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The Minister may recall that my colleague, Vince Cable, pointed out at an early stage that if the Government had only taken his advice on nationalisation, they would have saved millions of pounds in fees for Goldman Sachs. In order not to make the same mistake again, will the Government accept an offer from my noble friend Lord Oakeshott to value Northern Rock shares for nothing, and to do so extremely quickly?
There has been much speculation about legal action. Shareholders, both small and large, have contemplated legal action. I suspect that for the hedge funds they have to proceed with legal action to cover the fact that they made a huge bet and lost. For small shareholders, it seems to me that legal action poses a number of risks. First, they are, understandably, very frustrated at the situation in which they find themselves. Whether or not the shares are valued at nothing, they are clearly going to be valued at virtually nothing. They quite understandably are, first, looking to see who to blame, and, secondly, against whom they have a course of action. It seems to me that there is a real danger that they may go down a legal route and put in a lot of money pursuing legal avenues, which are offered to them by unscrupulous lawyers who see this as a way of making a significant amount of fee income. I hope very much—I do not expect the Minister to comment on this; it is obviously up to small shareholders to decide what they are going to do—that they are dissuaded from spending significant amounts of their own money on legal actions, which are almost certainly bound to fail.
The noble Baroness, Lady Noakes, asked the Minister about two documents which featured quite large in our debates on the nationalisation Bill. The first was the framework agreement. The framework agreement is, as it were, the instructions from the Government to Ron Sandler about how they want Northern Rock to
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The second document is the business plan. As the noble Baroness said, we understand that that has to be submitted within the week. I would again like to have an assurance from the Minister that when that business plan goes to Brussels it will be available for public scrutiny.
Finally—it is almost like a coda to any discussion on Northern Rock—the noble Baroness raised a big issue about Granite and the fact that the ONS has been able to give a degree of clarity about Granite which Ministers, either by accident or design, have completely failed to do on the Floors of both Houses and in the letter sent to my colleague in another place, Vince Cable. Perhaps I may repeat her questions. Will the Minister confirm that ONS has decided that all the assets of Granite will be included in the Northern Rock debts which will sit on the Government’s books, and that the total amount is therefore in the order of £90 billion? There is still a reasonable amount of confusion about a number of aspects of Granite, but if the Minister could at least give confirmation about that issue, it would be one less area of confusion to which we would need to return in the future.
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Viscount Trenchard: My Lords, I am also grateful to the Minister for the opportunity to debate this order. I agree very much with what my noble friend Lady Noakes and the noble Lord, Lord Newby, have said, so I will be brief. I would like to make one or two additional points.
Although we are grateful for the Opposition to debate the order on compensation, it is a great pity that your Lordships’ House and another place have been denied the opportunity to debate under the affirmative procedure either this main transfer or a further main transfer. I am extremely disturbed that the taxpayer is therefore at risk that, without any scrutiny by your Lordships' House, it would be possible that an equivalently large financial institution could be taken into public ownership under the order.
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As the noble Lord, Lord Newby, correctly said, Northern Rock would have gone bust without the Government stepping in to nationalise it last autumn. However, as your Lordships know, there was a serious
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Much has been said about the subject of Granite and I do not want to repeat what many noble Lords have already pointed out. However, it is clear that Granite should have been included in the nationalisation. Note 22 to the consolidated accounts of Northern Rock at 31 December 2006 says:
If they are regarded as legal subsidiaries of Northern Rock plc, that means that they are clearly legal subsidiaries owned by the shareholder of Northern Rock plc; that is, the Government.
I should like briefly to address the question of the Government's adviser, Goldman Sachs. I feel that the public have not been informed enough about the basis on which Goldman Sachs was appointed as adviser to the Government, what its remit was, or indeed whether it was paid a success fee. In other words, was the ultimate decision on the solution for Northern Rock regarded as a success or not? I wonder whether the selection of an independent valuer under this order will be subject to a similar kind of process as the appointment of the Government's investment bank advisers.
I should like to comment on the Northern Rock Foundation. Like my noble friend Lady Noakes, I do not understand why it was necessary for the Government to convert the foundation shares. In any event, the Government have committed to continue to pay charitable donations from Northern Rock—or they have required the new Northern Rock management to continue to pay, regardless of whether it makes a profit, £15 million in each of the next three years to the Northern Rock Foundation. I rather wonder why. I do not for a moment wish to suggest that the charitable causes in the north-east and in Cumbria which have been supported by the Northern Rock Foundation are not entirely worthy. Indeed, as the former chairman of Northern Rock pointed out in his chairman’s statement in 2006, Northern Rock was the third most charitable FTSE 100 company. But why should the taxpayer, who already makes his own decision about which charities he supports, be bound by that?
I can well understand why the former management needed such a potent poison pill to protect itself against takeover, which I understand was the purpose of the establishment of the Northern Rock Foundation and the obligation on the company to pay 5 per cent of pre-tax profits to the foundation, but I do not think that it is right for the taxpayer to bear this additional obligation and burden—insignificant though it is in comparison with the vast liability and obligation which
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The valuer must of course provide for the public interest to be entirely repaid before the shareholders receive compensation, but I am satisfied that that will be the case. But I ask the Minister to say a little about the Northern Rock Foundation and why—if the foundation is being preserved, and if Northern Rock under government ownership will continue to fund the privatisation although it does not need a poison pill any more—the foundation shares had to be converted to ordinary shares.
Viscount Eccles: My Lords, I am a member of the Merits Committee and, as it happens, of the Delegated Powers Committee. I do not intend to speak on the points made by either of those committees but shall start with a general point on this order.
In the Explanatory Memorandum, and indeed in the impact assessment, the Treasury has chosen to say, under “Policy Background”:
“The purpose of the Act is to enable the Government to act to secure the continued stability of the UK financial system”.
In the impact assessment, in answer to the question,
I suggest to the Minister that that was a mistake by the Treasury, because it is over the top. The fact was that a FTSE 100 company with a 7.5 per cent market share chose, at times when people were already issuing plenty of warning signals, to increase its market share to 20 per cent by underselling the market. When the history book is written, it will be shown that Northern Rock’s behaviour was in fact no threat to the financial stability of the UK system. To keep on telling the world that it was is not helping the British economy, the City of London or, indeed, the whole system of financial regulation which applies in this country.
I am fully aware—the whole House is—of the multiplicity of questions that the noble Lord, Lord Davies of Oldham, is expected to answer. But even when my noble friend Lady Noakes puts a ball right down the middle of the pitch, maybe with a bit of in-swing on it, heading towards the stumps, the noble Lord kicks it aside. It is true that in Oldham they do not recognise the LBW rule; they cry from the stands, “Give the lad a chance” and carry on with the game. The noble Lord is already facing a huge number of questions. There are 26 Written Questions in last Friday's House of Lords edition of Written Questions. Although none of them goes directly towards the compensation order, there is one tabled by the noble Lord, Lord Barnett, who is not in his place, to which I shall return later. But before that I should like to try to illustrate one or two of the difficulties of assessing the value of Northern Rock shares.
Article 3 of Part 2 of the order is headed:
- “compensation payable by the Treasury to persons who held shares ... immediately before they were transferred”.
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However, at the moment immediately before they were transferred they were suspended but there was an unofficial market in the shares. Between September—reference has been made to September already—and February, five months elapsed during which many changes in shareholding took place. Some of them were no doubt undertaken at the risk of the people who decided to buy. I declare an interest as a trustee of a charity that sold its small holding of Northern Rock shares for somewhere between £2 and £3 in the middle of the five-month period on the ground that it was better to be safe than sorry. So when the assessor reads Article 6(a), which states,
he will have to throw his mind back to September because in February Northern Rock was a going concern because the Bank of England had lent it a lot of money. There was no doubt that it was trading and the directors had not issued any statement to the effect that it was not a going concern. So it was only in September last year, on the assumption that the Bank of England did not lend Northern Rock money, that it would not have been at that time a going concern. I rather agree with my noble friend Lady Noakes that it is a pretty open question whether it would have been in administration. Nevertheless, the assessor has to try to determine what was thought by the market to be the value of the shares immediately before transfer when the Bill was already known about. What was the value of the shares back in September according to the assumptions in this order and what about the market in the shares in the five months between the one event and the other? I think that somebody will argue that there was a false market on occasions during those five months.
As regards the 26 questions, I return to the Question for Written Answer, which is relevant to the order; namely, that of the noble Lord, Lord Barnett,
- “to ask Her Majesty’s Government whether they will publish the due diligence undertaken on Northern Rock”.
I dare say that the noble Lord, Lord Davies, will say, “I shall answer that question when I have to. I do not have to answer it this evening and I am not sure what the answer will be”. However, I believe that the assessor will need to know what was the due diligence done by the Bank of England and the Treasury which led to the decision that the Bank of England would lend money and that the Treasury would guarantee the depositors. I do not see how you bridge the gap between last September and February and the matter of compensation without understanding the work that was done then. Of course, the noble Lord, Lord Barnett, may also have in mind the due diligence done by Virgin and Goldman Sachs’s reports on due diligence. We have asked before when Parliament will know about the due diligence. Will it ever be published and, if so, when is that likely to be?
Finally, I reinforce the point made by the noble Lord, Lord Newby. Exactly how long is this process expected to take with the valuation, the questioning of the valuation and perhaps an appearance before the tribunal and the complications of different jurisdictions, which has already been mentioned? I am sure that Her Majesty’s Treasury will have given the
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Lord Desai: My Lords, whenever we discuss Northern Rock it is like Groundhog Day in that the same questions and assumptions turn up. People are desperate to understand what happened. For me it is straightforward. Had there been any chance of making Northern Rock work, sooner or later a private company would have found a plan that was acceptable to the Government. As regards what was alleged to have happened with Lloyds-TSB, even at the time it was clear to everyone—certainly to me—that it would not have got beyond first base under the EC rules on competitiveness. I do not think that anybody could take that bid seriously.
It is quite straightforward: the bank collapsed, the Government had to save it and now we are trying to pretend that it had some value independently of the circumstances. What we have seen in the market apart from Northern Rock are hedge funds such as Peloton, worth $3 billion one day and nothing three days later. We have seen what has happened to the Cargill corporation, which borrowed 31 times its assets and is therefore about to go bust. If people do irresponsible things they will go bust, and if shareholders put their money in such companies they do not get anything out of it, whether they are in Hong Kong or elsewhere. If shareholders invest in a company that goes bust, they do not get anything out of it. It is not a case of the UK Government confiscating these assets; they are worth nothing. I hope that my noble friend will put the record straight. It is very difficult for the assessor to say in one day that the value is zero. One has to pretend that this is a rather difficult problem and at least take a couple of days over it. However, there is no great mystery about what the assessor has to do. The sooner that is done, the better.
Lord Davies of Oldham: My Lords, I am grateful to all noble Lords who contributed to the debate. As my noble friend Lord Desai indicated, we are covering some ground that we have traversed in the not too distant past. I accept entirely the cricketing analogy used by the noble Viscount, Lord Eccles, with reference to the noble Baroness, Lady Noakes. She is a specialist in reverse swing. She is able to perplex Ministers, and certainly myself, even when I think I am on secure ground, as I did on this occasion. However, it ill behoves him to upbraid Oldham’s British cricket connections. After all, it produced one of the finest England opening batsmen and captains of recent years, Michael Atherton. All I seek to do is keep bat and pad close together when I am dealing with these issues, not to disregard the rules of the game.
The noble Baroness began by asking about the valuation assumptions in Article 6, and she raised the issue of administration. We make it clear in Article 6 what has been the government position all along on Northern Rock. It is not a going concern, because only public support enabled it to get through the problems of cash-flow difficulties from the summer of
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I know that the Opposition indicate that that would have been at very limited cost and that it did not necessarily mean a fire sale of the assets. It would certainly mean a far more difficult situation as far as Northern Rock is concerned than the one that we are facing at present because of the judicious action of the Government, after seeing whether the private sector thought that Northern Rock was a going concern. Without going into too much detail about the travails of the past, let us be absolutely clear that as far as Virgin was concerned regarding Northern Rock, there was a huge price to be paid in public support. The public did not get anything back until Northern Rock had made £2.7 billion profit. That was a reflection of the fact that as far as Virgin—a private sector company—committing its resources to Northern Rock was concerned, it did not think that it was viable to do so at that time without this huge underpinning government subsidy.
I rest my case there. It is quite clear that Northern Rock was not a going concern, and therefore we are asking the valuer to look at the issues against that background. Why against that background? I do not see how any noble Lord can seriously argue that the taxpayer should be underwriting additional value for the shareholders in circumstances where Northern Rock was not a going concern. Of course, the valuer has his job to do regarding the assessment of Northern Rock’s value. I want to reassure the noble Baroness that we will ensure a competition for the appointment of the valuer; I take on board her point that it is a valuable contract and it should be open to competitive tender. We intend that that should be so. Clearly, the valuer has a challenging role to play, and we all recognise that. It is not going to be done in a matter of weeks; it will be a long process. I indicated in my opening statement the rights of shareholders with regard to the valuer and his initial assessment and any potential challenge to that. They have also the right to go to the tribunal if they disagree with the valuer, so their rights are safeguarded in those terms.
The Government are determined that all shareholders shall be equal with regard to the position of Northern Rock. I have heard the reflections, which were also made in the other place, that certain international treaties will safeguard shareholders based abroad and give them more favourable treatment than other shareholders. First, that is not so. Secondly, in all equity, it ought not to be so. I cannot think of anything being less fair to the ordinary small shareholder. The noble Baroness began her remarks by saying that we should consider the small shareholders first; at least she considered them first in her representation. Nothing could be more offensive to the small shareholder than the idea that someone based abroad would be able to take advantage of bilateral treaties that were designed to—and this has been accurately reflected in discussion
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There is the particular position of the Northern Rock Foundation, raised by the noble Viscount, Lord Trenchard. The foundation is a special case; after all, it is a section of Northern Rock in which there are shares devoted to charitable purposes. If he is saying that the Government ought to have treated that position four-square with every other shareholder in Northern Rock, with no particular respect for the foundation, he indicates scant regard for the value of the Northern Rock Foundation’s charitable role. The Government felt duty-bound to guarantee £15 million a year for three years. This is not a massive sum as a percentage of what the Northern Rock Foundation enjoyed under the best years of the bank, but is nevertheless a figure that it could expect to receive in years of relatively poor activity. The Government would have been open to criticism if they had shown that particular charitable function of Northern Rock no regard whatsoever. The criticism would have been voiced in all parts of the Chamber.
The issue of Granite has raised its attractive head yet again. I emphasise once again that everyone knows the nature of the category of securitisation vehicle into which Granite falls. Everyone knows that these vehicles exist for other banks and building societies, in order that they should be able to realise value from mortgages more rapidly than they would over the duration of the mortgage period. It is quite clear that the Office for National Statistics regards Granite as being included in the accounts of Northern Rock. That does not mean that it is to be included in the liabilities to the Government, because the Government have not taken Granite into public ownership. They are not responsible for the debts to bond holders, who are the massive majority of shareholders in Granite.
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