Cable on nationalising Northern Rock: Part 1

2.22.02pm UTC (GMT +0000) Wed 20th Feb 2008

[Feb 19] Bill Presented: Banking (Special Provisions) Bill: Mr. Chancellor of the Exchequer, supported by the Prime Minister, . . presented a Bill to make provision to enable the Treasury . .

to make an order relating to the transfer of securities issued by, or of property, rights or liabilities belonging to, an authorised deposit-taker; . . the same was read the First time; and ordered to be read a Second time . .

. . Business of the House (Banking (Special Provisions) Bill)

3:43 pm: Yvette Cooper (Chief Secretary, HM Treasury): I beg to move, That the following provisions shall apply to the Banking (Special Provisions) Bill:

. . 3:53 pm: Simon Hughes (North Southwark & Bermondsey, Liberal Democrat): As the House knows, my colleagues and I support the Bill . . However, if we are to have this Bill, it must be properly debated, as I made clear yesterday. It is just not reasonable to ask the House to deal with everything today . . the Lords will certainly have amendments; it is not conceivable that on a Bill of such breadth there will not be amendments later in the week. That means that there will rightly be further work for the House of Commons to do. Therefore, it is further nonsense that we are giving ourselves just one hour to deal with any arguments that may emerge in the House of Lords, any of the points made and not answered, and any of the commentary made by the informed press, the City, the financial world, the shareholders, and people in the north-east and elsewhere. To think that we can do that work, with any amendments from the Lords dealt with, in one hour on Thursday is treating the House just disgracefully . . I hope that colleagues in all parts of the House will say no to the timetable and give this place a proper chance to debate the Bill.

3:57 pm: Richard Shepherd (Aldridge-Brownhills, Conservative): . . This is truly a dreadful programme motion. It is consonant with all that the Government are about, and the nearest thing I can think of-the risible equivalent-is the Dangerous Dogs Act 1989, . . five months they have had to come to a determination; they now insist . . that the House dispose of the business in about five and a half hours.

. . I say this to Labour Members: it is all very well thinking that a majority is sufficient to justify the actions of the Government, but this House is increasingly becoming a place merely of announcements. We are expected to be pulled by strings and say, "Hail! Hail!" That is absurd. This is a debating chamber. This matter touches on very important issues, and the Government's motion is a corruption of the processes that we have. If they go on like this, they will be denying legitimacy to the very measures that they seek to secure.

3:59 pm: Gwyneth Dunwoody (Crewe & Nantwich, Labour): . . The privileges of the House of Commons were not easily won, and nor are they to be discarded after many hundreds of years simply because it is convenient for the Executive of any particular Government party . . The Government are wrong to pursue this timetable for a Bill that has very large implications and is quite complex. I regret the fact that Members of Parliament on both sides of the House now accept that they should be directed as to the times and the ways in which they debate legislation. I believe that the result will make the United Kingdom a poorer nation.

. . Question put:-The House divided: Ayes 291, Noes 223.

. . Second Reading: 4:23 pm

Alistair Darling (Chancellor of the Exchequer, HM Treasury): I beg to move, That the Bill be now read a Second time.

. . 5:27 pm: Vincent Cable: I made it clear yesterday that we support the decision and the Bill, and I fully understand the Government's need to move quickly; the bank is paralysed, so we must help to pass the Bill this week. That said, the Government seem to have an extraordinary search engine for finding banana skins to slip on. It was announced this afternoon on the BBC, which I presume is right, that Mr. Ron Sandler, who has been appointed as the chief custodian of taxpayers' money, is a non-dom. It seems that all the Government's favourite businessmen, including Sir Richard Branson and now Ron Sandler, have so little commitment to the country, let alone the Government, that they prefer to pay their taxes elsewhere. I presume that Ron Sandler will now become the second best-paid person in Newcastle after Michael Owen, but at least Michael Owen pays his taxes here. [Interruption.] Yes, we think so.

Clearly, there is scope for improving the Bill. As the Conservative spokesman, the hon. Member for Tatton (Mr. Osborne), rightly said, important challenges need to be made, particularly on parliamentary accountability, and we shall support his and other amendments designed to strengthen the Bill in that respect.

John Redwood (Wokingham, Conservative): Should we welcome the idea that taxpayers' money could help to pay Michael Owen's salary through the sponsorship deal that I believe is already in place?

Vincent Cable: The right hon. Gentleman is one step ahead of me on that.

We can continue to debate the argument that has been going on for several months about the pros and cons of nationalisation, but we have passed that point; the decision has been made, and the nature of the question has now changed and is to do with what kind of bank we are now talking about.

William Cash (Stone, Conservative): The hon. Gentleman might not know this, but in the draft order to which my hon. Friend the Member for Tatton (Mr. Osborne), the shadow Chancellor, referred there is a remarkable provision that says that no director of Northern Rock shall be liable for any act or omission of theirs that occurs while Northern Rock is wholly owned by the Treasury and, accordingly, no proceedings may be brought. Would the hon. Gentleman and his party approve of a provision that exempted directors of Northern Rock-being paid more than £1 million a year-from any liability for anything they do as directors?

Vincent Cable: The hon. Gentleman has an eye for legal detail, but I am not clear about whether he is talking about Crown immunity and civil servants' status.

William Cash (Stone, Conservative): I am talking about a specific provision, which the hon. Gentleman will doubtless alight upon when he has a chance to examine the draft order. Does he approve of it in principle?

Vincent Cable: I shall alight upon it and then decide whether I approve of it in principle.

May I return to the central question of what kind of bank will now operate? Will it be built up or run down? The hon. Member for Newcastle upon Tyne, Central (Jim Cousins), with whom I have had several exchanges in the past few weeks, put it rather well yesterday when he asked whether this is the end of the beginning or the beginning of the end of this bank. That question is crucial. It is at the heart of the argument about the business model, on which Ron Sandler will presumably be asked to decide. It is not clear to me which of the two approaches is the better. A wide range of options exists, so one can envisage a kind of continuum, at one extreme of which the bank would be run off and would have no new business. The other extreme might involve a highly expansionary strategy-a kind of publicly owned Virgin or "the people's bank", as somebody called it yesterday. Alternatively, something between the two might happen.

At some point, there must be a proper debate about which option will be chosen. This is a political issue; it is not just a technical issue for the man who has been appointed to chair the company. It is not obvious to me which is the best approach. My instincts suggest that given the excesses of the past, the bank is probably best run on a more conservative basis, but there is an argument for saying that if the primary concern is repaying the taxpayer, that could be done in two different ways. The assets could be run off to realise cash or the bank could be built up to sell it at a large profit. It is not clear which of those approaches is the better.

There is an issue to address in respect of the staff, who are important in themselves. If large numbers of them are laid off, one must deal with not only the redundancy bill, but problems of retention, management and keeping the bank going effectively. A crucial human resource issue is involved, and somebody has to decide on it. The matter is political as well as administrative.

The Conservative spokesman rightly mentioned the nature of competition and unfairness, and that is clearly important. It is complex, because the banking industry is not a normal one-Cruickshank reported on that several years ago-and other banks have lender of last resort privileges. A few moments ago, I saw the former chairman of Lloyds complaining on television that it was very unfair that Northern Rock would be the only bank that could not go bust. That is not true, because his former bank could not go bust either. The national savings bodies have complex competition arrangements. Insurance companies may well say that Aviva does not have lender of last resort facilities, but where an insurance company is owned by a bank, the parent company does. This is a messy area where competitive principles are very unclear, so there must be proper, publicly accountable discussion about which of the options will be taken.

I want to discuss a second set of questions, relating to the inheritance from the pre-nationalisation stage. This is not the point at which to have an inquest or post-mortem on what has happened-the Treasury Committee and the Public Accounts Committee will have plenty of opportunity to do that. Some questions about the past are highly relevant to what happens now, the first of which was posed by the Conservative spokesman-how sound is the bank?

An important contribution was made yesterday by the right hon. Member for Hitchin and Harpenden (Mr. Lilley). He reminded us of the scale of the repossessions that are now taking place. They run wholly contrary to everything we had previously been told about the bank's soundness. I began to become concerned about that matter about a year ago, possibly because of my particular personal interest-some would call it an obsession-with problems of personal debt and the housing market. It was clear that something very strange was happening with this bank and its performance. I questioned it, but the Financial Services Authority was completely blind to it. I recall being telephoned by the FSA's chairman on the day the crisis originally broke. He said that I was being irresponsible in talking about the bank and criticising its management. He said that it was a very well run bank with an exemplary loan book, and he asked what my problem was. Unfortunately, his position was undermined by the fact that at the same time a press conference was being held in the City explaining how Northern Rock's management had taken on rather a lot of the sub-prime mortgage liabilities in the US. None the less, that remains the official view, and as far as I know the Chancellor still subscribes to that description of the bank. However, we have had plenty of evidence to the contrary, including not just the evidence given yesterday, but serious brokers' reviews. For example, Panmure Gordon has said that bad debts were systematically hidden.

There were therefore all sorts of problems with the bank and the next step-which I advocated yesterday and on the day of the announcement, and which has been taken up today-is for a proper, independent audit under the supervision of the Bank of England, and not carried out by the FSA, to investigate how sound the bank and its mortgage book are.

The second inheritance from the past is the costs of delay. What were they? We have had questions already about the costs of financial advice, but there is a potentially much bigger cost, which is the cost to the bidders. Who has paid the bills for Sir Richard Branson and other bidders for due diligence and other costs, which have been formidable? I was alerted to this problem at the outset when it was said that 10 companies were interested in bidding. I happened to talk to someone from one of those companies and he said, "We are not going any further with this, because we have discovered that the Branson consortium has preferred bidder status and the Treasury is paying all its bills. Why should we compete on that basis?" A few days later, the other companies were told that the Treasury had changed its mind and would cover everybody's bills. I do not know what happened, but since last October bidders' costs have been paid by the Government. What are those costs? I suspect that they are a lot more than the Goldman Sachs bills.

The question of costs is important not simply because we want to rake up the past but because if the bank is to be sold again we need to know the principles on which it will be done. That is why the status of the bidders and who covers their costs is important.

A third question from the past is precisely how the Government came to make the decision to nationalise, which they announced formally on Sunday. Strategically, they made the right decision, but what steps led them to that conclusion? That is important, because if the bank is to be privatised eventually, the potential bidders need to understand the criteria that will be used. It has emerged in the press-we have no other source on this-that what seemed to have tipped the Government's decision were the scale of the fee offered for the security, the length of time of repayment of the taxpayer and what the professionals call the equity kicker for the Government. But there were many other issues involved that were not discussed.

I wrote to the Chancellor and Sir Richard Branson about those other issues. They include, for example, the nature of the security that was being offered for Northern Rock assets, and the tax status of the bidders and their vehicle. Those issues have never been discussed publicly and, at some point, we will have to have a proper explanation of the process by which the Government reached that decision to ensure that when the eventual sale takes place there is complete clarity about the criteria.

My final question is about Government debt. We all understand that by nationalising the bank the Government are taking on its full liabilities. Some of the newspapers yesterday, including the Daily Mail in its headline, assumed that nationalisation would increase the Government's liability from £50 billion to £110 billion. That is wrong, because the Office for National Statistics classified the bank a week ago as a public company, under which all or most of the debt became public. I am not sure that that is the case either, as there may well be new commitments that have been taken on, and it would be useful to have an explanation.

My questions relate to the Bill, to what it says and to how its provisions can be strengthened. The first issue, compensation, has been touched on already. The Conservative spokesman put it clearly and correctly: although we would all like to make a sentimental distinction between the hedge funds and the £100 shareholding grannies in Newcastle, it is not possible legally to do so. The practical, painful reality is that without Government support the shares would be worthless. Any independent valuer is bound to have to come to that conclusion, I would have thought-but those involved obviously need to fight their legal corner.

The second issue relates to competition and how the competitive process will now be dealt with. I think the right questions have already been asked. Other banks will certainly make several points, such as about the deposit interest rate that can be offered by the new Northern Rock bank. Will it offer a higher rate of interest in attracting deposits, or the same rate of interest? How will it be constrained? What will its lending practices be? We know that in the past those practices have been extremely aggressive to expand market share. Will the bank be allowed to do that, or will it be constrained in some way? A more important question for competitors will be what will happen when the wholesale markets open. Will the Northern Rock bank be able to access them much more easily than other banks? A lot of questions will be asked about the fairness and appropriateness of competition.

It is right to say that although the EU has rules, it also has a lot of state banks-in Sweden, France and elsewhere-that are accommodated in a fairly permissive way. It is not entirely clear that European rules meet our requirements. I support the measures to build in a role for the Office of Fair Trading.

The Bill inadvertently opens up the whole question of the banking system in general, because it is about banks in general and not Northern Rock. We understand the parliamentary procedural reasons for that, but the Government have inadvertently brought forward an argument that we were going to have in six months' time about the nature of bank rescues, bank nationalisation, intervention and how it all happens. They have therefore brought to the fore an argument that was originally made by Cruickshank in 2000. The former chairman of the stock exchange made the point that this is a strange industry that has what it calls regulatory privileges. It pretends that it is operating as a normal commercial operation and the bankers claim to be buccaneers who are out there competing in the market, when of course they are not-they are ultimately underpinned and protected by the Government.

The logic of Cruickshank's argument points in one of two ways. Either the industry must be much more tightly regulated against excess profits, as he put it-or, in some instances, companies should be nationalised-or it has to be fundamentally reformed so that new companies can come into banking much more easily and those that perform badly can go bust. One of the unexpected outcomes of the debate might be that we will go through the first approach, but finish up with the second. Eventually, the cosy little set up in British banking and the pretence at having a competitive industry will be broken. The industry will have to become genuinely competitive, like others are. Perhaps the Chancellor will be the author of a much more radical set of reforms than even he yet appreciates.

. . Third Reading:

8:30 pm: Vincent Cable: I am normally sympathetic to the interventions of the hon. Member for Wolverhampton, South-West (Rob Marris), but I do not think that he has understood the purpose of the amendments. Simply, they are a rather modest means of strengthening parliamentary accountability and oversight. I was happy to support them. They are not suggesting anything very radical, such as that the Minister should come forward with statements and debates. We are just asking for a reporting mechanism, not on exactly how the Government intervene in the company but describing the process.

As the hon. Gentleman correctly pointed out, there are two distinct thoughts. The first relates to the business plan-the strategy that will drive the company. As emerged from our debate on Second Reading, that is the issue that most concerns hon. Members: whether the business is run down, built up or dealt with by any of the permutations between those two options. For quite proper political reasons, it is important that it is reported to us what course of action is pursued by this nationalised company, whatever it happens to be. There is no requirement, as I understand it, for the Chancellor to tell us anything that is going on, and experience while the Government have effectively been acting as a shadow director shows that they prefer to say nothing. The requirement that they simply tell us what the strategic business plan is seems to be a modest but necessary improvement on what would happen otherwise.

All we know at the moment is that Ron Sandler is going to have a look at the company. He has to prepare a business plan, before, I think, the European Union competition policy determination. After that, the Government will adopt it. However, there is no obligation at the moment to tell us anything about it. The amendment would require the Government to report to Parliament on what that plan is.

A similar situation applies to the arm's length relationship between Ministers and the company. I rather sympathise, because of course the Government cannot simply ignore what is happening entirely. We have had a problem over the past six months as the Government have stepped back from decisions that ought to have been made, the first of which was the decision to sack the old management. The Chancellor quite properly stood up and said, "There is nothing I can do about it." Under the new arrangements, however, he will have that power of intervention. How it will be exercised is important.

It is not in the Chancellor's interest to be involved in micro-management, regardless of whether he would want to be, because he would be blamed for all the repossessions, redundancies and so on. There is clearly a balance to be struck between the need to intervene on important issues and the need to avoid micro-management. I do not know how the Government will strike that balance, but we should know about the basic outlines and parameters. The amendment would merely establish a report-back mechanism that would explain how the arm's length relationship will work.

For all those reasons, the amendment is very reasonable. It does not ask a great deal of the Government, and it is reasonably precise. I would have hoped that, in the spirit of reasonableness, the Government could have accepted it.

Kenneth Clarke (Rushcliffe, Conservative): I strongly support amendment No. 14, and the arguments put forward by my hon. Friend the Member for Fareham (Mr. Hoban) and the hon. Member for Twickenham (Dr. Cable) . .

. . 9:30 pm: Vincent Cable: I did not subscribe to the amendment originally, as its objective was not clear. I suspected initially that it might be a wrecking amendment, which I would not have supported. Having heard the arguments, however, I feel that some perfectly sensible points have been made. For practical reasons, the Government are not able to limit the scope of the Bill, but at least they can limit the time scale for its implementation to an appropriate period. I understand that Royal Assent will have been sought and hopefully given by the end of the week, and that there is then a relatively short period in which statutory instruments can be implemented. There is no particular reason for the power to continue beyond that point, and it seems rather indulgent to let it go on for a year.

The hon. Member for Runnymede and Weybridge (Mr. Hammond) is right: we shall have to return with more extensive and far-reaching legislation covering the conditions in which Governments should intervene. Such issues should be properly considered, and not under emergency legislation of this kind.

I did not, however, agree with everything the hon. Gentleman said. I have not yet heard all the arguments, but I am not entirely persuaded in regard to the concern about building societies. I think there is a genuine issue-I am not sure why banks should have a lender of last resort and building societies should not-but it is an issue to be dealt with separately when we reach the intervention powers. I also think we should be a little sceptical about the rather precious sensitivities of the City. After all, the problems in the financial markets were caused by a breakdown of trust between financial institutions themselves, rather than by a fear of nationalisation. That apart, I think the hon. Gentleman made a sensible, practical case for limiting the Government's action to a one-off emergency intervention.

. . 10:00 pm: Vincent Cable: I have agreed with all the amendments tabled so far by the Conservatives as ways of strengthening the legislation, but I disagree with this amendment. There are perfectly good reasons why building societies should be put in a position comparable to that of banks. I was not aware until this Bill came along that building societies were not in the same position as banks and could not access lender of last resort facilities in the same way as banks. That has just come to light, but if it is the situation, it seems entirely reasonable to address it.

The argument that the hon. Member for Runnymede and Weybridge (Mr. Hammond) made was, "Why don't we think about all this in the bigger scheme of things with the intervention powers?" However, we are not talking about omnibus powers of nationalisation. We are talking about situations that could well arise in the next few weeks or months in which a building society, as one understood that Barclays did in the autumn, could go to the Bank of England for liquidity support. We are in difficult circumstances, and it seems right that those powers should be available now both to protect the interests of the building society sector and to maintain a level playing field between banks and building societies, which surely we want to do.

Philip Hammond (Runnymede & Weybridge, Conservative): I may have confused the hon. Gentleman by speaking about clause 11, which introduces lender of last resort powers for building societies. Clause 6 deals with the nationalisation of the assets and rights, but not shares, of banks and building societies. Amendment No. 12A was tabled to avoid the possibility of the nationalisation of building societies' assets, property rights and liabilities.

Vincent Cable: I thank the hon. Gentleman for that correction. That is not the point that I wish to address; I am anticipating what I will say on clause 11 . . '

[continued in story below] [Extracted from the pages linked to: http://www.theyworkforyou.com/debates/?d=2008-02-19]: