Banking (Special Provisions) Bill

My Lords, the Minister, like the Prime Minister earlier today at Prime Minister’s Questions, reiterated that when the run started on Northern Rock last autumn the Government had to act to maintain stability, as if that somehow absolved them from all responsibility for the situation that had arisen. I think it is important, despite the understandable views expressed by the noble Lord, Lord Newby, to look back a little bit at the history of this. At the time of the run, it was quite clear that there had been two failures. The first was the failure of the business model being pursued by Northern Rock itself. I think that is generally understood, and I do not want to dwell on it. The second was the failure of the regulatory structure that had been put in place by the Government—indeed, by Gordon Brown himself. That structure had failed to spot that a weak business model was being operated by Northern Rock. The point was made earlier in this debate that we do not know the full story of what happened in the run-up to the crisis with regard to the one attempt at rescue that we know about, from Lloyds TSB. We do not know the full details of that, and the Government have not been frank about it. We do not know what other efforts were made, nor to what extent it was known by the regulators that there was a problem or indeed whether they took any other initiative. Those are all important questions that we ought to know about and about which the Government ought to have been frank. Had it been possible to head this problem off and arrange a rescue before the crash, that would have been highly preferable to the situation that has now arisen. In criticising the regulatory model, I am not relying purely on hindsight. I would like to point out that last August we stated, in a paper entitled Freeing Britain to Compete: "““We are concerned about the division of responsibility between the FSA and the Bank over banking and market regulation. Fortunately, conditions in the last decade have been benign internationally, with no serious threats to banking liquidity. We think it would be safer if the Bank of England had responsibility for solvency regulation of UK-based banks, as well as having an overall duty to keep the system solvent. Otherwise, there could be dangerous delays if a banking crisis did hit, with information having to be exchanged between the two regulators; and there might be gaps in each regulator’s view of the banking sector at a crucial time, when early regulatory action might have spared a worse problem””." That is a good analysis of what proceeded to happen only a short time thereafter, so it is not only with hindsight that we say that it was clearly a bad regulatory model. The simple fact is that from the time that Gordon Brown put the regulatory scheme in place until that summer, it had not faced any test. Last autumn was the first test of that regulatory structure, and it failed. Last autumn was a long time ago, and we are still stuck with that failed structure. I know the Government are consulting on other measures, but is it really wise, in view of the dangers that exist in the present economic climate which the Government themselves have adverted to, for us to have just gone on drifting along since last September, thinking that we had plenty of time to consult and to bring forward provisions for a new regulatory structure? I do not think that is the case. After the run, however, I suggest it was obvious that there had been another failure: that of Northern Rock itself. Whatever may be said about the bank’s asset base—and I will come back to that in a moment—it is clear that after the run there was no one seeking to buy. If there was a high-quality mortgage book of considerable value in the possession of Northern Rock, why was no one prepared to buy that valuable asset? The absence of buyers tends to point one towards the conclusion that there was not an asset of value to be bought. Two bids came in, which the Government spent months examining, but the less said about those two bidders, the better. It was obvious from the start that they offered a poor deal to the taxpayer, and that could have been sorted out very quickly. I note what my noble friend Lord Lawson has said with regard to the experience with Johnson Matthey Bank; that it was obvious to the Treasury within a matter of days that a decent bid was not forthcoming and so it acted. It was obvious to every commentator who looked at the bids coming forward that they were not of value to the taxpayer. One was surprised simply because it went on as long as it did. My noble friend has dealt with the way that an attempt has been made to suggest that this problem was not home-grown and has occurred elsewhere. I noticed yesterday in the other place that Mr Dobson in his speech listed all the crises there had been elsewhere, such as Citigroup in the United States having a $24 billion problem regarding its sub-prime losses and Merrill Lynch losing $22 billion. He went through various French, German and Swiss companies, all of which had losses of billions of pounds. The interesting thing about all those cases in those four different countries is that in every case the company in question managed to refinance itself and managed to get itself into a position to continue business without a collapse and without a run. Uniquely of them all, we in the United Kingdom had a run on our bank, and now that failed business is about to be acquired by the Government. I note what I thought were some very sensible comments in another place yesterday. The Minister will be glad to know I am quoting from a member of the Labour Party speaking yesterday, Mr Mark Todd. He said, "““We do not know the company’s asset base … We know neither the assets thoroughly enough to decide whether we are buying what we are told is as good as any mortgage lending business in the land, nor the liabilities we are taking on ... I have dealt with business acquisitions and I would expect to know a great deal more about a business that I was acquiring than the information that we have been offered to date””.—[Official Report, Commons, 19/2/08; col. 218.]" I would be quite happy to adopt those terms used by the Labour Member yesterday. Then we have got the confusion created by this SIV called Granite. This was news to me and, I am sure, to most Members of the House. It came into the discussion, the first time I noticed any reference to it, in the debate in the other place yesterday. We have had this paper circulated very belatedly by the Government today. The first question one has to ask about Granite is: when did the Government know about it? If Granite was known about some time ago, why was it not mentioned? There are questions about Granite itself. Like other Members, I have only had a chance over the past hour or so to look at this paper. I look at the technical note and I see that it says that Northern Rock has sold around half of its mortgage assets to Granite. Commentators tell us that it is the better half. Whichever half it is, better half or poor half, it is half of its assets—presumably half by value. It also says, "““Northern Rock receives full value for the sale of mortgages to Granite””." So the value of the mortgages that are transferred to Granite has already come in, presumably as cash, to Northern Rock. Those mortgages are owned by Granite and must, therefore, be available to Granite in order to meet the bonds that Granite is issuing. But, the technical note also goes on to say, "““The contractual structure of Granite is such that it is effectively controlled by Northern Rock as it continues””—" presumably ““it”” is Northern Rock— "““to service the mortgages in Granite and to provide cash management and other administrative services. This is absolutely standard for a structure of this kind and it is why Granite is consolidated on the Northern Rock Group’s balance sheet””." This is the answer to the question which my noble friend asked earlier in this debate. The assets of Granite are on Northern Rock’s balance sheet. But Northern Rock has already received full value for those mortgages. There is something here that does not add up. The word that leaps to my mind is Enron. I hope it is not appropriate in these circumstances, but I do hope that when we get to the wind-ups the Minister can proceed with this in some greater detail. The Minister says it is going to be business as usual. There is talk of the bank being at arm’s length from government. I think that it is absolutely impossible for it to be business as usual. Business as usual for Northern Rock, up until now, has been the 125 per cent mortgages and the deposits being paid at 6.5 per cent at the top of the market. This is the failed business model which is still continuing. Obviously, we have to move away from this. We hope that business as usual does not mean the continuation of the failed business model. It must mean something else, but what is it going to be? The question was asked repeatedly in the other place yesterday whether the bank will be built up or run down. If it going to be built up, will it be done on the back of subsidies from government? One hopes not. On that, one is left relying on the European Union to keep the Government honest. I am not very comfortable having to rely on the European Union, but on this particular issue I would have to say that it is probably the best assurance for keeping the Government’s virtue intact. But even if there is no subsidy, we have here a business that can now operate without fear of failure. It does not have to worry whether it is taking a risk: it is owned by the Government and it has the taxpayer behind it. That is bound to have an effect on how it approaches its business. I cannot see how it can, as has been said, operate as usual. What should have happened? At the early stage, as happened in the United States and in euro land, more liquidity should have been made available to the markets, before the crisis struck at Northern Rock. We appear not to have done so. When the crisis struck and it became necessary to provide some assistance to maintain stability, it should have been made clear to Northern Rock that the help was being made available only to enable it to find alternative private sector money and, if it was not able to do so, that it would have to sell off the mortgages and run off its business book to meet the repayments. That is what should have happened, and it is what should happen if we have a problem of this nature again. Part of the reason for referring back to the past is to make it clear that, as we can see in this case, if problems of this nature are not tackled immediately, they get worse. It is happening in this case and it is likely to continue to happen. The Government now feel that they have to take public ownership. But ever since this problem arose, neither the Prime Minister nor the Chancellor have given the impression, to me or to many others as well, that they have any real grasp of the situation or understanding of what they are dealing with. At every stage they have made the wrong call and they have ended up with what is the worst, or next to worst, possible situation. The Government are about to run a bank. They are the owners and they will have to take some responsibility for running it. One can only hope that they run it better than the other companies they have run, but I do not have much confidence about that.