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We need now to recreate the professionalism and the morale of the Treasury and the Bank of England. It must be difficult to work for this Government, who mix such a powerful brew of spin with such a low level of accurate information and timely decision-making. For the whole affair could have been settled in a month to six weeks, and by now Northern Rock would be operating at a much lower level in an extended run-off of its assets. Any thought of its eventual sale to ensure its continuance is for the birds, if they still fly in 2018.

8.20 pm

Lord Eatwell: My Lords, I will address part of the wider context of recent events, particularly the events surrounding Northern Rock. Most of us realise that we are now in the throes—perhaps the very early throes—of a major international financial crisis, which will ensure that the future of credit and of all mortgage businesses is radically different from how things are today. How different it is not yet possible to say, but what we can say is that the market for structured credit has virtually collapsed and there is at present no prospect of revival. If and when it does revive, it will look very different from how it looked, say, 12 months ago. We can also say that the regulation of the credit markets will be different. The role of credit ratings agencies will, I hope, be different and it is likely that the structure of the products themselves will be different. All that means that there will be fundamental changes in the way in which the UK mortgage market operates. The changes are likely to be forced on our banks and building societies over a relatively short time horizon of, say, two years.

Given the international crisis, it is obvious that the business model espoused in the past by Northern Rock is no longer viable. It is also obvious that the action being taken by the Government in bringing Northern Rock into public ownership is not only right but the only possible action today, dictated by force majeure. Not only should that be obvious in the context of today’s events, but it is also the lesson of history. It is the nature of banking that there exists a relationship of mutual dependency between the major banks and the state. As the United States Government learnt in 1984 in the case of Continental Illinois, large banks are “too big to fail”, for their failure would pose too great a risk to the banking system as a whole. This is as true in the UK today as it was in the US 24 years ago. All the large retail banks operating in this country today are too big to fail. Hence, when credit markets seized up around the world, it was obviously right that the authorities should seek to ensure that Northern Rock did not

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collapse. If the authorities had not acted as they did in September, the consequences for UK financial markets would have been disastrous.

We know that the Government then gave the private sector the opportunity to develop plans for the absorption of Northern Rock by other banks. The noble Lord, Lord Marland, who participated in that process, told us that the Government gave insufficient time—not too much time but insufficient time. Again, doing that was absolutely right, as evidenced by rescue operations in the past—for example, the Bank of England operations in the secondary banking crisis in the 1980s. It should also be remembered that in September no one, except perhaps my noble friend Lord Desai, could be sure that the crisis in credit markets would be as severe or persistent as we now know it to be. Once it became clear that private sector institutions were unable to absorb Northern Rock, taking it into public ownership was again clearly the right thing to do.

In this context, the solution proposed by the noble Lord, Lord Lawson of Blaby—the strategy of working out the book, as I understand it—is available to Mr Sandler if he wishes to pursue it. If that secures the best deal for the taxpayer, I am sure that Mr Sandler will pursue it. However, it would be quite wrong for the Government to tie Mr Sandler’s hands in that respect in the way that the noble Lord, Lord Lawson, wishes to do. Instead, Mr Sandler should simply have the instruction to secure the best deal for the taxpayer within the constraints placed on him by the competition authorities. It is important for the House to realise that the solution proposed by the noble Lord, Lord Lawson, is the same as the Government’s, plus a particular restriction placed on the management of Northern Rock.

Lord Lawson of Blaby: My Lords, first, the difference is very important and significant, for reasons that I indicated in my speech and which I will not go over again. Secondly, it is not just up to Mr Sandler to decide what is in the taxpayers’ best interests; it is the responsibility of the Government and they cannot run away from that.

Lord Eatwell: My Lords, I entirely agree with the noble Lord, which is why I suggested that the Government should instruct Mr Sandler to secure the best deal possible for the taxpayer in the context provided by the competition authorities.

There were two other alternatives: administration, a policy for a fire sale of assets and the ruin of depositors; or totally disproportionate subsidies to the private sector consortia. I do not think that either alternative would recommend itself to anyone who has thought through the consequences.

As I said, we must consider the measures in this Bill in the context of what is happening in world financial markets. As happens in financial crises, recent events have been unprecedented and they have exposed severe deficiencies in the business models of major financial institutions throughout the world. It is interesting to note that, while there have been major losses at a number of well known international banks,

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as yet Northern Rock has not lost anything. Although there are major crises, in the context of the impact of the changing financial markets, Northern Rock is not unique.

These events have exposed deficiencies in the legal framework that is available to Her Majesty’s Government to deal with those events and their consequences. As the Government have made clear, the measures enacted in this Bill are temporary, specifically designed to deal with the threats that the Northern Rock problem poses to the UK financial system. As we have heard from a number of speakers, the Government are consulting on what permanent changes should be made to enable the better management of financial crises, in particular how assistance should be better provided to financial institutions in distress and how institutions may be more smoothly transferred into and out of public ownership.

What has been extraordinary, as I have listened to speakers opposite, has been the impression that taking Northern Rock into public ownership is a threat to our financial system and to modern capitalism as we know it. Yet this is exactly the framework that already exists in the United States, which was created following the Continental Illinois case that I referred to. A new framework for taking institutions into public ownership when they need to be, in the face of a financial crisis, and then selling them back to the private sector will need to be formulated on a European Union basis so that its provisions are consistent with competition legislation.

Much has been said about the impact of this Bill on competition in UK banking and much of what has been said has been wildly exaggerated. Since all major banks and building societies in this country are too big to fail, the extra security offered to Northern Rock depositors is far less than has been suggested by many noble Lords opposite. This Bill is a vital, positive and welcome measure, because it provides a framework within which Northern Rock can be reconstructed in line with evolving market circumstances. What the business model of Northern Rock, and indeed of any other British bank or building society, will look like in two years’ time is difficult to predict. Business models are going to change because of the way in which the credit markets have changed.

The environment in which current business models were developed has gone, possibly for ever, and it is therefore vital that Mr Sandler, the management team at Northern Rock and the regulatory authorities are possessed of a legal environment in which a new business model can be developed for the future and for the stability of UK financial markets. That is why this Bill must be passed quickly to provide the certainty that markets crave and the legal framework in which the new team at Northern Rock can get on with the job. It is also why new measures should, after consultation, be brought forward as soon as possible to create a more appropriate framework for the relationship of mutual dependence that always exists between the state and the banking industry.

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8.30 pm

Lord Selsdon: My Lords, it is extraordinarily difficult for me to follow the enormous quantity and quality of privy counsellors who have spoken, baying like hounds on the leash looking for a fox sitting gently on the Benches opposite. I was a banker for many years and have realised that in front of me today we have a lot of amateur bankers—by “amateur” I mean someone who loves their subject—trying to make political points.

I will start at my beginning. I have one thing in common with the new executive chairman of Northern Rock—asbestos. Lloyd’s was bankrupted because of asbestos, but I was in the asbestos world, selling it and other materials in the north-east of England for years. It never seemed to do me any harm in the end. That was way, way back, but I wanted to be in industry. I wanted to make things. I wanted to create added value. I did not want to go into the City and be a blue button or a bell bottom, or whatever they were called in those days. My industry thought that I needed knocking down a peg or two, so I was sent to the north-east as a rep, because the rep there had had three hernia operations. In fact, he had only had two, but he had disappeared into the sunset. I was given the patch from Thirsk to Berwick.

I lived for a while in Hesketh and then found that in the winter if I went to the Park Hotel in Tynemouth and offered to work in the bar, I would be given the bridal suite to keep it warm. I got to love Newcastle—I was later allowed to pronounce it with a short “a”. I watched around me as industry collapsed. I watched those empty yards where there was no stock. I watched the cranes rusting in the shipyards and I realised that industry had gone. I managed to win an order for Blyth colliery and for the first time went down a mine. I was allowed to design a piece for the top of the eaves, called a finial—it was called the Mitchell-Thomson finial after my name, before my father died. I was proud and I loved that part of the world.

I watched as suddenly industry collapsed and unemployment rose. A proud people found that they were searching for something new. That is what led me to stand on those Benches—as did the noble Earl, Lord Ferrers—when the nationalisation of shipbuilding took place. For three nights I stood there to try to prevent the Government from nationalising and destroying an industry, but that is what happened. It was not that anything had been done wrong.

The second element in my life came when a committee that I served on with Lord Aldington was looking at what would happen when North Sea oil ran out. North Sea oil turned up and helped the north-east of England, not just Scotland. We said, “Well, if we don’t make anything, we won’t have anything to sell when North Sea oil runs out”. I realised pretty quickly that nothing was going to be made and I joined the financial world as a banker for many years. There, I learnt certain things. I worked with Midland Bank, which came from the Midlands. Barclays came from East Anglia. The four great clearing banks had certain rules. They had, as the Chancellor will know, certain equity-to-debt ratios

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supervised scrupulously by the Bank of England. You could not lend more than 17 to 20 times more share capital than you had reserves. That meant that, if you lost £1 million, you had to reduce your lending book by £20 million.

I was in the merchant banking side. I was told that our assets went up and down in the lift every day, but those of the clearing banks were undoubted. Alongside that came these institutions called the building societies or friendly societies, which started first at the Golden Cross Inn in Birmingham in 1751. By 1860 there were 750 friendly societies, or building societies, in London, and 2,000 throughout the country. In those days, people did not use banks. Even when I joined the banking world, only 30 per cent of people had bank accounts. The rest used building societies, which were often terminal societies. That meant that, when everyone had obtained a house, the society closed down.

Then the problem came. In 10 years—no, even 100 years—there were eight building society Bills, but people forgot the principle of a building society, which was to help a family to get a home. People put their money in and gradually they raised money to be able to buy a home. Homes were the most important things in the land, as they still are today. But gradually mistakes were made. My bank, the Midland Bank, made a mistake by buying a bank on the west coast of America that was operating in what you might call the sub-prime market. It was accused of “red lining”—of not lending to certain ethnic minority groups. Gradually we started to fail.

At that time the building societies were regarded as competition by the clearing banks. Noble Lords will know that, after the war, possibly 20 building societies merged in one form or another and then became banks or were absorbed by banks. That was not because the banks wanted any more branches. They suddenly stopped being banks and sold products. Now they sell them by telephone. You dial and press “1” and you ask to speak to someone and you cannot get a name; you then find that the name is often Sharon, but it is a different Sharon every three hours, and you cannot speak to anyone. We have in some way destroyed part of our banking system.

I had always liked the building societies, but gradually they, too, got caught up by the carpetbaggers—I was going to call the Government by that name. Noble Lords may remember that a carpetbagger was someone who came along and said, “Wait a moment, I have a way of making short-term money. I will take a deposit in a building society and then get some shares, and then make them de-whatever and make a quick buck”. That is what happened. Gradually all the big building societies ended up being taken over by banks—and one of the 10 biggest was Northern Rock, which was still independent.

Some 60 building societies remain, which together have an asset share of some £300 billion. However, that is only three times the level of the problem with Northern Rock. You could see it happening because people lost the idea of equity-to-debt ratios. They looked at the securitisation of debt at sub-prime levels and looked at the cash flow that came in from the

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poor depositor who was actually saving and who was a genuine person who may have been pushed on his house because of inflation and who then borrowed more. A mistake was made by the management, but above all the mistakes were made by the supervisory authorities. They should have known.

In my day we did not dare to move without the Bank of England. You would “walk across the road”, as was said, perhaps up to St Paul’s or down to the Bank itself, and you would sit, often with just one person—not four people sitting in a box—and you would ask for advice. It might be about exchange control; you would then get that advice and learn fairly quickly who was acceptable and who was not. The language that went around was, “We don’t lunch with so and so any more”, which meant that they were in financial difficulties, or, “We certainly don’t call to see them, and they should not be allowed to call to see us”. Then, one day, one of those people called to see me. He was the president of the National Bank of Cuba and the Finance Minister. I was going to say that I always got the bum end of the steer, but it was not quite that bad. Leon was a very nice man; when he came in, he said, “I feel so sorry. You see, we defaulted once with Midland Bank—32 years ago, for half an hour”. He apologised for that because many people had never defaulted.

The problem that we have today is that the building societies have tried to be banks when they were not capable of that and the banks were interested only in trying to lend as much money as possible to people who could not afford to pay for it. We are now in that crisis where our manufacturing and trading industries have been replaced by financial services. Is that the future of this country? We are relying on so much international money that it will disappear if we start to put pressure—either personal or other pressure—on people who bring their money here.

What do we have left? We have one great thing: this institution has been solid and sound in this debate. I feel sorry for the Government. I know what I would do about Northern Rock, but I would not like to do it. Normally, someone would produce a prospectus, maybe in six or eight drafts. Instead of being pushed around by the Chief Whips of each party on red Benches, that prospectus would be delivered by motor-bicyclists at three or four or five o’clock in the morning—this was before we had computers. You would have checked everything out and been made to sign off every page, which other people would then sign on top of you; there would be eight signatures initialled. If you made a mistake between a comma and a full stop in a letter of credit, that letter could be rejected. That was called professional banking; today, it seems to have disappeared.

8.39 pm

Lord Oakeshott of Seagrove Bay: My Lords, I declare an interest as a pension fund manager for the past 32 years. I am not sure whether the noble Lord, Lord Selsdon, would call me an amateur. I suppose that I have also borrowed £100 million or so in my time, but I hope that the noble Lord, Lord Selsdon, would still lunch with me as, so far, I have paid all of

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it back on time. The serious point is that the money I borrowed has been done on the balance sheet of the companies that I have run, where everybody understood what the liabilities were, and not through something called Granite or Dolerite, or any other artificial vehicle designed, in many cases, to deceive or to disguise commercial reality.

Four months ago, I complained in this House about the pernicious 125 per cent mortgages being pumped out by Northern Rock. My honourable friend Vince Cable challenged the Chancellor directly on that, and the Chancellor replied:

Not any more, it does not. That defence of dodgy lending just will not wash a moment longer.

It is fair to say that this has been a sombre debate. Several of your Lordships—the noble Lords, Lord Lang of Monkton, Lord Stewartby and Lord Forsyth—asked: Why the rush? I have some sympathy with that. After all, it has taken five months to get to this point. We saw chaotic scenes earlier, with letters to the Liberal Democrats that we have not had; I also apologise to the House for my noble friend and I having to go out briefly for meetings with Ministers. It has been a particularly rushed process, but having got to where we are it is clearly important that we go ahead—to debate the Bill properly and thoroughly, to amend it tomorrow, I hope, and to get it done.

The noble Lords, Lord Trimble and Lord Marland—and, I think, the noble Lord, Lord Forsyth—properly raised the question of the Lloyds TSB approach. That was an extremely serious approach, despite some of the spin from the Government, and it obviously should have been taken much more seriously than it was. My information comes from a director of Lloyds bank, so unless he is making it up it was well known in the City that that approach was extremely serious; it was a grave mistake to turn it down in such a way.

The noble Lord, Lord Goodhart, spoke eloquently and with great authority, as your Lordships would expect, on behalf of his committee. It is unusual for the chairman to do so but he explained why it was necessary to do that; we are obviously considering carefully what he has said, as I know that the Government have, and I hope that there will be some progress on that tomorrow.

I thought that the noble Lord, Lord Bilimoria, highlighted extremely well the reckless expansion of Northern Rock. As he pointed out, it was remarkable that the Financial Services Authority missed it. Part of the reason—this has perhaps not come out yet, but it will when this appalling scandal is fully investigated—is that Mr John Tiner, the outgoing chief executive and the man who so badly let down the people who suffered in the split capital investment trust scandal, retired in the early summer. I suspect that his attention was wandering; he may have been rather demob happy. That was just before Northern Rock ran out of cash.

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One or two noble Lords raised the question of what will be the compensation payable and what will be the share price for those calculations. I fear that, whoever the Government appoint as a valuer, noble Lords should not waste much time on that. It is quite clear when you read the Bill that there can be only one outcome: a big fat zero. A bank that runs out of cash with no assumption of support can only be worthless. That obviously has serious implications for the Northern Rock Foundation, as my noble friend Lord Shutt pointed out; I fear that the shares that it will be converted into will have no value.

I have a great deal of sympathy with the points made by noble Lords opposite, especially the noble Lords, Lord Desai and Lord Lipsey, about holding the management to account. I am bound to say that if we were in America, we would all be greatly cheered up by seeing marshals drag Mr Applegarth out of his flash office in handcuffs. Serious questions are still to be asked as to whether he, in particular, misled shareholders, auditors and the Financial Services Authority. I hope that that will be investigated seriously.

The noble Lords, Lord Naseby, Lord Marland and Lord Ryder, in their different ways said that it was a shame that there were not more experienced City bankers involved in Northern Rock. The noble Lord, Lord Naseby, in particular, raised questions about Mr Sandler’s banking record. Obviously, we wish him well, but he is not a career banker any more than his colleague—they are from insurance and other areas. Only the Treasury could manage to find two non-dom, non-bankers to run this big British bank.

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