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I agree with much of what the noble Lord, Lord Eatwell, said in a very interesting discussion of the major financial crisis that we are now in. I just wonder, if it is so obvious now under force majeure that the bank has to be nationalised, whether it was not obvious two or three months ago. I am surprised that it has taken quite that long. I was also amazed at his comment that Northern Rock has not lost anything. No bank loses anything if it is being propped up by the Government and before its accounts have come out. I do not think that the Northern Rock year-end accounts for December will make very happy reading. We are keen and will be pressing the Government hard to ensure that they appear very shortly. They should have appeared on 30 January, but we have seen no sign of them yet.

Can the Minister confirm in his winding-up speech whether the audit of Northern Rock will be carried out by the same auditors? There must be serious question marks about their performance in failing to spot the problems before. If it will be, that will not be satisfactory and I ask that a new firm of auditors be appointed.

There are very serious questions about the Northern Rock balance sheet. The June interim figures last year, which showed a tier 1 ratio of 11.3 per cent—a very healthy tier 1 ratio—were based on very optimistic assumptions about the bank's exposure to collateralised debt obligations and other funny paper of that sort. From what we now know and how the risk weightings have changed, the risk weighting under Bar rules, if

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those pieces of paper are written down, goes from 20 per cent if they are triple A to 1,250 per cent if they are single B. Leading banking analysts in the City have stated that on that basis, the tier 1 ratio last June was below the regulatory minimum. Again, there are serious questions for the Financial Services Authority as to how carefully it looked underneath the figures.

I turn to the letter to my honourable friend Vincent Cable, which we have received during the course of the debate and which we have obviously been having to study as we listen to the speeches. One question immediately strikes one: has Mr Alistair Darling’s mortgage been packaged out and sold off to Granite; was it adjudged higher quality or is it still stuck with taxpayers?

More seriously, the letter repeats the Chancellor's assertion:

What on earth is the evidence for that? How do they know; how have they checked it? If the FSA had done its job properly we would not be having this debate today. As I have said, an immediate independent audit of the Northern Rock loan book must be carried out by forensic accountants with nothing to cover up or hide.

We only have to look at the numbers and the massive expansion of Northern Rock at the top of the market and the fact that it was lending on terms that most of its competitors regarded as suicidal in the last few months to believe that there will be serious problems in the loan book. How could Northern Rock have accumulated the £8 billion of unsecured loans that we know it has if it was sticking to prudent lending policies?

The letter takes an optimistic view of Northern Rock’s commitments to Granite. In particular it seems to give the impression that the new management of Northern Rock will be able to use Granite as it suits them and assess its commercial relationship with Granite going forward. It is not as simple as that: it is a question of contractual arrangements. I have the agreement here: it is 411 pages of what Northern Rock can and cannot do.

The Government have also given the impression that there is no problem; we do not have to put further mortgages into Granite. What happens if the Northern Rock loan book runs down, as it is likely to do, as borrowers who have had short-term mortgages on these uncommercial rates as those fixes run out and as they remortgage away? Many of those mortgages will be repaid, many of them within Granite, so surely Northern Rock will have to take from the main pool of high quality mortgages if it can find them to replenish that. There are serious questions to answer on the letter.

What really matters now is to minimise the taxpayers’ losses. It is important that the business going forward is run on a prudent as well as a commercial basis. The Alliance and Leicester today said:



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If only Northern Rock had been adopting those policies, not just up to when it got into difficulties but in the past five months when it is effectively being controlled by the Government, we would not be in the position that we are in today.

I fear that the taxpayer is going to end up stuck at the bottom of a black hole involving probably somewhere between £5 billion and £10 billion. I hope that I am wrong, but I do not believe that I am. House prices have a long way to fall, and the overriding objective for Northern Rock must be damage limitation: to keep those losses and the taxpayers’ losses to a minimum.

8.53 pm

Lord De Mauley: My Lords, I thank the Minister for introducing the Bill and I echo the sympathy for him that one or two of my colleagues have expressed. I will not thank him for going through the Bill in detail because he did not and I cannot say that I disagree with his decision on that point, but I thank him for at least flirting with some of the key issues. I also thank all other noble Lords who have spoken. My noble friend Lord Lawson explained why we on these Benches believe that the Government’s intended course of action is not the best solution: he said the second worst. He also explained his grave concerns about the FSA and about banking supervision. My noble friends Lord Trimble, Lord Ryder and Lord Marlesford and my noble and learned friend Lord Lyell, as well as the noble Lords, Lord Bilimoria and Lord Oakeshott, all amplified those concerns and offered the Government valuable advice, which I hope they will heed.

My noble friends who have spoken before me have made very clear the Conservatives’ opposition to the Government’s actions in respect of Northern Rock. The Government’s position has been decimated by the voices of experience today. My experience is much more limited, but I can say that, in 16 years of advising British and foreign banks on the acquisition and disposal of financial businesses and portfolios of assets, not once have I seen a better outcome achieved by delaying a difficult decision, as the Government have been doing. It is not better for staff, for customers, or for the shareholder, who in this case is about to be the poor old taxpayer.

Any soldier knows that sometimes a bad decision is better than no decision at all. After five months of twisting and turning, the Government have decided on this course, and we have very reluctantly concluded that our time will be best used in trying to improve what we consider to be the flawed Bill that they have introduced to achieve it.

The more I try to make sense of the Bill and its relationship to the Government’s stated policy, the less coherence I can see in it. It is in essence two different Bills, addressing two different issues. Our amendments will seek to untangle some of this mess and impose some clarity and consistency on the provisions that we are considering. The first issue is the nationalisation of Northern Rock. After five months of dithering, we have apparently arrived at a

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full blown and immediate crisis, to which the only solution is emergency legislation.

My earlier comments about delaying difficult decisions notwithstanding, proper scrutiny is, as many noble Lords have said, essential, and I ask the Minister again, as I did on Monday and as my noble friends Lord Stewartby and Lord Forsyth and my noble and learned friend Lord Lyell did today, what the rush is. Where is the emergency that necessitates the nationalisation of Northern Rock by the end of the week rather than by the end of the month? The Government have demanded that Parliament suspend its usual intervals and accept that the Bill be subject to a mere three days of scrutiny in total by both Houses, and propose that there be no scrutiny of the orders made under it.

Your Lordships have quite rightly expressed their concerns about this, as did my honourable friends in another place yesterday. As my noble friend Lord Marland said this evening, the Government have clearly been expecting nationalisation for some time. The Bill was not drafted overnight; nor were the draft orders that we have been shown. The Government have tried to convince us in their Memorandum to the Delegated Powers and Regulatory Reform Committee that a decision to nationalise a bank is likely to need to be taken urgently and at short notice, possibly within days. The DPRRC report shows that the DPRRC is as unconvinced as I am, and we are all grateful to the noble Lord, Lord Goodhart, for his helpful contribution to the debate.

I draw your Lordships’ attention to the committee’s warning that even if, following the negative procedure that the Government currently propose, Parliament were to annul a transfer order under Clauses 3 or 6 after the Government have implemented it, the order cannot be unmade. The order-making powers in the Bill therefore in effect exclude Parliament from any role at all in the nationalisation of Northern Rock or of any other bank or building society that the Government might choose in the next year.

There is now a firmly established tradition that the advice of your Lordships’ committee on delegated powers is heeded by government, and although we understand that the Minister had short notice of the report, he has undertaken to resolve the situation, and we look to him to table amendments implementing all the committee’s recommendations. If he does not do so, I must tell him that we will press our amendments on the matter in Committee tomorrow.

I said earlier that we are faced today by two different Bills. We have here not just a Northern Rock nationalisation Bill. The second function and the second issue of this Bill is, as my noble friend Lord Bell said, the effect of the Government’s economic incompetence and mismanagement. They claim—my noble friend Lord Higgins referred to this—that we must also protect against a more general systemic instability in the financial system. The Government have occasionally tried to reassure your Lordships that this Bill extends only beyond the simple nationalisation of Northern Rock because of the necessity of avoiding Hybrid Bill procedures: I think

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that they mean the Private and Hybrid Bill procedures. The Minister corrected himself on Monday categorically to state that the activating provisions in this Bill will not be triggered by any other financial crisis in the next 12 months. The Chancellor has furthermore stated that the Government have at this time no intention of applying the provisions to any other institution than Northern Rock.

Yet, this Bill goes far beyond what would be necessary to avoid triggering the time-consuming Private and Hybrid Bill procedures. In passing, I point out that the British Leyland Act 1975 and the Rolls-Royce (Purchase) Act 1971 managed to avoid those procedures without extensive, unrelated provisions and enormous scope. My noble friend Lord Ferrers also referred to his experience on the Aircraft and Shipbuilding Industries Act.

Clause 2(2)(a) specifically anticipates the nationalisation of a bank or building society because of a potential “threat to the stability” of the UK financial system. But the Prime Minister this afternoon claimed that in the autumn the Government took successful steps to prevent Northern Rock from causing systemic failure. So why do the Government need these new powers now?

The noble Lord, Lord Newby, referred to one way in which the bank can be taken advantage of by customers. I fear that this Bill is a green light for more sophisticated skulduggery by unscrupulous investors to identify a target financial institution, to sell its stock short and then to seek to cause financial instability in the certain knowledge that the Government will step in and bail out that target. The Government are creating a potential speculators’ paradise. They are even trying to put into this Bill a wholly unrelated power to provide financial assistance to building societies under Clause 11. I cannot see what that has to do with Northern Rock or the avoidance of hybridity.

I am glad to see that the Delegated Powers Committee recommends that this “unsunsetted” clause should come out of the Bill or at least be hedged about with the tightest possible restrictions. If the Government do not do so, we will therefore press amendments to remove the worst of these unnecessary provisions and will attempt to return the Bill to something closer to what the Government led Parliament and the public to expect.

No acceptable justification has been offered by the Government for this Bill existing for a whole year. If they need it for the nationalisation of another financial institution, they should come back to Parliament. We will propose an amendment to reduce the sunset clause to a single month, which would be more than enough for the nationalisation of Northern Rock. For the same reason, we will propose an amendment to remove building societies from the Bill’s scope. If the Government are sincere about the overwhelming need for this Bill to be rushed through Parliament, the necessary orders can and should be made within a month.

I have spoken about the unnecessary provisions in the Bill: I should now like to turn to the necessary provisions that are not in the Bill. My honourable friend the Member for Tatton in another place

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yesterday pointed out, as did my noble friend Lord Forsyth today, that we do not know what the taxpayers are buying, how much they are buying it for, how long they will own it and what they will do with it while they have it. What is most concerning is that not only are your Lordships in the dark as to these matters but that it appears that the Government are, as my noble friend Lord Stewartby said, equally ignorant.

My noble friend Lord Lawson asked what the auditors had reported to the FSA and we look forward to hearing the Minister’s answer to that. The noble Lord, Lord Oakeshott, also asked about auditors. The Government are committing the taxpayer to a compensation package, despite the strong feelings of the noble Lord, Lord Lipsey, on the matter, that could hit nearly £2 billion for an asset book that has not been independently assessed. They remain unable to explain how they will square the circle and continue what they call “business as usual” when the business model was what precipitated the crisis in the first place.

Furthermore, despite what the Minister said earlier, it is not at all clear how they will prevent Northern Rock taking unfair advantage of its access to cheap Government money, while continuing to compete vigorously. I am afraid that we on these Benches are deeply sceptical of the touching assurances of the noble Baroness, Lady Kingsmill, that we simply do not need to worry about competition.

The confusion is summed up in the furore to which the Minister referred, which is now breaking as the public become aware of the existence of the Granite securitisation vehicle. As my noble friend Lord Lawson said, it is becoming clear that for all the Government’s reassurances that Northern Rock is a solvent bank with a good asset book, the best assets are, as my noble friend Lord Higgins said, locked away and will not, as the noble Lord, Lord Newby, said, become available to the taxpayer.

Notwithstanding the Minister’s strenuous assertions and the letter to the Liberal Democrats—which, incidentally, I, like my noble friend Lord Trimble, find unconvincing—the Government are between a rock, as my noble friend Lord Forsyth said, and a hard place on this one. It appears significantly to undermine the entire process. As the noble Lord, Lord Oakeshott, said, the terms of the contract are critical. To add insult to injury, as several noble Lords have mentioned, the Government even intend to perpetuate this fog of confusion by exempting the nationalisation from public scrutiny through the Freedom of Information Act. We have therefore tabled amendments to shed light on these matters.

The Minister referred to widely expressed concerns about competition. We will have to think carefully about what he said. If we are not satisfied, we will propose an amendment to establish a watching brief on how the nationalised bank impacts on a highly competitive financial market. I welcome the comments of the noble Lord, Lord Newby, on this. We will seek to ensure that there will be no exemption from the Freedom of Information Act. We will also propose an

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amendment extending the recommendations of the Sharman report to financial institutions nationalised under this Bill.

The management of Northern Rock must be subject to greater parliamentary scrutiny, both in its business strategy, as several noble Lords have said, and in its relationship to Government. The Government’s assurances of an arm’s-length relationship with the board, as my noble friend Lord Naseby said, are also starting to look somewhat thin with the recent appointment of the Prime Minister’s former Principal Private Secretary to the board.

There is no point in adding to the recriminations. The blunt truth is that come tomorrow night the British taxpayer will have chanced the odd £100 billion, give or take £10 billion, to own a crippled bank with a loan book that was not saleable to the private sector, even with Treasury money, and which is tied to a £40 billion offshore trust in Jersey, about which we still know all too little. It is now apparently official Labour policy to be the first Government to be big in Jersey trusts and 125 per cent mortgages. Nationalisation, sub-prime loans, offshore finance and the use of a small charity’s name to raise cash on Wall Street: was ever such a cocktail offered to the taxpayer?

When the Minister sums up, can he tell us whether, if Granite proves unable to repay its short-term loans when they fall due, there will be any charge on Northern Rock to meet those payments? Yes or no? The Minister used the word “temporary” several times in his opening speech. What does it mean? Some of us think it might be a rather long and bumpy time.

The bottom line is that a large number of serious practical and concerns have been raised on all Benches in the House this evening. Practical and sensible amendments have been put forward. Will the Government now give serious consideration to any or all of those amendments? Indeed, are they now ready to accept them? Or is this debate and this whole process no more than a charade?

This whole episode has been a saga of corporate arrogance and greed, and financial and political bungling. Let us not compound this by railroading through, unchanged, a Bill no one outside the Prime Minister’s narrow circle saw before Monday evening. I hope the Minister will not say that the Government have got things 100 per cent right in their first draft, and therefore cannot brook any amendment that noble Lords, in their wisdom, might suggest. That would be a negation not only of parliamentary government but of common sense.

9.10 pm

Lord Davies of Oldham: My Lords, I am grateful to all noble Lords who have spoken in this excellent debate and I accept, in the spirit in which it is intended, the sympathy for my position expressed, most recently by the noble Lord, Lord De Mauley, and by the noble Earl, Lord Ferrers. Indeed, I think that the noble Lord, Lord Forsyth, sympathised with the position I am in. The sympathy is somewhat wasted because most of those who voiced it have felt the heat of the kitchen themselves and therefore know

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only too well that that is what Ministers are paid to respond to, and I intend to do so. With a Bill of this kind, the issues are marginally more rushed than is usual with our legislation, and we are all having to adjust to the fact that while I am responding to the Second Reading speeches this evening, inevitably we will return to many of these points tomorrow morning when we deal with the Committee stage. I shall come to the detailed points, but first let us get down to the fundamentals.

I start by making the obvious point that no one needs much sympathy at this Dispatch Box when they are supported by the speeches of my noble friends, whom I congratulate on the high level of their contributions and their constructive approach to the issues. That is a contrast with all the speeches from the Official Opposition. They have been mightily critical of the actions of the Government without themselves articulating any conceivable strategy for how to deal with this problem, and that is the biggest contrast. My noble friend Lord Lipsey summed it up by saying that all noble Lords on my side of the House and, I hope, many others will support this legislation while regretting its necessity, because of course it reflects dire circumstances. Speakers for the Official Opposition rather like the mud that is around and think it may well stick to the Government. They have indicated that they intend largely to oppose the legislation tomorrow.

I want to emphasise that the Government have taken the right decision to take Northern Rock into a period of temporary public ownership. The noble Lord, Lord Bell, was not the only noble Lord to suggest that what the Government are doing is lurching back to the joys of the early 1980s with their enthusiasm for Clause 4 and widespread nationalisation. I believe that the noble Lord, Lord Marland, indicated much the same. Both noble Lords have failed to take into account the criticism expressed by most other noble Lords on their Benches, which has been to ask why the Government have been “dithering”—that was the word they used—by trying to find a private sector solution over the past months. At least the Liberal Democrat Benches have been consistent in their position. Most noble Lords on the Opposition Benches have argued that point when of course it was clear that what the Government were seeking to do was indeed to obtain a private solution to this problem. The noble Lord, Lord Bell, has left it a bit late to try to argue the case both ways, if that is what he is trying to do.

Lord Bell: My Lords, I am not being argumentative, but I said specifically that this is not a return to the nationalisation policy of the 1980s.

Lord Davies of Oldham: My Lords, I am glad to see that the noble Lord is not taking us that far back, but he did emphasise that the Government are bent on nationalisation without the obvious caveat that this is a position we have reached after making every effort to find a solution in the private sector.


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