the north-east, which has thrived under this Government during the past 10 or 11 years. But they will not do that. If they had their way, there would be no bank—

Mr. Kevan Jones: Will my hon. Friend give way?

Phil Wilson: I am just coming to the end.

If the Opposition had their way, there would be no bank and no jobs. We know about the Tories and the north-east of England. They have a long history of having no empathy with the people of my region, and unlike their policy on Northern Rock, that approach has remained consistent.

7.5 pm

Mr. John Redwood (Wokingham) (Con): I have declared my interests in the register.

I want to see this business survive, recover and flourish. I quite understand its importance to the north-east. I do not think that the nationalisation model on offer is the way to do that. Indeed, as those on my party’s Front Bench have made clear, it could well be that given the constraints on competition policy and the uncertainty of the Government over the business plan, nationalisation will mean substantial redundancies and a winding down and a scaling back of the business—the very opposite of what Members in the north-east want.

I propose, as I have consistently advised the Government, that the Government and the Bank of
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England should act as an intelligent and tough bank manager to this business. They are the bank manager, because they are the lender of last resort, and they gave a large loan to the bank when it was in difficulties. What they should have done was taken enough asset protection for the taxpayer so that there was no argument about getting our money back. They should now secure what assets they can, which they need to give us protection, and then agree a timetable for the repayment of the money. They should agree a timetable that makes sense for both parties. Of course, if the parties cannot agree it, they can dictate it because the Bank of England is the only bank that will lend to this business, but it is better to agree it. It should be tough; there should be exacting targets to get the money back.

Under such a course of action, Northern Rock has all sorts of options. It has the opportunity to get money back if the markets get freer and it can refinance. It has the opportunity to get money back through cash flow, profits and the success of its business. If it cannot do either of those things, it can always pay the money back—assuming that enough asset cover has been secured, as we were told originally—because it can sell assets. The pace of the sale and the cash generation should be agreed between the bank manager and the business. The bank manager should lean on the bank to go further and faster, should watch inappropriate spending and should ensure that the bank is not spending unnecessarily on capital expenditure, high wages or elaborate bonuses. People should not be earning bonuses in a business that is under this much pressure. I submit that that is a far better model than the nationalisation model, with all its uncertainties.

As someone who has spent time in business and has, from time to time, bought a company, what I find breathtaking about the business before the House is the lack of the information that a buyer of any size of business would wish to have, let alone the purchaser of the biggest business, in cash terms, ever bought on behalf of the taxpayer. But we do not know the price. We are told that the Government have decided to buy the business without negotiating the price with the sellers—or without deciding what price they are going to impose on the sellers. We are told that we have to rush the legislation through in a week, but the Chancellor cannot even tell us how long it will take the Government to work out the price to complete the deal. It is obvious that they cannot complete the deal until they know the terms of transfer for the shares. Why the rush? Why can we not do some due diligence on the business first, as they will have to, when trying to work out a price for the compensation, so that the House knows what it is buying?

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