Northern Rock
Philip Dunne outlines a catalogue of poor decision making by the Government during the crisis and examines the LibDem case for nationalisation.
Mr. Philip Dunne (Ludlow) (Con): It is a pleasure to follow the hon. Member for Newcastle upon Tyne, Central (Jim Cousins), given his experience of the circumstances surrounding Northern Rock on his constituents. I should like to focus on the Government's decision making throughout the process and conclude with some comments on nationalisation, following up on what the hon. Gentleman said.
It is clear that the origins of the crisis extend way beyond this country and the confines of Northern Rock, and lie in the difficulties in global credit markets and the inability of Northern Rock in particular to achieve its regular securitisations in order to provide funding. However, the problem was identified in January this year by the FSA in its remarks on the state of credit availability and the implications for liquidity around the world. They were also endorsed by the Bank of England in its quarterly review in April, yet individual financial institutions in this country were slow to react, to put it mildly.
Northern Rock continued with, and in some areas even increased, its pace of lending, increasing its share of the mortgage market in the first half of the year to 20 per cent. There are many reasons for that, which we could go into. It is fitting that we are having this debate on the day when Northern Rock is being removed from the FTSE 100 index, to mark its demise from its previous position in our financial services sector. The business model was clearly flawed, and the executives in the bank were carried away, partly as a result of their lack of experience.
Northern Rock's board appeared before the Treasury Committee, and it is notable that the chairman, who was acknowledged not to be a banker and who had quite properly offered his resignation to the senior non-executive when the crisis struck, has been replaced by somebody else who is not a banker. He has recently been non-executive director of a major bank, but his entire career was spent in the oil industry. The chief executive of the bank, who was responsible for the rapid growth in its lending, is still there, as we heard earlier. The chairman of the audit committee-the same person as the chair of the risk management committee-who oversaw the explosion of lending was the only member of the board who was a recognised banker. As emerged earlier today, he was Sir Derek Wanless, the man who was appointed by the Prime Minister to review the finances of the national health service.
Mr. Charles Walker (Broxbourne) (Con): A track record of success.
Mr. Dunne: A curious track record, although I believe that his role in banking preceded his role in advising Government.
When the crisis hit, how did the Government react? They reacted through the tripartite arrangements that had been established by the Chancellor as Chief Secretary to the Treasury 10 years ago, and by the present Prime Minister when Chancellor. It is now clear as day that the tripartite arrangements had not been stress-tested when they were put in place, and it was therefore not at all clear how decisions would be made, and by whom, during a crisis. That fundamental uncertainty about where responsibility lies and decisions are made in the depths of a crisis lies at the heart of the Government's reaction to this crisis and some of the false moves that they have made. The first real test of the tripartite arrangements has failed.
In her chronology of events, the Economic Secretary omitted the first key decision that the Government got wrong in the crisis. The Chancellor failed, in fact, to make the right decision over the offer for Northern Rock that was on the table from Lloyds TSB.
Mr. Colin Breed (South-East Cornwall) (LD): I know that hindsight is an inexact science, but will the hon. Gentleman offer a view on whether it might have been better to lend £30 billion to Lloyds TSB or to Northern Rock?
Mr. Dunne: That is precisely the point that I was about to make. With the benefit of hindsight, it is undoubtedly clear that had the Government decided to advance the facility to Lloyds TSB, it would have done so on terms that would have been commercially more attractive to the bank. That would have meant that the bank would not have had to pay the penal rate of interest that is causing part of the problem to the profitability of the remaining part of Northern Rock. I shall say more about that shortly.
Much has been made of the fact that what was on the table was not a firm proposal. Indeed, the Chancellor told the Treasury Committee that there was no firm proposal. However, my research makes it clear that Northern Rock ran a competitive bidding process among institutions that might have been in a position to make a bid, that the process began on 20 August, and that by Friday 7 September Lloyds TSB had concluded that it would proceed with an offer, but only on condition that the Government facility of £30 billion was made available at LIBOR flat, a commercial but not penal rate of interest. That offer would have been via a scheme of arrangement, a court procedure, and would therefore not have been conditional on shareholder consent, which would potentially have frustrated the bid.
The offer was there. It was not completely unconditional, but had the Government accepted it, confidence would have been provided for Northern Rock's funders and much of the present mess would have been avoided. Had a different decision been made it would undoubtedly have attracted political flak at the time, and there would have been difficulty, but it would have been nothing compared to what we have now.
The next piece of indecision from the Government occurred when someone-it is not certain who, but the finger of suspicion clearly points towards the Treasury, as the hon. Member for Newcastle upon Tyne, Central suggested-decided to brief the BBC on the extent of the problem surrounding Northern Rock on Thursday 13 September. The lender of last resort facility was announced the following day. A decision was made to leak some information-I am not accusing the Chancellor directly, but someone made the decision-and the next day, when the announcement was made, Northern Rock made a statement about its financial prospects. The failure on the part of Government was that no joint decision was made by the parties involved, the three members of the tripartite arrangements and the company. Nor was the decision made at the same time to extend the deposit guarantee, as has been referred to. Had both guarantees been announced together, and had there been a common statement from those concerned, considerable confidence would have been given to the market, we would not have had a run on the bank, and we would not be in the mess we are in. Furthermore, it now seems that the Government were taking all these decisions about critical aspects of market practice without any external advisers. Goldman Sachs was appointed only a week after the guarantee was provided. That is another example of poor decision making at the heart of Government.
The next poor decision was the security package that the Treasury and the Bank of England negotiated for their facility. The Bank of England is a bank so it understands security and it appears that it took security over the best assets available, which is good for the Bank of England. The Treasury is not a bank and did not take such good security. What package of security has the Treasury taken? The Economic Secretary gave us a clue; it seems that it does include the seller's share owned by Northern Rock in the mortgage collateral within Granite. The seller's share is, I believe, £7 billion of the worst tiering of security within the Granite structure, which effectively means that if the Granite mortgages start to default that will come out of the Government's security package first-in other words, it is the weakest form of security.
What will happen if either of the current offers are pursued? It will be interesting to hear from the Economic Secretary in her winding-up speech what security the Bank of England and the Treasury will be encouraged to surrender. Will they share in the risk with the bidding group, or will-as would be more normal practice-new money coming into the business require priority in security, in which case the Government would be left with even lesser quality assets?
Philip Davies (Shipley) (Con): My hon. Friend is making a thoughtful speech. Does he agree that it is difficult to know what is the best future for Northern Rock unless the precise terms of the arrangements of the Bank of England and Treasury loans are disclosed?
Mr. Dunne: That would be helpful not only to those of us who are trying to understand what has gone wrong, but to the bidders to get some idea of the details of the security package.
As my hon. Friend the Member for Fareham (Mr. Hoban) said, the Chancellor has confirmed that taxpayers' money is safe and will be repaid. That puts the Chancellor's position and credibility firmly on the line in the context of the Northern Rock situation and its resolution. I very much hope that the taxpayer will receive all their money back-that is the outcome we all want-but it is hard for me as a former banker to see how that can possibly occur. While the chairman of the Financial Services Authority confirmed yesterday to the Treasury Committee that he regards Northern Rock as solvent, that is due only to the Government facility, since it has not been able to meet its debts as they fall due since mid-September, which is the reason why it went to the Bank in the first place. We now know from the Economic Secretary that the security package includes Northern Rock's residual share of the mortgage held in Granite, ranking behind £48 billion-worth of security, at the last count, in Granite. It is composed of unsecured lending and home-equity release mortgages, which are the UK equivalent of sub-prime mortgages. It also rests on a portfolio of traded securities-some £15 billion according to the last balance sheet we saw-issued by others. Given what is happening in the credit environment and to the valuation of traded securities around the world, whether that is of par value is somewhat doubtful and an open question.
Let me conclude on nationalisation and pick up on Members' observations on that. Nationalisation is not a solution that protects the taxpayer. It could do so only in the event of benign market circumstances and over a prolonged period, with the bank being run as a business in competition with every other financial institution that is in the mortgage business around the country by a Treasury that, frankly, is not equipped to do so. It is highly unlikely that those circumstances will prevail. The other circumstance in which it might possibly work is as a facilitation of a back-to-back deal with a private sector purchaser. As I pointed out in an intervention, nationalisation places the Government in the position of being a 100 per cent. equity owner responsible for meeting all £110 billion of liabilities that might fall due. Is that a responsibility that the Liberal Democrats really want the Government to undertake?
6.49 pm
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PHILIP'S OTHER INTERVENTIONS IN THE SAME DEBATE
Mr. Philip Dunne (Ludlow) (Con): In relation to the risk committee and the audit committee, is the hon. Gentleman in a position to confirm whether the individual who had that responsibility was none other than Sir Derek Wanless?
Dr. Cable: I believe that that was indeed the case.
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Mr. Dunne: I recognise that the hon. Gentleman's preference, like ours, is for a private sale. However, in advancing his case for nationalisation over administration, what analysis has he done that leads him to suggest that taxpayers, whom he has just identified as the primary beneficiaries of either of these routes, would do better out of nationalisation-given that they would potentially be taking on all £110 billion of liabilities, plus redundancy liabilities that we have not even calculated yet-than administration, through which they are currently exposed only to £30 billion worth of liabilities?
Dr. Cable: None of us knows exactly what would happen because none of us has been exposed to the details of the bank's position. The Bank of England will not tell us and we do not have the resources to carry out the due diligence on the company. There is, of course, the possibility, which I have just alluded to, of temporary nationalisation-as has happened historically and as occurred with a small national mortgage bank that was temporarily nationalised and resold very successfully under the Major Government. It was a small enterprise, but it did happen. The whole point is to provide some legal and institutional stability in the hope that, in the end, not only will the taxpayer be repaid but any increase in the value of the bank from its currently depressed market conditions will accrue to the taxpayer. That is the objective.
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Mr. Dunne: Will the Economic Secretary confirm that the security package includes Northern Rock's seller's share in Granite-in which case it ranks behind all the mortgages used by Granite to secure its securitisation issues?
Kitty Ussher: The assets against which the Bank of England's loan to Northern Rock was secured include a number of assets on its balance sheet, which themselves include the portion of Granite that is on the balance sheet.
