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“Raising the rate of sustainable growth and achieving rising prosperity and better quality of life with economic and employment opportunities for all”—
a rather strange way to raise the issue of the biggest banking collapse this country has ever seen. The section “Reason for change” refers to
“Changes relating to movements in budgets”
“Changes in annual managed expenditure”.
The detail is as follows. First, the £4.6 billion for the transfer of the retail deposit book and the branch network of Bradford & Bingley plc to Abbey National plc following the Bradford & Bingley plc Transfer of Securities and Property etc. Order 2008 No. 2546—in other words, the cost of allowing Bradford & Bingley to collapse. Interestingly, that is a totally different approach from that taken to the nationalisation of Northern Rock or the part-nationalisation of the Royal Bank of Scotland, HBOS or Lloyds TSB. There is a significant lack of consistency on the part of the Government,
which was raised by the hon. Member for Twickenham (Dr. Cable). That lack of consistency has been a trend throughout this ordeal.
Secondly, we have the £0.6 billion going to ING under the Transfer of Rights and Liabilities to ING Order 2008 No. 2666—in other words, money to protect depositors in Icelandic banks. Thirdly, and this is where we turn to the capitalisation of the banks that has been discussed in recent days, we have the purchase of shares in Royal Bank of Scotland—£20 billion broken down into £15 billion of ordinary shares and £5 billion of preference shares. Fourthly, we have the purchase of shares in HBOS at £11.5 billion, of which £8.5 billion is in ordinary shares and £3 billion is in preference shares. Fifthly, we have the purchase of shares in Lloyds TSB at £5.5 billion, of which £4.5 billion is ordinary shares, and £1 billion is preference shares. When one says that quite quickly, it does not seem to be very much, but when we think of the enormity of what we are discussing, we can see that it is quite staggering.
I know that other Members intend to speak, so I will not comment on the £4.6 billion relating to Bradford & Bingley or the £0.6 billion relating to the Icelandic banks. I want to talk about the huge investments of taxpayers’ money into the three commercial banks, and the market capitalisation of the banks. First, I would like to discuss how the capitalisations relate to the money we are proposing to inject. On 14 October, according to the Library, the market capitalisation of RBS was £10.9 billion, but we are proposing to spend nearly double that amount in taxpayers’ money—£20 billion. The HBOS market capitalisation was £4.9 billion, and the proposed capital injection is twice that amount at £11.5 billion. Finally, Lloyds TSB’s market capitalisation was £9.7 billion and the proposed injection is £5 billion—just over half the market capitalisation. Those are extraordinary injections of cash, which are significantly disproportionate to existing market capitalisation.
It is not clear how we reached such low market capitalisation. The last reported profits for those banks were: RBS—£9.9 billion; HBOS—£5.5 billion, and Lloyds TSB—£4 billion. The auditors’ reports on those banks included no qualification, and it appears that the auditors will have signed off the companies’ assets at a much higher value than they are now worth.
The role of rating agencies in the fiasco should also be considered, but such issues should have been properly debated before we arrived at the mega supplementary estimate that we are being asked to approve today. How can we approve a blank cheque for £42.2 billion when we do not know the true strength of the three banks to which the estimate refers? It is impossible that due diligence was exercised. The ideas seem to have been thought up on the back of an envelope during night-long meetings. The detail of the offer and subscription agreements shows the folly of that.
Let us make a UK-America comparison. Later, I want to consider in detail the individual estimates that the various documents show, but the British Government’s proposal clearly differs significantly from the American package that was announced last night. The latter is market oriented and designed to benefit the American taxpayer and the larger economy. The British Government’s approach neither protects the taxpayer’s interests nor allows the banks to recover—it is deeply flawed.
There have been huge regulatory failures to control the banks over many years and a huge bubble of debt has ensued. It appears that the banks have been lending more and more debt between themselves, which has little or no value. The boom was built on debt and was therefore bound to crash. If a small prick is made in a big balloon, the whole thing will collapse. The housing market’s collapse has pricked the balloon and all the financial air is rushing out. The out-of-turn supplementary estimate constitutes an attempt to put a patch over the escaping air, but it does nothing to tackle over-lending, which is the root of the problem. How could it be right to lend mortgages of 125 per cent. of the value of property? How could it be right to allow self-certified mortgages or lend five or six times a person’s annual income?
The position was made worse by the insistence that there would never be a return to boom and bust—that was the Prime Minister’s mantra. That was clearly nonsense because it defied economics and trade cycles, but it encouraged ordinary people in this country to take on more and more debt because they believed that the value of their houses would always increase. The banks were happy to lend because they thought that the value of assets would always go up. The Prime Minister must accept a great deal of responsibility for that boom. The £42.2 billion in the supplementary estimate is the colossal price that we are paying for his incompetence.
Many people will ask why we are protecting the banks and bank jobs at colossal risk when we allow other companies to go to the wall. The employees of XL travel or Travel City Direct and others in that group, who lost their jobs overnight, must wonder why they are being asked to bail out bankers. Today, it was announced that total unemployment had increased to 1,792,000—5.7 per cent. of all those economically active. Inflation is running at 5.2 per cent., which is more than twice the Government’s required rate, and house prices are in a nose dive.
All those factors form a significant background to the out-of-turn supplementary estimate. I believe that British taxpayers will be outraged if we approve the estimate today without proper and due consideration of the relevant issues. In my constituency, 1,721 people are on jobseeker’s allowance: in 1997 the figure was 1,643. In Wellingborough, we have therefore already reverted to the position of 11 years ago. The unemployed in Wellingborough must be astounded at the amount of money they are effectively being asked to spend in the estimates.
It is difficult for hon. Members and the public to accept the Government’s consistently moving the goalposts. We are considering estimates, but proposals for spending the money change from day to day. I have no faith, given our limited knowledge today, that the money will spent in the way that we think—it could be spent totally differently.
Let me illustrate the point with some of the Chancellor’s statements. When he discussed the nationalisation of Northern Rock on 18 February, he said:
“I want to set out the reasons for the decisions that I have made and to outline what the new legislation will do. Before that, let me remind the House that last September there was almost universal agreement that the Government were right to intervene
to save this bank to stop its problems spreading to the wider banking system. There was also an agreement that, ultimately, the long-term future of the bank must lie in the private sector. Even those who advocated nationalisation in the autumn did so on the basis that this could be only a temporary step—a stepping stone—to return the bank to the private sector, when market conditions made that possible... The Bill potentially applies to a range of financial institutions, but I want to make it clear that the Government have no intention at present to use it to bring any institution other than Northern Rock into temporary public ownership.”—[ Official Report, 18 February 2008; Vol. 472, c. 21-2.]
Clearly, the Government’s position then was that nationalisation was a one-off—an individual, specific situation—and that the bank should be returned quickly to the private sector. It was to be a temporary stepping stone, not long-term nationalisation; a one-off, not a problem with the whole banking system.
However, on 6 October, the Chancellor made a statement to Parliament on the financial markets. He said:
“We need, too, to work with other countries to tackle the causes of these problems, as well as dealing with their consequences. Let me briefly remind the House of what we have done to stabilise the banking system as a whole. Since April, the Bank of England, with support from the Government, has introduced the special liquidity scheme providing funding to the banks. The Government have made available in excess of £100 billion of long-term funding to be lent through the scheme, and the Bank of England has extended it until January. I am willing to make further resources available as necessary and the Governor has made it clear that
‘In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity’”.—[ Official Report, 6 October 2008; Vol. 480, c. 21-2.]
The goalposts had been moved. The problem was no longer the temporary nationalisation of one bank but liquidity in the banking system.
Two days later, on 8 October, the Chancellor made a statement entitled, “Financial Stability”, and the goalposts were moved again. He said:
“I also said that the Government were ready, with the resources and the commitment, to do whatever was necessary—in terms of liquidity and capital—to maintain stability in the banking system. That is why today I put forward measures designed to restore confidence in the banking system and to put banks on a stronger footing.
There are three strands to what I have outlined today: first, to provide sufficient liquidity now; secondly, to make available new capital to UK banks and building societies to strengthen their resources and to restructure their finances, while maintaining their support for the real economy; and thirdly to ensure that the banking system has the funds necessary to maintain lending in the medium term.”
“The eight major UK banks have today announced that, in aggregate, they plan to increase their capital by £25 billion. Banks can raise that capital in the open market, in the usual way, or they can raise it through the newly created bank recapitalisation fund. Other eligible banks and building societies can also take part.
Through the fund, the Government stand ready to buy preference shares in the participating banks. Preference shares rank above the stock of ordinary shareholders. The Government will receive a fixed regular payment for holding those shares and will get better protection against any future losses. In addition to that, the fund will be ready to provide at least another £25 billion of capital to strengthen the balance sheets of any interested bank. The taxpayer, therefore, will be fully rewarded for that investment.”—[ Official Report, 8 October 2008; Vol. 480, c. 277-278.]
The goalposts were therefore moved, to £25 billion of preference shares with regular dividend payments—not a direct investment in common stock, but an investment
in preference stock. I could understand that logic, but the position has changed significantly in the current estimates, which are not the same as the position set out in that statement.
The Chancellor came to the House with another statement on 13 October—his most recent statement to the House. If I read a few lines from that statement, hon. Members will see that the goalposts have moved yet again. The statement was entitled “Financial Markets”.
Madam Deputy Speaker (Sylvia Heal): Order. Perhaps the hon. Gentleman could do us the pleasure of giving a précis of what the Chancellor said in his statement. Lengthy quotations, as the hon. Gentleman will know, are really not acceptable.
Mr. Bone: Thank you, Madam Deputy Speaker. I do apologise, but I wanted to get on record the fact that I was not misrepresenting in any way what the Chancellor had said. Basically, we had moved from the idea of preference shares to massive investments in common stock. Only in today’s estimates are we being asked to provide £9 billion of preference shares, when a few days ago we thought that we were going to be providing £25 billion of preference share stock. Instead, my calculation is that we have £28 billion of ordinary shares to buy, which came out of the blue. That is an extraordinary departure. The goalposts have moved so quickly and with so little scrutiny that I do not see how the House can approve today’s out-of-turn supplementary estimates.
Let me say something about the political impact of the statements and how the Government and the Opposition have worked. I would like to praise the Leader of the Opposition and the shadow Chancellor for what they have done in the past few weeks, which has not been easy for them. It would have been easy for them to attempt to make political gain, but instead they have acted in the best interests of the country. In this sobering time of financial crisis, they have put aside their differences and worked with the Government.
The Leader of the Opposition and the shadow Chancellor deserve great credit for that. I fully respect their actions in putting the good of the country first. They have suggested amendments to Government actions and, at a time of extraordinary crisis for the country, have supported the Government to ensure that there is no panic in the system. The manner in which my right hon. Friends have conducted themselves has been admirable. They have done extraordinarily well. Indeed, today we have yet again heard a helpful and constructive statement from the Opposition Front Bench, from my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke), who posed a number of questions that are of great importance to the country.
However, that does not abrogate the need for a proper parliamentary discussion about today’s estimates and the Government’s decisions behind them. Having the issue debated in Parliament is the tried and tested way of ensuring that matters of such high national and international importance are comprehensively and successfully concluded.
Let me turn briefly to something that appears to be missing from today’s supplementary estimates, which is the situation of Equitable Life. I cannot understand why there is no provision in the estimate for the money that the Government will have to pay in relation to Equitable Life. By not bringing that forward today, they
will have to return to the House and take up more parliamentary time introducing a provision to cover the cost of compensating Equitable Life pensioners.
There is no question but that the Government will have to do that, because the ombudsman has ruled against them. Unless they totally ignore what the ombudsman has said, why on earth was a small additional provision not included in today’s estimate to cover the potential cost of compensating Equitable Life pensioners? If I were an Equitable Life policyholder, which I am not, I would be outraged that the Government are providing £42.2 billion of taxpayers’ money to prop up the banking system while dragging their feet in supporting pensioners whom the ombudsman has already ruled should be compensated. I would be grateful if the Government could explain that omission.
Let me turn to the detail of what we are considering, which is the central Government supply estimate and the documentation relating to it. This large document—the placing and open offer agreement—is what the Government have supplied as background reading, and it was great fun to spend many hours reading through it. It is about spending £37 billion of our money. I have looked at many share subscription agreements in the past, but the ones in this document seem to have so many holes in them that we could spend the rest of day going through each one. I am not going to do that, but I want to address the main points that we are considering today.
I should point out that we are talking about only three banks, not the whole banking system. In fact, in his statement on 13 October, the Chancellor confirmed that Santander, Barclays, HSBC, Standard Chartered and Nationwide had all increased or were in the process of increasing their capital base without having to turn to the Government for funds. I therefore want to discuss what in the out-of-turn supplementary estimate relates only to HBOS, Lloyds TSB and RBS. There is a broad breakdown of the estimate in House of Commons document HC 1061. The details of the estimate are broken down in six separate documents, but they are far from complete and in some respects contradict each other.
It is extraordinary that the preference share subscription agreements could be so different and written in such a different style. I note that the US Government’s proposals, issued overnight, are common for all banks, and I am amazed that the same is not true for the three banks that we are talking about. I am not talking about just the details of the dividend rates; I am talking about the style and manner in which the agreements are written. One document refers to a floating dividend rate plus LIBOR, another to a floating dividend rate of LIBOR plus 7 per cent. They may refer to the same thing, but they are written totally differently.
I have personal experience of dealing with a Government preference share issue. It was many years ago, when I was running a small, expanding manufacturing company, but the principle is the same. In my case, we were helping to expand a new manufacturing company, but the issue could equally have been to support the working capital of an existing company. And we are seeing exactly the same principle today. My case involved £100,000—if we add a few noughts, we can compare it with what we are dealing with today—and it involved non-voting, fixed-rate, cumulative, redeemable preference shares. Preference shares are ranked more highly than
ordinary shares, so if there is a liquidation, the holders of those shares get their money back before the ordinary shareholders. However, the holders of preference shares rank lower than creditors, so they in fact become the capital of the company.
In the supplementary estimate that we are considering today, we are told very little about the terms involved. We have to look behind it to the supporting documents, which are not entirely clear. If I make errors when I talk about what I think the Government are proposing, it is because we have not had a clear, proper explanation of exactly what they are doing.
In the case of a cumulative preference dividend, if a company cannot pay a dividend, it does not have to do so. However, when its trading recovers, the dividend is collected in subsequent years. For example, a return of 5 per cent. might not be paid in year one or year two, but a return of 15 per cent. would be paid in year three. That dividend would be paid before anything was paid to the common shareholders. Why have the Government not made the preference share agreements cumulative? According to the documents, they are non-cumulative. There is therefore a possibility of there being no return at all for the taxpayer from the preference shares.
In my case, the preference share dividend was paid, the shares were redeemed and the company flourished. I would hope that that is the outcome that we want from the banks. However, the Government have done some extraordinary things. First, there is the non-cumulative aspect of the preference dividend. Secondly, the notional preference dividend is an extraordinary 12 per cent., at least until 2013. After that date, it splits, and Lloyds TSB will pay 7 per cent. on the preference dividend, while HBOS and RBS will pay that amount plus LIBOR. I do not understand how that will work if the Government are planning to put Lloyds TSB and HBOS together as one company. That is not explained in any of the documents or in the supplementary estimate. The rate of inflation is 5.2 per cent. at the moment. I could understand the Government setting the notional preference dividend at 12 per cent. if they thought that there was going to be an explosion in inflation. At this stage, however, it appears punitive, and it will prevent the company from making any preference share dividends. In the United States, the Government have come up with a 5 per cent. preference dividend.
Another issue that concerns me greatly is the restriction on when the preference shares can be redeemed. They cannot be redeemed before 2013, plus five years from the date of issue plus one day. That makes them a medium-term investment. The decision whether to pay a return on them is entirely a matter of discretion for the board of directors. That is made clear in the documents. If I were one of the directors, I would not declare any dividend before 2013, given that the directors would not be allowed to pay an ordinary dividend until all the preference shares had been redeemed, and that they could not redeem the preference shares until at least that date. If they repaid the preference shares at that point, there would be only one dividend payment. If that were divided by the minimum number of years that the preference shares had been held, the rate of return for the taxpayer on the billions of pounds invested in those preference shares would be 1.4 per cent.
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