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15 Oct 2008 : Column 820

We have already seen outrage in the financial press at the idea of preventing the banks from paying ordinary dividends until the preference shares have been redeemed. I cannot imagine why people would want to invest in banks that they know cannot pay a dividend until at least 2013, and possibly much later, when there are at least five other banks in which they could invest. That is a huge error on the part of the Government. They do not seem to have thought this through, and it is their rush to take action that concerns me most. I would have liked them to say that they would look at the provisions for preference shares, think the matter over in more detail and come back to us early next week with a properly thought-out motion that we could discuss before debating the supplementary out-of-turn estimate. The problem with agreeing to the estimate today is that a Bill was automatically generated under the motion passed last night on which we are allowed no debate whatever. We will be allowed only to vote on it.

My suggestion to the Government is that they follow the American example of having a much lower preference dividend rate, and that they allow dividends on the ordinary shares. Let us face it, we are going to be huge holders of the ordinary shares, and such a provision would get a return for the taxpayer right away.

I want to make a couple of points relating to the massive common share issue, which is totally new and has had no parliamentary scrutiny. Originally, we were told that Lloyds TSB, a strong bank, was to take over HBOS, so that there could be a market solution to HBOS’s problem. We were told that we were going to throw away the competition laws to allow that to take place. I am not sure that that was the right thing to do at the time, but the principle was that the two banks were being put together to provide a market solution. I really want the Government to explain why Lloyds TSB is not being allowed to go its own way, like Barclays and the others, now that we have nationalisation—or part-nationalisation—on a massive scale. It is a much stronger bank. We would then have only two banks in part-nationalisation. I have seen no ministerial statement, either in the House or in public, on that issue.

Finally, I turn to the supplementary estimate that we are being asked to consider today. There has been an enormous amount of talk across the Dispatch Box about the terms and conditions that would be put on these companies. I have hunted high and low through the documents to find out what kind of controls are to be placed on the directors. When I was in business and a mere £100,000 was being invested, we had a thick booklet to tell us what we could and could not do. Our emoluments were controlled. Only two pages among the several hundred pages of documents before us deal with this issue. They state that the directors cannot have a cash bonus this year, but they can have a bonus in stock. Most bonuses are in stock anyway, so no control is being placed on these greedy bankers about whom there has been so much fuss. The Government might be trying to hide the fact away, but there is nothing in the documents that will control those emoluments. That is an extraordinary omission.

At the same time, however, the documents set out a wholly unacceptable condition—my hon. Friend the Member for South-West Hertfordshire was right to correct me on this earlier. They state that, for three years, the level of lending must be at the 2007 level—the
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very time when too much lending was going on. The Government are imposing only very limited conditions on the directors, yet they are imposing a condition on the banks that is completely wrong for them and for the country. There are no time scales on these investments. The documents just have blank spaces where the time scales are supposed to be. They say 20—something. This week, we have been debating important issues, but not ones of fundamental significance, yet we are being asked today in a three-hour debate to approve a blank cheque for £42.2 billion. That is just plain wrong.

2.10 pm

Mr. Andrew Tyrie (Chichester) (Con): I strongly support bank recapitalisation. We therefore have no choice but to support the estimate.

Before I go on to discuss that, I want to allude to an issue raised in the debate on the Banking Bill yesterday. A number of people, including the press, have raised with me the allegation of the hon. Member for South Derbyshire (Mr. Todd), who I see in his place, that my article in The Times of 3 October was in some way connected with secret briefings that had allegedly taken place between the shadow Chancellor and the Governor of the Bank of England.

When I heard about the issue this morning, I was at first flattered that someone had taken the trouble to read my article, but I have now realised that, given the calls that I have had, I cannot let the matter rest. The hon. Member for South Derbyshire suggested that my article was derived directly from the briefing, and I am told that he has not been the only one to make the point, as a number of press briefings to the same effect have come to my attention.

I want to make it clear that the allegation is complete nonsense. I had no knowledge of any secret briefings between the shadow Chancellor and the Bank, although I have subsequently learned that a meeting did take place on 3 October, at which the Treasury was also present. Nor did I have any such conversation with the Governor. I know him well, but in recent months I have had no conversation with him or with any Bank of England officials.

I wrote the first draft of my article in mid-September, immediately after the decision taken by Paulson to let Lehman go bust. In view of that decision, I concluded that a general collapse in trust between banks about each other’s solvency was very likely and that bank recapitalisation would probably be an essential part of the solution. I discussed the article with The Times quite early on and a first draft was sent well before the 3 October meeting—at least a week before would be my guess, although I have not yet checked it with the newspaper. It is true that I rang the shadow Chancellor’s office on several occasions during the week of 22 September to put the case for bank recapitalisation and I also sent him a copy of my article a few days prior to its publication. Those are the facts and, judging by the briefings going around, there seems, frankly, to be a bit of paranoia going on.

Mr. Mark Todd (South Derbyshire) (Lab): I would like to make it clear, first, that I entirely accepted the assurances given by the shadow Chancellor in yesterday’s debate about the lack of provenance of any linkage
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between the article and his briefings. Secondly, I accept that it is entirely appropriate for the Governor to brief the Opposition in confidence; I certainly intended to cast no aspersions and I do not think that I expressed any to the effect that doing so would be wrong. It is, as I say, entirely right and appropriate. Thirdly, I withdraw, of course, any implication that the hon. Member for Chichester (Mr. Tyrie) might have been involved in any deep-laid plot. My reference was focused on the issue of the requirement for confidentiality in the preparation of a complex package of this sort; it was not an attempt to link the hon. Gentleman with the issue.

Mr. Tyrie: I am very grateful for those remarks and I appreciate the hon. Gentleman’s alerting me earlier today of his intention to make that statement.

We are being asked to stump up an unprecedented sum to bail out the banks and shore up the financial system. I strongly support the main elements of the bail-out; I just regret that the Government did not get to it earlier. Judging by the thinness of the Chancellor’s first statement, which was clearly no more than a holding operation, it is likely that Ministers had not undertaken adequate contingency planning for bank recapitalisation over the last few weeks and months. Much of that work should have been done after the failure of Northern Rock. It should have been clear then that something further might be required. Such work should have been at an advanced stage by the time of the Lehman collapse. History will, of course, tell us what Ministers were doing and what was really said, done and commissioned during that period. I am sure that officials were hard on the case; the question is whether the Chancellor and the Prime Minister realised the gravity of the situation.

In my view, the bank recapitalisation plan should have come as soon as solvency risk grew sharply between the banks and they more or less completely stopped lending to one another. That was almost a month ago, and the delay may prove to have been very costly, not only in lost confidence in parts of the financial system, but in costs to the real economy.

What of the package that we are being asked to fund today? First, we need more information. The US Administration got out of the traps a few days later than us with their bank recapitalisation package, and they appear already to have provided more detail about their rescue than has our Treasury. My hon. Friend the Member for Wellingborough (Mr. Bone) alluded to this issue, and I have picked up information about the details of the package as much from Lloyds bank press releases as from the Government. From that, I learned about the terms of the preference shares, which my hon. Friend also mentioned. I agree with him that their terms are draconian. The coupon is 12 per cent. and it is not tax-deductible; nor can it be redeemed for five years. I shall not comment on whether I believe that that is right in the present context, as it would need a lot more information and thought before doing so, but it is certainly a matter that I would ask the Government urgently to review.

My general point is that Parliament and the informed public are not in a position to conduct the necessary form of scrutiny because the information is, in many cases, simply not available. I realise that it is difficult for the Treasury to put such information into the public domain on the hoof, as there is always the risk of being
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picked up for any mistakes in what is published. However, there is a case for getting on with it and getting it into the public domain as fast as possible, even if, in some cases, what is put out is work in progress. We also need to know more about the competition exemption. I strongly agree with what my hon. Friend the Member for Wellingborough said about that earlier. I now have grave doubts about the retention of a competition exemption for banks in which the Government have sizeable stakes.

I do not want to go on for too long, but I want to make a few remarks, which may perhaps collectively form a plea for a sense of perspective over what we have just been through. There are about half a dozen points to be made.

My first point is about the nature of prosperity. We need to keep our focus on the source of the prosperity that we have enjoyed. Over the last 25 years, we have been through, arguably, the greatest increase in welfare and freedom that the world has ever seen. Globalised capital markets played a crucial role in securing that prosperity, as, of course, did the collapse of socialist economics. It is extremely important that we do not lose sight of that in reacting to the crisis.

A second related point is that we really must not end up blaming all global financial instruments as somehow pernicious. Many of those instruments have not been responsible for the crisis; indeed, they helped to spread the risk and reduce systemic dangers. It would be an absolute disaster if, in response to the crisis, we tried to return to segmented global financial markets.

Thirdly, we must not draw the wrong conclusions from the fact that we face a sharp downturn and possibly, I fear, a recession. We will, of course, have a cyclical downturn and it could be large, but it was a big mistake to imagine that we could abolish the business cycle. I recall the Prime Minister saying that time and again when he was Chancellor about a decade ago. I was not present for Prime Minister’s Question Time earlier, but I gather that this issue was raised. The Prime Minister was charged with saying 180 times—in this House alone—that he would put an end to boom and bust. It is not just that he was wrong, but that saying it caused damage because it gave people, businesses and financial markets a false sense of security. That applied to millions of people who take their own individual financial decisions, who were encouraged to take on even greater risk than they would have done otherwise. The truth is that, despite the spilling of several centuries’ worth of ink on the subject, as far as we know at the moment the business cycle is ineradicable, and any attempt to set a policy to remove it is bound to fail.

My fourth point concerns regulation. There will be calls from all sides for more regulation, re-regulation and heavier regulation, but I feel that we must avoid a panic reaction. I was struck by what Congressman Oxley said when he came to London a couple of years ago. As was widely reported, including in the Financial Times, he said that the Sarbanes-Oxley package had been an overreaction, and that those responsible were now repenting parts of it at their leisure. That package probably did not reduce risk very much, and certainly did not reduce it in the way intended. What it did was transfer a good deal of listing to the United Kingdom and other markets around the world.

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I have two or three more points to make about regulation. There has certainly been a failure of transparency in the pricing of risk. This may appear to be a recondite issue, but accounting standards definitely need to be tightened. There has been far too much managerial discretion on the part of banks in regard to how to value their assets. We shall need to return to that subject on another occasion, as there is no point in elaborating on it now, and in any event it is not clear exactly what needs to be done; all that is clear is that we should not continue as we are.

Then there is the regulation imposed by the Financial Standards Authority in other ways. We must be extremely careful not to allow ourselves to be drawn into thinking that prodding the FSA to become a more vigorous policeman will necessarily afford us better protection from this type of risk. The FSA’s periodic investigations of firms are akin to compulsory risk management consultancy activity, and, like any consultant, its work is only as good as the information that is given to it. It always knows less about the companies that it investigates than the management of the companies themselves, and in any case the work that it does can easily become just a business cost: in other words, the consumer pays for it but gains very little protection. I make no specific recommendation, apart from that we should be very cautious about demanding far more of the FSA in terms of risk-based regulation of individual firms in response to this crisis.

I think there is a case for strengthening boards, especially those of financial companies, in a number of ways. For example, could the combined code be strengthened to trigger greater shareholder activism, particularly to secure the appointment of more truly independent-minded non-executive directors? I think there are far too many comfort-zone appointments of “non-execs”. It is partly their job to pick up the growth of this kind of risk on the balance sheet. We have all been appalled by a number of the financial instruments that have found their way into the asset base of banks. The sad truth is that many, perhaps in some cases all, of the directors on the boards of huge institutions who make the decisions have failed to ask the right questions about the content of instruments such as collateralised debt obligations and special purpose vehicles. It is very difficult for them to do their job, but we must have people who are prepared to ask tough questions of management about such instruments.

The Government have improved depositor protection, and I think that they were right to respond in the way in which they did. They were, I think, also right to be cautious about blanket protection for deposits, whatever their size, certainly at this stage in the development of what I hope will now become a containable crisis. If all risk is removed, customers will simply chase the highest yield, which creates a form of moral hazard. That is pernicious in the long term. Such a blanket commitment would also be extremely difficult to reverse should a future Government wish to take such action, as I think they probably would.

I want to say a little about the monitoring of systemic risk, which clearly failed in the run-up to this crisis. It is not just banks that missed what was on their balance sheets; the Government, and the structure of systemic risk management that they introduced, have also failed. The institutional arrangements that were established as
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a consequence of Bank of England independence were clearly seriously deficient. The tripartite committee was created as a residual body, as an afterthought after the decision to strip the Bank of England of its regulatory function had been taken.

How should we deal with the systemic risk issue? During the Committee stage of the Bill that became the Bank of England Act 1998, I observed that it was crucial for the financial markets and the wider public to see one person in charge and leading the response to a systemic crisis. The creation of the tripartite committee, however, meant the creation of two independent statutory bodies with their own vested interests to deploy, plus, of course, the Government. At the time of the Northern Rock crisis, we saw those institutions initially minding their own backs and guarding their turf, rather than working collectively to reach a common position. We have now arrived at a point at which we have clear leadership. It is belated—it has taken 14 months—but thank goodness we have it. I believe that the tripartite arrangements must be altered to leave one person ultimately and clearly in charge of systemic risk management, and in my view that person should be the Chancellor of the Exchequer, accountable to this place.

Let me end with a point that may seem out of place at the moment, but to which we shall all have to turn our attention in the months and years ahead as a consequence of the passing of this estimate and the banks’ partial nationalisation, as we are now told to call it. That means mentioning the word “privatisation”. A key job for what I hope and expect will be a Conservative Government in a few years’ time will be to get rid of these shareholdings: to offload them and privatise the banks. It is essential that that task is accomplished as quickly as is reasonably possible. If we do not take such action, the losers from the retention of these state-influenced banks will be customers, as a consequence of higher bank charges, and the whole economy, as a consequence of a less efficient banking sector than would otherwise exist.

Even as the Government put this package together, I very much hope that they are giving deep thought to how to unravel it in a systematic and intelligent way. They must have in mind all the time where we want to end up. We do not want to end up where we are as a result of the package; we want to end up somewhere very different.

We have narrowly avoided disaster in the last few days and weeks, but the fact that we have narrowly avoided it should not deflect our attention from the fact that we have been faced with a very serious risk indeed. We should, of course, support this rescue plan, but we are only in the foothills of learning the lessons that will flow from the events of the past few weeks and months. If I am to leave the House with one thought, it is that I am very confident that panic overreaction in the regulatory field, and in the other fields to which I have alluded, would be the wrong response.

2.29 pm

Mr. Charles Walker (Broxbourne) (Con): Thank you, Madam Deputy Speaker, for calling me to speak in this supplementary estimate debate. I had a good crack at this subject in yesterday afternoon’s debate on the Banking Bill, so I shall keep my remarks short and concise, which I am sure will come as a great relief to you.

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