Examination of Witnesses (Questions 1800
THURSDAY 10 JANUARY 2008
MP, MR JOHN
Q1800 Mr Breed: But £26 billion
has been put in. The depositors are being protected, so who were
you protecting then by putting £26 billion into Northern
Mr Darling: We are protecting
Q1801 Mr Breed: I accept that, that
is the one side, but everybody else
Mr Darling: Because of the current
legislation, the government guarantee is the only way to do that
and again we will have proposals in the future, which I think
the Governor talked about, which will allow us to separate out
depositors' cash and then get it paid out as quickly as we can,
should this thing happen in the future, but the point of lender
of last resort facilities is to enable the company to continue,
and it is getting the breathing space it now needs to try and
find a solution.
Q1802 Mr Breed: In other words, not
to let it fail.
Mr Darling: Of course. The alternative
would have been to let it fail back in September and my judgment,
the judgment of the Governor of the Bank of England and the Chairman
of the Financial Services Authority was that, had we done that,
there would have been a risk of contagion into the rest of the
banking system and that was a risk that we were not prepared to
take. The problem we have always got is when people say, "Ah,
but it didn't happen". Well, I know that it did not happen
because we took the action that was necessary, and I would not
actually like to be the one that said, "Well, let's see what
happens", because, no matter how difficult things are with
Northern Rock, it would be rather more difficult to prove if I
was sitting here with rather more casualties on my hands.
Q1803 Mr Breed: What role, if any,
is the Treasury playing in next week's EGM with Northern Rock?
Mr Darling: Well, we are not.
Q1804 Mr Breed: You have provided
no information to the Board concerning the current lending?
Mr Darling: No, the EGM has been
called by certain shareholders and the Board is answerable to
its shareholders. We are in constant touch with the Board, as
you might imagine, given these present circumstances, and the
EGM is a matter for the shareholders.
Mr Kingman: Absolutely, and the
Board is in absolutely no doubt about where matters stand and
we talk to them all the time.
Q1805 Mr Breed: So, when the shareholders
turn up at the EGM, they will have nothing from the Treasury or
the Bank of England?
Mr Darling: We are not going to
the EGM, if that is what you are asking.
Q1806 Mr Dunne: The Governor, when
giving evidence to us in September, said that our system, meaning
the British system, for dealing with insolvency and public insurance
is markedly inferior to that of other countries. This was identified
in 2005 when the stress tests were undertaken.
Mr Darling: No, 2006.
Q1807 Mr Dunne: In 2005, and then
in 2006 when the crisis management exercise was undertaken, so
there have been two years' worth of advanced warning that the
system was not operating properly. What work was the Treasury
doing, admittedly prior to your appointment as Chancellor, but
during that period to put in place the sort of legislative arrangements
that you are now contemplating?
Mr Darling: Well, in 2006, as
you know, the stress tests were conducted, in the second half
of 2006, and they concluded at about the turn of the year 2006/07
when it was agreed that action needed to be taken and work was
put in place there. I may say that, even if the work was concluded
in short order, we still would not have had legislation until
this parliamentary session because it would have never been on
the statute book by the end of July, in other words, before Northern
Rock happened, but work was being carried out. As the Governor
said in his evidence and he was pressed on this point on 18 December,
he said that at the time that they were discussing these things,
people did not think there was a need or an urgency, a very pressing
urgent need to do this. In fact, he took some time to spell out
that he thought it was more important to get it right, to consult,
to get what would be complex legislation, and it will be complex
legislation, on the statute book, including amendments to the
insolvency law. I think anyone who has dabbled even in insolvency
law will know that it is an absolute minefield once you start
opening it up.
Q1808 Mr Dunne: I believe it was
minuted that it was urgent as far back as 2005, but we will let
that by. When were you firstly made aware of the need for legislative
change following your appointment to your current role?
Mr Darling: I would need to check
because, as you would expect, when you take over a new department,
the department briefs you on 101 different things, but it was
clear to me in September/October as I started to look at some
of the things that I could see were not right that we would need
to make changes and we would probably need to make legislative
Q1809 Mr Dunne: It was clearly apparent
following the Northern Rock crisis, but the point of my question
is to establish whether there was a team of people working within
the Treasury who were able to brief you in advance of Northern
Rock that there was a significant problem with our insolvency
Mr Darling: There was certainly
a team of people working on this, but what I could not be sure
about, and I would need to check because I do not want to give
you the wrong information, but I am not aware of, and certainly
there were no, proposals being put to me prior to the middle of
Q1810 Mr Dunne: But, Chancellor,
what it raises in my mind is the degree of experience and competence
within the Treasury over significant financial matters of this
order of magnitude.
Mr Darling: No, I disagree with
you. The people working in the Treasury are extremely skilled
and there is a lot of experience there. As the Governor said,
in 2006 it was identified that there were weaknesses, there were
things that needed to be done, and work streams were put in place
because this is complex. When you see our proposals when they
are published at the end of this month, there will be a lot of
people who will say, "Look, this is very complicated. You
need to have a lot of thought about this. You won't have got it
right first time", so that work was being carried out, but,
as the Governor himself said in December when he appeared before
you, at that time, simply because the present situation was not
an immediate contemplation, he said that he did not attach that
degree of urgency which, with the benefit of hindsight, others
are now demanding. Clive, who is responsible for this department,
may want to add a bit.
Mr Maxwell: We had a team of people
working on this and that has been a joint team involving the Treasury,
the Bank of England and the FSA. It has also involved legal expertise
tackling these issues since they have been identified.
Q1811 Mr Dunne: Identified when?
Mr Maxwell: Since late 2006 when
the principals discussed these sorts of issues.
Q1812 Mr Dunne: As we learned yesterday
when we were discussing the Capability Review of the Department,
there is a perceived weakness in the experience levels within
the Treasury and an acknowledged weakness within your ministerial
team and a lack of experience
Mr Darling: It does not say that
at all in the review.
Q1813 Mr Dunne: It was acknowledged
Mr Darling: I would not want you
Q1814 Mr Dunne:that none of
your ministerial colleagues had any experience of financial matters.
Of course they came in with a new team which you came in just
prior to this crisis which was not your responsibility because
of your recent appointment and I accept that.
Mr Darling: Thank you very much!
Q1815 Mr Dunne: Could I just pick
up some comments raised in earlier questions. In extending the
guarantee in December, and I believe it was the single largest
underwriting by the Government of any activity in the private
or public sector, you did so on a day when the House of Commons
was still sitting and you chose not to make a statement to the
House that day. Could you explain why?
Mr Darling: I made a written statement.
I do not always do oral statements. You are right, it was a significant
extension, but it was a logical extension of the policy that I
have been pursuing since this happened back in October to ensure
that the company was able to carry on and that it had the breathing
space while we try and find a solution in what are very difficult
circumstances. As I said in reply to earlier questions, these
are not normal times in the markets. At other times, it might
have been relatively easy to say, "Look, the Board has failed
in this", and the company can be sold to somebody who can
make a go of it, but these are difficult times. It is patently
obvious that people are not buying and selling in a way that they
would do at other times.
Q1816 Mr Dunne: You have said today
that it remains your intention that taxpayers will not lose money
out of the extension of guarantees to Northern Rock. At what level
of loss would you consider it appropriate to resign?
Mr Darling: I said to you that
I want to ensure that we do get our money back, and that remains
our policy. Beyond that I am not proposing to get into, frankly.
Q1817 Mr Dunne: So your position
is on the line if we do not get any money?
Mr Darling: My position is clearly
set out, as I have said on several occasions to the Committee.
Q1818 Chairman: Presumably your position
is on the line every day, Chancellor, is it not?
Mr Darling: Being Chancellor has
got many, many advantages, but also, you know
Q1819 Mr Mudie: One of the things
I have certainly found, and I believe it is more widely shared,
is the reason why the Bank of England did not intervene in a more
pragmatic, dynamic way throughout August. I was pretty rough on
the Governor here on this area. His excuse, his explanation, was
there were four things that stopped him acting to carry out a
covert action and get a market solution. I have got the verbatim
record in front of me. One of those was MAD?
Mr Darling: The Market Abuse Directive?