Financial Services Bill

I shall speak also to Amendment 2 in my name in this group. First, I declare an interest as a director of an investment trust which is regulated by the FSA. The main point of these amendments is to discuss the whole question of being too big to fail. That means that I will address the question of Glass-Steagall, but I should like to take the debate rather wider than only talking about divorcing the clearing banks from their investment banks. I am sorry that I missed the Second Reading debate on 23 February when that topic was covered extensively, but I was abroad in the Far East. The amendments call for a report to be drawn up by the Council for Financial Stability. It is important to emphasise that. We are only asking for a report and are not saying that these things should be implemented. As this is an extremely controversial subject and opinions are very divided on what we should do about financial organisations that are too big to fail, a report is very necessary and I hope that, prior to the report, there will be opportunities for people with strong views on this to give evidence to the Council for Financial Stability and make their points. I am sorry that the noble Lord, Lord Desai, is no longer in his place because during the Second Reading he described himself as "a Hayekian libertarian", which just about describes where I come from. I am a pretty ardent capitalist. I do not really mind how much money people make and do not worry too much if they pay themselves bonuses. I start to break with that when the taxpayer has to pick up the tab when it all goes wrong. There is much bitterness at the moment about the way that the City is behaving. Bankers are unpopular people. The view of people in this country is that they gambled, made a wrong call and now the taxpayer is left to pick up the tab. This financial crisis has brought down many viable businesses. It has led to repossession of people’s homes and unemployment, and created great personal distress. Many of those who have survived have done so by taking pay cuts and working shorter hours. These people see the bankers who have failed being bailed out. For them, life goes on. They still earn enormous sums and pay themselves vast bonuses as well. A good example of this is the recent result from Northern Rock. It has clocked up serious losses but they have not stopped the employees paying themselves bonuses. If you get bonuses when your company is losing money, how much bigger must the bonuses be when your company is making it? That does not add up for most people. What lessons have been learned from this? I think precious few, to judge from where the Government stand on all this. There is an extraordinary reluctance to look at bringing in the spirit of Glass-Steagall and separate those aspects of banking that involve taking significant risk from the more conventional form of banking that involves taking deposits and making loans. I know that things can never be that simple. Banks that lend mortgages and so forth often use financial instruments to offset their liabilities. What if we do not address this? To come back to a remark made in Second Reading by the noble Lord, Lord Desai, on 23 February, we have these cycles and there will be future financial crises. We must not think that this is the be-all and end-all of financial crises; there will be others. The normal evidence of financial crises is that each is worse than the last. When you come to assess the financial damage you can normally add another two noughts to the end. Surely we must entertain the idea that the separation and breaking up of large organisations may be a way forward. This needs study and we need to carefully weigh up the consequences of going down that road. I totally accept that we must ensure that the western world moves together on this. We cannot see London being asked to unilaterally take measures if this is not copied by other financial centres in the world, otherwise businesses will merely move from our city to places with more favourable regimes of taxation and regulation. Critics of Glass-Steagall always argue that it would have done nothing for Northern Rock or Lehman Brothers. That argument has to be right but I do not regard it as much more than a debating point. It has to be true: Northern Rock did not have an investment banking arm and Lehman Brothers did not have a retail bank. Even if Glass-Steagall had been operating at that point it would not have affected either of those spectacular bankruptcies. Yet let us be honest: Northern Rock had a completely indefensible and unsustainable business plan. It borrowed overnight money and leant it in 20-year mortgages, often lending more than the value of the property on which it was secured. As has been pointed out by my noble friend Lady Noakes, the tripartite system completely failed. Many months ago on a Question in this House, I asked the noble Lord, Lord Myners, what was happening to the bank supervisors. He assured me that all the people who used to carry out bank supervision in the Bank of England had been transferred to the FSA. Therefore, in a way, nothing had really changed: the people were still there and life carried on. However, we have to ask what they got up to, what they spent their time doing and what form of inspection they made of Northern Rock. Did they ask any serious questions about how sustainable this way of doing business was or did they all fall asleep? One wonders what on earth happened. There is no doubt that, if there had been early intervention in Northern Rock, its bankruptcy might well have been prevented. Therefore, some very serious questions need to be answered regarding why Northern Rock was allowed to carry on in the way that it did for quite as long as it did. Let us look at Lehman Brothers. Although the company was forced into liquidation, it is generally accepted that it was too big to fail. The collateral damage suffered as a result of Lehman Brothers going down was much too great. I think that if the United States Administration relived that time, they would bail out Lehman Brothers as well. However, if Lehman Brothers was too big to fail two or three years ago, how about Goldman Sachs today? Of course, as there is no Glass-Steagall in the United States as we speak, Goldman Sachs would currently be bailed out anyway because it has a retail banking side to the business and depositors would obviously have to be protected. However, I argue that, even if you separate the retail banking side from Goldman Sachs, you are still left with a financial organisation that is too big to fail. Everyone might say that the idea of Goldman Sachs going down is unthinkable, but then we suddenly hear that it was Goldman Sachs that bought all the Greek Eurobonds. So far as I can see, that seems to be pretty speculative business. Therefore, the rationale is that we have to break up organisations that are too big to fail and form them into smaller bits which are small enough to fail. If we do not do that, we will find ourselves back in this whole situation all over again. Contrary to the view of people who defend enormous organisations, very often smaller units produce greater returns to shareholders than large ones. I have no doubt that Goldman Sachs, which is a partnership, would make even more money if it operated as a number of smaller businesses rather than the very large one that it is today. It must be right to try to get our financial organisations into a position where they are small enough to fail so that we do not constantly have to look to the taxpayer to bail them out when things go wrong. If we do not want to destroy the capitalist system, we must change the structures to minimise the risk of taxpayers being called on to bail out businesses. The noble Lord, Lord Myners, has made himself a fortune as a freewheeling capitalist in the City of London. That capitalism, which has enriched the noble Lord, must be preserved because, if it goes through periodic bouts of nationalisation, it certainly will not survive. I beg to move.