Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1800 - 1819)



  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 Rock?

  Mr Darling: We are protecting the depositors.

  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 changes.

  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 protection.

  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 August.

  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 yesterday—

  Mr Darling: I would not want you to inadvertently—

  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—

  Chairman: Okay.

  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?

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