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The argument that has been made for maintaining the openness of the measure, apart from the hybridity point, is that in an uncertain market there may be other occasions where banks fall into difficulties. We need to understand that, even if the Government were aware of such specific possibilities, they obviously would not be able to reveal them to noble Lords today. My concern about the measure is that it may lend credence to the notion that nationalisation is the only or first option. We all ought to take the view that nationalisation should be the last resort and that wherever possible the appropriate response to a failing institution should be for it to be put in the

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hands of another private institution; alternatively, the option of an ordered rundown ought to be considered. It is possible that, if the situation had been dealt with sooner, it would have been easier to find a private owner for Northern Rock.

Whether the provision applies for a month or a year, I am concerned that we are leaving it open to the Government to use nationalisation as a first resort. Therefore, irrespective of whether the provision applies for a month or a year, will the Minister explain to the Committee what criteria the Government would use, over and beyond the general criteria set out in the Bill, to decide that nationalisation was the appropriate response to a specific situation? If they are to use the provisions in the Bill to do that, how would they ensure that Parliament as a whole had the opportunity to discuss and challenge them on whether nationalisation was the right response in another instance? If we leave this as an open door for the Government, nationalisation too easily becomes the first resort when it should not be.

Lord Davies of Oldham: I am grateful to all noble Lords who have spoken in the debate. I shall seek to answer the questions that were properly directed to me. I begin by apologising to the noble Lord, Lord Forsyth, if he felt that last night’s reply was inadequate. He will recognise that we had a protracted debate. It took me 20 minutes to answer the central points that were raised in a considerable number of speeches. Had I directed myself then to all the detailed questions that were asked, I would have at least doubled that time. Of course, it may be thought that we have plenty of time at our disposal, but I am conscious of the fact that a Minister ought to speak only for a certain time. That is why at the beginning of the debate I dispensed with the usual formula of going through the Bill clause by clause, although my speech was drafted in those terms, and addressed myself to the fundamental issues that had been raised—we had the advantage of the other place having discussed it only the day before—so that I could as far as possible reassure the House on those questions. That was the purpose behind my opening speech. Although I did not at that stage do much in the usual way of going through the Bill clause by clause, I still spoke for 30 minutes. Noble Lords must recognise that I have to balance the proper response to a debate with the time available.

Lord Forsyth of Drumlean: I—

Lord Davies of Oldham: If the noble Lord will forgive me, I should continue. Because the Committee stage was due to follow today, when the details could be considered—as they are being considered at this very moment—and to which I am expected to give answers, and as more than 25 noble Lords contributed to the debate last night, I thought it right to concentrate on the main issues that they raised. The noble Lord will say that I should have addressed the large number of detailed questions as well. I could not offer to write given the time constraint before the Committee stage. However, that constraint is also an

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advantage in that we are returning fresh from last night’s debate to the detail which we are considering in Committee today. I hope that the noble Lord will recognise that I shall, of course, address myself to the detailed questions that he and others asked, but that was the reason behind the reply yesterday evening.

Lord Forsyth of Drumlean: I—

Lord Davies of Oldham: I shall give way to the noble Lord. I should also say that one reason why I took so long yesterday was that there were repeated interruptions on every point that I made.

Lord Forsyth of Drumlean: I plead guilty to repeatedly intervening; that is what we are here for. I completely understand the Minister’s problem in respect of time, but he has several thousand civil servants and specific questions were asked. I asked a number of specific questions about the proposals put forward by Lloyds TSB. I asked him to confirm whether what I said was the case and to give an explanation. I have had no response. If the Minister is saying that he will write giving answers to these questions, I am satisfied. It would have been quite good if the officials had actually done the work and written to us this morning. It is not our choosing that this Bill is going through at this ridiculous pace, but it is our responsibility as Members of this place to ask the questions and it is the responsibility of the Executive to answer them.

Lord Davies of Oldham: Of course the noble Lord is right that it is the responsibility of the Executive to respond, but we now have the Committee stage in which the Executive will seek to respond in detail to the issues that are raised. I apologise to the noble Lord, Lord De Mauley, because it will be a little time before I get to the main thrust of his amendment, as I have a series of detailed questions to address.

One question was about Dolerite. Dolerite does not exist. It is of no concern to Northern Rock at this stage. It was an SIV that was used, but it is not used now and it is therefore not relevant to this Bill. On Granite, I attempted to express this point yesterday. Granite has no shares in Northern Rock. Granite is an SIV and there has been no transfer from Northern Rock to Granite since September 2007. The relationship is in suspension in those terms. The reason why Granite is not in the Bill is that we do not need to nationalise Granite, as it is not directly relevant to the position of Northern Rock.

Lord Trimble: I accept what the Minister said about there being no transfer to Granite since September of last year, but there were transfers before September of last year. According to the technical note, Northern Rock received value for those transfers at the time of the transfers so that, at the time of the transfers, it seems to me that the ownership of those assets moved from Northern Rock to Granite. Northern Rock may have been giving management services to Granite with regard to those assets, which it clearly did, but it no longer owned those assets. None the less, we are told

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that those assets appeared on its balance sheet. That cannot be so. What on earth is going on? No doubt these special investment vehicles are more sophisticated than I appreciate. I wish that the Minister would explain how it is that assets that Northern Rock no longer own, for which it has received value, appear on its balance sheet.

Lord Davies of Oldham: As I have sought to emphasise, because of the nature of the relationship between Granite and Northern Rock, Granite is not the subject of this measure and is not part of this Bill. As Northern Rock exercises control over Granite, it means that Granite vehicles are consolidated on Northern Rock’s group balance sheet; that is why they are there. This consolidation does not mean that the assets or liabilities of Granite are those of Northern Rock, or that Northern Rock is liable to Granite bondholders for the repayment of the Granite bonds. That is why Granite does not feature as part of the Bill. I sought to express this yesterday. The noble Lord, Lord Marlesford, has emphasised his view that my response at the end of the debate was inadequate. I sought to make the position clear at the beginning of the debate and I am taking the opportunity of Committee stage to do so now. I have also answered his question on Dolerite. I see that he is about to rise again.

Lord Marlesford: Before the noble Lord leaves the subject, he has admitted that Dolerite existed and that it was a SIV for Northern Rock. It would be nice to be told when it ceased to exist, whether it has been totally wound up, or whether it is merely in a slightly analogous situation to Granite, in that it has done no business with Northern Rock for some while. If it still exists, does it have any debts or finances that have been passed to it and which themselves are still linked to Northern Rock?

Lord Davies of Oldham: The noble Lord must accept that my original answer encompassed this concept, but I will spell it out in more detail. Dolerite was a securitisation structure similar to Granite. It was used by Northern Rock to fund its commercial mortgage book. All bonds under that structure have now been redeemed. Therefore, Dolerite is entirely irrelevant to Northern Rock. As I cannot be any more explicit than that, I hope the noble Lord will forgive me.

12.30 pm

Earl Ferrers: I am so sorry, but the noble Lord has the charming ability to make everyone appear to be duffers if they do not quite understand what is happening. I happily fall into that category. I wonder whether he can explain one point about Granite. As I understand it, Granite appears on the books of Northern Rock. It is therefore in some ways owned by Northern Rock. But Granite is apparently a legally separate entity, set up for charitable purposes in Jersey. How can Northern Rock own something that is legally independent? And what happens if Granite goes bust? Does Northern Rock have to pay out? If so, Granite is part of Northern Rock.



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Lord Davies of Oldham: I emphasise again that there are no obligations on Northern Rock in that respect with regard to Granite. There is therefore no question of Granite, any more than of Dolerite, being brought within this legislation. Forgive me; I am not suggesting for one moment that the questions being addressed to me are anything other than insightful—of course they are. My problem is how often I am being expected to answer them within the constraints of my time at the Dispatch Box.

The noble Lords, Lord Forsyth and Lord Lawson, asked me about a supposed bid last September, a question which was certainly raised yesterday. There was never a bid or a proposal to which the Government should have responded in those terms. Although the Chancellor made it clear, as did the Governor of the Bank of England and the chairman of the Financial Services Authority, that an enquiry by a possible buyer was made, no firm proposal was ever received. There was nothing on which the Government could act. It is therefore not right to give the impression that what was going on last September was similar to the issues relating to Olivant and Virgin over the past few months.

Lord Forsyth of Drumlean: I apologise for interrupting the Minister again, but I asked that question yesterday. I believe that Lloyds TSB said it was prepared to take over Northern Rock on the basis that the Bank of England would provide a £30 billion facility for two years—a draw-down facility which would not necessarily be used, because banks tend to want to match their long and short liabilities—and that although the Government responded at first that they were not prepared to take the loan book as security on the facility, they then changed their mind. The facility would have been at a commercial rate of interest. Secondly, the Government were not prepared to have a commercial rate of interest but wanted a penal rate. When the Government rejected that proposal they committed themselves to a course which has brought us to this sorry state. The Minister owes it to the Committee to tell us whether that is correct. It is playing with words to say that they did not have a firm proposal. Was Lloyds prepared to take over Northern Rock as a private buyer on these terms or was it not?

Lord Tordoff: Before the noble Lord answers, perhaps I may say that I am a bit baffled. Although I came somewhat late to the debate, I see that it has taken 57 minutes so far to decide whether the clause should say “month” or “year”. I also detect that a number of Second Reading speeches are being made. Perhaps the noble Lord could give brief answers—if possible—to the questions, and then we could move on to the actual subject of the amendment. It is an abuse of the procedures of the House.

Earl Ferrers: With respect to the noble Lord, Lord Tordoff, he is what one might call off side. Second Reading speeches are not being made; questions are being asked of the Government at Committee stage, as is quite right, and the Government are expected to answer. A matter of considerable concern is bound to take some time and, on this occasion, the noble Lord ought to have a little bit of patience.



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Lord Davies of Oldham: I have limitless patience; the question I have to judge is the patience of the Committee. We are considering specific amendments but a range of other issues have been raised within that framework. Many of them have been raised before, and I have sought to respond to them. Perhaps I may now address myself to the questions. I have no further reply to the noble Lord, Lord Forsyth, on the position last September. As the Chancellor made clear in another place and I have repeated, there was never a significant development regarding a bid for the Government to consider. The issue is therefore extraneous to the Bill, which is about how to deal with the present situation of Northern Rock.

The noble Lord, Lord De Mauley, deserves a reply on his two amendments. There was some concern when the amendment was put forward in the other place that a full year would not be needed for the process we are undertaking. Of course we recognise that concern, so it may be helpful if I set out why a full year is desirable. But first, to avoid any misunderstanding, I must make it clear that the sunset clause applies only to the powers to make transfer orders under Clauses 3 and 6. It does not apply to the powers to make compensation orders in Clauses 5 and 7 or to the other powers of the Bill.

In addition, Clause 2(9) provides that transfer orders will continue in force even when the powers in Clauses 3 and 6 have expired. However, the powers in Clauses 3 and 6 may have to be used more than once in any particular case. So, following the initial order, further orders may be made under these clauses where, for example, provision must be made in connection with or in consequence of the transfer, or to deal with new matters or issues affecting the transfer. It is too soon to say whether further orders may be needed in relation to Northern Rock. We would not wish to take the risk that we will need to make consequential provision after the one-month time limit has expired. That is why we need time in relation to Northern Rock.

As the Committee will recognise, the Bill is drafted in general terms, and I have explained the two reasons for this generality. The first, of course, is to avoid the issue of hybridity—an issue which raises very real difficulties about the timescale in which any measure should be passed, when everyone recognises the urgency of dealing with Northern Rock. The second aspect of the timescale is that, as I sought to make clear yesterday, the Government are seeking to produce a significant Bill that will encompass permanent solutions to the issues of banking reform. We have had extensive consultations on that because it is an issue of the greatest import. The Government published a consultation document on the reforms at the end of last month and we will introduce a Bill in the present Session. That Bill is not likely to achieve Royal Assent for many months. In the mean time, we have to address significant issues about regulation of the banking system.

The other amendment in the group probes why the Government believe that the Bill and Clause 6 in particular should apply to building societies. Clause 6 gives the Treasury the power to transfer the property rights and liabilities of deposit-taking institutions to

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companies owned by the Treasury or the Bank of England or a private third-sector party where one of the strict conditions in Clause 2 is satisfied. I address that point to the noble Earl, Lord Ferrers. He will appreciate that very strict conditions have to be met under Clause 2 before the provisions are triggered. That is why they relate to Northern Rock and only to Northern Rock. They would only apply to any other financial institution if we faced the direst crisis with it.

Earl Ferrers: I am very grateful to the Minister for saying that this applies to Northern Rock and only to Northern Rock. Why is it not therefore a hybrid Bill?

Lord Davies of Oldham: I have just explained the problems with hybridity in terms of the timescale in which we would have to operate. The Bill is not hybrid because, at present, the conditions under Clause 2 apply only to Northern Rock. They are emergency circumstances; they apply to Northern Rock. The reason why we require the provision for 12 months is that we cannot foresee the future. It is not a question of the Government knowing something that the rest of us do not know, as the noble Lord, Lord Forsyth, suggested—as if the Government would ever be in a position to know more than the noble Lord, Lord Forsyth. It is not a question of us knowing something that he does not; it is the Government being prudent in these difficult times. What could be more absurd—and just think of the criticism that would emerge from various parts of the House—than if an emergency occurred and there were difficulties with another institution, and the Government came trailing back to the House again to say, “We now need specific legislation with regard to this institution and we are asking the House to go through the whole matter”? It is surely better that we are prudent.

Lord Hunt of Wirral: The Minister is on shifting sands. I know that a week is a long time in politics, but when the Chancellor of the Exchequer made his announcement on Monday, he made it absolutely clear that:

Last night, the Minister started flirting with the need for “necessary defences” in a “rapidly changing environment”. Does he realise that the Bill has cast a shadow on the banking industry? It is about time that he made the position absolutely clear. Is it just for Northern Rock or is it to cover some other circumstance which the Government can or cannot foresee at present?

Lord Davies of Oldham: Circumstances which the Government cannot foresee—that is the whole point and burden of my remarks. I am merely saying that the Government are prudent to have in place legislation which can be activated if a disaster occurs. If it is suggested that the Government are acting imprudently here, the Committee must be aware that every advanced economy is presently looking very

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closely at its banking system, the threats to it and the problems that institutions have—problems that occurred on a massive scale with a whole range of institutions. That is why the Financial Stability Forum, the international forum looking at international financial stability, is extremely active.

The British Government are playing a very important part in addressing the circumstances in which Northern Rock has proved to be vulnerable. Let me say that institutions in some other countries are even more vulnerable than Northern Rock, if one looks at the scale of the assets which have collapsed in the face of the present financial circumstances. The Government are not about creating law in order to nationalise any other institution. The Government are creating law to make it possible for that to be done if the very strict conditions of Clause 2 are met—that confidence in the financial system is threatened, the issue that Northern Rock raised, which is why we acted as we did with regard to Northern Rock.

Lord Roberts of Conwy: Will the noble Lord clear up one point for me? He is very anxious to stress the irrelevance of the subsidiary company, but is it not possible that there could be a repurchase of the mortgages already given to the subsidiary company, the Jersey-based company, in which case that repurchase would have to be done by Northern Rock? Therefore, it would come under the Treasury guarantees.

Lord Davies of Oldham: I have enough problems with this amendment. The noble Lord is effectively anticipating later amendments, where that issue will be addressed, and I will of course respond to the point at that time.

Lord Hunt of Wirral: Will the Minister clarify once again that he is no longer pursuing his language of last night, when he kept referring to “other eventualities”, and that we are back with the position as explained so clearly by Mr Darling on Monday?

Lord Davies of Oldham: If the noble Lord is bringing to my attention that the Chancellor of the Exchequer expresses himself more accurately than I am likely to do, of course I subscribe to that. What I sought to do last night was to reiterate exactly the point that the Chancellor of the Exchequer had made in the debate on Monday. I am grateful to noble Lords for giving me the chance to give that assurance.

I emphasise again that the powers that we are taking are triggered only in the most extreme circumstances. They are merely the actions of a prudent Government in difficult times creating legislation that will carry us over a temporary period. That is why the 12-month limit is there, because we intend to have in place the full banking proposals under a banking Bill, which we hope will become an Act, which will render the provisions in this Bill quite otiose. That is why they are limited powers.

I hope that the noble Lord will think that at last I have got round to his two amendments and will feel that he has created a most interesting debate, but can safely withdraw his amendments.


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