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The third way is the one that the Government have adopted. They envisage the bank seeking new business but on a more prudent basis. On balance, I think that I favour that option, partly because I suspect that the taxpayer will get his money back only if Northern Rock can do profitable business on the basis of new business and partly because I have sympathy with the argument that Northern Rock is a significant regional institution, although I accept that that cannot be the main preoccupation. The route set out by noble Lord, Lord Lawson, would mean significant staff cuts very quickly and no prospect of any future. While I am not misty eyed about Northern Rock being the embodiment of the north-east, the bank deserves, under new management, a chance to go forward as a going concern. I believe that that is the option that the Government are pursuing.

Lord Forsyth of Drumlean: My Lords, I am not clear what the noble Lord is saying. On the one hand he is saying that the bank should operate at arm’s length on a commercial basis but not compete too hard. On the other hand he is saying that the Government should direct the levels of interest for deposit placers and the rest. Which is it? The noble Lord, Lord Newby, and his party are going to vote for the Bill. Surely we should have clarity about the kind of Northern Rock that the noble Lord sees operating as a nationalised concern and about the business plan.

Lord Newby: The bank will operate at arm’s length on issues such as the detail of interest rates and repossession policy. I am recommending that the Government give a general instruction to Ron Sandler to look closely at the existing rates and other practices of Northern Rock that were and are reckless. I am not suggesting that the Chancellor sits down with his calculator and tries to work out exactly what every individual interest rate should be.

Our attitude towards the Bill and the amendments before your Lordships’ House in general is that although we have supported and do support nationalisation, and despite the tight timetable, this House should exercise its normal function in submitting the Bill to detailed scrutiny and in making amendments where they are required. The Government have set aside the princely time of an hour in the House of Commons tomorrow to consider amendments from your Lordships’ House, so they clearly contemplate that there may be some. Indeed, I suspect that, unless the Government make quite a number of concessions, that will be the case.

Broadly speaking, we have either tabled amendments or will be supporting amendments tabled by the Conservatives that seek to strengthen the accountability of the Government and Northern Rock, as appropriate, to Parliament. Our amendments call for an immediate independent audit of Northern Rock so that we can

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get greater clarity of what we are taking on. We propose a regular report to Parliament on the progress that Northern Rock makes against its business plan. We are seeking an explicit provision that Northern Rock—and, indeed, any bank or building society covered by the Bill—should be managed in a prudent manner. We hope that other noble Lords will support these amendments. We also propose to support Conservative amendments that require the Treasury to lay before Parliament, in effect, the business plan of Northern Rock to bring it within the scope of the freedom of information legislation. We will also support amendments that require the OFT to report to Parliament on whether Northern Rock is operating in a competitive manner.

On the questions raised by the Delegated Powers and Regulatory Reform Committee, our initial view was that we would support the Government on the negative resolution procedure. However, having had a quick look at that view, I think that the basis on which the Government proposed it was not factually correct, so we may need to revise our opinion on that.

We contemplate supporting the Bill more in sorrow than in anger. We have been alarmed at some of the dealings of Northern Rock and the way in which the Government have attempted to introduce this legislation and some of its provisions. Tomorrow we will table amendments and vote for them unless the Government, in their wisdom, accept them in advance of our needing to do so.

5.21 pm

Lord Lang of Monkton: My Lords, nothing better characterises the drift, muddle and fudge of the Government’s economic and fiscal policy than this Bill. It is being rushed through both Houses as a panic measure after five months of dithering, during which the delay has done great damage to the high reputation of our financial services industry. This House—the upper House in our cherished bicameral parliamentary system—has endured a number of casual and ill-considered constitutional attacks in the past 10 years by a Government who get cross when they do not get their way. Even they have acknowledged in the past that our House does have importance as a revising Chamber. Yet this surprisingly complex and potentially wide-ranging Bill, shrouded as it is in secrecy and in unanswered questions, has been rushed through another place in all its stages in one day and we are expected to bow and send it back, preferably unamended, tomorrow.

My first question to the Minister is: why? Are the Government trying to convey an image of dynamic resolution and purpose? Or do they just want to get the issue off the agenda and hope that it will soon be forgotten? I fear that on both counts they will be sadly disappointed.

Of all the phrases used in recent days, the concept of “business as usual” and managing Northern Rock “at arm’s length” are the most inappropriate. The Government are nationalising it precisely because they want to control its future performance. Indeed, ownership imposes obligations. So, if they take ownership on behalf of taxpayers, they take on an

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obligation to pursue the taxpayers’ interests. “Business as usual” is impossible when that has happened and where the bank is uniquely protected by government guarantees; when more than £100 billion of taxpayers’ resources are tied up in it; and where shareholders will be litigating and other banks and EU regulators will be watching for any commercial move of any kind that might be seen to exploit its nationalised status and disadvantage its competitors. So it cannot compete; it will have to downsize; it will have to run down its mortgage book; and the Government want to reduce its exposure. In that situation, it seems to me that there can only be a fire sale of assets.

Perhaps the Minister will tell the House when he replies to the debate how the Government propose to present this commitment of taxpayers’ funds in the public accounts, as public expenditure roars above 40 per cent of GDP and the Prime Minister’s golden rules are broken again. Will they change the rules? Will they announce a new cycle? Will they treat the matter as an off-balance sheet item? Perhaps the Prime Minister, when he next goes to watch Raith Rovers, will take note of the fact that it is the players who move around the pitch and not the goalposts.

Nationalisation is not only wrong in principle, it is an unnatural solution in a commercial context such as this. It can be justified only in order to unwind as quickly as possible the truly massive commitment that the Chancellor has made on our behalf of more than £100 billion—more, by a large margin, than the total cost of every past nationalisation in our history, of steel, shipbuilding, coal, the motor industry and so on—and all for one not very large regional bank.

It is right, I believe, to try to protect the interests of depositors, but nationalisation can only be understood here as a political act. It may save some jobs, but even if half the jobs are saved, the cost of £36 million per job seems a little on the high side. Socialism may have been roundly defeated in the battle of ideas, but clearly the old instinct lingers on in the bloodstream of Labour—the atavistic desire to control, to intervene, to centralise, to direct, to take into public ownership by big, high-spending government. We now see the concept of nationalisation mutating. We see a reversal of past experience. Then they nationalised the core heavy industries and, in Anthony Crosland’s immortal words, made them as efficient as the Co-op. Now they set out to seize the commanding depths of the economy—temporarily, of course, like Mr Pitt’s income tax—and promise not to hold it in perpetuity for the workers but to return it soon, restored and reinvigorated, to the capitalist world of free enterprise. I find that all a little hard to believe and a little counterintuitive.

When disaster struck last autumn, the Government claimed that Northern Rock’s problems flowed from the American sub-prime mortgage crisis and the resultant credit crunch. There is some truth in that, but the underlying cause of the problem is, I submit, home-grown. It lies in the bloated housing market that the Government have encouraged for political reasons within the bloated macroeconomy that they have created—an economy floating on a toxic mixture of deficits and debt. With a budget deficit of 3 per cent of GDP and a current account deficit of nearly

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6 per cent at the top of the cycle and with no fiscal reserve, we are immensely vulnerable to any downturn. If public borrowing is now heading for £40 billion, the private debt has been encouraged to follow the public example. The savings ratio has plunged and the household sector is breaking borrowing records at more than 100 per cent of GDP. It is not just Northern Rock’s borrowing policy that got it into trouble but its lending policy as well. Though it may be the worst case, too many lenders have been encouraged to lend money to house buyers on too easy terms; 100 per cent mortgages, even 125 per cent mortgages, we are told. And on what multiple of earnings? Five times, seven times or even more. With self-certification, buy-to-let, equity withdrawal, everyone gets a coconut. The housing market is a central part of the overall danger that our economy now faces. Where have the watchdogs been while this has gone on? They were triangulated 10 years ago with responsibilities split three ways. Everyone gets a whistle so nobody blows a whistle.

Against that background, Northern Rock’s collapse was an accident waiting to happen, but where in the Treasury, if not in Government, has been the voice of authority and of sanity? Are they all so pulverised by a decade of political fudge and media spin that the fundamental principles of economic and fiscal integrity have been lost? In years to come, the history of the past few years will provide a textbook on how not to manage an economy as it approaches the top of a maturing economic cycle. It is in that context that we have to see the failure of Northern Rock. This Bill seeks to impose a political solution to part of a deep-rooted macroeconomic problem that should have been seen and tackled years ago. As such, it will fail and the blame will belong not in America but at Nos. 10 and 11 Downing Street.

5.28 pm

Lord Trimble: My Lords, the Minister, like the Prime Minister earlier today at Prime Minister’s Questions, reiterated that when the run started on Northern Rock last autumn the Government had to act to maintain stability, as if that somehow absolved them from all responsibility for the situation that had arisen. I think it is important, despite the understandable views expressed by the noble Lord, Lord Newby, to look back a little bit at the history of this.

At the time of the run, it was quite clear that there had been two failures. The first was the failure of the business model being pursued by Northern Rock itself. I think that is generally understood, and I do not want to dwell on it. The second was the failure of the regulatory structure that had been put in place by the Government—indeed, by Gordon Brown himself. That structure had failed to spot that a weak business model was being operated by Northern Rock.

The point was made earlier in this debate that we do not know the full story of what happened in the run-up to the crisis with regard to the one attempt at rescue that we know about, from Lloyds TSB. We do not know the full details of that, and the Government have not been frank about it. We do not know what other efforts were made, nor to what extent it was known by the regulators that there was a problem or

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indeed whether they took any other initiative. Those are all important questions that we ought to know about and about which the Government ought to have been frank. Had it been possible to head this problem off and arrange a rescue before the crash, that would have been highly preferable to the situation that has now arisen.

In criticising the regulatory model, I am not relying purely on hindsight. I would like to point out that last August we stated, in a paper entitled Freeing Britain to Compete:

That is a good analysis of what proceeded to happen only a short time thereafter, so it is not only with hindsight that we say that it was clearly a bad regulatory model. The simple fact is that from the time that Gordon Brown put the regulatory scheme in place until that summer, it had not faced any test. Last autumn was the first test of that regulatory structure, and it failed.

Last autumn was a long time ago, and we are still stuck with that failed structure. I know the Government are consulting on other measures, but is it really wise, in view of the dangers that exist in the present economic climate which the Government themselves have adverted to, for us to have just gone on drifting along since last September, thinking that we had plenty of time to consult and to bring forward provisions for a new regulatory structure? I do not think that is the case.

After the run, however, I suggest it was obvious that there had been another failure: that of Northern Rock itself. Whatever may be said about the bank’s asset base—and I will come back to that in a moment—it is clear that after the run there was no one seeking to buy. If there was a high-quality mortgage book of considerable value in the possession of Northern Rock, why was no one prepared to buy that valuable asset? The absence of buyers tends to point one towards the conclusion that there was not an asset of value to be bought. Two bids came in, which the Government spent months examining, but the less said about those two bidders, the better. It was obvious from the start that they offered a poor deal to the taxpayer, and that could have been sorted out very quickly. I note what my noble friend Lord Lawson has said with regard to the experience with Johnson Matthey Bank; that it was obvious to the Treasury within a matter of days that a decent bid was not forthcoming and so it acted. It was obvious to every commentator who looked at the bids coming forward that they were not of value to the taxpayer. One was surprised simply because it went on as long as it did.

My noble friend has dealt with the way that an attempt has been made to suggest that this problem

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was not home-grown and has occurred elsewhere. I noticed yesterday in the other place that Mr Dobson in his speech listed all the crises there had been elsewhere, such as Citigroup in the United States having a $24 billion problem regarding its sub-prime losses and Merrill Lynch losing $22 billion. He went through various French, German and Swiss companies, all of which had losses of billions of pounds. The interesting thing about all those cases in those four different countries is that in every case the company in question managed to refinance itself and managed to get itself into a position to continue business without a collapse and without a run. Uniquely of them all, we in the United Kingdom had a run on our bank, and now that failed business is about to be acquired by the Government.

I note what I thought were some very sensible comments in another place yesterday. The Minister will be glad to know I am quoting from a member of the Labour Party speaking yesterday, Mr Mark Todd. He said,

I would be quite happy to adopt those terms used by the Labour Member yesterday.

Then we have got the confusion created by this SIV called Granite. This was news to me and, I am sure, to most Members of the House. It came into the discussion, the first time I noticed any reference to it, in the debate in the other place yesterday. We have had this paper circulated very belatedly by the Government today. The first question one has to ask about Granite is: when did the Government know about it? If Granite was known about some time ago, why was it not mentioned?

There are questions about Granite itself. Like other Members, I have only had a chance over the past hour or so to look at this paper. I look at the technical note and I see that it says that Northern Rock has sold around half of its mortgage assets to Granite. Commentators tell us that it is the better half. Whichever half it is, better half or poor half, it is half of its assets—presumably half by value. It also says,

So the value of the mortgages that are transferred to Granite has already come in, presumably as cash, to Northern Rock. Those mortgages are owned by Granite and must, therefore, be available to Granite in order to meet the bonds that Granite is issuing. But, the technical note also goes on to say,

presumably “it” is Northern Rock—



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This is the answer to the question which my noble friend asked earlier in this debate. The assets of Granite are on Northern Rock’s balance sheet. But Northern Rock has already received full value for those mortgages. There is something here that does not add up. The word that leaps to my mind is Enron. I hope it is not appropriate in these circumstances, but I do hope that when we get to the wind-ups the Minister can proceed with this in some greater detail.

The Minister says it is going to be business as usual. There is talk of the bank being at arm’s length from government. I think that it is absolutely impossible for it to be business as usual. Business as usual for Northern Rock, up until now, has been the 125 per cent mortgages and the deposits being paid at 6.5 per cent at the top of the market. This is the failed business model which is still continuing. Obviously, we have to move away from this. We hope that business as usual does not mean the continuation of the failed business model. It must mean something else, but what is it going to be?

The question was asked repeatedly in the other place yesterday whether the bank will be built up or run down. If it going to be built up, will it be done on the back of subsidies from government? One hopes not. On that, one is left relying on the European Union to keep the Government honest. I am not very comfortable having to rely on the European Union, but on this particular issue I would have to say that it is probably the best assurance for keeping the Government’s virtue intact. But even if there is no subsidy, we have here a business that can now operate without fear of failure. It does not have to worry whether it is taking a risk: it is owned by the Government and it has the taxpayer behind it. That is bound to have an effect on how it approaches its business. I cannot see how it can, as has been said, operate as usual.

What should have happened? At the early stage, as happened in the United States and in euro land, more liquidity should have been made available to the markets, before the crisis struck at Northern Rock. We appear not to have done so. When the crisis struck and it became necessary to provide some assistance to maintain stability, it should have been made clear to Northern Rock that the help was being made available only to enable it to find alternative private sector money and, if it was not able to do so, that it would have to sell off the mortgages and run off its business book to meet the repayments. That is what should have happened, and it is what should happen if we have a problem of this nature again.

Part of the reason for referring back to the past is to make it clear that, as we can see in this case, if problems of this nature are not tackled immediately, they get worse. It is happening in this case and it is likely to continue to happen. The Government now feel that they have to take public ownership. But ever since this problem arose, neither the Prime Minister nor the Chancellor have given the impression, to me or to many others as well, that they have any real grasp of the situation or understanding of what they are dealing with. At every stage they have made the wrong call and they have ended up with what is

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the worst, or next to worst, possible situation. The Government are about to run a bank. They are the owners and they will have to take some responsibility for running it. One can only hope that they run it better than the other companies they have run, but I do not have much confidence about that.

5.42 pm

Lord Goodhart: My Lords, I am speaking in my capacity as chairman of the Delegated Powers Committee and only in that capacity. It is not normal practice for the chairman of the Delegated Powers Committee to speak in debates on matters on which the committee has reported, but the committee’s reports are usually published in time for Members of your Lordships' House to study them carefully before we get to the Committee stage of a Bill. That is not possible in this case. We received copies of the Bill and the Treasury memorandum yesterday. The committee met at 10.30 this morning. Our report was published a couple of hours ago and is now available in the Printed Paper Office, though very few noble Lords will have had time to look at it. I was therefore authorised by the committee to speak in order to inform your Lordships of our conclusions and our reasons for reaching them.


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