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Finally, let me reassure the House about how the financing of Northern Rock will operate. At present, Northern Rock is subject to the same interest rate premium arrangements and is paying for government guarantees in precisely the same way as it paid for those facilities in the private sector. It has not had overnight access to a different source of financing. In future, financing arrangements and fee arrangements for guarantees will need to be put in place that are consistent with the business plan and the requirements of the European Union. It is too early to speculate sensibly on what those may be but, clearly, we expect to be able to demonstrate both to competitors and to the European Union that the bank is operating in a way that does not distort the market.

After 26 minutes, I am now about to fulfil the normal obligations of Second Reading by going through clause by clause what the Bill entails, but such is the insight of the House and knowledge about these matters that some of that may be otiose. Suffice it to say that I want to reinforce the points I made at the beginning. The Bill is a general Bill, but it is brought in as an emergency measure to deal with the particular circumstances of Northern Rock. The provisions regarding state powers have a limited duration: they are subject to a sunset clause of 12 months. I also emphasise to the House that on Monday night, the Government placed in the House drafts of two orders that we propose to make quickly after the passing of the Bill. The first provides for Northern Rock to be taken into public ownership; the other provides a scheme to determine the amount of compensation, if any, that is payable by the Treasury to those whose shares were transferred or whose rights were extinguished by the transfer order.

Viscount Bledisloe: My Lords, the noble Lord referred, albeit fleetingly, to the sunset clause. Why should not the period of the sunset clause be a great deal shorter—say, one or two months? Is he worried that if it was so shortened, the fact that this is in reality a Hybrid Bill dressed up as a Public Bill would become too apparent?

Lord Davies of Oldham: No, my Lords, it is not that. As I said as a background to the Bill, we intend to introduce legislation that will produce reform for the banking and building society sectors and all deposit-takers. It will take us some months to do that. We are working on the proposals; they will of course be put before this House and the other place in due course. We cannot guarantee to have that as an Act of Parliament in the short term. In the mean time, such is the general financial situation and all noble Lords will recognise the strains and stresses that are happening across the international financial community and the extent to which other countries are facing problems with regard to institutions in great difficulty that it is

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necessary for the Government to have legislation in place that enables us to act appropriately and rightly when that is a threat to the financial system and the interests of the nation. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(Lord Davies of Oldham.)

4.49 pm

Lord Lawson of Blaby: My Lords, the whole House has the greatest sympathy for the Minister for the manifest embarrassment that the shambles of this Bill has landed him in. Nevertheless, I must say at the beginning that it is deplorable that the very important issue of Granite, which is an offshore securitisation vehicle that holds the better half of the Northern Rock assets and which is not part of the nationalisation process at all, has many complicated and questionable aspects. Although this was raised in another place in yesterday’s debate, so we should have been fully informed about it this morning—well in time for this debate—we did not receive the document until the debate had already begun and I have not had the opportunity to read it and study it fully. It is not acceptable. When he winds up, I hope that the Minister will be able to give the House a fuller statement of the position.

I see that the Chancellor states in his letter:

That is not enough. We need an assurance that no further mortgage assets will be transferred to Granite henceforth and that that will not cause any legal complications for the process that we are debating.

The best thing I can say about the Bill is that it is only the second worst solution to the problem with which the Government have been grappling. The worst would clearly have been to have given public subsidies, however hidden, to Mr Branson or any of the other bidders with whom they were flirting and whom they desperately wished to get to the altar. At least he has not done that.

I speak with some experience. I think I am the only person taking part in this debate who has had experience, as Chancellor of the Exchequer, of dealing with a bank failure. That was the case of Johnson Matthey Bankers in 1984, which, I may say, was handled slightly better. Of course it was a simpler matter but it was of sufficient gravity for the Bank of England to consider that it posed a systemic threat, which is why something had to be done. After a few days of attempting to get a private sector rescue it was clear that a genuine private sector rescue was not possible and I authorised the Bank of England—the authorities, as we used to call it in those days—to take it over there and then. The Bank of England did so to run Johnson Matthey down in an orderly manner and to clear up the mess, which was satisfactorily done.

One of the curious things was that the word “nationalisation” was never once voiced at that time: not in the House of Commons, not here, so far as I am aware, and not in the media. There were two

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reasons for that: first, it was all done so swiftly, and, secondly, there is a great distinction between the act of the state taking over a failed bank in order to run it down in an orderly way and the state running a continuing business pretending that it is a commercial business, in competition with genuine commercial businesses. That is the great distinction.

Lord Eatwell: My Lords, will the noble Lord confirm that, in the case of Johnson Matthey, there was but one shareholder; there were no retail deposits; and, when the bank was finally wound up, there was a loss of many millions of pounds to the public purse?

Lord Lawson of Blaby: My Lords, I explained that that case was simpler. In fact, however, there was no loss to the public purse whatever. Not one penny was lost to the public purse as a result of the Johnson Matthey operation. This is what should be done on this occasion.

I am sorry to have to say this, but there is absolutely no public interest whatever in perpetuating the existence of the Northern Rock bank. It is not as though we in this country are short of mortgage-lending institutions. It is not as though there is any strategic national interest in maintaining one more mortgage-lending institution. There are, however, grave risks in keeping it going. There is greater exposure of the taxpayer, there is the problem of unfair competition, and there is the continuing reputational difficulty which the United Kingdom has suffered as a result of perpetuating the existence of this failed bank. Clearly the Government should be saying, “This bank will undertake no new business. The existing mortgage book will be managed, and when the financial markets improve in time, as they will, the loan book can be sold off piecemeal at a proper price and in an orderly way to private sector buyers”. That is what should be done. Far from protecting the taxpayer, as the Government are pretending they are doing, they are causing great risk to the taxpayer.

Why are the Government doing this very foolish thing? I am afraid that it is difficult to think of any explanation other than the political one: that the Government are sensitive about feelings in the north-east. It is right to be sensitive about feelings in the north-east, but it is not right that these feelings—these rather grubby political feelings, if I may say so in the politest possible way—should over-ride all the other considerations about how the operation following a bank failure should be conducted.

Incidentally, I see from the Chancellor’s letter, which I have only just read—I think that the Minister said this in his opening remarks—that,

I shall make just two observations about that. First, the Financial Services Authority’s record in this matter does not engender great respect and belief. Secondly, even if that is so at the present time, it is well known that if there were to be any further decline in the housing market, Northern Rock would be at greater risk than any other bank or lending institution. The Minister’s complacency is therefore unwarranted.

Let us look to the future. How will we best avoid this sort of shambles, which has been extremely damaging to the United Kingdom as a financial

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centre? We clearly need to strengthen banking supervision. That is what I sought to do, as the noble Lord, Lord Eatwell, will remember, in the Banking Act 1987 following the Johnson Matthey debacle. I reflected long and hard and brought forward that Act, which considerably strengthened banking supervision.

What has happened since then? This Government, notably in the person of the then Chancellor of the Exchequer, Mr Gordon Brown, have successively weakened banking supervision in this country. The first thing he did was to take the responsibility for banking supervision from the Bank of England and give it to the Financial Services Authority. I suppose he must have thought that financial regulation and bank supervision are the same. They could not be more different. That has been a disaster. We know now—it has been established—that the FSA was asleep on the job; moreover—certainly until a few days ago—if you go to the Financial Services Authority’s website and click on “What we do”, you will see not a single mention of banking supervision. It is scarcely aware that it is doing it. It is certainly very low down its priorities. That is not the way to enhance banking supervision.

In addition, in the 1987 Act, because banking supervision needed to be strengthened, I set up the Board of Banking Supervision, statutorily, and imposed it on the Bank of England. Initially, the Bank of England was not terribly happy about that, but the noble Lord, Lord Kingsdown, who was the Governor of the Bank of England at the time, accepted that banking supervision needed to be enhanced and that it would be helped by the injection of real expertise. When I set up the Board of Banking Supervision, it was chaired by the governor and had two other senior Bank of England representatives on it. But I also put on it the most experienced, most respected and most market-savvy former bankers—from both commercial and investment banking, that I could find—and they did a very good job.

What did Mr Brown do about the Board of Banking Supervision? He did two things. In 1998, he removed the Governor of the Bank of England and the other Bank of England representatives, which did not seem to be very sensible. But that was not enough for him. In 2001, he abolished the Board of Banking Supervision altogether. That is not how to have effective banking supervision in this country. This Government have set up more boards, committees and commissions on this, that and the other than any previous Government. It has abolished just one board—the Board of Banking Supervision. No wonder we are in the mess that we are in now.

The reputation of this country as a financial centre has been gravely damaged by this situation, which the Minister would do well to admit. Perhaps I may put two questions to him, and I hope that he will pay attention to this. First, what were the auditors of Northern Rock up to? After all, it is about to be owned by we the people and, very shortly, we will have a right to know what the auditors were up to. Did the auditors warn Northern Rock of the irresponsible policy and irresponsible business strategy that it was pursuing? Did they warn Northern Rock that it should

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at least—if it was to be funded 80 per cent from the wholesale markets—insure that risk, as Countrywide did in the United States? Did the board reject that?

Because I was very concerned about auditors and regulators, in the 1987 Act, I gave auditors an indemnification from any claim for damages if they gave information to the bank supervisors which the supervisors required. Did that happen? There would have been no problem, because I had given them that indemnity. Did they do that? If the auditors did not do that, were they negligent? If they were negligent, perhaps they should be sued. In the case of Johnson Matthey, the Bank of England sued their auditors for a substantial sum of money and won. Perhaps the taxpayer could get at least a little bit back that way. I would like to know what the Minister has to say about that.

My second and final question concerns the shareholders. Will the Minister give an undertaking—despite what he says, it is not at all clear—that the assets will prove sufficient to allow the taxpayer to get his or her money back? Whatever independent valuation is put on the shares now, will he give a firm undertaking that the shareholders, who must be at the end of the queue, will not receive a penny until the taxpayers have received everything due to them? If not, that would be the greatest imaginable scandal.

The reputation of the financial services sector, this country’s biggest industry, has been gravely damaged by what has been done, but it is so strong that its reputation will recover. The Government’s reputation has also suffered gravely; I do not believe that it will recover.

5.05 pm

Lord Newby: My Lords, I sometimes sense, when listening to debates in your Lordships’ House, that noble Lords have had so long to prepare their speeches that, by the time those speeches come to be delivered, they have lost some of their freshness. There is no danger of overpreparedness in our speeches today.

I suspect that there are a number of things on which most, if not all, of us agree. First, Northern Rock’s management was increasingly reckless and its policies led directly to the bank’s downfall. Secondly, the FSA was complacent and dilatory in the first half of 2007 in the way in which it attempted to regulate Northern Rock. Thirdly, when the storm broke, the tripartite system proved incapable of acting quickly and decisively enough. Fourthly, the process of finding a buyer and of arriving at a resolution of the Northern Rock crisis was too long drawn out and the initial process was unsuccessful. Where we clearly disagree is over whether—and, if so, when—Northern Rock should have been nationalised. However, the die on this is now cast. We should spend much of today discussing not the history but the future of the bank.

Noble Lords know that on these Benches we have been advocating nationalisation for over three months. Why? Not for any ideological reasons. We have done so because we believed that it was inevitable and the least worst of a number of unattractive options. I am sure that a number of noble Lords will rehearse this afternoon the argument in principle against any form

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of nationalisation on ideological grounds. It is difficult to overstate the difference between the case for this nationalisation and the ideological arguments advanced for nationalisation a generation ago. However, a Northern Rock small shareholder told me yesterday that he had been called by an old left-wing friend, who had said triumphantly, “I have always been in favour of nationalising the 200 major monopolies—only 199 to go”. I suspect that he will have a long wait before he makes another call.

Until last night, I thought that the key issue that we would be exploring today would be exactly what nationalisation would mean to Northern Rock. What has become clear in the discussions that we have already had, however, is that there is a prior question: what is the Northern Rock that is being nationalised? This is what the discussion about Granite is all about. I am grateful to the Government for having written to my colleague Vince Cable and for letting me have the letter, albeit rather belatedly. For noble Lords who have not had a copy of the letter, the noble Lord, Lord Davies, quoted extensively from it and the technical note in his introductory speech. The letter says little in addition to that, except for one or two points, which I will come to in a second.

It is worth repeating, or attempting to clarify, exactly what Granite does. Northern Rock raised much of the finance that it needed to expand and issue its mortgages through the Granite procedure. More than £40 billion was raised in this way. That £40 billion was consolidated on to the Northern Rock books. I have here the annual accounts for 2005-06, which show that £40.225 billion of Granite securitisation is on the books of Northern Rock, so it cannot be wished away as though it has no relevance to the asset base of Northern Rock. However, as has been made clear, the Granite companies are not legally part of Northern Rock. They are owned by a charitable trust established by Northern Rock for the supposed but not actual benefit of the Down’s Syndrome North East Association (UK) and any other charities that the company could select. The Government’s technical note makes it clear that:

My question for the Minister is this: is the Down’s Syndrome North East Association aware that it has such a leading role in this drama and did it ever occur to Northern Rock, as it was making a substantial amount of money by using the name of this very small charity, to make any payments to it? If so, do the Government think that that can be justified? Finally, on the charity, is the Minister aware of the position taken by the Charity Commission on the names of charities being taken, as far as I can see, almost completely in vain by commercial entities in order to make significantly greater profits than if the charities were not involved?

It is clear that Northern Rock considered that it controlled the Granite companies, even though they were legally distinct. It included them in its audited accounts, which was extremely misleading; it claimed as its own assets that in effect it did not have. In doing so, it represented that some of its best mortgages were

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available for it to use to grant security when they already belonged to a separate legal entity, with the security on them already being wholly pledged to other people. The figures that have been used in many of the debates on Northern Rock have assumed that the full assets listed in the balance sheet were at the disposal of Northern Rock, but we know that almost half of them were not and, worse, they were the best half.

Can the Minister tell us what the Government now intend to do in respect of the Granite group of companies? One logical step would be to bring the Granite entities into the ownership and under the explicit control of Northern Rock over a period of time because only then would the benefit of those assets become available to the taxpayer. Can he tell us whether that can be done and, if so, over what timescale it might technically be possible to achieve? Have the Government asked Mr Sandler to follow such a course of action? The Granite situation is a new issue and has led to a lot of misleading comment about the true status of Northern Rock. It is also something that the Government have yet to get to grips with.

The key question beyond that is what Northern Rock is going to look like and how it is going to behave. There are a number of options. One that I suspect we can all agree on is that Northern Rock should not attempt to carry on in the way that it has in the past. We on these Benches have repeated almost to the point of nausea the issue of together mortgages, under which people can borrow 125 per cent of the value of the house against which they are getting a mortgage. It was always claimed by supporters of Northern Rock that lots of other people did this. I was pleased that yesterday Alliance & Leicester, which was doing something similar, announced that it would stop. I hope very much that Northern Rock will also stop and that, if Ron Sandler has not already been told this, the Government will now issue that instruction.

Other problems that arise with the current practices of Northern Rock are exemplified in a letter published in today’s Independent under the heading, “The wonderful world of Northern Rock”. I hope that noble Lords will not mind if I read this brief letter:

Have the Government issued instructions on that kind of practice, which Northern Rock has been and is still, at least until today, undertaking? We can agree that that kind of reckless activity is unacceptable.

The other end of the spectrum of how we might deal with Northern Rock was set out by the noble Lord, Lord Lawson. You would stop the bank taking

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any new business and run it down over a period. That route has a number of attractions. It is clearly the easiest in some ways and it limits risk in a number of others. Obviously, it avoids any possibility of falling foul of EU and competition legislation. It is quite a tempting offer.


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