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There are a number of ways one can take that comment. I do not know whether it meant that there would be no more Tory boom and bust because instead we would have Labour boom and bust, or whether he really thinks that he said that. I cannot explain that comment.

The facts that the UK was so badly prepared for the financial crisis, that the regulatory system was unable to cope with this bust and that the public finances are woefully unprepared for this downturn suggest that maybe the Prime Minister believed throughout the 10 years when he was Chancellor that there would be no return to bust, whether it was Tory bust or any other kind of bust. That is deeply disturbing, because it means that he believed he could defeat the business cycle, which has existed for ever. The consequence of that was enormous complacency. No attempt was made to use the good years to prepare for bad years; no attempt was made to fix the roof when the sun was shining. We have been left in a terribly vulnerable position in which we are more exposed than almost any other economy in the world to a global economic downturn with inflation at three times the level of ’97, with unemployment rising at a faster rate than at any time in the past 17 years and with the public finances in one of the worst positions of any particular economy in the world. No more boom and bust—if only it were so. Today, we are paying the bills.

1.9 pm

Dr. Vincent Cable (Twickenham) (LD): I realise that the narrow issue of the supplementary estimates is a peg for discussing some of the wider financing issues around it. A great attempt is being made these days to portray good news, but the idea that we are buying out the banking system for £1,000, as the Minister seemed to suggest in his introduction, stretched things a little far. None the less, there is good news as far as it goes.

This issue is important because it leads us from the complicated issues of the banking bail-out to the wider question of how that affects public finances and how the market perceives the state of public finances. At the moment, markets in Britain, the United States and elsewhere trust Government paper but not the paper of banks and other financial institutions. Perhaps that is a reflection of how we see Governments—perhaps more positively than has historically been the case. None the less, there are limits to the extent to which the markets will absorb Government paper.

Although in the current environment it is possible to float gilts at attractive terms, there will obviously be limits to that. In the spectacular case of Iceland, not only the banks, but the country—the Government—have gone bust. Its creditworthiness as a country no longer
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has any credibility. Of course there is a vast difference between Britain and Iceland, but equally there is a vast difference between Iceland in October and Iceland in April; its position deteriorated very rapidly, and we need to be careful that the same does not happen here. In addressing that issue, we must focus on how these vast public liabilities, of different kinds, are to be represented in terms of public presentation and the relationship to public debt.

Yesterday I read two rather obscure articles in the financial pages. They were not an attempt to talk up the drama around the public debt figure, but one of them suggested that the whole £500 billion aspect, rather than the £50 billion aspect, of the bail-out should be covered in the public debt. I do not know the statistical or financial basis for arguing that, but if the £500 billion—the contingent liabilities around underwriting inter-bank lending—were to be treated as public debt, we would be talking about 100 per cent. of GDP, not 40 or 45 per cent.

Quite independently, a separate article argued that there was a case for treating the liabilities of the Royal Bank of Scotland as public debt; that would add another staggering sum and, independently of the first point, take us up to about 100 per cent. of GDP. If we add the two together, we get up to 150 per cent. of GDP. Those are rather meaningless numbers, but somebody needs very quickly to produce a proper, accurate and transparent assessment about what the public liabilities are.

One of the lessons that we have learned—the banks certainly have—is a hatred of uncertainty, which causes panic and loss of confidence. We therefore need a completely open statement about what the various Government liabilities are, including the ones to do with public sector pension liabilities, the private finance initiative and the rest of it, which we have endlessly debated in the past. We need an open, transparent statement about the different components of the liabilities that the Government are now taking on—some are direct stakes, some are guarantees and so on—so that the markets can make their own assessment.

I do not believe for one moment that there is any imminent danger of the Government breaching their debt ratio to the extent of people calling into question the value of Government bonds, but the Government need to be careful. This is partly a presentational issue, about how we present statistics; I hope that the Government will apply themselves to that.

I have little to say on the substance of the bank bail-out; we have had plenty of opportunities to discuss it, including yesterday. However, simply because it is relevant to the specifics of the supplementary estimate, it is worth drawing attention to the fact that Bradford & Bingley shareholders are on the march. I had an altercation with one of them on the radio this morning; they clearly intend to go for litigation with the Government to find out why they have effectively been wiped out when the share prices of other banks a few days later, although badly depreciated, have had the chance to recover. I did my best to defend the Government’s position but they are going to find themselves in court to offer an explanation, which will be tricky.

The other issue specifically raised by the supplementary estimates is the Icelandic banks. My hon. Friend the Member for Somerton and Frome (Mr. Heath) wishes to say something about that from councils’ point of
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view. I want to raise the broader policy issue. The problem arose because the Icelandic banks could be passported through the European economic area rules. I do not think that anybody saw this coming, but there is a slightly odd arrangement in which there is a claim on the host country following that of the home country. I assume that the Icelandic banks made no contribution to the British financial services compensation scheme. Some have posed the question of whether we should now seek a change in the European Union regulations to make sure that when EEA banks act here, they are fully part of and covered under the financial services compensation scheme and therefore make full contributions to it. Does the Minister have any views on whether such a regulatory change would be helpful?

1.15 pm

Sir Peter Viggers (Gosport) (Con): I could not contribute to the debate yesterday for the agreeable reason that I was at Buckingham palace, so I welcome the opportunity to make a brief contribution today.

This banking crisis did not emerge from old-fashioned banking at all; it emerged from the kind of banking, known in the trade as “originate to distribute”, that has developed in recent years, whereby banks put together packages of securities and then pass them on to each other in collateralised debt obligations, or CDOs, which have proliferated and become far more complicated. The amounts involved are enormous. The derivatives are inter-traded and cut in different ways; the original asset may go through many different manifestations and changes before it eventually ends up in the book of one bank. It has become a matter of enormous complication and vast financial implications. No bank can be completely confident that the asset that it holds is sound; all banks are contaminated to a greater or lesser extent by loans or investments that they may not be able to recover. All banks are toxic because of the massive amount of inter-trading that has taken place.

There is an urgent need accurately to identify each bank’s assets and liabilities. The issue has to be resolved because most businesses, large or small, depend on bank gearing and bank borrowing to a greater or lesser extent. Most businesses have bank loans or facilities, many of which are not being rolled over. Many smaller businesses in particular are being offered much less advantageous terms; banks that had been borrowing at 8 or 9 per cent. are finding that their facilities are being reoffered or not offered at all. If they are being reoffered, it is happening at about 15 per cent. Moreover, all trade depends on bank facilities; goods in ships may not be unloaded and sent on to their ultimate destination unless the bank facilities for their transit are available. Something must be done.

In many ways this situation is unprecedented, but it is not completely so. A week ago, I drew attention in the House to the fact that what evolved at Lloyd’s of London in the 1990s is a close analogue to the current situation. I became an underwriting name at Lloyd’s in 1972. In 1989, when I ceased to be a Minister, I could see that things were going wrong at Lloyd’s. I could come out of Lloyd’s, stay there and worry or stay there and try to do something. I stood for the council of Lloyd’s as an external member and was elected. I later became a member of its audit committee, so I was closely involved in the resolution of the problems in the 1990s.

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The problems were similar to the ones that we have now. I put that point to the Chancellor of the Exchequer two days ago, but he brushed it aside saying that the Lloyd’s situation was very different. But it is not: it is the nearest that we have to an accurate analogue. Lloyd’s syndicates were underwriting risks and passing them on by way of reinsurance. The syndicate that had reinsured would then reinsure further, and there was a whole cycle of investment and reinvestment. The problem was that the syndicates were not entirely sure what risks they were underwriting. There was uncertainty because no one knew the reliability or soundness of the risks. That situation is very similar to that in which we find ourselves with the banks now.

Let us imagine—my comparison is a rather ugly one—that every single loan is a tiny piece of spaghetti, all the pieces are mixed up in a great big bucket, and we end up with a massive asset so that no one knows what they have got when they buy a share or slice of it. What we must do—this is the parallel that we draw from Lloyd’s—is identify and isolate the unsound assets. Lloyd’s created a new vehicle, Equitas, into which it transferred the unsound or questionable assets, so that it could move forward with purged units or entities that were free of the unsound or doubtful assets that were there previously.

Mr. Bone: My hon. Friend makes a powerful point. Is he suggesting something similar to the American Government’s attempt, in their first package, to remove toxic debt from the banks?

Sir Peter Viggers: In fact, I thought that the first Paulson plan to inject $700 billion into the banking sector was fundamentally misconceived because it did not identify and isolate the toxic assets. Paulson suggested an investment of $700 billion in the unsound part of the market, and the money was intended mainly to acquire the assets that were known to be unsound at a price higher than market value.

Mr. Andrew Tyrie (Chichester) (Con): I am listening carefully to my hon. Friend, but I wonder whether the Equitas parallel works. In that case, the toxic waste was transferred to a body that remained the responsibility of the private sector and where the liability ultimately remained with those who created it. In the case of the banks, and of the Paulson plan, it was transferred to a public body, with taxpayers being directly at risk.

Sir Peter Viggers: I will come to the main thrust of my argument three points further down the line, if I may. Obviously, the situation is vastly complex. We have to respect Mr. Paulson’s background and experience, and we must assume that he built into his plan safeguards that I have perhaps been too naive to understand. I am not saying that Lloyd’s is a complete parallel and that I have the answer that nobody else understands, but I am convinced that there are lessons to be learned from the Lloyd’s experience that I have not yet seen Government taking on board.

The next point to draw from Lloyd’s is that we are all in this together. The Lloyd’s community realised that if the Lloyd’s ship sank everyone would drown, so we had to find a way through. That leads to the need for a strategy for burden-sharing.

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My next point concerns moral hazard. We should ensure that those who took the greatest risks bear proportionately more loss. That requires an overarching strategy to identify those who took the risks to ensure that they suffer.

Why should anyone—taxpayers or Government—invest in an institution that is known to be unsound or at least questionable? Why should not Government money—taxpayers’ money; our money—be put into vehicles that we know to be sound, their having been purged of unsound or questionable risk? More needs to be done to ensure that Government money is invested soundly and that unsound or questionable assets are put into a situation of run-off so that they bear their own risks.

My penultimate point is that there is one piece of good news. Nobody knows exactly where the risks lie, so banks and other institutions have inter-traded, with the same unsound and questionable assets being passed from bank to bank and institution to institution and carried as risks on the balance sheet of everyone who has handled them. If the questionable assets can be identified and isolated, I am certain that we will ultimately find, on adding them up, that they are the subject of double, triple or multiple counting, so the obligations are not as great as we first feared.

Finally, I challenge the Financial Secretary to the Treasury to demonstrate to the House that the investment that is being made and the vast increase in funding that the Government propose is to be made in sound securities that in the longer term will be seen to be robust in the eyes of the taxpayer.

1.25 pm

Mr. Peter Bone (Wellingborough) (Con): My hon. Friend the Member for Gosport (Sir Peter Viggers) makes an extremely important point about treating the causes rather than the symptoms of the problem and removing the toxic liabilities from the banks, but nowhere is that addressed in the central Government supplementary estimate that we are considering.

On the technical point that I raised with the Minister, I understand that the vast bulk of this is cash accounting, but if there is a resource accounting element that is not provided for, the whole thing might fall. I am sure that his officials have considered that, but I am surprised that only £1,000 was included, whereas perhaps it should have been, say, £10,000 to cover all eventualities.

In the course of the next three hours, assuming that the debate runs its full course, we will write a blank cheque to the Government for £42.2 billion—an increase in the cash estimate for the year of nearly 10 per cent. That is an unprecedented increase in an out-of-turn supplementary estimate. During those three hours, we will have spent £234 million of taxpayers’ money per minute, yet what we know of how that money is to be spent is sketchy at best. It equates to £1,361 for each and every taxpayer in the country. It is to be spent as the Government want without proper debate or consideration, and without full parliamentary scrutiny. It is like the Government taking £1,300 of our money along to the local casino and betting it on black, hoping that it will not turn out to be red. On the roulette wheel, at least
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one knows the odds, but in this situation we have no idea what the possible return, if any, will be for the taxpayer.

This supplementary estimate is part of the Government’s £500 billion bail-out of the banks. It is the biggest bail-out in the world so far, paid for by the biggest peacetime increase in debt. It will lead to the Government’s debt rising to 50 per cent. of gross domestic product—in other words, £8,200 for every man, woman, child and baby in the country. It asks us to approve an enormous amount of borrowing to support and bail out irresponsible banks. Only now are members of the public beginning to realise just what the Government are about. I recently received an e-mail from a constituent, which I should like to read because it adds light to the situation:

We can all relate to that. Anyone who has ever run a small business will know how unsympathetic, ruthless and heavy-handed banks can be, literally putting companies into liquidation at the drop of a hat. Yet taxpayers are being asked to bail out the banks to the tune of £1,361 each.

It strikes me that it is a duty of Parliament not to write a blank cheque, but to scrutinise the Government’s proposals in much greater detail. This out-of-turn supplementary estimate is the first opportunity we have had to scrutinise the Government’s banking recapitalisation plans. Indeed, it is the first time that many Back Benchers have even had the opportunity to discuss the issue. Yes, there have been a number of statements from the Chancellor, but on each and every occasion Back Benchers have been left standing. Many Members have not been able to put even one question to the Chancellor about the extraordinary amount of expenditure that we are considering in this Government supply estimate.

Things are different in America. Full congressional scrutiny took place and the revised package was far better than the original one proposed by the Executive. But in this mother of Parliaments, no time has been allocated to debate a substantive motion on which the Government could be defeated. The Government are spending the most extraordinary amounts of our money in nationalising, or part-nationalising, certain banks. Today’s three-hour debate will be the first time that many Back Benchers have had an opportunity to discuss the matter.

I find it quite extraordinary that this week we have found it possible, on non-substantive motions, to discuss democracy and human rights, access to primary care trusts, local government and energy providers. We have had hours and hours of debate on what are no doubt
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important issues, but clearly they are not as important as the biggest financial crisis in 100 years, with the Government heading from boom to bust at breakneck speed.

I might be the only Member of the House who thinks that the Government’s proposals have significant flaws, and that there should have been a far more market-oriented solution, but there should have been proper thought and consultation, and detailed proposals should have been brought to this House. I am sure that if that debate had occurred, many Members would have made improvements to the package. If we pass the supplementary estimate today, the Government will be able to do what they want with £42.2 billion of our money.

I turn to the proposed, out-of-turn supplementary estimate we are considering. As I have said, we know little detail of how the £42.2 billion will be spent. Some detail on the estimate is outlined in House of Commons document 1061, and some supplementary information was provided by the Chancellor, who placed in the Library a number of documents two days ago. It was rather difficult at the time to get hold of the documents, but they were eventually released. The documents were the preference share subscription agreements between the Commissioners of Her Majesty’s Treasury and the Royal Bank of Scotland plc, between the Commissioners of Her Majesty’s Treasury and HBOS plc, and between the Commissioners of Her Majesty’s Treasury and Lloyds TSB Group plc. In addition, we were provided with the placing and open offer agreements between the Royal Bank of Scotland plc and UBS Ltd, and Merrill Lynch International and the Commissioners of Her Majesty’s Treasury, and the placing and open offer agreement between HBOS plc and Morgan Stanley & Co. plc, and Dresdner Kleinwort Ltd and the Commissioners of Her Majesty’s Treasury. We were also provided with the placing and open offer agreement between Lloyds TSB and “blank”, and “blank” and the Commissioners of Her Majesty’s Treasury. We have not even been told which merchant banks will be involved with the Lloyds TSB agreement.

We know in broad terms that the estimate deals with £42.2 billion, and it is broken down as follows. RfR 1 of the supplementary estimates is entitled:

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