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I say again that Northern Rock has set out its business plan; it has set out the series of actions it will take. Opposition Members have to recognise that to protect taxpayers we have ensured that their interests are safeguarded by a responsible
approach to temporary public ownership, which they have rejected time and again. They seriously seem to think that getting the Bank of England or another organisation to sell off the assets would somehow result in a better deal for the taxpayer. However, the consequence would be to put the taxpayer at risk.
Opposition Members have referred to the level of arrears as a result of Northern Rocks decisions. The level of arrears for Northern Rock has increased, just as it has across the market. However, it is still significantly below the Council of Mortgage Lenders average, so Northern Rock is in a very different position compared with other banks across the market. We know that Northern Rock had an unsustainable financial model; the bank needs to change its approach and it is right that it should do so. That is what the business plan does.
In the end, the transfer order is about the decision to transfer. It is right to reflect on whether alternatives were available and whether they are still available. Opposition Members have asked us to oppose the transfer order, as they believe that the decision should be reversedan utterly irresponsible approach at a time when the financial markets continue to be in global turbulence and when we face a continued credit squeeze in the markets. It was right to seek private sector alternatives, and we made no secret of the fact that we would have preferred such an alternative. We were not prepared to go with a private sector bid at any pricewe were determined to protect the taxpayerand that was the right thing to do.
Stewart Hosie: The Minister said that she was not prepared to accept a deal at any price, and that is rather sensible. If all the stories are to be believed, however, early in the process it was going to be £2 a share from Lloyds TSB with a £10 billion credit line, which is a far better deal than £110 billion of potential liabilities should it all go wrong. Surely to goodness, £2 a share and a £10 billion credit line is a much better deal than a potential liability of £110 billion, which we are sitting on today.
Yvette Cooper: I caution the hon. Gentleman against making decisions on the basis of speculation about different alternatives. The clear view of the tripartite authorities was that there was not a viable private sector alternative, and we spent time seeking such an alternative and seeking private sector bids. However, we have not received an appropriate private sector bid that meets the terms that we require to ensure that we get a good deal for the taxpayer. It is right that we should make such a requirement. Transferring Northern Rock into temporary public ownership, by contrast, means that the taxpayer will receive any upside from a future sale of the business, which better aligns risk with reward.
Mr. Redwood: Does that not mean that, as the business will lose money for the next three years, it will receive a Treasury subsidy to compete against others in the market that will not have that luxury?
Yvette Cooper: Once again, I have to remind Opposition Members that the decision that they supported in the autumn to support Northern Rock through Bank of England loans and Government guarantees exposed the taxpayer. Those decisions were supported by hon. Members at the time, and there are consequences that flow from that. As a result of those decisions at the time, it is important to ensure that the taxpayers exposure is limited and their interest is protected. Opposition Members have singularly failed to make any proposal that would protect the taxpayers interest as a result of those decisions.
John McDonnell (Hayes and Harlington) (Lab): We have heard a lot about the taxpayers potential losses, but before my right hon. Friend concludes will she say something about potential job losses? We understand that 2,000 jobs are at stake. From the evidence available to the Government, are wider job losses possible, or are we consolidating at this point in time? She mentioned responsibilities, so would she comment on the responsibilities of the previous chief executive and the directors? The chief exec, we understand, is to receive a payout of £750,000, despite the folly of the investment strategy that he pursued that resulted in significant job losses.
Yvette Cooper: My hon. Friend makes an important point. The proposals set out in the business plan are for the contraction of the overall Northern Rock business, returning it to its more modest roots and putting it on a more sustainable footing. As a result, it is proposed that staffing should be reduced by about a third. We have had discussions with One NorthEast, and Northern Rock has had discussions with Unite trade union, to consult on job losses and make sure that people receive proper support to find new jobs. There are vacancies in the financial sector in the north-east, and it is important, when there are job losses on such a scale in a particular area, that serious support is available to help people find new jobs. Had we not stepped in in the autumn, which was the right thing to do to protect the financial stability of the banking system, we would have seen job losses across the board. We would have seen Northern Rock go under, so it would not have continued to be a significant employer in the north-east. The business plan envisages that Northern Rock will continue as a significant employer in the north-east, with a viable future for the operation.
My hon. Friend also raised the issue of remuneration. He will appreciate that it is not for the Government to set the remuneration of banks. The remuneration of the previous chief executive was set while Northern Rock was in the private sector. However, my hon. Friend is right that staff, depositors and shareholders will all look at those arrangements with some concern, and he is right that remuneration committees in future should reflect on those arrangements.
Opposition Members have proposed a series of alternatives and it is right to consider them seriously. However, it is also right to point out that at no stage have the Opposition suggested how any of them would work in practice. They proposed putting Northern Rock into administration. That would have made it impossible to reconstruct the bank. It would have
triggered insolvency processes, depressed the price that would have been obtained on any sale of assets, and forced the sale of assets into a market in which a credit squeeze is continuing. It would not have been a good deal for the taxpayer.
The Opposition say that the new powers proposed under the special resolution regime should be used. Those powers do not yet exist and Northern Rock needs to be dealt with now, not in 12 months when a new banking Bill has been introduced. It needs to be dealt with now. That, in the end, is the problem with Opposition Members. They will not face up to the consequences for Northern Rock, which need to be dealt with now. They hop about from one position to another. None of them makes sense. How on earth can they promote financial stability in the banking system when they cannot establish stability even in their own policy?
Northern Rock got into trouble last year as a result of its business model and the serious turbulence in the financial markets at the time. The Bank of England and the Government stepped in. Now we have to see it through. Temporary public ownership was the right decision for the taxpayer, for financial stability and for consumers. It has provided Northern Rock with the chance to restabilise and to restructure itself at best value to the taxpayer so that it can be returned at the earliest possible opportunity to the private sector. The decision to bring Northern Rock into temporary public ownership was the right way to meet the objectives that we set out, and right for financial stability for the taxpayers and consumers. The Opposition were wrong to oppose it and they would be wrong to vote against the transfer order today.
Dr. Vincent Cable (Twickenham) (LD): I shall not repeat all the arguments about the history of the nationalisation of the bank, which we have heard several times before. I simply reiterate our basic position. We believed from the outset that temporary public ownership was necessary and inevitable once the Government had made large-scale loans and guarantees, and it was certainly preferable to a bad private sale, which is what was on offer.
On that point, I noted from several interventions from those on the Conservative Benches flattering reference to the Bear Stearns arrangement as a private sector solution. It was not a private sector solution at all. It is underwritten by $30 billion of American Government guarantees. What was impressive about it was the speed with which it was negotiated, but it was a public sector solution to a private sector problem and it remains so, albeit under private ownership. If people are looking to the United States for inspiration, the extent of the taxpayer commitment in the United States in underwriting mortgage securities is far greater than any that has been undertaken in this country. We can admire the speed with which the crisis was handled, but let us not try to pretend that it was in any sense a private sector solution. It was not.
Because of the time constraints and because we have been over the historical ground before, I shall pick up a few points that are relevant from todays information from the accounts of the company, and make some
reference to the business plan, which we have in rather skeletal form, and some brief reference to the quality of the assets of the company. I agree with the point that the hon. Member for Fareham (Mr. Hoban) made. I have for a long time shared his doubts about the quality of the loan book. Now we are hearing anecdotes about it, although we have no hard and fast evidence on that subject.
One thing to emerge clearly from the balance sheet is the very rapid expansion of lending last year, from £87 billion to £99 billion. We now have that in black and white. Much of it was undertaken in the earlier part of last year; there was a rapid spurt in mortgage lending growth at the approach to the peak of the market. That, of course, is the source of all the problems that the bank subsequently got itself into.
There is a link between that and the issue raised by the hon. Member for Hayes and Harlington (John McDonnell) in an intervention about the remuneration of the senior executives responsible for that spurt in lending, which was the source of the problem. I note that the accounts refer to the fact that Mr. Applegarths payments are substantially less than what he would otherwise have been due on the termination of his employment. I would love to ask him what on earth he would have been paid if the thing had turned out wellhe has got £750,000, plus a cheap loan, plus a £2.5 million pension pot as reward for failure of the most abject and embarrassing kind. The Minister is right: not a great deal can be done about something that was undertaken when the bank was under private ownership and that is now subject to contractual arrangements. However, it sends the most appalling signalnot just to the work force, but to the shareholders who have lost everything. We need at least to record that.
The other thing that the balance sheet brings out is the size of the Bank of England loan, which is £28.5 billion. It is the first time that I have seen the figure in black and white. One of the problems has been that in the past we have had to deduce the figure indirectly from the accounts of the Bank of England. It is very odd that the Bank refuses to disclose that important information and that we have eventually got it in precise terms from the balance sheet of the company. That is an odd approach to freedom of information, and I hope that it will be rectified.
The other issue, which has already been touched on several times, is the profit and loss account, the summary and the operating and financial review, and the deterioration that took place between the £626 million profit and the £167 million loss. Several items are worth commenting on. For the most part, we are talking about exceptional items. There is a very large sum£127 millionfor non-recurring administrative expenses, and a large chunk of that is for professional fees. I do not know whether the Chief Secretary is responding to the debate, but if she is, will she explain the process by which the professional fees of the lawyers and advisers have translated through to the bank?
As I understand it, the Treasury was given bills of about £75 million from the various bidding partiesGoldman Sachs and others. Some of those have been accepted and some rejected, but it seems that as much
as £50 million may well have made its way to the company. It would be useful to have some reassurance that the more outrageous claims have been pruned outbecause some of them were outrageous. The largest quantitative sums were the impairment charges, which were £658 million. That sounds like an awful lot of money, but it is a great deal less than 1 per cent. of the assets. Given the doubts that are now beginning to creep in about the quality of the assets, the figure strikes me as conservative rather than very large.
A second set of questions relates to the business plan. The hon. Member for Fareham made the right points on that: there is clearly a tension between the attempts to get taxpayers money back as quickly as possible and preparing the company for eventual sale. If the two objectives are not in direct competition, they are certainly in tension. I understand that the current management are redeeming mortgages and realising cash from that, and also trying to sell them on to other banks; inevitably, the better-quality mortgages are being sold on. That raises the issue of whether the latter stages of the repayment of the taxpayer will be achieved. The question that we need to answer is about not merely whether there is a general commitment to repay the taxpayer by 2010, but what the specific staging posts are, and how much we can expect to be repaid and when.
The third set of points relates to the quality of the assets. My understanding of this has advanced a little since our previous debate, much of which centred on Granite. There was concern that the Granite mechanism potentially transferred into the Granite vehicle the banks better-quality mortgages. When I talked to the new chairman about thisI think it is public knowledge and I am not breaching any confidentiality in the conversationhe sought to reassure me that there is a computer model at the bank that ensures that the mortgages that go into Granite are chosen entirely at random, so they are a mixture of good and bad. If so, there may well be problems with Granite but they will not result in the sort of cumulative impairment that we were worried about. None the less, there are clearly problems with many of the mortgages that were advanced last year, and I would expect the repossession problem and the difficulties flowing from that to get progressively worse over the next year or so.
Let me say a little about a controversial matter. Several of us have had e-mails during the day from shareholders who see this transfer order as a mechanism for raising again the issue of compensation. I support the Governments view that the argument that there needs to be some kind of fair settlement in the direction of generous compensation is unrealistic. The simple fact is that the valuation of the shares before nationalisation was based almost entirely on artificial Government support, and it is unrealistic to expect substantial compensation in those conditions. The hon. Member for Fareham talked about the helpful certainty of the Bear Stearns compensation. I am sure he followed that as closely as I did, but my understanding was that the shareholders were offered about 2 per cent. of the value of the shares and, after a lot of negotiation over a two or three-day period, that was increased to about 10 per cent. However, it was
virtually wiped out. It is unrealistic and unfair to imagine that such rescues can be accompanied by generous compensation of shareholders.
Last week, we had an indication of continuing problems in the financial markets. This is clearly not just a Northern Rock problem; many of the other banks are rocky as well. As has happened in the United States, we will get continuing pressure from the rest of the banking system for the public sector to take over the risks and for it to retain the potential upsides of any improvement. The Governor of the Bank of England is under a lot of pressure from the City and financial commentators to take over poor assets and poor mortgages in return for liquidity. He is absolutely right to take a strong line on that. I believe that the Bank of Englands position has changed slightly and it is now willing to accept mortgage assets in return for liquidity while insisting that they are of very high quality.
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We can only hope that that was not a bad omen of what lies before us. It does not bode well on the very day that Northern Rock is putting its best foot forward, announcing its business plan and setting out its future, with much publicity surrounding its full-year results for 2007.
In view of Northern Rocks declining mortgage book, the order before us deals with the transfer of shares to the Treasury solicitor, the possible hiring and firing of directors, and administrative changes surrounding shares. I want specifically to consider the regulatory aspect of this exercise, because that is at the heart of the problem. Section 2 of the Banking (Special Provisions) Act 2008 requires the Treasury to consider the desirability of making the order for two reasons. The first is to protect
the public interest in circumstances where financial assistance has been provided by the Treasury to the deposit-taker for the purpose of maintaining the stability of the UK financial system.
the stability of the UK financial system in circumstances where the Treasury consider that there would be a serious threat to its stability if the order were not made.
In a letter sent to MPs by the chief executive of the Financial Services Authority, the internal audit identified a number of key failings. Before we can agree to any order, therefore, we have to be satisfied that the arrangements will be satisfactorily monitored by the FSA. I should add in passing that Northern Rock will not be a publicly owned company for the purposes of the Freedom of Information Acta key element in the whole Northern Rock picture. After the regulatory failure of Northern Rock as a public company, is the Minister satisfied that there the FSA will adequately resolve that issue with regard to Northern Rock in its new state? It is worth remembering that the reliance on wholesale markets helped to bring Northern Rock down when banks became reluctant to lend to each other.
The interest rate offers on the website that I mentioned are pretty generous. Despite the modifications to the business plan, we must consider what is happening in the marketplace today. For example, LIBOR, which is the interbank lending rate, is back over 6 per cent.its highest level since 27 December. That indicates the real nervousness among financial institutions, despite the additional liquidity provided by the Bank of England. In the build-up to the situation that confronted us, we saw the failure of the tripartite system introduced by the Prime Minister. Given the poor regulatory performance of the FSA, what assurances can we get that it will meet regularly and monitor lending and borrowing practices carefully? Given the clear illiquidity I referred to in the wholesale marketsand there is real pressure out therewill the FSA work closely with the Bank of England? There is no easy divide between liquidity, compliance and solvency. Last summer, the FSA presumed that the Bank of England would provide sufficient liquidity to bail out failing banks. We have to see the order in that context.
As far as Bear Stearns is concerned, it is not a question of it being some sort of pure exerciseI refer to the comments of the hon. Member for Twickenham (Dr. Cable). Of course, a credit facility was provided by the Federal Reserve, but the real point is not so much the way in which Bear Stearns was handled by the Federal Reserve, but the speed of the action. That was the key.
Mr. Doug Henderson (Newcastle upon Tyne, North) (Lab): I went through the argument about Bear Stearns with some of the hon. Gentlemans colleagues earlier. Is he arguing that a Conservative Government, had they been in place last September, would not have made every effort to explore a private sector solution to the problems faced by Northern Rock? If he agrees that they would have done that, does he accept that it would take time to work through such an option?
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