Northern Rock nationalisation debate
During the debate on Northern Rock, Philip Dunne raises his concerns about the implications of nationalisation - most specifically about the impact on Granite.
Mr. Philip Dunne (Ludlow) (Con): The reason we are here today is that, uniquely among any of the 192 countries in the world affected by the credit crisis, we have suffered a run on a bank. The banking supervisory regime failed to spot the risks posed by the reckless business model of Northern Rock, and when the risks were finally spotted, the tripartite authorities failed to act decisively-mainly because no one was clearly in charge.
The reason for that is the failure of the present Prime Minister and Chancellor-when, as Chancellor and Chief Secretary, they introduced the new banking supervisory regime-to anticipate what might happen in a significant financial crisis. No stress testing was carried out for the possibility of a major bank getting into serious difficulty. That barely seems credible now, but that is what we established through the Treasury Select Committee.
We are now presented with a Bill that, according to the Chancellor, will give the Treasury the power to determine threats to the financial stability of individual institutions. As many Members have pointed out, this will apply not only to Northern Rock but across the banking and building society sectors. The Chancellor's arguments for the Bill, and his recent actions, show that he is obviously confused. He says that the Bill is needed to provide for clear management accountability at Northern Rock, but he also says that he wants to consult in the coming months on the regime to improve the management of financial stability in the UK economy. Why, then, is he pre-empting his own review by using the Bill to give the Government wide-ranging powers that go way beyond the problems of Northern Rock and will extend to all deposit-takers?
The Chancellor is ignoring the recommendations of the Treasury Committee's report-and pre-empting his own response to the report, which has not yet been published-by giving powers not to the Bank of England, as the Committee recommended, or to the Financial Services Authority, as he had flagged up in speeches last month, but to himself and the Treasury. What confidence can we have in the ability of Treasury Ministers to take the necessary decisions provided for in the Bill? One of the Ministers now sitting on the Treasury Bench appeared before the Treasury Committee the other day, and when she was asked what experience she had in financial matters, gave the extraordinary response that she had a big overdraft. It is barely conceivable that we should place responsibility in the hands of Ministers who have little, if any, experience of handling banking matters, rather than in those of the professionals whom they pay-through the Bank of England or the FSA-to take such responsibilities.
This nationalisation raises a host of questions about the role of banking supervision and the relationship between the FSA, the Bank of England and the Treasury. Given the way in which the Chancellor is taking such peremptory powers for himself, he owes it to us during the course of this debate to answer certain key questions. Is there any longer any credence in the independence of the Bank of England? What should the Bank of England be responsible for, operationally, if not for the provisions in the Bill? Can the UK regulatory structures cope with the complexities and rates of change in the modern financial world? What is the role for the Bank of England? And where is the experience among those in the Treasury to exercise the powers that they are giving themselves in the Bill?
7.39 pm
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Philip's other contributions to the debate
Mr. Philip Dunne (Ludlow) (Con): The Chancellor has just referred to the consultation document that he published only last month, which referred to the Government's proposals to bring forward legislation after consultation to cope with financial stability. What perplexes Opposition Members and those watching from outside the House is that the legislation that we are discussing, particularly clause 2(2), covers the maintenance of stability in the UK financial system. It goes far wider than the narrow issue of Northern Rock. Is that not in direct conflict with the document that he published last month, which will require extensive public consultation?
Mr. Darling: It might have been tempting to have a Bill that simply had one clause saying, "Let's nationalise Northern Rock." It is just not possible to do that. As hon. Members are aware, the procedures of this House require that for a specific Bill on one institution we adopt a procedure that can take some years rather than a matter of days. It is because of the urgency of establishing the certainty that the board needs in order to run the bank-it is a bank and it is important that the board has that authority and certainty-that we need that legislation. I have said on previous occasions that I think that we need to make more substantial reforms to the banking and supervisory system. We also need to learn from what is happening in different parts of the world, as systems in many countries have been found to be in need of reform. To carry on with that consultation is important.
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Mr. Philip Dunne (Ludlow) (Con): If I may, I want to see if I can help the hon. Gentleman to understand the true implications of Granite's not being included in the nationalisation. My understanding is that Northern Rock retains a seller's share in the packages of mortgages provided to Granite to provide security for the debt obligations that Granite issues, and that that package of mortgages will have to be refreshed continually by Northern Rock as mortgages are redeemed or repaid or come to the end of their natural lives. If Northern Rock fails to supply continuing fresh mortgages into Granite, the liabilities will crystallise, there will be a default in Granite and the entire securitised debt obligations will implode and will have to be sold off on a fire sale basis, with proceeds going to the bondholders. At that point, the seller's share held by Northern Rock will also be part of the fire sale and will become of much lesser value than its stated asset value in the books. Guess who will pay the bill, if Granite is not included in the nationalisation? The taxpayer.
Mr. Deputy Speaker (Sir Alan Haselhurst): Order. That was a very generous intervention.
Dr. Cable: I am trying to absorb the hon. Gentleman's analysis, and I hope that he will repeat it at greater length. My understanding is that the remainder of the assets of Northern Rock, outside Granite, consist of unsecured mortgages and the so-called Together mortgages-those at 125 per cent. of value-or, in other words, the rubbish. That is what the Government have acquired. We now need a rapid and thorough explanation of exactly what has gone on, as otherwise the Bill can be stopped in the other place.
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Mr. Dunne: I should like to endorse what my hon. Friend has said about Ron Sandler, whom I also know of old. As my hon. Friend has just outlined, Mr. Sandler's experience is in wholesale money markets-not retail financial markets, which are precisely the business of Northern Rock.
Mr. Greenway: That is true, but one of the reasons why Mr. Sandler was successful in the Lloyd's reconstruction and renewal project was that he had good people around him; I hope that he will have them in this case, too.
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11.51 pm
Mr. Philip Dunne (Ludlow) (Con): I am pleased that the Chief Secretary is back in her place to hear the final observations. I should like to repeat the point about the impact on Granite that she missed when she stepped out of the Chamber. Earlier, she said that Granite would be excluded from the Bill and thereby from the nationalisation. As the hon. Member for Twickenham (Dr. Cable) and other hon. Members remarked, that leaves a gaping hole in the nationalisation programme.
Yvette Cooper indicated dissent.
Mr. Dunne: The Chief Secretary shakes her head, so I hope that she will take the opportunity to clarify the matter.
Northern Rock owns a seller's share of the mortgages that are supplied to Granite to underlie the securitisation package to provide funding back to Northern Rock. If the security package is not continually replenished with fresh mortgages for Granite, Granite's structure will implode. That is the contractual basis of the securitisation documentation. If default occurs, the seller's share in Northern Rock will also have to be sold at a fire sale price to fulfil obligations. If there is insufficient confidence that new mortgages will be put into Granite through the mechanism under national ownership, which requires continuing business flows, the Government and the taxpayer are at significant risk of sustaining a much larger loss than the Government have let the House believe. It is important that the Chief Secretary tackles that point.
Mr. Beith: Would the hon. Gentleman be prepared to take an intervention from the Chief Secretary or to allow a couple of minutes at the end of the debate for her to respond? Many of us are genuinely anxious to hear her comments about that point.
Mr. Dunne: The Chief Secretary is more than welcome to correct the impression if it is wrong.
Yvette Cooper: We have made the position on Granite clear. We said throughout Second Reading that it is a separate legal entity, which will not be covered by the order, and was equally not covered by Government guarantees. We made that clear from the beginning. The assessment of what was in the interests of the public sector and the taxpayer took all that into account. The private sector proposals and temporary public sector ownership were fully assessed. On that basis, we are clear that it is right to take Northern Rock into temporary public sector ownership to protect the financial stability of the system and the taxpayer's interests.
Mr. Dunne: That is about as clear as mud. Granite has the contractual ability to suck assets out of Northern Rock, which will be in national ownership.
Mr. Stephen Dorrell (Charnwood) (Con): The only assets worth having.
Mr. Dunne: Indeed. The quality of the assets in Granite is higher than the quality of the assets remaining in Northern Rock, and it will have the ability to take what other good assets remain in Northern Rock.
As the Chief Secretary is here, I would like to ask her another question-again, she may not be prepared to answer it: why is there such urgency over the suspension of shares? One of the main planks in her argument for the haste with which we are having to consider this nationalisation Bill-we are doing so in one day: today-is that it is vital for shareholders to have some clarity about their future. The shareholders know that Northern Rock is going to be nationalised; the shares are suspended. It is perfectly normal corporate practice when shares are suspended these days for resumption to take weeks, and in some cases months. It is not a legitimate argument to pin the speed of nationalisation on the issue of suspension.
Finally, I would like to point out another commercial practice, in relation to administration. This point was missed by the hon. Member for Wolverhampton, South-West (Rob Marris), which is surprising given his legal background and his understanding of corporate law. The administration arrangements were set up to mirror in the UK legal context what happens in the US under chapter 11, under which businesses can be taken into administration to protect them from their creditors, not to wind them up or declare them insolvent. The purpose of an administration is to provide a protective umbrella, under which the administrator takes steps to restore the company to health. That is precisely what my hon. Friends on the Front Bench have proposed, but Government Members have consistently obfuscated the issue or misunderstood it.
11.56 pm
Mr. Kenneth Clarke (Rushcliffe) (Con): [...] The most extraordinary thing that has emerged-it did so clearly only really on Third Reading, although it was referred to yesterday-is that the Prime Minister is perhaps now as bemused as we all are about precisely what assets we are nationalising. It has become clear that we are not acquiring the assets in Granite. I think that my hon. Friend the Member for Ludlow (Mr. Dunne) is the only Member in the Chamber with a comprehensive knowledge of the arrangements, but the Minister could neither add nor subtract anything from what he said.
The best assets are in Granite-it looks as though there is a contract enabling more assets to be drawn in-and it is the rubbish in the assets that we are now nationalising. Where is all the constant assurance that we have had on the authority of the Financial Services Authority that this is a quality loan book? We have been reassured that it is an asset that is to be taken into public ownership and well managed, under the Government's wise direction, by the new managers that they have put in place. I would advise the Minister-
