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It was fully in contemplation at the time of the order and the transfer administration agreement that adjustments to the £8.6 billion would be needed. Yet, the only reference to this is in a small-print footnote in the Explanatory Memorandum, which is at pains to say that such adjustments, which could be considerable, are not "consideration", and the order does not say how the adjustments are to be determined. This is all convenient for avoiding the affirmative procedure. Can the Minister say how the adjustments will be effected? The order is clear as to the payment of £8.6 billion but unclear as to any adjustments. Can the Minister say whether the Treasury intends to use the power of modification in paragraph 22 of the order to achieve the final effect, as foreshadowed by the transfer administration agreement?
That brings me to the modification power in paragraph 22 of the order. This was also covered by the Merits Committee in its fourth report. Paragraph 22 allows the two Northern Rock companies to make a modification instrument. This is subject to Treasury consent. The Merits Committee said in paragraph 5 of its report that,
"as both companies are wholly owned by the Treasury, the House may have a view on how much of a safeguard this would provide".
I suggest that the House should have a very dim view of the safeguard involved. Furthermore, the Treasury's relentless desire to marginalise Parliament is also evidenced in paragraph 22. This provides for publication of the modification instrument in newspapers and online,
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I turn now to the impact of the transfer order on certain creditors of Northern Rock. I want to explore with the Minister whether the Government have behaved properly in relation to all those who were creditors of Northern Rock before the transfer order came into effect. The Merits Committee, in paragraph 6 of its report, drew the attention of the House to the lack of consultation on the order. Consultation was undertaken only with Northern Rock, the Financial Services Authority and the Bank of England, which is, I submit, so inward as to amount to no genuine attempt to carry out consultation at all. The Explanatory Memorandum notes merely:
"It was not considered appropriate",
to consult beyond that, but no reasons were given. I hope that the Minister will be more forthcoming this evening in the light of the comments that I am about to make.
The Merits Committee said in paragraph 6 of its report that,
"the House may wish to satisfy itself that the restructuring is in the public interest".
It pointed out that some former Northern Rock shareholders are unhappy that they have received no compensation for their shares. I do not wish to revisit the issue of compensation to shareholders, but I will concentrate on creditors, who have to be paid before there could be any question of return to shareholders. The Explanatory Memorandum to the order in paragraph 3.4(i) says that because of the way that the transfers were made,
That is an arguable statement but, more importantly, it does not address the question of the creditors of ACo and whether they are worse off.
Some creditors of Northern Rock did not benefit from government guarantees given to Northern Rock when it ran into difficulty. Broadly, the Government guaranteed the retail depositors of Northern Rock, but not all of its wholesale liabilities. These guarantees have been rolled over into the two new companies by guarantees issued at the same time as the transfer order. Before the transfers, the creditors were creditors of the old Northern Rock company, which was a mixture of good and bad assets. After the transfers, some creditors will be creditors only of the company now known as Northern Rock Asset Management-that is, the bad bank.
I wish to raise with the Minister whether the Government have disadvantaged those creditors by isolating them in a vehicle which has only undesirable assets. How can it be reasonable to isolate the creditors in this way, especially as they have not been consulted? Can the Minister explain how the Government see the end game of the bad bank? What is the prognosis for the creditors of the bad bank? Do the Government believe that the creditors of the bad bank will have any losses to bear at the end of the day? In the light of that, can the Minister explain why the transfer order makes no provision for any good-will value to be attributed to the value of the business which is transferred to the new Northern Rock company by this order?
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I assume that the ongoing business which was owned by the old Northern Rock company has a value. If it had no value, there would have been no reason for the Northern Rock name to be kept in the new Northern Rock company. If the business had no value, it would have been wholly improper for the directors of the Northern Rock company to have agreed to pay £10 million to its local, but not particularly successful, football team in order to promote the Northern Rock name.
7.45 pm
As neither the transfer order nor the transfer administration agreement deals with a value or good will, the old Northern Rock company has, in effect, given the Northern Rock business to the new Northern Rock company for nothing. Will the Minister say whether it is fair to the creditors left behind in the bad bank? I cannot see that it is. Will the Minister explain why this transaction, effected by the transfer order, does not amount to a preference either for the creditors transferred to the new Northern Rock company, which will include the Government, or to the shareholders of Northern Rock, who are also the Government? The Minister will be aware of the duties which apply to directors of insolvent companies. Can he say how it is that the transfers avoid the dangers of undue preference, which would almost certainly have arisen had we been dealing with transactions which arise in the private sector?
My last area of concern also relates to a creditor, although a rather different one, from the bondholders and similar, which might have been prejudiced by the transfer order. This concerns the pension scheme. I understand and look to the Minister to confirm that Northern Rock's pension scheme has been left in the bad bank. The pension scheme has a significant defined benefit section, which now appears to have been stranded in a company which may not pay all its creditors. I understand that there is a deficit in the scheme on an actuarial basis of some £60 billion. My source for this figure is the Minister's honourable friend Mr Frank Field who knows a thing or two about pensions. Mr Field has raised questions of whether this transfer to the good bank should have recognised the liability being left in the bad bank. He has concerns that the Government plan to dump any residual liability in the bad bank into the Pension Protection Fund, which is funded by employers generally and not the Government. Hence, there is a real issue of public policy at stake. I hope that the Minister can explain the position.
I have taken a long time to explain my concerns with this order. I have big concerns about the way in which the Treasury has treated Parliament, so that we are unable to scrutinise what is an important transaction properly. I have substantive concerns about whether the Government and Northern Rock have treated creditors fairly in the process.
We should seek to welcome the fact that the Government are trying to maximise the value of Northern Rock, so that some or even all the taxpayers' money can be recouped in due course. I hope that the Minister will agree that the principle of taxpayer value should not be used to ride roughshod over the interests of other parties. I beg to move.
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Lord Newby: My Lords, I congratulate the noble Baroness on raising this issue and on having penetrated the depths of the Treasury website and read and understood the voluminous documents there. There is sometimes a view in Government that simply putting something on a website is informing the world about it. Unless one has the tenacity and the forensic skills of the noble Baroness, the fact that those documents are on the Treasury website is of very little relevance to most people because they simply have neither the time nor the facility to spend the effort, which she has clearly spent, in making sense of them.
Like her, we do not necessarily object to the principles under which the Government are operating. They are clearly trying to get a return from their investment in Northern Rock. Splitting it into a good bank and a bad bank is a perfectly reasonable way of doing it. However, as the noble Baroness said, it is unacceptable that the Government injected £5.5 billion, which, until 18 months ago, was a reasonable amount of money, into Northern Rock in such a way that, but for her interest, I doubt whether anyone would know that it had happened. Unless I am mistaken and I have not read every newspaper assiduously in the past 48 hours, the fact that £5.5 billion has been injected into the two Northern Rock banks has hardly been reported. Through negligence, or simply because of the methods that have been used, this huge further commitment of government funds has happened without notice or comment.
The noble Baroness reminded us of the passage in the Banking (Special Provisions) Act under which Northern Rock was nationalised. She said that there was very little time for scrutiny, and I was very surprised that the Minister shook his head slightly as she said that. My recollection is that the whole scrutiny process in Committee took place in one long and intensive parliamentary day. There certainly was not a chance to go into huge detail. There simply was not time to have thought through the issue that the noble Baroness raised. However, where I think she is wrong-although I may be underestimating them-is in the way that Sections 8 and 13 combined operate. To the extent that they were thought through by the Treasury, it almost certainly did not consider that 18 months later they could be to put together enabling something to be slipped through under the negative resolution procedure. My recollection is that that was not the air in which the Bill was brought forward and certainly was not the air in which it was considered. It was a panic measure. In our view, the Government waited far too long before nationalising Northern Rock, and when they did, they had to do it in a greater rush than would otherwise have been the case.
Somewhat typical of the way the Government are treating this business is their plan that, when the instrument is modified, it will appear on the website of the bank and in two newspapers. As we know, depending on the newspapers and when you put something in them, it creates public interest or does not. The fact that this order was laid just before Christmas, within a few days of the House rising for the Christmas Recess, is an example of how timing really matters in terms of the extent to which there is public understanding of what the Government are up to.
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The Merits Committee is again to be congratulated on pointing out the issues raised by this instrument. One area where I cannot agree with the committee is in its suggestion, in raising the interests of the shareholders, that just because some shareholders are still dissatisfied, that is at all relevant. The truth is that from the moment the Bill became an Act, because of the phraseology of the Act and the subsequent secondary legislation, it was clear that the shareholders were not going to get a penny. My concern is that the procedure that was followed-having valuations theoretically done-merely gave false hope to shareholders who were never going to get a penny. I am afraid nothing can be done about that.
The issue that interests me, which is raised only obliquely by this order, is what happens next. For example, is it the case, as was reported at the weekend, that the Government intend to merge the bad bank remainder of Bradford & Bingley with the bad bank of Northern Rock to make a very bad bank? If so, what is the timetable and strategy behind that? Secondly, in terms of the new good bank, the Government say they intend to start seeking a private sector purchaser. Can the Minister say something about the timetable that he has in mind? Our concern about seeking private sector purchasers has been that, partly in order to maximise their short-term revenue, the Government would, if not effect a fire sale of that part of the bank, do it on a shorter timescale than would maximise the return to the taxpayer. We would be most grateful if the Minister could give us some indication of what the Government's plans are for the good bank as well as the bad.
Lord Bates: I support my colleague on the Front Bench, my noble friend Lady Noakes, who has done the House a great service by tabling this Motion and moving it so ably and in such forensic detail. However, the events to which the order refers have already occurred on 1 January for the reasons that the noble Lord, Lord Newby, referred to. The Government should have learnt their lesson about acting in haste and avoiding consultation on this issue. The telephone numbers dealt with in this banking rescue package behove a greater level of parliamentary scrutiny. I associate myself with the concerns of my noble friend Lady Noakes about the treatment of creditors and the concerns of members of the pension scheme-both current and future beneficiaries. There will be quite a bit of anxiety about where this fund will end up. There will also be a great deal of concern among shareholders who are currently undergoing the independent assessment for compensation.
I am torn between two distinct emotions when I see this order before us this evening. The first is real excitement and enthusiasm. The prospect of a phoenix of a great north-eastern institution rising from the ashes of the great recession enthuses me greatly. One of the reasons why I believe we can have a degree of confidence in the new venture is that it has some outstanding leaders. There is a lot of talk, often ill informed, about bankers being the villains of the piece and about there being no such thing as a good banker. I want to inform the House that there is. One of them, Gary Hoffman, happens to be running both parts of
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At the other end of the spectrum, I am reminded of my deep sense of anger and injustice at the way Northern Rock was handled in the period between August 2007 and September 2007. Indeed, it continued through the period while the Government dithered over whether to nationalise the bank, which led right up to February. Between Friday 14 September and Monday 17 September 2007, we saw the first run on the deposits of a UK bank for 140 years. Centre stage, we now know, were three elements which conspired to create a perfect storm and signal the onset of the recession for the UK economy. These failures were highlighted in the Treasury Select Committee report in another place which found that the directors of the Northern Rock, especially senior management, were the principal authors of the difficulties that the company faced. It went on to say that the failure of Northern Rock, while being a failure of the board was also a failure of the regulator. In the case of Northern Rock, the FSA appears to have systematically failed in its duty as regulator. However, it was not just the FSA that failed; according the Select Committee, the entire tripartite arrangements seemed to have failed between the FSA, the Bank of England and the Treasury for the financial supervision of the City, which had been put in place with considerable hubris by Gordon Brown as his first act in government. The Select Committee said that,
- "for a run on a bank to have occurred in the United Kingdom is unacceptable, and represents a significant failure of the Tripartite system".
Then there was the publicising-the leak, by accident or design, of 13 September that Northern Rock had been granted emergency financial support, which led directly to the queues of investors around Northern Rock branches on the morning of 14 September. Those pictures were sent around the world in a matter of seconds and did immense damage to the reputation of UK financial services and of north-east England, with which Northern Rock is so closely associated. Just to be clear, it was this Government who set the regulatory environment; it was the regulatory environment, along with management, which failed; and the disclosure of sensitive market operations between the Bank of England which destroyed depositor confidence and shareholder value. We now know that there were potential buyers for Northern Rock in July and August 2007, but mixed signals, founded on a fear of competition rules set out by the Government, discouraged people from taking part and pursuing those interests further. We also know that emergency funds from the Government
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"I had still hoped and indeed pressed strongly for the ability to conduct a covert operation, but in the end strong legal advice amongst the tripartite authorities was that this could not be done".
That was September 2007; but one year later, in September 2008, of course they discovered that it could be done, and when HBOS got into difficulties, an emergency acquisition by Lloyds TSB was allowed. Bradford & Bingley had its retail operations sold to Grupo Santander, and the remaining part of the business was nationalised. The Government took a controlling stake in Royal Bank of Scotland and it was only a year later that they revealed that the Bank of England had made loans of £61.5 billion to these institutions. They had delayed that information from coming out for a year; if only they had done that with Northern Rock, there would have been a very different picture. The pain that was felt by the 2,000 employees who lost their jobs, the concern and anxiety felt by the depositors, and the loss of value for so many individual shareholders will be indelibly placed on the record of this Government.
Given this track record, the Minister will understand why there is scepticism bordering on cynicism on this side of the House that again we see a new approach presented for Northern Rock in this setting. It is a new way that has not been tried before. Of course, we do not know whether it will or will not work, but neither do the Government-yet it is Northern Rock that is again the institution being experimented on in this respect.
The Government, the Chancellor of the Exchequer who announced the tripartite regime, and now the Prime Minister are centre stage. Now, the same bodies-the Treasury, the regulator and the Bank of England-who failed in 2007 are the ones to come forward to tell us that we can trust them-it will be all right and they will get it right this time. The people of the north-east will wait and see.
Lord Davies of Oldham: My Lords, we are all grateful to the noble Baroness for giving us the opportunity to have this debate. However, we noticed that the Conservative Front Bench in the other place did not provide such an opportunity. If there is to be a debate in the other place, it will be on the initiative of a Back-Bencher. That should put into context just how much anxiety there is about this order and what the Government are seeking to do.
At the beginning of his speech I was somewhat grateful to the noble Lord, Lord Bates, because at least he started to put the order and the reconstruction of the bank into the context of the events that led up to the crisis in Northern Rock two years ago. But I was somewhat disappointed when he continued by saying that this was yet another experimentation on Northern Rock. We are not about experimentation. He must know above all, as his former constituents were greatly involved and threatened at the time, that the queues at Northern Rock were because the bank was in very serious trouble.
There was no experiment by the Government. The measure received the most lukewarm endorsement from that side of the House, as we prepared to take
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Lord Bates: In the light of the Treasury Select Committee report that I was quoting from, will the Minister acknowledge what it found-that, in the case of Northern Rock, the Government, the regulator and the Bank of England got it wrong?
Lord Davies of Oldham: If the noble Lord is going to apostrophise the British Government as getting regulation wrong at that time, what about the collapse of banks in Germany? What about the threat to banks in France or the American crisis, where one of the largest banks in the world collapsed in the United States? Is he somehow suggesting that this is a little local difficulty produced by mismanagement by the British Government?-of course not.
The noble Lord certainly ought to be aware of that. I know he is, with his usual acumen. The noble Baroness is certainly aware. I know that she was not able to participate in our debate on the Bill at that time, which was a great misfortune and we sorely missed her on that occasion. I am not so sure that she should strive to make up for her inability to participate at that time by engaging us in debate today, but she has the option to do that. But the noble Lord will recognise, I am quite sure, that emergency action was taken at that time.
The noble Lord, Lord Newby, indicated how hard we had to work on legislation over a very short period of time to deal with this, because the crisis was upon us. Is it contended on the other side that somehow the Government ought not to have acted in this way? These are somewhat misplaced criticisms of the Government's strategy, which I will develop in a moment in response to questions about how the Government intend to set out the future for Northern Rock. One has to face the fact that Northern Rock was nationalised at a period of very great crisis. It will not do for the noble Lord to abstract from our position that the problems of Northern Rock at that time were not part of a much wider issue.
The Government acted with dispatch and, I should add, with success. We are now moving to the stage whereby restructuring is necessary to maximise the company's capacity for new lending and protect taxpayers. We said at the time that we certainly wanted to protect depositors-lenders to the bank-and those with mortgages. We needed to protect the ordinary citizen and restore a degree of confidence in the wider financial system. However, we said all along that the other great objective was to protect the taxpayers' investment in Northern Rock. This is the next stage in which we seek to do that.
I appreciate that these are significant sums and that therefore they should be the concern of Parliament. However, the Government are acting entirely properly. It is part of a wider government policy to encourage and support a well functioning mortgage market, whereby
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