Banking (Special Provisions) Bill

My Lords, I sometimes sense, when listening to debates in your Lordships’ House, that noble Lords have had so long to prepare their speeches that, by the time those speeches come to be delivered, they have lost some of their freshness. There is no danger of overpreparedness in our speeches today. I suspect that there are a number of things on which most, if not all, of us agree. First, Northern Rock’s management was increasingly reckless and its policies led directly to the bank’s downfall. Secondly, the FSA was complacent and dilatory in the first half of 2007 in the way in which it attempted to regulate Northern Rock. Thirdly, when the storm broke, the tripartite system proved incapable of acting quickly and decisively enough. Fourthly, the process of finding a buyer and of arriving at a resolution of the Northern Rock crisis was too long drawn out and the initial process was unsuccessful. Where we clearly disagree is over whether—and, if so, when—Northern Rock should have been nationalised. However, the die on this is now cast. We should spend much of today discussing not the history but the future of the bank. Noble Lords know that on these Benches we have been advocating nationalisation for over three months. Why? Not for any ideological reasons. We have done so because we believed that it was inevitable and the least worst of a number of unattractive options. I am sure that a number of noble Lords will rehearse this afternoon the argument in principle against any form of nationalisation on ideological grounds. It is difficult to overstate the difference between the case for this nationalisation and the ideological arguments advanced for nationalisation a generation ago. However, a Northern Rock small shareholder told me yesterday that he had been called by an old left-wing friend, who had said triumphantly, ““I have always been in favour of nationalising the 200 major monopolies—only 199 to go””. I suspect that he will have a long wait before he makes another call. Until last night, I thought that the key issue that we would be exploring today would be exactly what nationalisation would mean to Northern Rock. What has become clear in the discussions that we have already had, however, is that there is a prior question: what is the Northern Rock that is being nationalised? This is what the discussion about Granite is all about. I am grateful to the Government for having written to my colleague Vince Cable and for letting me have the letter, albeit rather belatedly. For noble Lords who have not had a copy of the letter, the noble Lord, Lord Davies, quoted extensively from it and the technical note in his introductory speech. The letter says little in addition to that, except for one or two points, which I will come to in a second. It is worth repeating, or attempting to clarify, exactly what Granite does. Northern Rock raised much of the finance that it needed to expand and issue its mortgages through the Granite procedure. More than £40 billion was raised in this way. That £40 billion was consolidated on to the Northern Rock books. I have here the annual accounts for 2005-06, which show that £40.225 billion of Granite securitisation is on the books of Northern Rock, so it cannot be wished away as though it has no relevance to the asset base of Northern Rock. However, as has been made clear, the Granite companies are not legally part of Northern Rock. They are owned by a charitable trust established by Northern Rock for the supposed but not actual benefit of the Down’s Syndrome North East Association (UK) and any other charities that the company could select. The Government’s technical note makes it clear that: "““The trust does not undertake any charitable activities because its property is limited to the shares””." My question for the Minister is this: is the Down’s Syndrome North East Association aware that it has such a leading role in this drama and did it ever occur to Northern Rock, as it was making a substantial amount of money by using the name of this very small charity, to make any payments to it? If so, do the Government think that that can be justified? Finally, on the charity, is the Minister aware of the position taken by the Charity Commission on the names of charities being taken, as far as I can see, almost completely in vain by commercial entities in order to make significantly greater profits than if the charities were not involved? It is clear that Northern Rock considered that it controlled the Granite companies, even though they were legally distinct. It included them in its audited accounts, which was extremely misleading; it claimed as its own assets that in effect it did not have. In doing so, it represented that some of its best mortgages were available for it to use to grant security when they already belonged to a separate legal entity, with the security on them already being wholly pledged to other people. The figures that have been used in many of the debates on Northern Rock have assumed that the full assets listed in the balance sheet were at the disposal of Northern Rock, but we know that almost half of them were not and, worse, they were the best half. Can the Minister tell us what the Government now intend to do in respect of the Granite group of companies? One logical step would be to bring the Granite entities into the ownership and under the explicit control of Northern Rock over a period of time because only then would the benefit of those assets become available to the taxpayer. Can he tell us whether that can be done and, if so, over what timescale it might technically be possible to achieve? Have the Government asked Mr Sandler to follow such a course of action? The Granite situation is a new issue and has led to a lot of misleading comment about the true status of Northern Rock. It is also something that the Government have yet to get to grips with. The key question beyond that is what Northern Rock is going to look like and how it is going to behave. There are a number of options. One that I suspect we can all agree on is that Northern Rock should not attempt to carry on in the way that it has in the past. We on these Benches have repeated almost to the point of nausea the issue of together mortgages, under which people can borrow 125 per cent of the value of the house against which they are getting a mortgage. It was always claimed by supporters of Northern Rock that lots of other people did this. I was pleased that yesterday Alliance & Leicester, which was doing something similar, announced that it would stop. I hope very much that Northern Rock will also stop and that, if Ron Sandler has not already been told this, the Government will now issue that instruction. Other problems that arise with the current practices of Northern Rock are exemplified in a letter published in today’s Independent under the heading, ““The wonderful world of Northern Rock””. I hope that noble Lords will not mind if I read this brief letter: "““Sir, does the Government have any idea of what it is getting into with the Alice in Wonderland world that is Northern Rock? We have a mortgage with the bank that is fixed at 4.99 per cent until 2016. We can borrow back money we have already paid at the same interest rate.""Taking up an offer on the bank’s website today, we can lend that same money back to Northern Rock at an interest rate of 6.35 per cent. Our savings will be guaranteed in full by the Government and we could pocket the 1.36 percentage point profit at no risk.""Without spending a penny of our own money, we could join what must be a fast-growing line of depositors who could milk Northern Rock and the Government dry””." Have the Government issued instructions on that kind of practice, which Northern Rock has been and is still, at least until today, undertaking? We can agree that that kind of reckless activity is unacceptable. The other end of the spectrum of how we might deal with Northern Rock was set out by the noble Lord, Lord Lawson. You would stop the bank taking any new business and run it down over a period. That route has a number of attractions. It is clearly the easiest in some ways and it limits risk in a number of others. Obviously, it avoids any possibility of falling foul of EU and competition legislation. It is quite a tempting offer. The third way is the one that the Government have adopted. They envisage the bank seeking new business but on a more prudent basis. On balance, I think that I favour that option, partly because I suspect that the taxpayer will get his money back only if Northern Rock can do profitable business on the basis of new business and partly because I have sympathy with the argument that Northern Rock is a significant regional institution, although I accept that that cannot be the main preoccupation. The route set out by noble Lord, Lord Lawson, would mean significant staff cuts very quickly and no prospect of any future. While I am not misty eyed about Northern Rock being the embodiment of the north-east, the bank deserves, under new management, a chance to go forward as a going concern. I believe that that is the option that the Government are pursuing.