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However, the regulatory framework that accompanied the independence of the Bank of England also introduced the now infamous tripartite system of the Bank, the FSA and the Treasury. When times were good, the tripartite system was a happy merry-go-round that seemed to work fantastically well. As we have now seen, when times were bad and pressure was placed on the system, it became a bitter blame-go-round. The lines of responsibility, accountability and authority all became and remain blurred.

The Bank of England is widely respected around the world. It has a proud and historic reputation for authority, prudence and capability and it has had many outstanding individuals, including the current governor, Mervyn King, serving as its governors. Look at what has happened. In the Northern Rock crisis, under the new regulatory system the Governor of the Bank of England is fighting with his hands tied

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behind his back and, at times, blindfolded. In the United States, on the other hand, the Chairman of the Federal Reserve has in a crisis the advantage of being both the lender of last resort and the regulator. In the sub-prime crisis, the Fed was able to act swiftly to inject liquidity into the market and drastically reduce interest rates. In the case of the Federal Reserve, the right hand knew what the left hand was doing. In the UK, on the other hand, a month passed between the FSA’s telephone call to the governor alerting him to the serious problems that the credit crunch would have on banks such as Northern Rock and the decision to inject £10 billion into the money markets.

I genuinely believe that this Government have made great efforts to create an environment where business can prosper. Britain is one of the most open economies in the world and we are respected worldwide for our principles-based regulatory system. However, the once warm relationship that the Government have had with business has now definitely cooled. The Government have come under criticism for proposals that appear not to have been fully or clearly thought through. To give a few examples of what has happened in less than 12 months, I refer to the increase in corporation tax for small businesses; the proposal to almost double capital gains tax by removing taper relief, which was a wonderful incentive encouraging investment in enterprise and entrepreneurship; and, more recently, the uproar in the business community from all quarters surrounding the proposal to tax non-domiciles. Is the tripartite system of banking, governance, supervision and regulation yet another example of a policy not fully thought through? Did the Government truly and fully consider how the system would operate in a crisis?

Today, we have been presented with a Hobson’s choice. It is a situation that no one wanted, but we are being forced to rush through a Bill that will give the Government the power to nationalise Northern Rock. This crisis demands far more than this Bill. I urge the Government to continue with their plans and completely to revamp the regulation, supervision and governance of our banking system to enable it to be proactive, reactive and rapid. The Government will also have to establish clear lines of responsibility, accountability and authority.

The eyes of the world are on us. At stake is more than the reputation of a Government or the future of a bank. At stake, as we have heard, is the reputation of the United Kingdom. At stake is our position as the leading financial centre of the world.

6.18 pm

Lord Forsyth of Drumlean: My Lords, by this stage in the evening, most of the points that one wants to make have already been made, but perhaps I can make one point that has not been made, apart from by my noble friend Lord Lawson, which is to say how much sympathy I have for the Minister, the noble Lord, Lord Davies, for having to deal with the Bill. He truly is between a rock and a hard place.

Rather like the noble Lord, Lord Bilimoria, I feel that we have Hobson's choice. The Government having rejected the initial Lloyds-TSB bid and the

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Chancellor having gone on the “Today” programme and announced that the depositors’ money would be guaranteed by the Government, from then on it was inevitable that the Government would have to take control from the shareholders in some form.

What I do not understand is the timing. I do not understand why it is necessary to deal with all this legislation in two days. I should be very grateful if the Minister could explain that. What is the urgency? Why, as my noble friend said, if we have such complex matters to discuss, can we not have time to do so? Why is it necessary to have all this done by next Tuesday? I do not understand it. What has been going on for the past five months? I know that investment bankers are expensive but I read that £100 million of our money is being spent on advice. We are spending £100 million on advice not just for Northern Rock and the Government but apparently we are paying for the advice for Mr Branson and the other bidders, which is outrageous. Speaking as an investment banker, we normally operate on the basis that if the deal is not done, one does not receive one’s fee. No deal has been done here, so why is all that money being paid out and what was the impact of that advice? We have had five months of dithering and delay.

I should like to ask the Minister a number of questions. I hope that he will deal with them in the wind-up or that we can obtain some answers before tomorrow, because I would not wish to have to repeat them or to make difficulties in Committee. We are entitled to answers to these simple questions. The Bill, which does not mention Northern Rock by name, has wide-ranging powers, as the noble Lord, Lord Goodhart, has indicated, and we are told that its purpose is simply to enable the Government to acquire Northern Rock without getting into hybridity difficulties. Normally if we are buying something we want to know the price, so how much are we going to pay for the Northern Rock shares? What is going to be the Government’s position on the compensation for shareholders?

If we do not know the price, it is a strange process to start on. I understand that, but what are we getting for our money? We have been given no indication of the nature of the assets. We have had concern about the special purpose vehicle in Granite and we have no idea what the liabilities are. In answers to Questions and throughout the course of the past five or six months the Minister has repeatedly told us that the loan book is sound and good. How does he know that? Have his advisers done due diligence? Does he have that information? Could we have it as we have paid all this money for this advice? I wonder about the quality of the loan book. I was brought up on the principle of high risk, high reward. If someone is paying high interest it is probably higher risk; and here we are dealing with a bank that was paying the highest interest to depositors and charging among the lowest interest rates to borrowers and had the highest debt to equity mortgages. It is an open question as to whether the loan book is as sound as is suggested.

Why do we not have a business plan? What have the advisers been doing for the past five months? I

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read in the papers that Goldman Sachs advised the Government five months ago that they would have to nationalise the bank. Is that correct? Did they receive that advice? If that advice was being given, why has no one done the work? I understand that the European Union has to have information and a business plan by 17 March, which is soon. If the Government will be in a position to produce the business plan in three weeks, why can we not have the business plan now? Why have the Chancellor, the Minister and every one else refused to answer the questions that have been repeatedly asked: what is the bank, under government ownership—under state control— going to do? Is it going to be business as usual, as the new chairman says, is it going to be run down, or is it something in between? How is that going to work? Surely it will have to be in the business plan, and surely before the business plan is written we need to know the answer. Why are we not receiving an answer?

Given the need for information, what is the purpose of uniquely making this public enterprise, as it will be, exempt from the provisions of the Freedom of Information Act? It does not apply to the Post Office or to National Savings & Investments or to any other organisation. What are the Government trying to hide by placing the provision in the Bill?

There was no mention in the other place about what went on in the summer with Lloyds-TSB, as I said when the Minister kindly gave way to me. We are entitled to know as £100 million of our money is on the line because the Government made a mistake. Is it true that Lloyds-TSB was prepared to take over Northern Rock and that it asked for a facility of £30 billion over two years to be provided by the Bank of England at commercial rates of interest? It is true that that facility was intended as a backstop facility in case Lloyds were unable to provide its own liquidity? Is it true that the response from the Bank of England and the Treasury was that they were not prepared to provide that facility because the loan book was not considered sufficient security and that they demanded gilts as security?

If it is true, why have the Government been telling the country that the loan book is a sound basis on which our money could be provided? I understand that the initial response from the Government was that the loan book would not be sufficient security and then they changed their position. They argued that Lloyds-TSB would have to pay a penalty rate of interest. All of that information has been reported in the press and bandied around the City and we have heard nothing from the Government about the facts. We are entitled to know what the facts are. If Lloyds-TSB was prepared to pay a commercial rate of interest, why were the Government suggesting that there would have to be a penalty rate? Is it because they felt that it would be seen to be giving an unfair advantage to one bank over the others? Compared to what is proposed now, that is derisory. While that was going on, if the Bank of England, the Government and the Treasury were taking that position, what was happening in the EU? The European Central Bank opened the window and was providing liquidity to

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any bank that wanted any amount of money because it saw the necessity to do so in the crisis.

I have to ask the Minister: did the Chancellor drop the ball in the summer? Why did the Government not take the opportunity; or was it that the Prime Minister was planning an election and did not want anything to interfere with his plans in that respect? Why was it allowed to fall away? The effect of allowing the deal to fall away, as the Treasury knew full well, was inevitably that there would be a run on the bank and there would be the problems that we have had; that Northern Rock’s good brand was trashed and the opportunities to move forward were limited. Here we are today.

I am not going to repeat the points that have been made about the tripartite structure. When the noble Lord, Lord Bilimoria, says that the Bank of England was given independence, I would say not at all. As we have seen, the Bank of England was not given independence; it was given the right to set the interest rate. Even now, the Government are seeking to change the criteria, as inflation comes back into our system. I agree with the noble Lord that the tripartite structure has failed abysmally. It is clear that no one was in charge and that the Chancellor either refused to take a grip or was not allowed to take a grip by a Prime Minister who was putting his party political interests ahead of the taxpayer’s interests.

The Bill contains extraordinary powers, which apply to any financial deposit-taking institution. The Government are asking us to give those powers to the same people who dropped the catch in the summer and have given us five months of dithering and delay and great uncertainty. I certainly will not be voting for it.

6.28 pm

Earl Ferrers: My Lords, whenever we have controversial Bills such as this there is always some poor blighter in the middle who is catching it in the neck. Today it is the noble Lord the Captain of the Queen’s Bodyguard. Like my noble friend Lord Forsyth, I feel sorry for him. I am sure that all your Lordships will feel a great deal of sympathy because it must be the noble Lord’s saddest day. He is introducing a Bill for the nationalisation of a bank. That has never been done before: no bank has been nationalised in England before. It is a bad thing that that should happen: not even the Labour Party nationalised a bank.

One remembers the late 1970s. The question then was: what will the Labour Government nationalise next? The Minister may be too young to remember those days, but one wondered whether it would be the banks, the insurance companies, or the chemical industry? That put the frighteners on the electorate to such a degree that the Labour Party went into opposition for the next 18 months.

Noble Lords: Eighteen years!

Earl Ferrers: Well, my Lords, we have to give them a little help somewhere.



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We all thought that that was the end of nationalisation and that we would never see it again, but here it is. I wonder what the benefits of nationalising Northern Rock will be. Will it bring stability? Presumably that is its purpose, but of course it will not do so. The Government are putting £110 billion of taxpayers’ money at risk. To the normal person, this is a telephone-number figure that compares with expenditure of £104 billion on public sector health and £34 billion on defence. It is a huge sum. Two and a half thousand people will be sacked, 144,000 shareholders will lose their money, 800,000 people will find that their houses are now mortgaged to the Government, and some may find that their houses will eventually be repossessed by the Government. They will find that charming.

That is not a nice, contenting or relaxed state of affairs. If the Government wished to keep the bank functioning, why did they not take action earlier? After all, the shares were £12.14 a year ago; they are now 99p. There is not much left to shore up, so why did they not just let the bank go? This is in the nature of things sometimes. Some businesses do run into trouble and have to go out of business, and people are deeply hurt. One does not wish it, but it is not the Government’s business to shore up ailing businesses, even banks. I thought that we had learnt that.

History shows that this does not work. Look at Upper Clyde Shipbuilders; that did not work. Look at British Leyland; that did not work. Look at British Steel; that did not work. I doubt whether this will. This is totally different from Rolls-Royce being taken into the public sector in 1971, because if that had been allowed to go bankrupt, defence equipment would have had no spare parts and aeroplane engines would not have been available. That was why that was done, but Northern Rock is an ordinary bank.

As we have heard, the Prime Minister says that he will take the bank into temporary public ownership and return it to the private sector soon, but this is not like taking an exhausted footballer out of a match, giving him a rest and then letting him return to the fray later on. I suggest that it will be ages before Northern Rock is ever returned to the private sector. If it is, it will be a very different beast.

As has been said so often today, Mr Sandler, the new executive chairman, said that the company would compete vigorously in the market. Those are stout words that sound very impressive, but how do you compete vigorously? Offering half a per cent or 1 per cent more on its deposits might well draw funds to it, but is it fair, in an open market, for a government-backed bank to try to outdo its rivals? What happens if that succeeds? Northern Rock will do well, but what about its rivals? They might then run into trouble. If Northern Rock does not engage in that sort of competition, how will it ever get out of its muddle?

Of course it is necessary for the best minds to be applied to this problem, but there is something bizarre about paying someone £90,000 per month to run it. Will the Minister say who is paying those salaries? Is it Northern Rock, or is it the Government? Of course, without the Government’s backing, the company could not have afforded it and probably would have

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gone bust. I question whether that is fair or equitable trading. By nationalising the bank, the Government will be putting themselves deeper and deeper into the mire of business, banking and debtors, and that is not what government is for.

Your Lordships may remember that in 1976 the Labour Government of the day introduced the Aircraft and Shipbuilding Industries Bill, by which the Government intended to nationalise some of the aircraft and shipbuilding businesses. I had the privilege of acting on behalf of the Opposition. As such, I was asked to the Farnborough Air Show. That was a very agreeable experience and great fun. At lunch, I happened to sit next to the chairman of de Havilland Canada, which had just been denationalised. I shall never forget what he said: “Ministers can say what they like about nationalisation: that they intend to let the business run on its own, at arm’s length, and they will not interfere”. We have heard all that this afternoon, too. “They may mean it, but it will be the civil servants who will badger the thing to death”.

The Act of Parliament will say what has to be done, and the civil servants will consider it their duty to ensure that the Act is working in the way in which it is drawn—indeed, that it would be a dereliction of their duty if they failed to do so—so they will badger the organisation with questions, strictures and rules, to say nothing of targets. Governments do not simply put £110 billion at risk without endless strictures.

So the Government are bringing in a Bill to nationalise Northern Rock, but that is not what it will do, although that may be the Government’s intention. Clause 2(8) gives the power to nationalise any bank or building society within 12 months of the Act being passed. That is a colossal power. Barclays, Lloyds-TSB, Nationwide—any bank or building society—can be taken over at the Government’s behest. No doubt this has been inserted to prevent it being a hybrid Bill. However, the Aircraft and Shipbuilding Bill was a hybrid Bill because it proposed to nationalise some, but not all, parts of the industry. It was just like this Bill. There may be an advantage to some companies in being nationalised, and other companies that are not nationalised might like to be. The point is that the law that is being proposed is not the same for all who are competing in the same marketplace. That is why this should be a hybrid Bill.

Lord Naseby: My Lords, am I right in remembering that, at the time, the Government said that the Bill to which he refers was not a hybrid Bill, and that legal action proved that it was?

Earl Ferrers: My Lords, my noble friend is half right and half wrong. There was a fearful row about whether it was a hybrid Bill. The Government said that it was not, everyone else said that it was, and the Examiner said that it was. That Bill failed, and the Government produced another one in the next Session.

The Government are getting over this problem by saying that it is not a hybrid Bill, but the purpose of hybridity is to be fair to all. By removing hybridity, you remove fairness. There is one particular point in

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which I am interested. Northern Rock has offered mortgages of 125 per cent, as we have heard. In other words, for a house worth £100,000, you could get a mortgage of £125,000. Two other banks were doing that, but have stopped today. Has Northern Rock also stopped doing that?

Granite is legally owned not by Northern Rock but by a charitable trust administered through Jersey, as we have heard. Northern Rock considered that it controlled Granite, even though legally they were distinct. Northern Rock included Granite in its audited accounts, even though Northern Rock did not own its assets. If Granite is unable to repay the money that it has borrowed when it becomes due to repay it, it will fall to Northern Rock to do so. Will that still be the case once Northern Rock is nationalised? Perhaps the Minister could let us know.

I fear that the Government have a tiger by the tail. It is not simple, it will not be simple, and they will be pulled into all sorts of difficult problems.

6.40 pm

Baroness Kingsmill: My Lords, it might be appropriate at this stage to have a little context on why we are here. We have heard a lot about Northern Rock and its difficulties. But not so very long ago Northern Rock was a beacon of competitiveness and its business model was envied by other financial institutions. It was also a time when it provided a great service for consumers; hence 20 per cent of people took out mortgages with it and it had a substantial mortgage book.

However, we have to remember that that was the sunny uplands. Thereafter, there was an overambitious business plan where success went to its head and it started to do things that were perhaps a little overextravagant. As previous speakers have said, borrowing short and lending long is very dangerous, particularly when interest rates may be volatile. It was a risky and unsustainable business plan at one stage. But we have to remind ourselves that the favours of the market place, the City, are easily won and easily lost.

Something we need to think about in relation to Northern Rock is the lack of oversight from the non-executive directors, which has not been mentioned by previous speakers. Certainly, they were highly experienced non-executive directors and one might have expected them to show a greater degree of oversight. In the first place, this was a failure of management. In the second place, it was a failure of governance. I hope that the Minister will give me assurance that none of those non-executive directors on the board when Northern Rock got into the troubles that it did will continue to be on the board in the new nationalised version.

It seems to me that all the actions the Government took were entirely appropriate in all the circumstances. It was entirely appropriate that they should take five months to look for a private-sector solution. I think we would all have preferred that to have taken place. However, the circumstances in which Northern Rock found itself, and to protect the interests of the taxpayers in relation to the guarantee of deposits, which in itself was an entirely reasonable to prevent further instability

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in the financial sector, made it impossible to do so. As I have said, it is very important to say that the risk of financial instability was brought about by a failure of management and a failure of governance.


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