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It is now very appropriate that Northern Rock should be taken temporarily into national ownership. That is the best way to ensure the money expended on behalf of the taxpayer already will be returned. Ron Sandler is an extremely good choice of executive chairman. I am sure that he will not wish to remain as executive chairman any longer than he has to and that a proper management board will be in place in the not-so-distant future.

It is important to look at the competition aspects of this. At one point, Northern Rock was a force for good in competition within financial services. It certainly was a price setter and a number of organisations felt the competitive pinch when it was in its ascendant. Now, there is absolutely no chance that it will be a competitive force, as such. It will be subject to enormous scrutiny, not only from the EU to ensure that none of the provisions of state aid will be breached, but also from other members of the financial services industry; that is, banks which will be looking out for any unfair competition that could arise as a result of the arrangements with the Government.

Lord Forsyth of Drumlean: My Lords, on competition and the point that was made earlier, Northern Rock is offering very much more generous deposit rates and depositors to Northern Rock have a government guarantee behind them. We already have unfair competition. Where were the Competition Commission and Europe while this was going on?

Baroness Kingsmill: My Lords, the guarantees mean that Northern Rock will attract more depositors who are seeking security. But it is very unlikely that it will be able to sustain any uncompetitive rates to depositors in any long term. It is also true that our competition authorities, which have significant powers, will be able to give considerable scrutiny to this. Other banks also will be able to do this. Competition is not an issue that we need to worry about. I do not think that competition will be a serious problem. It is unfortunate that Northern Rock is no longer the competitor that it was, but it will not be anything like it was. It definitely will be a price follower; otherwise, the wrath of all will descend on it. I am sure that Ron Sandler will be only too aware of that and will have to operate in a sensible and conservative way.

I should like to make a couple of further points. Lloyds TSB has come up over and over again. When I was at the Competition Commission, I refused to allow it to buy Abbey National, because that acquisition was deemed to be anti-competitive. If the same issue had come before me in relation to Northern Rock and mortgages, it would not surprise me if that had been found to be an uncompetitive merger as well because of the scale of the mortgage book of those organisations. I have no idea what the terms were or the reasons why that was turned down, but I think that it would, in itself, have been deemed to be an uncompetitive merger and probably would never have got past the regulatory authorities.

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I have a great deal of sympathy for the loyal employees who have had a significant degree of uncertainty over the past five months or more. Those people deserve our concern and our sympathy. However, there is one group of people for whom I have absolutely no sympathy whatever; that is, those shareholders who piled in in such numbers after the bank was so clearly in distress and who now are making what I hope are empty threats to sue. They would be advised to slink back quietly and not to make a great deal of fuss about this.

On the whole, this regrettable situation has been handled with as much reasonableness as possible. If it had been dealt with any faster, there would have been a great deal of criticism of the speed with which it was all done. Five months is an entirely reasonable time to consider a merger or takeover by the possible candidates. Now, we will have to watch and see how it all works out, but for the moment, I am feeling reasonably optimistic.

6.48 pm

Lord Lyell of Markyate: My Lords, I am glad to follow the noble Baroness, Lady Kingsmill, because I agree with her on one thing. I feel a great deal of sympathy for the employees of Northern Rock and for its small shareholders up there who regard it as a true rock and a safe place for their shareholdings. When I left university, my first job was in Newcastle. I grew to love the people of that deep, Labour heartland. While the Government may have let Northern Rock rather overbalance its judgment, I can understand why they stepped in, but I cannot understand the reasons why they proceed down the course of this Bill and the rather unlikely effort to make it business as usual.

My first point, I hasten to say, is a personal one. I am a member of your Lordships’ Select Committee on the Constitution, which met this morning. It will be understood that there was not time to produce a report between this morning and this afternoon. What I say is entirely personal, but it was understood that I would say something. This Bill causes concern. In due course, the Select Committee will probably look at things with hindsight, because the Bill will have gone through almost certainly by then. But I and others share a view in asking: why the haste? The noble Baroness rather emphasised that. There have been five months of what she says is not dithering. Why now do we have to do it in two or three days?

My second point is, of course, the important one of hybridity. In reality, this is unquestionably a hybrid Bill. It is dressed up as though it covers other—or all—banks, but this is a hybrid Bill, dealing with one bank, Northern Rock. Its shareholders have constitutional rights, hence the interest of the Constitutional Commission. Private individuals, be they companies or simply individual persons, have the right to petition in a hybrid Bill, to be sure that Parliament will take their views and interests into account when legislating. That is not possible in this Bill. I congratulate the noble Lord, Lord Goodhart—he is not in his place—and the Select Committee on delegated legislation on their speed and efficiency. They had an opportunity, which they thoroughly fulfilled, to warn this House. There are constitutional issues to which we shall have to return.

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I hope to make my key point at not-too-great length. A number of noble Lords have dealt with the fundamental problem in this case. It is clear enough that matters were triggered by the sub-prime lending problem in the United States, but that was not the fundamental problem. After all, almost all mortgage-lending institutions in this country have, at least so far, managed to survive the vibrations from the sub-prime crisis. What we really need to find out—and a great many of my noble friends have already put their finger on it—is: why did the disaster occur in the first place; who was responsible; and why did our existing, or then current, banking, regulatory and governmental structures fail not merely to prevent it, but even to warn Northern Rock against it?

Here, I believe that the present Government and no one less than the Prime Minister himself, as the former Chancellor, have very real questions to answer. The immediate responsibility lies, as the noble Baroness said, with the directors and senior management of Northern Rock. They committed what my noble friend Lord Stewartby said vigorously was a breach of one of the prime rules of banking: that if you borrow short-term in the wholesale money markets, in order to fund long-term lending, you are very likely to go wrong. I speak as a lawyer, not a banker. It is that kind of mistake that we hope our regulatory structures, which get more and more complex, will prevent. At this morning’s meeting, those who understand regulatory structures and the terms of surveillance very well talked about the extraordinarily complex regulatory structures that are being built around everything, and the fact that they do not work. This was not started by this Government. The Financial Services Act 1986 has a good deal of complexity in it, but it has certainly been built upon and elaborated over the years.

The fundamental difficulty lies in the elaborate tripartite system set up by the Prime Minister when he was Chancellor, where regulatory responsibility for the banking sector, instead of being, as previously, the clear responsibility of the Bank of England, was divided between the Treasury, the Financial Services Authority and the Bank of England. The FSA was supposedly in the lead but, frankly, was not up to the job. Sir John Gieve, as a member of the FSA, and appointed by Gordon Brown as deputy governor of the Bank of England, has taken a great deal of flak. It may or may not be fair, but it must be remembered that Sir John Gieve, who headed the FSA, has never been a banker. Sir John Gieve was a distinguished career civil servant. He is an administrator. In order to spot what was going wrong in banking circles and what was going wrong with Northern Rock, you needed to understand banking.

When you see a comparatively small northern institution becoming the largest mortgage lender in the country, you wonder where the money is coming from. How are they funding it? It is not funded by capital. If you are a banker, it does not require genius to realise that it must be borrowing it. It is borrowing it on the wholesale market, and borrowing short and lending long. It is committing the fundamental error and there are very great dangers. The old-fashioned Bank of England would have said, “We must step in and warn it to draw in its horns and have a contingency

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plan to help it out of the problem when it happens”. It is not the way of this Government. The Prime Minister gets plaudits for his intellectual capacity. He obviously has a huge capacity for detail, but there is an expression about failing to see the wood for the trees. That is what happened here. We need regulatory structures that will genuinely guard us against that in the future. I hope that they will soon follow.

6.56 pm

Lord Higgins: My Lords, this is a dangerous and damaging Bill. It will certainly not bring the Northern Rock saga to an end. Many aspects of it give grave cause for concern. In one way, what is of widest interest and concern is the fact that it is not a Northern Rock Bill. It goes far beyond what would be necessary merely to deal with the Northern Rock situation. It takes very wide powers to deal with any bank that gets into trouble under the various initial clauses in the Bill. The trouble with that is its effect on the reputation of the City of London. It will be thought that Britain needs a Bill to bail out failed banks. The implication is that this will happen because the regulatory system is not adequate to prevent it happening. That is of great concern.

One understands why the Bill is so wide: the Government are clearly desperate to avoid the idea that it is a hybrid Bill. My noble and learned friend who has just spoken referred to that. If the report of the Statutory Instruments Committee is accepted with regard to making the orders under the Bill an affirmative resolution procedure, those orders will, anyway, be hybrid because our proceedings in this House are not the same as those in the other place. The Government are not going to avoid that problem anyway. I am desperately concerned about the implications of the wide powers in the Bill as it now stands.

The Bill is also, effectively, a licence to take risks. Why should people be prudent if they are going to be bailed out by the Government? There is some qualification to this. If you are going to take risks and need bailing out, you need to do it in the next 12 months. These are matters that require detailed analysis. It is singularly stupid of the Government—if I may presume to say so—not to give adequate time for both Houses to look at the Bill in detail. They will live to regret pushing it through, quite unnecessarily, in the way that they are.

We are taking over a bank with no prospectus, a suspect balance sheet and no due diligence. I presume that, in the course of carrying out their very expensive operation, Goldman Sachs showed some due diligence. Will its report be put in the Library? We are certainly entitled to know what we are buying. Again, however, the implication of going along the route the Government have chosen is that the assets of the bank do not match its liabilities plus the loans which the Government have made.

The Government have said throughout that the taxpayer will be protected. If you want to protect the taxpayer and the loan book is worth what it is said to be, you can sell off the book on a commercial basis, pay off the liabilities and loans, and that is the end of the matter. Instead, what the Government appear to

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be hoping to do is run the operation so that it gradually makes a profit and eventually puts Northern Rock into a position where the taxpayer’s interest really is protected. But at the present time I have the gravest doubts as to whether that will be so. This also raises the question of unfair competition. It may be that the Government can do this because under its new ownership the bank will be in a stronger position than those with whom it is competing because it will be able to borrow at a better rate, and it is difficult to see how the Competition Commission will be able to force it to borrow at a higher rate.

I want to say a few words about the difficult question of the Granite system, which I referred to an intervention to the Minister. He has now provided us with a document which sets out the situation. It reveals in the starkest form the sordid way in which a charitable trust was being used for financial gain, and that is something which can only be deplored. It also makes clear the complex situation we now face. I asked the Minister in my intervention whether it was true that the Granite arrangements appeared on the Northern Rock balance sheet. This document, which alas I am not sure was available to the House of Commons yesterday, shows that the Granite position is consolidated on the Northern Rock Foundation balance sheet. But the Minister then goes on to state that we are not nationalising Granite, for the want of a longer expression. If Granite is on the Northern Rock balance sheet and we are nationalising Northern Rock, I am puzzled as to how it is that we are not nationalising Granite. No doubt the Minister can explain to us how that is so.

Perhaps we could also have some indication from the Government about the size of this interesting complex of companies. It is alleged that Granite amounts to something like £40 billion, a very substantial sum indeed, and has been operating on the basis of securitising the best quality assets in Northern Rock. We are constantly getting statements from the Government saying that the loan book is of very good quality, but it appears that best assets are in the Granite part, which is not going to be nationalised—or are we? At some stage, one becomes a little bemused by what is actually happening in this operation. However, I do think that we are entitled to know. I share in the sympathy that has been expressed generally for the Minister in this, and I can do so on a reasonably personal level since on occasion I am his parliamentary golf partner. None the less, I hope that he can provide us with answers, and indeed he was wise not to go through all the clauses one by one at the beginning of the debate.

I turn finally to the report of the Joint Committee on Statutory Instruments. I doubt very much indeed whether there has been quite such a critical report for a long time. It considers in detail the memorandum provided by the Government setting out why they wish to have various points covered by the negative rather than the positive resolution procedure. They have put forward a series of spurious arguments which the joint committee knocks down totally because the real reason is the problem of hybridity. Why the Government were not upfront in saying,

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“This is why we’re doing it”, I do not know, because it was not likely that the committee would not catch them out—and indeed it has.

There are greater problems here because some of the committee’s other recommendations are very severe indeed, in particular with regard to the later clauses, such as Clause 12. It sets out a most extraordinary proposal of unusual delegation—we are grateful to the noble Lord, Lord Goodhart, for explaining it—to deal with an entire range of government legislation by way of the statutory instrument procedure. That is both dangerous and unnecessary. What is essential here is a very effective sunset clause. If the order goes ahead, we shall see how it works out in the case of Northern Rock, but we really ought not to allow the dangerous proposals set out in this legislation to remain on the statute book any longer than necessary. I believe that we should repeal the Bill at the earliest possible moment, but meanwhile we have most certainly got to tighten up the regulatory procedure generally because it is clear that the tripartite system has not worked. It ought to be possible to go back in rapid order to a situation where the Bank of England has sole responsibility and thus can effectively protect the interests of both the taxpayer and consumers.

7.06 pm

Lord Desai: My Lords, it is a great pleasure to follow the noble Lord, Lord Higgins. I start by pointing out that when we debated the gracious Speech, I said then that we were in the middle of one of the most serious financial crises we have had for a long time and that it was not over. No one should presume that in the next 12 months, while this Bill lasts, there will not be any more bank failures. I certainly would not put money on that, so I will keep an open mind on whether a 12 months’ limit on the Bill is a good thing.

I have been struck by the great wisdom of hindsight in the debate, as well as a bit of rewriting of history. When a bank fails under a Conservative Government, it is just a debacle; when one fails under a Labour Government, it is a shambles. I like that because if we are ever in opposition, which I doubt, I shall use the same expressions all over again. We have also been mixing up the faults of the management of Northern Rock and treating them as if they were the Government’s fault. We have been mixing up the fact that there are bound to be delays in considering offers to buy the bank, as pointed out by my noble friend Lady Kingsmill. Five months is a short period in which to sell a bank like this, and that too is seen as the Government’s fault. Finally, the fact is that the tripartite arrangement has been operating for nearly 10 years and this is the first and only failure. Suddenly, everyone says the whole thing has broken down. I submit that one great thing about financial markets is that they change so rapidly that any legislation passed or arrangements made in one year are obsolete within the next two or three years.

A major aspect of the current financial crisis, which I also pointed out in the debate on the gracious Speech, is that the people in charge of big banks have themselves not been aware of the business they are

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conducting. They too have been surprised by the level of losses. That is true of Citibank, Merrill Lynch, Bear Stearns and others like them. This is a business in which the rocket scientists get younger and younger and understand what is going on, while the bosses get older and older, are given large compensation, and do not understand the business they are in. Moreover, as has been pointed out, financial markets normally run according to people’s expectations. We know the strategies to follow, which business plans work and so on, but occasionally there is what they call a black swan. When a black swan hits the markets even a genius fails, as we remember with Long-Term Capital Management.

Northern Rock has failed through no fault of the Government or any member thereof. When Northern Rock failed, we were told that there were offers by Lloyds TSB. I do not know how concrete those offers were; as I read it, even if there had been a concrete offer, Lloyds taking over Northern Rock would have raised issues of competition so severe that the European Commission would not have allowed it beyond first base. I doubt that it was as easy as people pretend with hindsight—that all that we had to do was sell it to Lloyds with no questions asked and that would have been the end of it. Once you did not do that, you had to protect depositors, you had to come out openly and give a guarantee, and that triggers a process under which the Government say, “We nationalise on day one”. Had we done that, the storm would—believe you me—have been much bigger than it is now. So, we waited patiently and saw whether the market would turn up with a reasonable offer, but it did not. That is the nature of the market and we have to respect it. If people cannot give us an offer that will take the business off the Government’s hands and guarantee taxpayers’ money, the only alternative is nationalisation. Had we given it to Branson or the management and the consequence had been that we were subsidising a huge bonanza for private sector buyers the storm would again have been fantastic. By not agreeing to a private sector bid we were being prudent and cautious. We were looking after the taxpayers’ interest and depositors’ interest. On that ground a lot of the criticisms and the moralising that has been going on from the Opposition are completely beside the point.

This has been an open process—everybody has known that the Government were seeking private buyers and that there had been discussions; finally, when it turned out that the Government could see that neither of the two offers were viable, they nationalised. Once you nationalise, speed is of essence. I do not criticise the Government for giving the Bill a very short time in Parliament. Although it is a technical Bill, there is nothing in it which requires detailed revision or amendment. The amendment proposed by the noble Lord, Lord De Mauley, about removing hybridity is important; that has been reflected in the report of the Delegated Powers and Regulatory Reform Committee. Once we have fixed that and changed from the negative to the affirmative procedure, there is nothing else that needs to be amended in the Bill and we can all go home. The sooner we can do that the better. There is no virtue in

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spending a lot of time on a Bill that is short and technical and needs a quick response.

I commend my noble friend, who has been much sympathised with. I think that he did a good job; he explained the Granite problem to us in words of one syllable, but people still insisted on having it all written down; that has now been done. I suspect—I have only read the documentation as recently as other noble Lords have done—that the reason why Granite is not part of the nationalisation plan is that we do not want to be liable for its bonds. That seems to be the way to do it. I am guessing; I have only had a short time to read the document.

Some of our laws are not sufficiently tight to be able to place the blame on the people who got into the mess in the first place. We ought to have laws sufficiently strong to haul the management and directors of Northern Rock before some court—and perhaps the auditors, whose duty it was to point out that the business model was failing. Perhaps somebody will tell me that we already have such laws on our books; if so, let us use them and let us get a few more people into jail. If this had happened in America, the entire management would have been in jail long ago. Our laws are too lackadaisical in our laws and in allowing this sort of behaviour to go on. It is time to put a stop to that.

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