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I had better move on from talking just about the banks, because then we have the auditors. There are supposed to be auditors, but what were they doing? What were the auditors of Northern Rock, Bradford & Bingley and the Royal Bank of Scotland doing? They were clearly not doing their job, but they were paid a
fortune for not spotting that there was anything wrong. We need a regulatory system that will do something about that. Anyone who has been damaged by the auditors’ failure should get ready to mount a class action and sue them. The auditors ought not to be allowed to fail, to let people down and cause them to lose money.
Then there are the rating agencies. Until about six months ago, a chap from Standard & Poor would come on television and radio and lay down the law to the rest of us about the wonders and risks of this, that and the other. Now we discover that the rating agencies were giving AAA ratings to pieces of paper that were not worthless—they were worse than worthless. That is what the rating agencies were doing, so we need new and tough regulation. I believe that the regulations need to be laid down by law that is passed by this House. I do not think we can leave the determination of the regulations to the regulators. Their job should be to enforce rules, not make them up.
As we all know, the major problem at the moment is that the banks do not trust one another. The deliberate obscurity of their accounts means that some cannot fathom even the extent of their own exposure, let alone that of other banks. If the banks cannot trust one another, there is no reason why the British people should trust them.
Some of us have talked in the past about tougher regulation of the City of London, but we have been told, “Oh, you mustn’t over-regulate, it would inhibit innovation.” Well, we can see where innovation has got us, but the Spanish banking industry, which is not immune to the world’s problems and which has what might be described as a little local difficulty over its own housing situation, did not get involved in US sub-prime mortgages. That is because the Spanish banking laws—what might be described as the new Spanish customs—prevented them from doing so. In fact, Spanish banks were subject to the sort of counter-cyclical regime described by the hon. Member for Twickenham (Dr. Cable), and that was because there were regulations in place. No one can say that those regulations stifled initiative: if they had, the useless people running British banks and building societies would not have seen them taken over by Banco Santander. That bank was not restricted by any of the regulations, even though the Tories normally used to call them “stifling” when some of us advocated them.
If regulations had stifled some of the enterprise that we have seen, I frankly believe that that would have been all to the good. Some of that enterprise—and its “new products”—has been the cause of all the problems that we now face, and is the sort of enterprise that we ought to stifle.
I come now to pay and bonuses. Even without the bonuses, the pay of some fat cats in the banking industry is at ludicrous levels. Barts hospital is in the City of London. If we asked people in this country in an opinion poll who should be paid more, a cardiac or cancer surgeon at Barts hospital or someone running a bank, I think that the ones doing the operations would probably get the nod.
As for bonuses, why did those overpaid people need them? Most people do their jobs to the best of their ability for a rate of pay. Why do bankers need bonuses in order to put their backs into their work? Surgeons and teachers do not get bonuses. Firefighters, police
and research scientists work properly without bonuses, so what is wrong with the bankers? They are obviously so ethically degenerate that they cannot work without getting a bonus. Most of them are a deplorable lot of people, so why should they get a bonus at all?
They certainly should not get bonuses that are based on short-term targets and handed over long before the real consequences of their decisions become known. I want to put a suggestion to my hon. Friend the Economic Secretary, who is on the Front Bench at the moment, and to the Chancellor. It is that any bank receiving public money should be treated as part of the public sector, with public sector pay and conditions applying. On a bad day, I think that bankers’ pay should be determined by the Low Pay Commission.
We all know now the long-term consequences of the scandalous and ridiculous activity in the banking industry. The failures of the banking industry start off by causing a run on share prices. Then the hysterics in stock exchanges around the world drag prices down even further for fear of a recession which everyone agrees has been caused by the banking failures in the first place.
Of course, the share price falls—I take the Financial Times as evidence for this—have been worst among those firms and industries most popular with hedge funds and least where there has been no hedge fund involvement. As various parts of the finance industry try to sort out their debts and assets, the private equity buy-outs based on heavy borrowing are becoming yet more heavily affected. That is what happens when deregulated, free-market, profiteering people get us into a mess.
It seems to me that there is every possibility that we will go into a recession, so I ask everyone to look forward to how we should deal with it. We can do no better than look at the works of that great economist John Maynard Keynes, who started getting things right in 1920. It took the politicians about 15 years before they got a grip of what he was saying and started doing something about it. He advocated investment, which increased employment by means which at the same time increased our stock of useful wealth. He pointed out that, if a recession is coming, that is the last time in a cycle one should try to reduce spending because if we all stopped spending, we would all be out of work. If we want to keep people in work, we should encourage people to spend.
In his great general theory, Keynes pointed out that the Egyptians built pyramids, and that created work, and medieval Europe built cathedrals, and that created work. As he said, we appear to
“have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the ‘financial’ burdens of posterity by building them houses to live in.”
The Government need to bear it in mind that, whatever people from the City crawling back out of their holes say once they have got the money, we need to keep money going into the system. If we have to borrow to do it, we should borrow, to make sure that we do not go into recession and that people stay in work. It is no good messing around and taking four or five years to realise that we have to keep the economy up. The way to keep the economy up is by spending money; it is the only way to do it.
7.3 pm
Mr. Michael Fallon (Sevenoaks) (Con): I remind the House of my interests stipulated in the register.
It is rather exhilarating to hear the authentic voice of old Labour ringing out once again from the right hon. Member for Holborn and St. Pancras (Frank Dobson). In welcoming the Bill, which strengthens banking, I want to pick up one point that the right hon. Gentleman made. As my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) said, there has never been a free market in banking. None of the deregulatory measures taken in the past 10 or 20 years has given us an unregulated banking system. To suggest, as not only the right hon. Member for Holborn and St. Pancras but others have done, that somehow Ronald Reagan or Margaret Thatcher so deregulated the banking system that they brought us to this crisis is nonsense. On the contrary, banking is the essential prerequisite of all our markets. It is the clean water in the financial system. Of course, we have an interest in ensuring that it continues to be something on which we can rely. We have to have banks that we can trust; we have to have banks that can trust each other. Over the past year we have clearly had neither.
One does not have to be Michael Heseltine to understand that if banks are not working, the authorities have to intervene. I support the intervention that there has been. Indeed, if banks have been significantly illiquid over the past year, if they have been seriously under-capitalised, the regulator—the Financial Services Authority—ought to have intervened much earlier. That of course is the fault of the supervisory system set up by the Government of the right hon. Member for Holborn and St. Pancras back in 1997. It separated the responsibilities disastrously, and fatally left no one in overall charge.
I fear that some of the measures taken by the Government last Wednesday and yesterday may not go far enough. The package is necessary, but it may not yet be sufficient. It does not, for example, deal with some of the toxicity that remains in the system. We may yet have to deal with it. I want to focus in the context of the Bill on the measures taken to recapitalise the system.
The decision taken to inject taxpayer equity has some real dangers. When government plays God with the markets, there is a serious risk, as my hon. Friend the Member for Stratford-on-Avon (Mr. Maples) said, of creating inequity. It is extremely important not to repeat the mistakes of the United States authorities in deciding to rescue Bear Stearns and not to rescue Lehman’s. If we are going to rescue banks with public money, we need to do so on the basis of some clearly established principles.
At the moment, we have reached the position in which, of our 10 UK banks with significant numbers of retail customers, we have rescued five, with four different solutions. That is regrettable. It leaves the market completely uncertain as to what will happen when the next bank needs to be rescued; it may be rescued on different terms yet again. It makes it more difficult, I suspect, to raise capital and equity for other businesses. It leaves us with a very real prospect that those banks that are fully public now will be pressed into the service of extending borrowing on a non-commercial basis to other industries that are in difficulty and, crucially, it reduces competition and choice.
I was struck by the impact assessment published with the Bill. The only section that does not contain the required commentary on competition is the one on page 26 that deals with temporary public ownership. As others have said before me tonight, there is simply no competition policy. Yet competition is important. It has given us a huge range of savings products, borrowing products and mortgages over the past few years. It is easy with hindsight to scoff at the innovation of the City, but that innovation helped to bring asset ownership and wealth accumulation to a much wider section of the population than ever enjoyed them before.
The right hon. Member for Holborn and St. Pancras has to be careful about his partisan remarks about Reagan and Thatcher. It was Democrat congressmen in the United States who berated Fannie Mae and Freddie Mac for not doing enough to lend in the sub-prime market, and who encouraged more such lending through the Community Reinvestment Act. Here, too, we heard a chorus from the Labour Benches that we ought to be doing more for social inclusion, and that the banks should be lending more and more, irrespective of credit history and family background to encourage more people into home ownership. They did so—probably the right hon. Gentleman would welcome that—but, fatally, without satisfactory supervision and a sufficient regulatory structure and without providing the commensurate financial education to enable people to distinguish between products that were high, medium and low-risk.
I want to mention briefly three aspects of the Bill. The special resolution procedure is important. Clearly, it is a nuclear power. We hope that it will never have to be used again. The problem with what the Government have proposed in several different drafts and finally in the Bill, as the Select Committee has pointed out, is the peripheral role that is still given to the Governor of the Bank of England. That is wrong. I understand why my hon. Friends on the Front Bench have suspended hostilities on that point in the national interest, but I do not see how we can ever again mount an effective rescue operation unless we restore the Governor of the Bank of England’s authority and right to give advice, and ensure that the Bank has the working knowledge of the money markets that it used to have. That is absolutely essential, and I hope that we will be able to return to such a situation.
The measure on depositor protection is long overdue. I do not see why measures to improve depositor protection could not have been introduced immediately after we returned from the summer recess last year, after the crisis in Northern Rock. I am suspicious of the argument that it would take 14 or seven days to return people’s deposits, that some vast new computer machinery would be needed, and that such measures would all be too difficult for the banks. When the Treasury Committee was in Tokyo last week, we were told by a representative from the deposit guarantee fund there that if a bank closes on a Friday, all individual accounts are frozen, and people can go in on Monday morning and recover their deposits, up to the prescribed limit. I urge the Government to look again at the banks’ rather feeble argument that that would take weeks or months to sort out. On the contrary, we need a much faster and much more transparent scheme. I would like to see notices placed in all bank branches reassuring people of the amount of protection to which they are entitled, and how they can claim it, as happens in the United States.
Finally, there is the issue of pre and post-funding. I have to say that I disagree somewhat with my right hon. and hon. Friends on the Front Bench on this subject. It is important to bind all the banks into the compensation scheme. Of course it is wholly the wrong time to approach banks and ask them to cough up, although it will never be exactly the right time to do so. However, the principle is important. There is no harm at all in putting the relevant provisions in the legislation, and getting banks used to the idea. The British Bankers Association has produced a particularly feeble submission on the subject. It is four pages long, and I cannot find the word “sorry” in it anywhere. The BBA says, “Well, the strong banks shouldn’t have to bail out the weak.” Strong banks should have to bail out the weak; that is what happens in other sectors. It is important that all banks make their contribution, but I fully understand why they cannot do so at the moment.
The Bill should be supported tonight, and I think that it will help. However, it will not repair the damage that has been done to our economy, our constituents and the City of London by irresponsible lending, imprudent borrowing and wholly incompetent regulation. The Government are right to legislate, but they cannot wholly escape their responsibility.
7.12 pm
Mark Lazarowicz (Edinburgh, North and Leith) (Lab/Co-op): When the Chancellor took an intervention from me at the start of this debate, he was kind enough to remind the House that I am an Edinburgh MP, as he is. I make no apologies for the fact that my starting point in this speech, as in the speech that I made during the discussions held last week, is the interests of the many thousands of my constituents who are directly employed by some of the banks affected, and the many thousands more in Edinburgh and the surrounding areas who are indirectly affected because of the nature of their employment. The other Edinburgh MPs and I probably represent a greater concentration of people affected by the situation than MPs representing any other area in the country. Obviously, we are all extremely concerned about future employment in our city, as well as in the country as a whole.
It is worth emphasising that the picture is not all bad by any means, even in the financial services sector, whether in Edinburgh or elsewhere. In Edinburgh, there are many thousands working in insurance, or working for banks other than those concerned and for other businesses in the financial sector. The strengths that led companies to establish headquarters in Edinburgh and elsewhere in Scotland are still there, and can be built on in future strategies to retain existing jobs and attract new employment.
Nevertheless, there are undoubtedly a lot of worried people in Edinburgh and elsewhere, including my constituents, and it is important that we do what we can to provide them with reassurance based on an understanding and belief that we are going in the right direction. Clearly, I support the Bill and the measures that were taken last week, and one of the advantages of both is that they provide an opportunity to address problems on a longer-term basis. They remove the risk of a sudden fire sale of one of the major banks based in Edinburgh; obviously, that could quickly have a serious effect on jobs in that city. Of course, people still have
understandable concerns about where they will be financially in a few months’ or years’ time—about what their job prospects will be, and about what that will mean for their standard of living. That is clearly an issue of concern to me, and to all Members across the country who are in a similar situation.
I want to highlight an issue that I mentioned in debate last week. Unfortunately, my right hon. Friend the Financial Secretary to the Treasury was unable to respond to my question on the subject when he replied to that debate. When conditions are set, and when negotiations take place between the Government, the regulators and the banks that will receive assistance, what kind of consideration will be given to those who work in the industry, whether in Edinburgh, Halifax or the City of London? Not everyone employed in the City of London is a fat cat, and those people need to be remembered, too.
I want to reassure hon. Members on either side of the Chamber who might think that I am suggesting detailed regulation of the employment practices of the banks in which the Government have taken a major share. I am not suggesting that; it would clearly be ridiculous and have a number of damaging consequences, not least for the banks. If, however, we are to take account of the need to provide continuing finance for the mortgage market and for small businesses—I support that—it is fair to take account, too, of the interests of those who work in the industry. The Government should recognise that, and try to raise the issue in discussions in the coming days, weeks and months.
I accept that that raises the wider issue of how the Government will respond to pressure to intervene in more and more ways in how the banks in which they have a major stake operate. I do not, at this stage, want to suggest the kind of relationship that should exist, but the question highlights the fact that it is important to address the issue—not now, but sooner rather than later—of exactly what this period of partial nationalisation means for the way in which the banking sector will operate. I am thinking particularly of the banks in which the Government will have a major stake. The Government will come under all kinds of pressure to respond to particular actions taken by those banks.
The Government would do themselves a lot of good if they set the ground rules fairly early on. We would then know what might happen during the period—a lengthy period, I suspect—in which the Government have a substantial stake in the banking industry. Like my right hon. Friend the Chancellor, I certainly hope that there will not be a high level of involvement for as long a time as some people might suggest, but it will certainly be a substantial involvement for some time to come.
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