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This crisis, as other noble Lords have said, was not of the Government’s making. The genesis of today’s problems lies in the business strategy pursued by the board of Northern Rock—as mentioned by many other noble Lords—and as supervised by the FSA. It was not my right honourable friend the Prime Minister who devised the strategy of borrowing short and lending long: nor was it my right honourable friend the Chancellor of the Exchequer who sat on the board of Northern Rock, responsible for exercising fiduciary responsibility and, frankly, signing up to a strategy that reinvented the concept of capital adequacy. It is a bit rich to suggest that the Government are somehow directly culpable for the actions of a publicly owned company that was independently regulated. To suggest that the perfectly sensible position now being taken by the Government in facilitating a temporary period of public ownership is somehow akin to the

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way in which nationalised companies used to operate in the 1960s and 1970s is a gross distortion.

The Bill before us is the logical and appropriate solution at this time to give shareholders and management time to find a solution and an approach that meets the three objectives that the Chancellor has consistently set out since last year: to best protect the interests of taxpayers, to continue to support financial stability and to protect depositors’ money. When tested against those three objectives, neither of the other solutions on the table matched the option of taking Northern Rock into public ownership, so for those reasons it deserves the support of the House.

There are important issues that have been raised today that need to be explored further in tomorrow’s deliberations. It is important to determine what exactly is coming into public ownership. Are the assets wrapped in the Granite SIV, which are consolidated on the balance sheet of Northern Rock, to be included or not? I listened carefully to the Third Reading debate last night in the other place and have now read the letter that was circulated, but it remains unclear to me how these assets are to be classified. I encourage my noble friend the Minister to set out more clearly tomorrow the difference between ownership and control; it might reassure some noble Lords if we were able to do that.

We also need to explore what business model is to be pursued by the new management. Is it a growth plan, or are we really talking about an orderly sale of the loan book when conditions permit? Some clarity on that question would also go a long way to reassuring the concerns of some noble Lords. What is the likely reaction of the European Commission on the question of state aid? I know this is a difficult question—and my noble friend may not thank me for asking it—but how temporary is temporary? I hope that these issues can be explored in much more detail tomorrow because they are important issues and they have been raised in a singularly articulate way in the House tonight.

In finishing, I would like to add one other point and, in so doing, echo a range of the comments made by other noble Lords. I, too, am dismayed that some aspects of the very business model that is now so widely discredited are still being pursued by Northern Rock. I refer to the practice of approving mortgages, at a loan-to-value ratio of 125 per cent, still being advertised by Northern Rock. I listened very carefully to my right honourable friend the Chief Secretary to the Treasury on “Newsnight” on Monday night and in the other place last night. She is of the opinion that it is for the new management of Northern Rock to determine its business practices. I really find myself disagreeing with her. On this occasion I am pretty clear that enough is enough. I really hope that Ron Sandler is paying attention.

7.51 pm

Lord Marlesford: My Lords, I would really like to be able to acquit the Government of blame for the collapse of Northern Rock. These things happen. I am afraid that this debate has shown very clearly that the consequences of Mr Gordon Brown dismantling the protective mechanism which was in place to spot

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trouble before prices burst must have contributed to us being where we are now. I would like to say first, before I raise various questions, that we should look at the economic backdrop against which these events have unfolded here. I believe it makes the criticisms of the Bill which we have heard and the events leading up to it all the more serious. I have just returned from a three-day conference of American fund managers where there was a great deal of interest in Northern Rock.

There is no doubt that the world economy is shuddering as what started as a credit-crunch storm seems to have uncovered a tide of unsound credit which could destroy much of the potential for economic progress, for years rather than just for months. The extent and the volume of toxic credit based on unsound lending has been far larger than was anticipated even a few weeks ago. It may well have been a tidal change which was neither recognised nor generally predicted, until the storm broke.

While the scale of the problem may well push the western economies into recession, it is probable that a longer term result than the recession itself will be a reduction in the volume of credit with much tougher lending terms and higher rates to reflect risk. Inevitably, there is going to have to be more state control of the practices and techniques of financial institutions worldwide, since so many of the most glittering world-financial names have been shown to be disastrously incompetent at huge cost to themselves.

One of the really serious things is the way in which consumer credit has overwhelmed the capacity for business credit. What capitalism essentially needs is business credit. That has been the case since Adam Smith, and Marshall, going on to Keynes. Business credit is what makes things tick. Consumer credit is now so large that it has dried up business credit, for the moment at least. That is what has caused the problem; the supply of business credit. Incidentally, I do not think that the central bankers are all free of criticism. There are two who I do not criticise: the governor of the Bank of England and Monsieur Trichet from the ECB. Both of them have done rather well.

The esteemed Alan Greenspan has lost a certain amount of his reputation for having been a sound steward of the American economy. I do not know if any other noble Lords have read his autobiography, The Age of Turbulence. In it I found the most devastating quotation:

That book was published a few weeks before the storm broke. I suspect he regrets it was not published a little bit later. One effect of this is to erode the confidence in the world’s central bankers. The reputation for competence of politicians, as economic managers, has already eroded. Sadly, the high reputation for a while of our own finance Minister, Gordon Brown, has now been shown not to have been justified. As Prime Minister he has disappointed his supporters as much as he has

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astonished the wider public. Sadly, for him, his reach does seem to have been shown to be greater than his grasp.

There are a number of specific points that I would like to raise which come in the Bill and in the consequences of the Bill. The first is on hybridity, which has been mentioned a number of times. We all realise that the Bill has been drafted in a way so as to avoid hybridity. On the other hand, there is a very clear procedure for testing hybridity and getting a ruling on it. I am not clear how this works in the case of a piece of legislation which is being rushed through like this. As I understand it, if there is a claim of hybridity, and therefore of hybrid procedures which enable applicants to challenge the Bill and to object to it, the Speaker has to give a ruling on whether the Bill is hybrid. I do not know whether that has actually happened, whether there is time for it to happen, or whether the Bill can get Royal Assent before it has happened. I think it is an important point that must be looked at.

Then there is the question of Northern Rock in its publicly owned form and what it has to do. I am absolutely convinced—not just by my noble friend Lord Lawson who said it at the beginning, but by what has been said by everyone both in the House and outside—that there can be no question of the Northern Rock under public ownership continuing as though it were a commercial concern. One of the things that really astonished me was in the Statement that the Chancellor of the Exchequer made on 21 January in which he said it is to be owned and run in the private sector as a commercial bank, but with the Government providing backstop guarantee for private financing. That is a contradiction in terms. You cannot have a government backstop for private financing. It is then no longer private financing. That is perfectly obvious. We are in a slightly similar situation now, except that the bank is about to be taken over. It is absolutely crucial that we know what it intends to do. In my view, the right answer is to run it down, for it to cease to grant any further mortgages. I think it can continue to take deposits because it is basically now a government savings vehicle. It is therefore okay for it to take deposits, but it should not be allowed to extend its business and liabilities by giving out further mortgages. The mortgages that it has been giving out recently have themselves apparently been as unwise as those which the Government allowed it to give because of a failure of proper supervision.

I also have a warning. I suspect that at some stage someone will say, “Wouldn’t it be nice if we kept Northern Rock as a government supplier of housing finance? After all, the United States has had two very large government finance organisations, Fannie Mae and Freddie Mac, and they have done very well over the years”. The fact is that they, too, are now running into considerable difficulty. However, not only is it not a function of government to supply finance for home ownership; there is currently no way that the sort of resources which would be required would be available. I know that that has not yet been suggested, but it might be and I want to warn against it.



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The Bill goes far too far. Clause 12(1) states:

There is then a great list, one of which is,

That is an astonishing proposal. Of course the Government will say, “We don’t intend to use it”. But all of that makes the Bill thoroughly bogus.

If I were challenging on the grounds of hybridity, I would say that as this Bill has clearly been designed, written and presented in a form purely to avoid being declared hybrid, and as the whole principle of hybridity is to give rights to individuals who are treated differently from others, the Bill should not be regarded as an obstacle to doing that.

8.02 pm

Lord Lipsey: My Lords, it is always a great pleasure to follow the noble Lord, Lord Marlesford, in this House, as I once followed him on the staff of the Economist magazine, though I regret that, from his remarks this evening, he does not share that magazine's wise view that nationalisation is the right course for Northern Rock.

I do not exactly welcome the Bill, because of the sad circumstances that have made it necessary, but I do strongly support it. That of course is the exact opposite of the position of the Conservative Party, which opposes it but has thoroughly enjoyed wallowing—like hippopotami—in the resulting mud, hoping that some of it will stick on the Government. The political arguments will go on, no doubt, as no doubt will the orgy of wise hindsight which has informed so many of the contributions from the Benches opposite in the course of today's debate. If I may, I should like to stand back for a moment and try to look at this whole episode from the point of view of an economist looking at how you handle financial crises and what you try to do.

The rules about the handling of financial crises are pretty well agreed by every financial economist, as I hope the noble Lord, Lord Eatwell, who is to follow me, will agree. The first is that the authorities should inject into the system sufficient funds to prevent the contagion spreading—no Credit Anstalt here. Secondly, at the earliest feasible moment, the management of the organisation responsible for the disaster should be sacked, and preferably disgraced, pour decourager les autres. Thirdly, the shareholders should lose certainly most and probably all of their investment. According to those established criteria, has the handling of the Northern Rock debacle been a success or a failure? It is too early to be sure, but not too early to be reasonably reassured.

So far as limiting the crisis is concerned, the Chancellor swiftly guaranteed all deposits. The Bank injected sufficient liquidity to ride the initial run on the bank and restore stability. Despite widespread rumours and fears, no other institution has followed Northern Rock down the pan. So far at least, the real economy has remained largely insulated from this

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crisis in the financial economy, though of course it remains to be seen if that continues. We are not in the 1930s, thank god.

Secondly, the management—they are out. Ron Sandler, good luck to him, is in. Now of course, some people will complain, and I sympathise a bit, that the management left with pockets still stuffed with Northern Rock gold, and it would be a great thing if some of them chose to put some of that back into the communities that they have let down. Still, I knew Matt Ridley, the former chairman, slightly in the days when he was sticking to his last as a great scientific journalist—energetic, confident and, in the old sense of the word, gay. Then I saw the pictures in the newspaper of Matt Ridley at the height of the crisis, prematurely old, creased with worry, devastated. I have not asked him but I dare say that Mr Ridley would give back every penny he made out of Northern Rock for his whole tenure never to have happened. Or take Sir Derek Wanless, previously likely to be remembered by history for his authoritative report on the National Health Service, now to be remembered down the generations for having been chair of Northern Rock's risk committee. They and others have paid—rightly—a high price for their recklessness. It is only sad that their staff will have to pay a price, too.

Thirdly, the shareholders. Everyone will have some sympathy with the small shareholders who have lost out; they are victims of a situation that they could not have reasonably been expected to predict. But let me draw a homely analogy. There have been all too frequent occasions when I have ventured into a betting shop and placed my bet on a carefully chosen horse, only for the beast to fall with the race at its mercy. I am sure that everybody in your Lordships' House would sympathise with me in that sad situation, but I do not think that any of you would expect the bookmaker to give me my money back. If Northern Rock had stellar luck and made stellar profits from the stellar risks it was taking, no one would say that the shareholders should not collect, any more than they would resent my collecting from my bookie on the occasions, alas only too rare, when it is my horse that wins because someone else's horse has fallen.

It is not, however, the small shareholders who are making most of the noise at the moment. It has been the big institutional shareholders, many of whom bought their shares after the crisis in the hope of scavenging a profit from the corpse. For hypocrisy—for sheer, egregious hypocrisy—it would be hard to beat the hedge fund managers, some of whom have even been heard to murmur that they will take legal action for compensation. Compensation for what? For the infringement of their human rights. Where is this human right to make an unearned profit out of taxpayers? I hear some in this House complain that the Bill’s scope is not drawn wide enough. If I consulted my heart and not my head, I would wish that it was wide enough to nationalise fiends like that without compensation and dispatch them to perform voluntary service in deprived Newcastle, whose corpse they look to feed off, until they learn sense and

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morality. That will not happen but I trust the courts will sweep aside any challenges to the compensation payable under the Bill.

Ironies pepper the current debate. Over the last few days I have enjoyed watching the City, and, indeed, some in this House this afternoon, who have long preached the complete inefficiency of nationalised concerns. Now it seems they have got their knickers in a twist lest the newly nationalised Northern Rock proves to be an effective competitor. I have enjoyed—and give credit to—the Liberal Democrats for latching on to nationalisation as the right solution before the Government committed to it. And most of all, as a seasoned political observer, I have enjoyed witnessing the Conservative Party practising every sort of diversionary tactic to hide the fact that there is no alternative—no sensible alternative at any rate—from where we are to what the Government are doing.

Let them have their fun. I remind them only that when it comes to the next general election the British public will have a choice to make about who they want in charge of the economy in difficult and dangerous times, in charge of their jobs, in charge of their mortgages, in charge of their savings. Is it to be men, or boys? I am confident that they, like the Government in this case, will make the right choice.

8.11pm

Viscount Eccles: My Lords, my noble friend, and wife, Lady Eccles and I live 12 miles from Darlington. We have always looked north to the admirable city of Newcastle. Our eldest daughter and her family live there. My noble friend Lady Eccles has been a Northern Rock depositor and our charitable endeavours are being greatly assisted by the Northern Rock Foundation. We deeply regret the failure of Northern Rock. Its failure is a sad and severe blow to the north-east. Nevertheless I still wonder why we are here today.

In September, when the depositors were given their guarantee and the Bank of England made its first loan, Northern Rock became de facto in public ownership—100 per cent under public sector control. There was no reason not to decide upon a swift and final way forward. The Treasury guarantees will have been accompanied by stringent conditions, the Bank of England loans similarly; for example, as, presumably, a preferred creditor with a ban on asset disposals. Both the Treasury and the Bank of England will have supplanted the inadequate FSA by obtaining the right to information, to the full opening of Northern Rock’s books and many other matters. No doubt before the second Bank of England tranche the question of whether Northern Rock controlled any off-balance-sheet assets would have been answered. Granite could have been unravelled if it was prudent to do so as a condition of any further Bank of England loan. All the leverage lay with the Treasury and the Bank of England. This due diligence was not a complicated matter, but was it done, and was it done in a timely fashion? It is difficult to be sure. Granite has arisen as a surprisingly last minute complication.

Monday’s Statement said:



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as if to say there are no agreements now—an astonishing admission.

Mortgage finance is not a complicated business, nor is the control of a company engaged in this business. It is the spread between the cost of borrowing and the flow of income from the mortgages that sets the level of profit. In this case one thing is certain. From each day when the Bank of England has made an additional loan to Northern Rock this spread has narrowed. Yet no information has been given to Parliament because no assessment of current trading is available. Parliament does not know what it is being asked to buy—a point made by many noble Lords. Instead, the Monday Statement directed us to remember the long term and promised a future sale, claiming that this assertion of success protected the taxpayer. That brings me to the key missing piece of information without which nobody could determine the least worst way forward. We have been told:

Just as mortgage finance is not a complicated matter, nor is the testing of options when a business is in deep trouble. There are only three. All require a quick and definite decision to be made. The first is to run the business through its troubles as a going concern because the cost will not be too great and success is reasonably assured. The second is to sell it and the third is to realise its assets while greatly restricting the volume of and terms for new business. The most significant step towards making the choice is the calculation of a break-up value. This calculation will control the likelihood of sale and inform the risk assessment of continuing to trade as a going concern. It would take about 10 days for competent advisers to provide a break-up valuation subject to a sensitivity analysis of, say, 5p in the pound either way. Presumably, this key piece of information has been available to the Treasury for months. Nevertheless, Parliament does not have it and so I will hazard a guess. In doing so I take no comfort from the letter which we have seen this afternoon which has a vague FSA assurance. Frankly, I do not believe it. My guess is that if such a valuation has been done, it would have come up with a figure of well below £1 in the pound, give or take 5p.

I am not used to having my questions answered so I will confine myself to a short question with three parts. Have there been calculations of break-up value? When were they made? What did they reveal as the estimated value of Northern Rock’s net assets?

Now we are presented with a sketch of the way forward. No business plan yet exists, which is astonishing given the leverage granted by Northern Rock’s financing needs of five months ago. If my guesstimate on the net asset value being well below £1 in the pound is anywhere near right, it is no wonder that the Treasury could not obtain a satisfactory deal from either the virtual reality world of Branson or that of the Northern Rock directors. The sale exercise has been just a waste of time and money. On the other hand, if the FSA turns out to be right, it should have been no problem to sell.



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My final question is, what would be the impact on the economy of the continuance of Northern Rock or its disappearance over, say, the next five years? It would be marginal. No fewer houses would be bought and sold. No fewer mortgages would be negotiated. The competition would need more branch offices, some of them in Newcastle. The total of employment would not be significantly affected—only, and regrettably, its distribution.


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