The Permanent Secretary's explanation
8. The Committee called Sir Nick Macpherson, Permanent
Secretary to the Treasury and Accounting Officer to explain why
the indemnity had been concealed for so long. He first claimed,
in a letter to the Chairman, that his action had been "consistent
with the principles in Managing Public Money". We asked his
justification for this:
I think you will find, Mr Fallon, that in relation
to the role of the Accounting Officer there is a line which says
that the acid test is whether the Accounting Officer could justify
the proposed activity if asked to defend it, and I believe I can.[10]
I think you have to go back to the very exceptional
circumstances of October of last year. Over a period of days
there emerged a very considerable risk that the banking system
would collapse altogether. The previous year in relation to Northern
Rock emergency liquidity assistance had been offered but, you
will recall, leaked prematurely, thus triggering the run on Northern
Rock.[11]
Sir Nicholas claimed both that the indemnity had
to be kept secret to avoid triggering bank runs and that Parliament
had been informed about the scale of potential Government support
for the banks:
You will recall that the Chancellor came to Parliament,
or certainly made a statement to Parliament, on 8 October, I think,
which was before the guarantee supporting the ELA was given, which
was on 14 October, so the Chancellor had already informed Parliament
that the amount of guarantees we might give to the credit guarantee
scheme could reach £250 billion. The ELA in effect was subsumed
within that £250 billion, so that when, over the course of
November in the case of RBS and, I think, December in the case
of HBOS, those companies had managed to line up support from the
credit guarantee scheme, they no longer needed the emergency liquidity
assistance. In terms of the aggregate liabilities, we have always
been totally clear to Parliament about the magnitude.[12]
9. It was clear that the decision to conceal the
liability was taken by the Chancellor:
Sir Nicholas Macpherson: No, I did not advise concealment.
We advised the Chancellor on this issue.
Q7 Mr Fallon: What was your advice?
Sir Nicholas Macpherson: The advice was consistent
with notifying Parliament.
Q8 Mr Fallon: Did you advise the Chancellor to
notify Parliament?
Sir Nicholas Macpherson: Yes, as we would with all
contingent liabilities. The Chancellor, perfectly reasonably,
took the view that he did not want to disclose the support at
that time.
10. However, as Sir Nicholas himself pointed out,
Accounting Officers have the power to demand explicit instruction
if they consider a Minister is acting improperly. He did not consider
this to be the case.
As Accounting Officer I could have demanded a direction
on the issue but I thought, taking all the issues into account,
that was a perfectly reasonable decision for the Chancellor to
take and I did not think it right to demand a direction in this
case.[13]
…..I thought the Chancellor's decision was consistent
with the principles of Managing Public Money because the circumstances
were truly exceptional. I have mentioned already that the support
was consistent with the broader guarantees which had already been
notified to Parliament, so I did not feel that this was somehow
an additional sum of money because it was subsumed within the
money contained within the special liquidity scheme and the credit
guarantee scheme.[14]
11. Later in Sir Nicholas's evidence, a picture emerged
of decisions necessarily taken extremely quickly, in extreme circumstances:
you have to understand is that everything during
this period happened at an extraordinary pace. This advice was
put together in the course of about 45 minutes. We had that little
time. The decision was taken within an hour, I think, of the
advice being drafted.[15]
It was also clear that the Governor of the Bank of
England considered that secrecy was paramount, and that:
The Governor was clear that for emergency liquidity
assistance to be successful secrecy was of the utmost importance.
What you need to remember is that they started the ELA initially
without a Treasury guarantee. You should also bear in mind that
at its peak we guaranteed £18 billion of the £60 billion.
The Bank had £100 billion of quite good quality collateral
being offered for the £60 billion, so initially at least
there was a prospect that the Bank of England could provide the
assistance without a Treasury guarantee, so it was only a few
days after the ELA started that the guarantee was sought and given.[16]
However, Sir Nicholas was clear that the decision
as to whether or not to inform the Chairmen was one for the Government,
not the Bank.
12. One reason for Government reluctance to reveal
the liability to the Chairmen was that the Treasury clearly envisaged
that the two Chairmen would have to be advised by letter, as had
been the case in the past, and that this would inevitably compromise
the extreme secrecy needed:
the Chancellor of the Exchequer, and indeed the Treasury,
have the highest respect both for the Chairman of this Committee
and the Chairman of the PAC, but this was all about minimising
risk and it is in the nature of letters that there is a risk that
more than one person sees them and the decision was taken on that
basis.[17]
13. Since the Committee hearing the Chancellor of
the Exchequer has written to the Chairmen of this Committee and
the Committee of Public Accounts and proposed that if such exceptional
circumstances arise in future they should receive an oral briefing.
14. Sir Nicholas's
evidence was exceptionally frank, and is to be commended. Given
the events surrounding the failure of Northern Rock, the extreme
urgency of the situation, and the Bank of England's view that
"secrecy was of the utmost importance", we can understand
why the Chancellor decided that absolute secrecy was paramount,
and why Sir Nicholas considered that decision proper. Nonetheless,
in our view, the decision was overly influenced by the assumption
that disclosure of the liability would have to be in writing.
We welcome the Chancellor's proposal that if such extreme circumstances
arise in future the Chairmen should be briefed orally, and regret
that this was not done when the indemnity for Emergency Liquidity
Assistance was extended. In future, we expect Committee Chairmen
to be briefed properly, whatever the circumstances.
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