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 Lloyds of London. I remember it very well. One Lloyds 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
Mr. Newmark: There is one other point to make. People at Lloyds 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 foundI do not mean to be too political herewith the current Governments 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 Lloyds 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.
What did Lloyds 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, Lloyds separated the toxic assetsthe uncertain assetsfrom 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.
Lloyds 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 subsidiaryfor
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. Friends suggestion?
Sir Peter Viggers: I think that one needs to go further to identify and isolate the toxic assets. Drawing on the parallel of Lloyds 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 isolatedcarefully identified and cross-checked against other tainted assetsit 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 authoritiesthe Bank of England, the Treasury or the Financial Services Authorityhave 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. Friends solution is to try to separate off the bad assetseffectively creating a good bank and a bad bankbut 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.
Mr. Bone: I am grateful for the hon. Gentlemans 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 todays 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
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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|Prepared 5 November 2008