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7.15 pm

Lord Bell: My Lords, I rarely speak in the House. One reason is that, as the noble Lord, Lord Forsyth, pointed out, by the time one gets to speak, everybody has said everything that one was thinking of saying. I will make one simple point; I will certainly allow the noble Lord, Lord Desai, to go home early, because I shall not take up much of your Lordships’ time. Noble Lords will not be surprised that I am opposed to nationalisation and that I shall, therefore, vote against the Bill. When I read what the Government’s policy on Northern Rock would be, I asked myself a serious question. I have always been a huge fan of how the Labour Party recreated its image, changed its branding and got elected as a long-term Government. It struck me as interesting that the fundamental core in the rebranding was the dropping of Clause IV and the abandonment of nationalisation. It seemed odd that, all of a sudden, when confronted with a crisis, the new Labour Government’s answer should be, “Let’s nationalise it”, albeit for a short time.

When the Labour Party abandoned nationalisation, it said that nationalisation was an economic problem, not an economic solution. Yet the Government have suddenly decided that, after all, nationalisation is the solution, with the result that they are now rushing through a Bill giving Ministers the power to nationalise not just one high street bank but any bank. Is it, I ask myself, part of their grand economic strategy? Clearly not. Is it because they believe, like the Labour Party of old, that the public sector is better at running companies than the private sector? No, I believe that the Government have changed their view on that, although that is perhaps evident not tonight. Is it because this has been forced on them by the world banking crisis? Not as far as I can see, because, as far as I know, no other country is nationalising a bank.

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Nationalisation is not a policy that the Government believe in; it is not what they wanted and I do not believe that they think that it will work best. How on earth have we got to this situation? I can give a simple answer: through sheer incompetence.

When the Northern Rock crisis broke last autumn, the Prime Minister was, as we all know, dithering and shilly-shallying over whether to call a general election. He did the same dithering and shilly-shallying over the future of Northern Rock. That was when the scales fell from the eyes not only of the Conservative Party, which for many years had been blinded by the glow of new Labour, but also of the public. The true nature of this Prime Minister is that he simply cannot take decisions until they are forced on him by events. That is the genesis of the Bill before your Lordships’ House. The Government, having struggled for months to avoid nationalisation, are now standing on their head and have the gall to say that a nationalised Northern Rock will be business as usual. What absolute nonsense.

The Bill breaks all the rules of good government and good business. The Government say that they believe in openness, but what is their strategy as the 100 per cent shareholder for the bank? Hands on or hands off? Expansion or contraction? They do not know and so they cannot tell us. The Government preach accountability, but to whom will the nationalised Northern Rock be accountable? The answer, in theory, is to everyone, which, of course, in practice means to no one. Then there is the Prime Minister’s old friend prudence—thrown overboard as the taxpayer is saddled with potential liabilities of over £100 billion. What about fair competition? A bank with a government-guaranteed, copper-bottomed underwriting is bound to put other banks at a competitive disadvantage and to distort the market. If you think that the EU will stop that or that the Government can stop it as the shareholder, let me point out as a marketing man that most markets are driven by sentiment—how people feel about something is what leads them in making decisions. Everyone will know that this bank is underwritten and that will drive their decision-making process no matter what is said by the EU or by the Government as the shareholder.

There is no discernible principle, no political philosophy, no vision and no clear objective underlying the Bill. It is an accident of a Bill introduced by an accident-prone Government who cannot control events and who, instead, are controlled by events. Every time the Government try to take a decision, they cannot. Whether on Northern Rock, non-domiciles or capital gains tax, each time they delayed and they dithered. These are the hallmarks of an incompetent Government simply living from day to day. No wonder people are asking, “What is the point of this Government?”. Let me indulge myself by quoting a slogan that I coined some years ago: “Labour isn’t working”. I urge your Lordships to vote against the Bill.

7.20 pm

Lord Naseby: My Lords, I, too, am conscious of the need not to repeat speeches that have already been made. I want to add a little to the background and the

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early stages of that background, to demonstrate why the proposals will not work and to ask some questions. I do this from a background of being an FSA-approved person. I have chaired two financial services companies recently and I currently chair one quoted investment trust. I am primarily a marketing man who specialises in financial services. Is this background the least bit relevant to the Bill? I think that it is. I know the FSA in some detail and, more important, like my noble friend who has just spoken, I know whether or not a brand is dead. This brand, Northern Rock, is dead and cannot possibly be revived.

Looking quickly at the antecedents and the parts that have not been covered, I believe that it was in the autumn of 2005 that the Government’s leading financial experts realised that the failure of a high street bank would create a serious problem in the UK. I understand that meetings were held between the Treasury, the FSA and the Bank of England and that the Minister involved was Ed Balls MP. By the autumn of 2006, a minute had been sent to the then Chancellor, now Prime Minister, Gordon Brown, which suggested that urgent action was required in order to anticipate such a problem. The tragedy was that that urgent action was never forthcoming. Once again there was no decision taking, just dithering.

Then, of course, as we know, along came Northern Rock to compound the whole problem. It is alleged that the FSA was concerned and was seeking stress-testing and so on, but when the real question came on 27 June 2007 and Northern Rock announced to the Stock Exchange that it had a problem, the FSA’s reaction seems solely to have been one of not acting at all. In fact, it did the exact opposite by relaxing the controls, allowing the bank to free up certain assets and to make a big payout to shareholders.

This then became a joint problem with the Bank of England, the FSA and the Treasury. As we have heard, a lifeline was offered by Lloyds Bank and rejected. The election was looming and the heartland of Labour’s north-east was in peril. There was no leadership and no decision was taken until last Sunday. The result, as we know, was Labour’s old traditional policy of state control.

Allegedly this is temporary, but it cannot be temporary. Let us consider the case history of Abbey National and the turnaround achieved by Mr Arnold. That was a reasonably good brand but it took him three years to turn it round, so how on earth can this dead brand of Northern Rock be turned round in any shorter time? It cannot be done. Branson has a highly respected brand but he reckoned that this was not worth the risk in the end. Incidentally, why was he given an extra month to work out his proposals? Shades of insider dealing there, I would venture to suggest. But Branson walks away, as has already been said, with £5 million in cash, millions of pounds worth of free publicity and perhaps a beneficial pay-off in the future.

Both Branson and Arnold know that it is impossible to pay back with that organisation the £110 billion of bank guarantees, the £100 million in fees that has been spent, the expenses, the redundancies, the pension contributions and so on. If they cannot do it, how will

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Sandler succeed? Mr Sandler’s track record has not been a huge success over time. Colleagues may remember the Sandler suite of stakeholder products. They are all dead ducks in the market—no one buys them, no one markets them, no one wants them. That is not financial success in retail financial services. They are totally dead ducks. That is not terribly encouraging. Why did they fail? They failed because both he and the Treasury thought that cheapest equalled value. It does not in financial services.

Even on the financial control front, Sandler’s track record does not appear to be that good. In 2006, I am told, he was chairman of Kyte Securities, which was fined £250,000 for financial control and accounting failures. That is not a good antecedent. He has a team of independent directors, we are told, but they are all close friends of either the Prime Minister or the Chancellor of the Exchequer. Hardly a recipe for independence.

How can it be business as usual? Let me repeat a question to the Minister. Even today on the website there is the highest return on a cash ISA, the highest return on a deposit account and, as far as I know, as of yesterday, Northern Rock was still offering 125 per cent mortgages—all backed by Her Majesty’s Government. Is this fair competition? Why are the Government unable to be more open and honest and tell the people the real truth?

The business has to be downsized—there is no other prospect. Fifty per cent of the book has to be sold off and, sadly, yes, probably 50 per cent of the staff have to be made redundant. The retail savings side should be saved. At least National Savings & Investments is highly efficient these days; the whole of the retail side could be moved across there and individual depositor’s positions safeguarded.

I conclude by asking my questions. Who will monitor the fairness? I have no faith in the Competition Commission; I have no faith in the FSA any more; and I certainly have no faith in the Government. I have some faith in Europe, but Europe acts after the event and that is too late. How will Parliament be informed? I think that we have a right to know how Parliament will be regularly informed. Are the terms and conditions of the new company to be determined by the remuneration committee of that board or are they to be determined by the Government? I ask the question again: is there any bonus for Mr Sandler? Is he working full time or part time? As I understand it, he is a non-dom. This question has been asked before, but it has to be asked again: why is Northern Rock to be exempt from the Freedom of Information Act? Finally, why is Clause 11 even in the Bill at all? Of all the Ministers, this Minister knows full well that the building society movement is totally different in its mortgage lending, in its capital structures and in the way in which it is controlled. It is totally different from the banking sector; it is not a problem and should not be in the Bill. I hope very much that that clause will be deleted.

So there you have it. It is a sad day for a company that a year ago was 67th in the FTSE 100 on the basis of market capitalisation and now, frankly, is nothing. This is Prime Minister Gordon Brown’s biggest gamble. He will lose it. More important, British

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taxpayers will lose their money as well. It sends totally the wrong message to foreign investors who have so far chosen this country for its liberalism and openness in financial affairs. Boom has led to bust and prudence has gone to new Labour’s casino.

7.30 pm

Lord Shutt of Greetland: My Lords, the Title of this Bill is Banking (Special Provisions), and special it certainly is. The words “Northern Rock” are not in the Bill and yet that is what it is about. Why are we here? In his contribution the noble Lord, Lord Stewartby, mentioned the business of borrowing short and lending long, which has been the model of the building society movement for more than 150 years. What is different in this case is borrowing short in bulk and lending long. Reference has been made to the word “sub-prime”. I am not certain I understand what it means. It could be one of two things: either lending takes place on rather doubtful property; or lending is given to people without the resources to repay. But as well as borrowing short in bulk and lending long, and these two different ways of being sub-prime, there is general incompetence.

We have heard that Lloyds TSB was some months ago contemplating coming in, that Virgin was prepared to buy and that the group that the noble Lord, Lord Marland, was part of was also prepared to come in. The due diligence of these people suggests that there is a feeling about that there is still some value. I am not clear whether there is value or not at the moment. Is there any value for the small shareholder who received shares 10 years ago when the demutualisation took place? Is there any value for the Johnny-come-latelys who have bought shares in the past few months—the hedge-fund folk? Is there any value for the Northern Rock Foundation? This is what I really want to speak about.

The amazing thing about the Northern Rock demutualisation was that it was done on the basis that when the building society decided to become a bank, the intergenerational equity that had been built up over 150 years would be shared between its members who would become shareholders and the greater community of the north-east of England. Five per cent of the profits were given to the Northern Rock Foundation, contingent on a 15 per cent stake in foundation shares to be relevant on a winding-up. To listen to this debate so far, one would think it was all about a bank which is in trouble, but to many people in the north-east of England Northern Rock will mean the work that has been done by the foundation. Of the £192 million which went from Northern Rock to the foundation, £175 million have been spent so far in that community.

What is to become of these shares? Nationalisation is not a winding-up. The foundation shares are held by the Northern Rock Foundation. The accounts say:

But nationalisation is not a winding-up so do these shares stay as a contingent 15 per cent on the balance sheet so that on a further privatisation of Northern

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Rock the 5 per cent of the profits and 15 per cent on a winding-up are handed on to the successors? It is very much a special case. This is a general Bill about handling any bank or building society and the words “Northern Rock” do not appear, so all this will be left to the order. Will the order tell us about these very special shares and their standing? The Government have said that they are determined that the foundation should receive £15 million in years one, two and three. I suppose that will see shareholders OK for the moment, although it is half what they have been receiving in the past few years. But what is the long-term position? As I said, it is a very special case. The foundation was not given 15 per cent of the shares; it was given a contingent 15 per cent. Had it been given 15 per cent of the shares, it would have been wise, in my view, to have diversified. But it did not have that luxury and therefore it is in this very strange position of being a contingent shareholder without any prospect of a winding-up. I would be particularly grateful if the Minister could find out what the score is going to be and whether this is going to be important as far as the order is concerned.

The Minister mentioned some draft orders. I was not clear whether these have already been produced and are available for us to look at or whether he was suggesting that they are going to be available on Monday. It would be useful to know. But it seems important to consider under this Bill the particular position now for the north-east of England of this important institution which has done so much tremendous work in the past 10 years in that area.

7.38 pm

Lord Ryder of Wensum: My Lords, I appreciate that the regulatory consequences of the collapse of Northern Rock will not be obscured by this Bill because the Government have said that they will undertake a consultation exercise on potential reform of the banking supervisory legislation and this will provide us all with an opportunity to review the effectiveness of the tripartite system and to rectify some of its shortcomings. I shall make one general observation and comment on a recommendation of the Treasury Select Committee, whose report was published on 26 January 2008.

The tripartite system failed because it allowed the Treasury, the FSA and the Bank of England to shift the burdens of responsibility at crucial moments. As far back as January 2006, the FSA was aware of the tom-tom warnings in the markets relating to the financial strategy of Northern Rock. A year later in February 2007, Northern Rock’s share price began to tumble and between then and June the FSA could and should have stepped in. As other noble Lords have remarked, to compound the problem the Treasury then unwisely spurned the chance of a takeover by Lloyds TSB involving £30 billion in state-backed loans to be repaid over a two-year period. Here, too, I am forced to conclude that political calculations overrode sounder economic counsels.

Surveying the aftermath of this debacle, the Treasury Select Committee produced a lucid report. I was struck by paragraph 276. It declared that despite

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the evidence of some of the witnesses to the contrary, the tripartite system had not worked well, partly because,

had shown weaknesses. And no wonder. As my noble friend Lord Lawson of Blaby observed, the Banking Act 1987 was dismantled, and with its demise went the necessity of appointing people with expertise and first-hand knowledge of banking and the markets in a clear, uncluttered structure of supervision. Under that erstwhile system 20 years ago, as the Economic Secretary to the Treasury under my noble friend Lord Lawson, I saw the importance of the quality of the daily relationships between the Treasury and the Bank at Under-Secretary and Deputy Secretary levels. If working relationships then broke down for reasons of chemistry, vanity or turf protection, new people were put in place. In the case of Northern Rock, it is clear that relationships foundered without the necessary corrective action.

In these days of heavier, more prescriptive regulation, over-reliance is placed on the book and too little on putting the right people—experienced City banking practitioners capable of demonstrating good judgment—into key jobs at senior levels. That is one reason why I was struck by the Select Committee’s recommendation 66 that a new post should be established called the “deputy governor of the Bank and head of financial stability”. He or she would head a new unit with powers to intervene in failing banks. That would help, in part, to remedy some of the defects of the tripartite system. The holder of this new post would have a key role in ensuring that the Chancellor received authoritative and co-ordinated advice in any future case of financial instability. If that new role is created, as I hope it will be, then I go further than the Select Committee by suggesting that the new post must be filled by a person with extensive working knowledge of the banking system and markets rather than by an economist, a civil servant, a journalist or an academic. I retain respect for the governor and the deputy governor of the Bank, but neither of them had direct or significant experience of the baking system or markets before assuming their offices. Surely that imbalance of first-hand knowledge at the top of the Bank of England must be avoided in future.

Of course I would prefer a return to the better features of the Banking Act 1987, but, if that option is discounted by the Government, I commend to them the model recommended by the Select Committee.

7.43 pm

Baroness Ford: My Lords, I support the Bill before the House to enable the Government to take Northern Rock into temporary public ownership. I realise that is a bit of a minority interest in the House today, but I shall persevere. I very much regret that the Government find themselves in this position but, from the moment last autumn that my right honourable friend the Chancellor of the Exchequer provided guarantees for depositors in Northern Rock, I think we all understood that a temporary period of public ownership was always one of the options on

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the table. Indeed, my right honourable friend has always been explicit in his acknowledgement of that as an option.

I do not recall too much opposition in September to the idea that Government should take action to protect depositors. In fact, I am pretty clear that there was cross-party support for the action taken at that time. But I do wonder whether, in retrospect, it was wise to have a guarantee that was so widely drawn and therefore, in the absence of viable alternatives, inexorably led the Government to the position where all of the liabilities of this bank, however temporarily, have now fallen on the public’s shoulders.

The important aspect of the stability of the financial system had also to be considered, however. Letting Northern Rock go to the wall could have had significant consequences for the UK’s financial stability. I am perfectly well aware that some noble Lords have taken a different view today, but the plain fact is that with the capital markets in the febrile condition they were in last autumn—and I speak as someone who earns her living in the capital markets—I am not prepared to dispute the Chancellor’s judgment. He made a call that the right thing to do was to stop the run on the bank, not just in the interests of depositors but in the wider interests of UK financial stability. It was a call that, measured against that yardstick, has so far been seen to be correct.

I am also clear that the Chancellor has always said that his preferred position was a market-based solution. I am afraid that I have to disagree with the noble Lord, Lord Bell; my right honourable friend has always said that such a solution would be the best option for the rescue of Northern Rock. I agree with my noble friend Lord Desai; it was right that my right honourable friend should take the time to explore whether such a solution could be found. It was quite right that, having decided to explore alternatives, those proposals that came forward should have been taken seriously and given proper and diligent consideration. Had that not been the case, the charge today would have been of precipitous action, or panic, or some such. I imagine that the Government are perfectly happy to plead guilty to the charge of taking enough time to consider this important issue really seriously.


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