Banking (Special Provisions) Bill

My Lords, I declare an interest as a pension fund manager for the past 32 years. I am not sure whether the noble Lord, Lord Selsdon, would call me an amateur. I suppose that I have also borrowed £100 million or so in my time, but I hope that the noble Lord, Lord Selsdon, would still lunch with me as, so far, I have paid all of it back on time. The serious point is that the money I borrowed has been done on the balance sheet of the companies that I have run, where everybody understood what the liabilities were, and not through something called Granite or dolomite, or any other artificial vehicle designed, in many cases, to deceive or to disguise commercial reality. Four months ago, I complained in this House about the pernicious 125 per cent mortgages being pumped out by Northern Rock. My honourable friend Vince Cable challenged the Chancellor directly on that, and the Chancellor replied: "““The decisions taken by Northern Rock in respect of its business model and its lending—whether generally or to the noble Lord Oakeshott … are a matter for the bank and not for any Minister … The bank belongs to its shareholders””.—[Official Report, Commons, 11/10/07; col. 470.]" Not any more, it does not. That defence of dodgy lending just will not wash a moment longer. It is fair to say that this has been a sombre debate. Several of your Lordships—the noble Lords, Lord Lang of Monkton, Lord Stewartby and Lord Forsyth—asked: Why the rush? I have some sympathy with that. After all, it has taken five months to get to this point. We saw chaotic scenes earlier, with letters to the Liberal Democrats that we have not had; I also apologise to the House for my noble friend and I having to go out briefly for meetings with Ministers. It has been a particularly rushed process, but having got to where we are it is clearly important that we go ahead—to debate the Bill properly and thoroughly, to amend it tomorrow, I hope, and to get it done. The noble Lords, Lord Trimble and Lord Marland—and, I think, the noble Lord, Lord Forsyth—properly raised the question of the Lloyds TSB approach. That was an extremely serious approach, despite some of the spin from the Government, and it obviously should have been taken much more seriously than it was. My information comes from a director of Lloyds bank, so unless he is making it up it was well known in the City that that approach was extremely serious; it was a grave mistake to turn it down in such a way. The noble Lord, Lord Goodhart, spoke eloquently and with great authority, as your Lordships would expect, on behalf of his committee. It is unusual for the chairman to do so but he explained why it was necessary to do that; we are obviously considering carefully what he has said, as I know that the Government have, and I hope that there will be some progress on that tomorrow. I thought that the noble Lord, Lord Bilimoria, highlighted extremely well the reckless expansion of Northern Rock. As he pointed out, it was remarkable that the Financial Services Authority missed it. Part of the reason—this has perhaps not come out yet, but it will when this appalling scandal is fully investigated—is that Mr John Tiner, the outgoing chief executive and the man who so badly let down the people who suffered in the split capital investment trust scandal, retired in the early summer. I suspect that his attention was wandering; he may have been rather demob happy. That was just before Northern Rock ran out of cash. One or two noble Lords raised the question of what will be the compensation payable and what will be the share price for those calculations. I fear that, whoever the Government appoint as a valuer, noble Lords should not waste much time on that. It is quite clear when you read the Bill that there can be only one outcome: a big fat zero. A bank that runs out of cash with no assumption of support can only be worthless. That obviously has serious implications for the Northern Rock Foundation, as my noble friend Lord Shutt pointed out; I fear that the shares that it will be converted into will have no value. I have a great deal of sympathy with the points made by noble Lords opposite, especially the noble Lords, Lord Desai and Lord Lipsey, about holding the management to account. I am bound to say that if we were in America, we would all be greatly cheered up by seeing marshals drag Mr Applegarth out of his flash office in handcuffs. Serious questions are still to be asked as to whether he, in particular, misled shareholders, auditors and the Financial Services Authority. I hope that that will be investigated seriously. The noble Lords, Lord Naseby, Lord Marland and Lord Ryder, in their different ways said that it was a shame that there were not more experienced City bankers involved in Northern Rock. The noble Lord, Lord Naseby, in particular, raised questions about Mr Sandler’s banking record. Obviously, we wish him well, but he is not a career banker any more than his colleague—they are from insurance and other areas. Only the Treasury could manage to find two non-dom, non-bankers to run this big British bank. I agree with much of what the noble Lord, Lord Eatwell, said in a very interesting discussion of the major financial crisis that we are now in. I just wonder, if it is so obvious now under force majeure that the bank has to be nationalised, whether it was not obvious two or three months ago. I am surprised that it has taken quite that long. I was also amazed at his comment that Northern Rock has not lost anything. No bank loses anything if it is being propped up by the Government and before its accounts have come out. I do not think that the Northern Rock year-end accounts for December will make very happy reading. We are keen and will be pressing the Government hard to ensure that they appear very shortly. They should have appeared on 30 January, but we have seen no sign of them yet. Can the Minister confirm in his winding-up speech whether the audit of Northern Rock will be carried out by the same auditors? There must be serious question marks about their performance in failing to spot the problems before. If it will be, that will not be satisfactory and I ask that a new firm of auditors be appointed. There are very serious questions about the Northern Rock balance sheet. The June interim figures last year, which showed a tier 1 ratio of 11.3 per cent—a very healthy tier 1 ratio—were based on very optimistic assumptions about the bank's exposure to collateralised debt obligations and other funny paper of that sort. From what we now know and how the risk weightings have changed, the risk weighting under Bar rules, if those pieces of paper are written down, goes from 20 per cent if they are triple A to 1,250 per cent if they are single B. Leading banking analysts in the City have stated that on that basis, the tier 1 ratio last June was below the regulatory minimum. Again, there are serious questions for the Financial Services Authority as to how carefully it looked underneath the figures. I turn to the letter to my honourable friend Vincent Cable, which we have received during the course of the debate and which we have obviously been having to study as we listen to the speeches. One question immediately strikes one: has Mr Alistair Darling’s mortgage been packaged out and sold off to Granite; was it adjudged higher quality or is it still stuck with taxpayers? More seriously, the letter repeats the Chancellor's assertion: "““FSA advises that Northern Rock's mortgage book is of good quality””." What on earth is the evidence for that? How do they know; how have they checked it? If the FSA had done its job properly we would not be having this debate today. As I have said, an immediate independent audit of the Northern Rock loan book must be carried out by forensic accountants with nothing to cover up or hide. We only have to look at the numbers and the massive expansion of Northern Rock at the top of the market and the fact that it was lending on terms that most of its competitors regarded as suicidal in the last few months to believe that there will be serious problems in the loan book. How could Northern Rock have accumulated the £8 billion of unsecured loans that we know it has if it was sticking to prudent lending policies? The letter takes an optimistic view of Northern Rock’s commitments to Granite. In particular it seems to give the impression that the new management of Northern Rock will be able to use Granite as it suits them and assess its commercial relationship with Granite going forward. It is not as simple as that: it is a question of contractual arrangements. I have the agreement here: it is 411 pages of what Northern Rock can and cannot do. The Government have also given the impression that there is no problem; we do not have to put further mortgages into Granite. What happens if the Northern Rock loan book runs down, as it is likely to do, as borrowers who have had short-term mortgages on these uncommercial rates as those fixes run out and as they remortgage away? Many of those mortgages will be repaid, many of them within Granite, so surely Northern Rock will have to take from the main pool of high quality mortgages if it can find them to replenish that. There are serious questions to answer on the letter. What really matters now is to minimise the taxpayers’ losses. It is important that the business going forward is run on a prudent as well as a commercial basis. The Alliance and Leicester today said: "““We will slow down our mortgage lending during this year. We will maintain our current strategy on doing only high-quality business with no self-certification, no subprime, very little buy-to-let and not lending any more than 90% of loan to value. We will not be out there behaving aggressively””." If only Northern Rock had been adopting those policies, not just up to when it got into difficulties but in the past five months when it is effectively being controlled by the Government, we would not be in the position that we are in today. I fear that the taxpayer is going to end up stuck at the bottom of a black hole involving probably somewhere between £5 billion and £10 billion. I hope that I am wrong, but I do not believe that I am. House prices have a long way to fall, and the overriding objective for Northern Rock must be damage limitation: to keep those losses and the taxpayers’ losses to a minimum.