Sir
Peter Viggers: Indeed. My hon. Friend makes a very good
point. I recall being called in by the then Prime Minister Margaret
Thatcher, who told the assembled junior Ministers that we would be
faced with a number of complex situations. Quite often it was difficult
to understand the nature of the complexity of the issues that were
being put to us. I remember her saying with a very firm and direct
gaze, “Never do something you do not fully understand.”
That is exactly what happened in the secondary banking crisis. There
were people in senior positions in banks who did not fully understand
the nature of the complicated instruments that they were acquiring.
They saw those very clever hot-shot people dealing in these assets.
They saw that fees were involved. They saw that it was very profitable
and they allowed the deals to go through.
There is an
exact parallel here with Lloyd’s of London. I remember it very
well. One Lloyd’s underwriter would nod through risks that he
did not fully understand. In the trade he was known as the nodding
donkey. Anyone wanting to offload a risk could go to him and he would
agree because he was making a great deal of money out
of trading in assets that he did not fully understand. There is a close
parallel. I could go into considerable detail on this. It took up a
great deal of my time in the 1990s, but the parallels between the
Lloyd’s spiral then and the banking spiral in the last year or
two is very
close. Mr.
Newmark: There is one other point to make. People at
Lloyd’s felt that they could effectively pass the sardines
continually around and that everybody would keep making money. It is
analogous to what has gone on in the last 10 years and the theory that
it was the end of economic history; we had ended this era of boom and
bust and we could manage growth for ever. Perhaps this is the hubris
that we have found—I do not mean to be too political
here—with the current Government’s thinking that they
could control events and control cycles. But at the end of the day it
is difficult to control cycles. Therefore the Bill needs to address a
little bit more how we manage our way through difficult times,
particularly economic cycles. We have seen today that we have not ended
the era of boom and
bust.
Sir
Peter Viggers: I very much respect all the points that my
hon. Friend makes. He is one of the Members of Parliament who, in a
previous incarnation, dealt with very large amounts of money. He
understands large sums with lots of noughts on the end, which are
difficult to grasp if one has not been involved in banking and
international financing matters.
There are
close parallels between the Lloyd’s situation of the 1990s and
the banking situation that has developed in the last year or so. What
lessons can we learn? I have made the points before and it is a matter
of regret to me that despite the fact that I have talked to journalists
from the Financial Times, made speeches on the Floor of the
House and raised the issue with the Minister, the points that I am
about to make have not been fully understood and
comprehended.
11
am What
did Lloyd’s do? How did it face up to that very difficult
situation? Faced with a spiral of risks, which were not fully
understood, that had been undertaken by a range of bodies,
Lloyd’s separated the toxic assets—the uncertain
assets—from the viable, continuing business. That is what the
banks should be attempting. They should be carrying out a much more
scrupulous, careful and determined analysis of their assets and should
be separating out the viable, continuing business. All the banks and
building societies that we have been talking about have very sound
businesses and assets. The accountants and others need to identify the
parts that are definitely, provably sound and then separate them from
the assets that are not definitely, provably sound. Of course, not all
of those assets will be defective and useless; many will be valuable.
When I talk about toxic assets or doubtful assets, I am not talking
about worthless assets, but those with a value that cannot be
completely
proven. Lloyd’s
separated the uncertain assets and moved them into a new vehicle, which
was called Equitas. If we were to follow that plan in the current
banking situation, Smith bank Ltd would identify the proven valid
assets, which would stay in the parent company, but all the uncertain
assets would be relegated to a subsidiary—for
the sake of simplicity, let us call it Smith Toxic bank Ltd. Smith bank
Ltd owns Smith Toxic bank Ltd, which owns the uncertain assets. There
are two key points: first, it is crucial that new
money—taxpayers’ money, investors’ money and
shareholders’ money subscribed by way of rights issue or
preference shares—does not go into the old, mixed up Smith bank
Ltd, which includes toxic assets, but into the new Smith bank Ltd, the
parent company, which only has assets that are known to be
sound. One
does not invest new money in a body that has assets of uncertain value,
which is why I think that the Hank Paulson plan is fundamentally
flawed, although I am not claiming to know more about banking than
Mr. Paulson. It is flawed because it involved putting the
$700 billion of new money into mixed bodies that included the toxic or
uncertain value assets, rather than putting it into proven, sound top
companies. Mr.
Peter Bone (Wellingborough) (Con): My hon. Friend is
making a clear argument. The standard way that accountants would deal
with the matter would be to provide fully against what we have called
the doubtful, or toxic, assets. Those should have been written down and
established before any investment decisions were made. Would that not
have the same effect as my hon. Friend’s
suggestion?
Sir
Peter Viggers: I think that one needs to go further to
identify and isolate the toxic assets. Drawing on the parallel of
Lloyd’s of London, taking a top company and making allowances
and provisions against its assets does not have the same decisive and
incisive effect as separating off the assets. Identifying and isolating
toxic assets is a central feature of the way
ahead. Dr.
John Pugh (Southport) (LD): The hon. Gentleman puts
forward a therapy for many banking ills. Does he consider that the
procedure that he is mapping out would probably have been a better way
of dealing with Northern Rock in the early days, when some of the
sub-prime mortgages were held by Lehman Brothers and an agency of
Northern
Rock?
Sir
Peter Viggers: Indeed. My point has general application.
My central point is that new money should go into the purged body, so
that shareholders and taxpayers know that they are investing in a sound
body rather than a tainted or uncertain
one. There
is some good news here. My second point is that if the tainted assets
are identified and isolated—carefully identified and
cross-checked against other tainted assets—it will be found that
because the spiral has involved reinsurance or, in the case of CDOs in
banking, reinvestment, in a ring, all the banks that undertook that
insurance or investment made reservations against their investment,
because they too were uncertain about the value of the asset. When all
the tainted assets are pulled together and carefully cross-checked, the
bank that undertook the collateralised debt obligation and then sold it
on will be found to have made reservations against the CDO, as did the
second, third and fourth banks and so on, perhaps in a multiple ring.
There will have been a duplication of reserves in the spiral, and
therefore the risk and the potential loss will not be quite as great as
had been thought. That is the good news.
I urge that
there be much closer analysis and breakdown of risk, that investment go
into the purged top body and not into the mixed body, and that an
analysis of the toxic assets be undertaken, perhaps by a different
body. If Smith bank toxic assets and Jones bank toxic assets are pulled
together and carefully identified, the lesson of Equitas is that there
will be duplication and the risk will not be as great as originally
thought. That is exactly what the sage of Omaha has discovered; his
American company has invested in Equitas, demonstrating that the value
of the loss was not as great as it should have
been. I
have seen some references to the point that I am making. For instance,
last week a former Japanese Finance Minister made an important speech,
urging that there be closer analysis of the risks that banks have
undertaken and more careful identification of the toxicity of the
assets. I return to my central point, which is that I am not satisfied
that the authorities—the Bank of England, the Treasury or the
Financial Services Authority—have done enough to ensure that
banks undertake as scrupulous and detailed an analysis of their
prospective losses as they
should.
Mr.
Newmark: I agree that the Paulson plan was flawed, in that
it effectively asked taxpayers to stump up for all the bad assets. My
hon. Friend’s solution is to try to separate off the bad
assets—effectively creating a good bank and a bad
bank—but he will find that many assets defined as toxic are not
really. They are assets that are effectively under water compared with
when particular individuals took out loans. These houses still have a
value and over time these particular assets will, with inflation, rise
and no longer be toxic assets.
A weakness of
some of the solutions that have come up is that there is no solution to
deal with the front-end crisis, which is a super-decline in asset
values, almost to an extent that the values of houses are lower than
any rational market would say that they are. One needs to come up with
a solution that gives confidence to people who are borrowing and to the
housing market, so that over time many of these so-called toxic assets
effectively reflate their way out of their
toxicity.
Sir
Peter Viggers: Indeed. Using the word toxic is shorthand,
which is why I did expand and say uncertainty, because uncertainty
derives from not knowing how other people will value the assets. A book
of mortgages will have a high value if people are confident in property
prices but if they are not confident the value is doubtful and becomes
“toxic”. We need to restore confidence. If one is
drowning and wants to restore confidence, one has to get a foot on the
bottom of the swimming pool. It is no use just splashing around. We
have to find a firm, clear point of certainty, which in my opinion is
to have assets that are certified as valid and sound. That is where new
money should go, not into the mixed body.
I am grateful
to the Minister for his attention. I am concerned about this point. I
hope that more can be done to satisfy me that the point has been
grasped and that the Government are working in this
way.
Mr.
Bone: I am pleased to follow my hon. Friend the Member for
Gosport, who made an important case and highlighted the problems in
clauses that we shall be discussing.
My hon. Friend
described the problem of what we have seen in the banking sector as a
spiral. The accountants’ reaction to this is that all these
debts are toxic. It is an unfortunate word because it really means
doubtful value of assets. They might not be toxic. What has happened is
a collapse in the market for those assets. As a chartered accountant,
my reaction is to ask why we do not write those things down to their
lowest possible value. That is the problem. If they are written down to
where they are at the moment, there is a collapse in the asset base of
the individual banks, which then has to be responded to by stuffing in
capital through investments in shares and preference shares, which is
the way that this crisis has been handled. I am interested in the idea
of moving these debts out of the banks and putting them into separate
subsidiaries. That is an interesting proposal because it then produces
a good bank and a bad bank but the bad bank might not actually be a bad
bank. That is one solution.
Mr.
Mark Todd (South Derbyshire) (Lab): If the hon. Gentleman
has studied the Scandinavian banking crisis, he will know that the
establishment of the bad bank there did eventually deliver a rather
better outcome than had been anticipated because, as he says, they were
not assets without value; they were simply assets for which it was not
possible to determine an appropriate market value at that time, which
had led to substantial writedowns. So there is merit in a bad bank
option. 11.15
am
Mr.
Bone: I am grateful for the hon. Gentleman’s
intervention. I do think that we should be looking at that.
The other
solution is to take a more realistic value of the provision made
against the assets. Instead of writing them down significantly, they
should be written down to a realistic value, as we heard Angela Knight
argue in oral evidence. If that is done, the requirement for the
capital to be injected into the bank is by no means so great.
I am also
concerned that the Bill does not address the speed at which the
Government have put in, or propose to put in, extraordinary amounts of
money without really knowing the value of the banks. It is
extraordinary that banks that could make billions year after year can
overnight seem to become virtually worthless so that, without billions
of pounds of investment by the Government, they would sink. We have
already seen in today’s media that the proposed injection into
Lloyds bank of huge amounts of preference money by the Government is
now being said by Lloyds to be unnecessary because it will have repaid
it all within a year. I question whether we are looking at the real
problems or reacting to the crisis as we perceive it at the
moment.
Dr.
Pugh: I do not know whether the hon. Gentleman shares my
conceptual confusion. I listened carefully to what the hon. Member for
Gosport said about differentiating toxic and non-toxic assets and what
the hon. Member for Wellingborough said about how the toxicity of
assets could change. The hon. Member for Gosport then redefined toxic
and non-toxic in terms of certainty and uncertainty, but what is toxic
or non-toxic then itself appears to be uncertain. I wonder whether
we ought to continue to use the term “toxic”, given that
it is largely a metaphor and has no real resonance in economic
science.
Mr.
Bone: The hon. Gentleman makes my point. The word
“toxic” is trundled out in every news broadcast as though
it means something, but it does not mean anything. It is the actual
value of an asset that we cannot be sure of, and I think that we have
got the approach wrong on that. My hon. Friend the Member for Gosport
suggested a solution that really highlights the issue. The bad bank is
nowhere near as bad as it looks, because those assets have been
provided against time and again by different banks, so it is only
really the first set of debts, where the first loans are in doubt and
part of them will be valuable anyway, that needs to be provided
against. I am not sure that the spiral of debt, which has led to a
spiral of provision against the value, is necessarily the right way
forward.
Mr.
Newmark: My hon. Friend has made several excellent points,
and it might be instructive, not only for him, but for my hon. Friend
the Member for Gosport, and perhaps even for the Minister, to have a
look at a new document that has come out today from the Centre for
Policy Studies called “From Boom to Bust: a plain guide to the
causes and implications of the banking crisis” by Mr.
Howard Flight. Reading his analysis might be a helpful guide to the
Minister in coming up with some robust solutions to the current
crisis.
Mr.
Bone: I thank my hon. Friend for his intervention. I have
not had a chance to read that document, but I am sure it would be worth
reading, because Mr. Flight is a superb author.
In
conclusion, I feel that we should avoid using the word
“toxic” because it is misleading. We just need to look at
the basics of what a company is and what its value is. The banks cannot
have gone from being the soundest investment one could possibly have,
making billions of pounds each year, to having such colossal writedowns
overnight. That just does not make common
sense.
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