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Mr. Spring:
Of course, the Bear Stearns exercise was encouraged and helped by the Federal Reserve, and I know that the hon. Gentleman would agree with me about that, but the point is that the process took place very rapidly. Let us remember the situation in which we found ourselves. There were queues of people outside the banks—it was a terrible indictment of our financial services industry. Of course, the Americans, seeing the potential for equivalent disasters in the United States, moved very quickly to ensure a private sector takeover
of Bear Stearns with the support of the Federal Reserve. The point for us to consider when comparing Bear Stearns with the fiasco of Northern Rock is simply this: it is impossible to discern, because we cannot get a clear answer, what the Lloyds TSB offerings happened to be. However, we know enough to know that something could have been worked up to ensure a satisfactory takeover, but something called “the general election” intervened. I fear that the decision was ultimately political, and its consequences have been the dithering and backsliding of the past few months, which have had a devastating impact on the reputation of our financial services industry.
The order demands assurances on transparency and good management. Northern Rock made a great impact on the reputation of our financial services industry and our regulatory oversight. The price to earnings ratio of UK domestic banks is now the lowest in Europe. The market is taking a view of us and our country, even though the financial services industry in this country is probably the most important such industry, relatively speaking, in Europe. That view flows partly from the Government’s incompetence and their handling of Northern Rock.
The solution had better work this time. However, I am afraid that, given the way the Government handled the issue, we can have little confidence that a Government so marked by indecision and procrastination, perfectly illustrated by the Northern Rock fiasco, will ever enjoy the fullest confidence of the banking and financial services industry in this country or internationally again.
11.1 pm
Mr. John Redwood (Wokingham) (Con): It was a great pity that the Chief Secretary decided to devote so much energy to rather silly and clumsy partisanship and to claiming that we do not have any better ideas about how to tackle the position, instead of doing what the House expected of her and telling us a little about the challenges and difficulties that lie ahead if the business stays in the public sector. It probably will if we are unsuccessful in persuading the Government otherwise.
The Chief Secretary constantly asks, “What was the other option?” There was an easy other option, for which I have argued throughout the crisis, from when it broke in the summer. Of course, the Bank of England had to step in when there was a run and act as lender of last resort. However, the Bank of England—and, if necessary, the Treasury, working with it—should subsequently have been the intelligent bank manager of the business. It had a natural relationship with Northern Rock as its banker.
As a banker, it could have taken all the collateral it needed to ensure that taxpayers’ money would never be at risk. It could have guided and influenced the business plan so that it had an impact on phasing the repayments and the way in which they would be made. It did not have to take over the bank’s ownership, with all the other liabilities and risks. It did not have to take responsibility for the staff or future trading. It should have concentrated on lending the least amount needed to get the bank through the immediate problem, and
having the best possible security for the taxpayer and the best possible supervision and management overlooking the board, as a bank manager should do, to ensure that the money would be repaid in good time. That was the obvious thing to do.
The problem with the current model is that the Government are trying to do two contradictory things. Of course, the Chief Secretary is right to tell the House that she views getting back the £24 billion—the remaining outstanding loan, we were told tonight—as an urgent priority. I suspect that she can do that and I wish her every success. We all represent taxpayers and it is important that we get the money back. It is also important that the Bank of England gets its money back as quickly as possible because it is a small bank trying to deal with a large and complex system. All the time that it is so committed to Northern Rock, it does not have the firepower that it needs to deal with the obvious imperfections and difficulties in the money market.
How can we get the money back? The Government and the bank’s recently appointed management admit that the money will be repaid—we trust in reasonable time—by squeezing the business, perhaps halving it, getting people to repay their mortgages early because they remortgaged with someone else and making sure that new advances are not made through Northern Rock to replace advances that are maturing as people pay them off, so that business can be transferred to other organisations in the financial world, and some of the assets can perhaps be sold on, as appropriate.
That is a perfectly good working model for getting the Treasury money back, but it is not what the owners of a bank would be doing if they were trying to sell it on to someone else for maximum value. Indeed, doing so will diminish the value of the assets under control, because the bank will have to battle constantly to cut its costs, by sacking its staff and reducing its administrative overheads, to bring it closer to the reality of the falling revenue. Instead of having one or two years of rising profits before returning the business to the private market, which would be best for securing a good price, we have been told tonight that it will definitely have three years of losses. We know, too, that it will have a much smaller business, so it will be quite difficult for it to explain how it can suddenly turn all that round.
Jim Cousins: Does the right hon. Gentleman accept that the logic of what he is saying points to a longer period for the repayment of the bank’s loan than the period to 2010 and to putting less pressure, by the reduction of business, on the rest of an already struggling mortgage market?
Mr. Redwood: I do not think that the circle can be squared. If the loan were made permanent for, say, 10 years, it would give the business more chance, but there would then be enormous competition issues with the European Union, which might prevent it from exploiting that chance. Indeed, my next point is that given that the Government are forecasting perhaps three years of quite serious losses, they will have to argue hard to our bosses in Europe that they are not making a direct Treasury subsidy to allow unfair competition, even though the business is slimming itself down.
My hon. Friend the Member for Fareham (Mr. Hoban) has already put his finger on the issue, which is that although it would be quite easy to defend ourselves against a charge of anti-competitive practices in making new advances, because the business would be shrinking its advances portfolio, it would be more difficult to defend against that charge on the deposit front. I looked at the Northern Rock site today, as many others preparing for this debate no doubt did too, and saw offers of 6 per cent. with the full Treasury guarantee. That seems a pretty attractive rate, but a justification will need to be made to the competition authorities in Brussels if such rates are supported by direct Treasury subsidy, because the company is a loss-making business offering those rates to collect capital to replenish its capital base.
We have a business with two conflicting aims. I trust that the repayment of the moneys will be completed before the next general election—it would be a neat order to do so—but the Government will then have a weakened, loss-making business with far fewer staff and an unpleasant impact on the north-east, which is one of the tragedies of the situation that they have created, that will be quite difficult to return to market for a sensible price. Ministers must accept that they are responsible not just for getting back the £24 billion that has been lent, but for getting a fair value for the assets that they have taken over, rather than going through three of four years of writing them down, showing that they are impaired, losing lots of money on them and ending up with a second set of losses for the taxpayer, in addition to the running annual loss that will have to be paid for out of taxpayers’ money, as the Chief Secretary knows but will not admit, because once someone owns 100 per cent. of the shares, they are clearly responsible for paying the losses.
There are other oddities. It is interesting that Northern Rock appointed new non-executive directors on £90,000 a year, plus £10,000 for every committee, shortly before the nationalisation went through. Will that become the standard level of remuneration for such posts in the public sector, or will an attempt be made to bring Northern Rock into line with the more normal public sector levels? That is an issue for Ministers, who have naturally been telling the public sector that they want good wage and salary control, because they are worried about the inflationary effects of doing otherwise.
One interesting point to emerge in the business plan is that there is to be a continued transfer of new money into the Northern Rock Foundation. We have been promised a minimum of £15 million, but we have to ask whether that has been through the proper public expenditure assessment processes and whether other parts of the country would be eligible for such treatment, as we are now talking about a public subvention to a particular part of the country for particular purposes.
If Ministers are to have their way in the Division, as they often do, what we need above all is a bit more explanation of how they will satisfy themselves that Northern Rock’s business plan will lead in due course to resale to the private sector on terms that are satisfactory to the taxpayer, and how they will satisfy themselves that they can do that without falling foul of competition rules, while still getting the repayment within a reasonable period. I think that they have set themselves an impossible task.
Ministers are in this situation because they dithered and made mistakes at every twist and turn of this awful story. They did not keep markets liquid enough in the summer to head the problem off. They did not understand how to organise a lender of last resort, in secret or with the involvement of all the banks, so that there was no great shock to Northern Rock that brought it down. They delayed when the run on the Rock began, and greatly increased the cost of the rescue by not making an immediate statement, as they should have done. They spent too long lecturing banks for making all sorts of mistakes and not enough time understanding that there was a crisis in the credit markets, and that bad credit and good credit were both going down at the same time in a way that would undermine good as well as bad institutions. They delayed too long when trying to put together a private sector bid, even though many people told them that that was not likely to be productive, given the delays and difficulties that the Government faced.
The Government have come up with the worst of all possible worlds, which is to nationalise all the assets and liabilities of Northern Rock. I fear that those in the north-east will grow to dislike the policy because it will mean redundancies, closures and a squeeze on the bank, and I fear that taxpayers will come to loathe the policy because it will mean endless losses and a very bad final result if the Government try to sell the bank.
11.11 pm
Mr. Philip Dunne (Ludlow) (Con): It is a great pleasure to follow my right hon. Friend the Member for Wokingham (Mr. Redwood), whose closing remarks form a précis of the calamitous state of affairs regarding the nationalisation of Northern Rock that economics students will, in years to come, turn to first to get a proper understanding of what went wrong. The Chief Secretary to the Treasury has unfortunately again left the Chamber. It seems to be becoming a habit that whenever I stand up she goes off, perhaps to get help. I shall start my remarks by explaining to her colleague, the Exchequer Secretary to the Treasury, why the parallel with Bear Stearns is so pertinent; Ministers seem to have failed to pick up on that. I am pleased to see the Chief Secretary return. I should tell her that I am trying to explain why the parallel with Bear Stearns is so clear and direct.
Last August, the financial authorities were made aware of the problem with Northern Rock and tried to put together a private sector rescue. They received an indicative proposal that was dependent on substantial, Government-guaranteed financing. If the authorities had sat round a table in the same room as the financiers, just as Secretary Paulson did with JPMorgan Chase, a deal would have been done over the weekend, and the Government would have avoided all their subsequent problems. It is for the Government to reflect on why that did not happen, and to repent for years to come.
I should like to pick up on one or two of the revelations in Northern Rock’s annual report and business plan, published today, which allow us a glimpse of why the Government were so reluctant to disclose what is happening in the bank. Consistently over a period—ever since he first discussed the issue with us—the Chancellor has told the House and the public at large that he is confident
that Northern Rock’s asset book is good, and that Northern Rock was solvent. He was confident about that because he had been told by the Financial Services Authority that that was the case. One of the final notes of the accounts—note 41(B) on capital management, on page 99—says that on 19 April 2007, the FSA was told that
“Northern Rock’s regulatory capital was below the capital requirement imposed by the FSA by £85.5m”.
As long ago as last spring, months before the problems emerged in the credit markets, the FSA was aware that Northern Rock was operating outside its capital regime. However, it did little about it—so little, indeed, that despite its having identified Northern Rock as one of the so-called high-impact firms, its regulatory regime was so lax that its own internal review, published last week, describes it as being
“at the extreme end of the spectrum”
The FSA’s decision that, alone among 38 high-impact firms, Northern Rock did not need a risk mitigation programme implies considerable scrutiny during “close and continuous” meetings. However, it is clear from the FSA’s commendably frank and candid appraisal of its own performance that the number of such meetings held by the FSA in the three years from 2005 until 2007 amounted to none in 2005, one in 2006 and seven in 2007. Of the seven, five took place on the same day—I would describe that as a single meeting—and two took place by telephone. I calculate that that represents an average of less than one day of meetings per year during the three years in which Northern Rock was supposedly a high-impact firm. The organisation in which the Chancellor has placed such confidence said repeatedly that Northern Rock was a good bank, solvent and with good assets. It beggars belief that the Chancellor can have placed such trust in the regulator, given its performance over that period.
Let us examine the asset quality revealed elsewhere in the accounts, which has already been mentioned by other Members tonight. A most revealing statistic is the proportion of residential mortgages—the primary and most secure category of assets held by the bank—which are at the
“extreme end of the spectrum”,
as the FSA put it. Page 92 of the annual report reveals that in 2006-07, the proportion of mortgages with a loan-to-value ratio in excess of 100 per cent.—in other words, the loans were greater than the value on which they were secured—rose from £110 million, in round figures, to £432 million. That £432 million is now guaranteed by the taxpayer, although the company itself admits that the loans were greater than the security on which they were pledged. As for the second-worst-secured assets, those with a 95 to 100 per cent. loan-to-value ratio, the figures are remarkable. Since the end of 2006 the amount lent increased from £2.1 billion to £4.1 billion, an increase of £2 billion.
Jim Cousins: I happen to have the table in front of me. Does it not also show that the best-quality mortgages, those with a loan-to-value ratio of less than 70 per cent., rose by a figure three times as great as the one that the hon. Gentleman has given?
Mr. Dunne: I readily agree that the overall book has increased substantially, which means that all categories of loan have increased. My point is that the risk of the book has increased significantly over the year—and this is the book that the Chancellor keeps telling us is of very high quality. The least-high-quality lending has risen by nearly £2.5 billion, and that is the part that is most at risk, not least given what is happening in our present housing market.
Mr. Redwood: Perhaps my hon. Friend will remind Labour Members that there are a good many unsecured loans as well. People were being lent 125 per cent. or so of the value of the houses involved, including the top-up unsecured loans, and I believe that the 2007 accounts show particularly large increases in provision against those unsecured loans.
Mr. Dunne: I am very grateful to my right hon. Friend for reminding me of that. Indeed, the unsecured lending book is of the order of £7.7 billion as at the end of 2007, and the impairment charge was in excess of £200 million, much of which was secured against that portfolio.
Hometrack, which provides one of the widest analyses of the housing market, published some statistics today confirming that we have entered the sixth month in a row of declining house prices. The increase in high-risk residential mortgages places a sharper focus on the Chancellor’s confidence that the book will be good and that taxpayers’ money will be secure. I wish I could share his confidence.
In an earlier discussion of the possible consequences of administration, the Chief Secretary referred to its leading to fire sales of assets. Of course, we have been in a state of uncertainty over this company since mid-September, and the company has successfully sold a portfolio of assets—its commercial loans—for a premium over the book value at a time of considerable uncertainty for the company as a whole. That firmly demolishes the argument that an administration would have somehow made it more likely that losses would have been incurred on the sale of the loan portfolios. Good assets will sell for a good price in these circumstances irrespective, as has just been proven, of whether the company is in distress.
That brings me on to my main point, which also comes out of a reading of the accounts. Much was made in earlier debates about Granite of whether or not the business plan will feed the beast. Enough has already been said about that this evening. However, Northern Rock established another financial vehicle, which has not been referred to in previous debates. I refer to the Saphir Finance vehicle, a special purpose vehicle, which issued £400 million in tier 1 notes; they were issued against the £400 million of preference shares issued by Northern Rock. The preference shares were provided as collateral to the holders of the notes issued by Saphir Finance.
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