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21 Jan 2008 : Column 89
“I shall next week publish proposals for strengthening depositor protection and the supervision of banks. Today, let me set out how we intend to meet the previously stated objectives of the Government, the Financial Services Authority and the Bank of England with regard to Northern Rock, as well as the background against which we make our proposals. The proposals I set out today for a commercial solution to Northern Rock—underpinned by Government support—best meet our objectives of protecting taxpayers and depositors, and maintaining financial stability. I will set out the reasons for this in greater detail.
“I can confirm that the existing government guarantee arrangements to depositors will remain in place. Savers’ money remains safe and secure. As the House will recall, at the end of last summer, following the problems in the US mortgage market, Northern Rock found it increasingly difficult and then impossible to raise the billions of pounds it needed to finance its business. It was completely exposed. It had no Plan B. Northern Rock was forced to ask the Bank of England for support to allow it to continue to operate. The Government agreed to that support because, in the then prevailing conditions, there was a serious risk that other parts of the banking system would be destabilised. That support was successful and prevented further contagion. That decision was wholeheartedly supported by right honourable and honourable Members of this House.
“As the House knows, the Government have announced guarantee arrangements for depositors’ money saved with Northern Rock. In October and December we also provided further guarantees and funding arrangements in order to give the company the time it needed to try and find a solution to its problems, as I informed the House. At that time I said that I would ask Northern Rock to come back with proposals no later than mid-February this year. These guarantee arrangements, including the extension in December, have not been called and there has been no cost to the taxpayer. However, these arrangements remain necessary and will be in place for the time being. Equally, Bank of England lending is secured against Northern Rock’s assets, such as high quality mortgages, which are assessed by the Financial Services Authority as being of good quality. Again, there has been no cost to the taxpayer.
“Let me make it clear that the Government’s position—which I reiterated most recently in the Treasury Select Committee on 10 January—is that a private-sector solution for Northern Rock is the preferable route for meeting our three objectives, but this cannot be at any cost. If it does not prove possible to secure a proposal that meets our stated objectives and conditions, it would be necessary to take Northern Rock into temporary public ownership. For that reason it would be irresponsible to rule it out.
“Despite intensive efforts over the past few months, and as a result of uncertain market conditions across the world, it has proved impossible for Northern
21 Jan 2008 : Column 90
“Before I turn to my proposal, let me first deal with the question of putting the company into administration, as some have suggested. Administration would mean that control would immediately pass to an administrator who would look to realise the value of the company's assets which, under current market conditions, would amount to a fire sale. It could also exacerbate current market turbulence, and costs would be significant. I have therefore rejected such a proposal.
“My proposal today is one in which Northern Rock is owned and run in the private sector as a commercial bank, and where the Government provide a backstop guarantee to make private financing possible in the current market conditions. I believe that this company should be managed with private-sector disciplines and management, provided that we can do so on terms that properly protect taxpayers' interests.
“Let me now set out in greater detail how this proposal will meet our objectives of protecting the taxpayer, protecting consumers and promoting financial stability. Northern Rock would raise the funds it needs from investors by selling assets. The Treasury would guarantee payment to those investors in the event that the assets were insufficient to meet its obligations, for which Northern Rock would pay the Treasury a fee. In this arrangement, shareholders and other providers of capital in Northern Rock accept the first risk, with the Government acting as a backstop.
“According to the Financial Services Authority, Northern Rock has a good quality loan book. In normal market circumstances, such a guarantee would be unnecessary. However, in the current circumstances, to attract a wide range of investors on acceptable terms that protect the public interest, a guarantee is necessary.
“If this proposal is accepted, it would mean that all of the Bank of England's current loan facilities for the company are repaid in full, with interest, upfront, on completion of the transaction.
“Our willingness to put that support in place depends entirely on the terms on which a deal can be struck. I will authorise support for the private sector only if the public interest will be better served than through taking the company into temporary public ownership.
“In addition, any acceptable proposal would also need to comply with clear conditions. The company will need to demonstrate how it can operate sustainably in future without any government support and we will favour proposals that reach that point quickly.
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“To allow that financing structure to be explored, the Treasury and the Bank of England will make arrangements to extend the Bank of England's loan facility until 17 March, by when we must submit a restructuring plan to the European Commission.
“The proposals would involve private sector participation in the financing of Northern Rock and would also provide the taxpayer with the ability to share in the potential upside returns, as business conditions improve, in return for the financial support provided to the company.
“The Government will make our decision as to which proposal we can, as provider of support accept, and, with the Bank of England and the Financial Services Authority, we will consider proposals received by 4 February from potential interested parties, including the company itself.
“Any proposals as a result of either that support or public ownership are highly likely to need state aid clearance and will therefore be dependant on approval by the European Commission.
“The Government have already started discussions with the company and with the two parties who have publicly stated an interest in the company. The Government are also ready to have discussions with any other interested parties.
“Let me make it clear: if the solution that I have outlined proves not to be possible on terms that protect the public interest, a temporary period of public ownership will be necessary. Legislation is being prepared, should it be necessary, and would make provision for an independent valuer to decide on the level of compensation to be made to shareholders. The principles for assessing that compensation would be based on the company not receiving public support and that all specific financial assistance from the Bank of England or the Government had come to an end. That is set out more fully in the statement to the markets today.
“It is for the independent Office for National Statistics to determine whether Northern Rock is classified to the public sector in the national accounts. Any liabilities classified to the public sector would be temporary and backed by significant assets and do not represent any meaningful measure of fiscal sustainability. The code for fiscal stability—set out in legislation passed by this House—provides for such situations. We would also address the future of the Northern Rock Foundation, in the event of temporary public ownership.
“The proposal that I have outlined today meets our stated objectives of protecting the taxpayer, protecting depositors and maintaining financial stability. Northern Rock got into the difficulties it faced because of global market conditions. The Government agreed to Bank of England support
21 Jan 2008 : Column 92
“Ideally, the best solution would have been a private-sector solution without any government support, but in current uncertain market conditions that is not possible. Administration, with the resulting fire sale of the company’s assets, would not be in the public interest. Temporary public ownership—nationalisation—remains an option. However, even those who advocate that now see it as a stepping stone to returning Northern Rock to the private sector that would involve government support. In the mean time, it would still require continuing financial support and it would leave the public sector bearing all the risk. The proposal that I have outlined today is the right one. It provides a government guarantee that enables a commercial solution in which the private sector raises finance and bears risk. It also offers the prospect of withdrawing government support more quickly and is therefore most likely to meet our stated objectives and conditions. I commend this Statement to the House”.
My Lords, that concludes the Statement.
8.37 pm
Baroness Noakes: My Lords, I thank the Minister for repeating the Statement on Northern Rock made in another place. The Minister last repeated a Statement on Northern Rock two months ago. How does today’s Statement differ from that of two months ago? Courtesy of some leaked documents at the time, we knew even then that the Government’s advisers were talking about the continuation of government support beyond an initial deal. The Government did not deny that then but hid behind the assertion that a potential private sector deal could not be,
Far from the “full glare of publicity”, we have had the deep darkness of Hades surrounding this deal—except when the Government have chosen to brief the press, as they have been frantically doing all weekend.
Two months ago, the Minister assured the House that the Government would protect the interests of taxpayers. We now know that the Government have made no progress in protecting the interests of taxpayers in the last two months. There is no private sector deal at present. In desperation the Government have agreed to continue to use taxpayers’ money to support the Northern Rock balance sheet in the hope that there might be a deal to be done. As a result of the Statement, taxpayers will continue to bear significant risk, but for longer—and that is certainly no improvement on the risk profile at present.
Can the Minister explain why the Government are now prepared to keep taxpayers’ money behind Northern Rock for an unspecified time? The Governor of the Bank of England was very clear in relation to the
21 Jan 2008 : Column 93
“I don’t think that it took the Chancellor very long to recognise that this was something which central banks don’t do, it’s also something that governments don’t do”—
except that U-turns on principles are exactly what this Government do all the time.
Those clever bankers who advise the Government may have come up with something that sounds as if the debt will be refinanced. However, through the guarantees, all the risk remains with the taxpayer. We had expected something more substantive in reducing the risk to taxpayers’ money from this Statement.
The Statement refers to the proposals being a “commercial solution” to Northern Rock, although later they are described as not being a “purely” commercial transaction. What the Government are proposing is a million miles from the commercial solution. It is a political solution that uses taxpayers’ money to avoid the truth that there is no genuinely commercial solution available. Further, today’s Statement gives us no real information. How much money will be tied up in these new guaranteed loan notes, and for how long? Is it just the existing lending or will even more taxpayers’ money be going in under cover of guaranteed loan notes? The Statement talks of arrangement fees and expenses, which the BBC’s business editor estimated this morning could amount to £1 billion at market rates. Will the Minister tell us what the fees and expenses are expected to total, and how Northern Rock will pay them? Will the Government have to lend Northern Rock even more money for that purpose?
This morning’s press release said that a terms sheet of the principal terms and conditions will be provided to interested parties shortly. Can the Minister tell us when that will be? We know that “shortly” is one of those words in the Government’s lexicon that can assume a variety of meanings. More importantly, I can assure the Minister that we on these Benches, and I expect those on the Benches of the noble Lord, Lord Newby, as well, are very interested in this. Will the Minister commit to making the terms sheet available to Parliament?
Two months ago, the Government talked about Northern Rock financing in terms of maintaining wider financial stability. Can the Minister explain how Northern Rock now impacts on wider financial stability? When the Government first guaranteed the retail deposits, they brought to an end the run on Northern Rock. What other impact could Northern Rock now have on financial stability? Are there any remaining financial stability issues? Is it not true that the only real issue left is the Labour Party’s political interest in avoiding the truth that its strategy and actions for Northern Rock have failed?
While we must never forget that it was Northern Rock’s reckless management that caused the problems in the first place, we must not let this fig leaf of an announcement get away from the fact that the tripartite arrangements invented by the Prime Minister failed their first real test. The Government have made noises about improvements that they will make for the future, but they have done nothing. They have not yet explained
21 Jan 2008 : Column 94
This Statement also takes us for the first time to the N-word: nationalisation. We regard nationalisation as a signal of the complete failure of the Government’s handling of Northern Rock. The Government have borrowed the Liberal Democrats’ idea of “temporary public ownership” as if that is something different from nationalisation, and that it is something which can be arranged to order. If the combined efforts of all those involved to date have failed to come up with a solution which keeps Northern Rock in the private sector, what hope is there of a crippled nationalised business being returned to the private sector on a successful and timely basis? The history of public ownership is not a good one. The fact is that nationalised industries have destroyed value. Can the Minister tell us what makes the Government believe that, under their control, nationalisation would be both temporary and not value-destroying? We simply do not believe that they can achieve that.
I have asked the Minister a number of detailed questions, but I am well aware that the likelihood of him answering them all is low. I am sure that he will try to answer them all, but I hope that he will make a commitment to respond in writing to all noble Lords who have taken part in this debate with those that he fails to answer completely.
8.45 pm
Lord Newby: My Lords, I, too, thank the Minister for repeating the Statement. When the Minister last made a Statement on Northern Rock a couple of months ago, we argued that the private sector solution which the Government were then pursuing was unobtainable. Since then, events have proved us right.
First, the two consortia bidding to take over the bank conspicuously failed to raise the cash which they were happily reassuring everyone they could relatively easily do. Then, in order to give them a little help, the Government appointed Goldman Sachs to take the begging bowl round the world on their behalf to try to raise the cash for the two consortia, which by this time were sitting pathetically on the sideline. Goldman Sachs has been round the world and its begging bowl remains empty. That is why we have today’s Statement.
What we have has been described by some people as a public/private partnership and by others as a partial nationalisation. The truth is that we have a nationalisation of the risk and a privatisation of the profits. The original proposals were that the bidding consortia would raise £15 billion up front to repay part of the debt that the Bank of England had
21 Jan 2008 : Column 95
As the noble Baroness, Lady Noakes, said, the Statement is remarkably vague as to figures. Indeed, not a single figure is mentioned in the entire Statement except for two dates on which future action is planned. We know that any decision about the future of Northern Rock will be delayed by a further four to six weeks, during which time the market, particularly the housing market, is likely to fall further, and the costs of having dithered on Northern Rock will have increased yet again.
The noble Baroness referred to the terms sheet being available shortly. Unless I am mistaken, anyone wishing to put in a bid on the revised basis has a fortnight in which to do so. So if the terms sheet is not available today, a day or two will make a huge difference to the ability of anyone to make an informed bid. I therefore repeat the noble Baroness’s question about what, in the context of the announcement, “shortly” means.
Given that the Government are single-handedly keeping Northern Rock afloat, it would seem logical that they should reap any benefits of turning the company round. They say in the Statement that they intend to take some of the up-side that might accrue if the bank has a successful future, but it is completely unclear how much of the profit the Government intend to benefit from. Is the Financial Times right, for example, in saying that the Government’s equity stake will be no more than 5 to 10 per cent? Such a figure would obviously leave 90 to 95 per cent to a private buyer. What is the logic in those figures? Given that the Government are the only ones keeping this institution going, that seems a completely unacceptable ratio.
On shares of profit, can the Minister be clearer about the future of the Northern Rock Foundation? The Statement contains the wonderful phrase:
That is completely meaningless. What does it mean? What is the point of putting into a Statement something which is so vacuous that no one in the north-east can take any comfort from it? Talking of the north-east, the Statement is completely silent on the Government’s thoughts about the future of the Northern Rock workforce.
Do the Government agree with the BBC’s political correspondent who said today that Richard Branson was behaving like the cat who got the cream? Could we be clear about exactly what he and the other consortium are currently offering in order to take over Northern Rock? Is it the case that they are both proposing to take over a bank with assets allegedly worth £100
21 Jan 2008 : Column 96
Noble Lords will be aware that equity markets today have seen heavy losses around the world and glum faces among investors. Two investors, however, have a happy smile across their face. They are the hedge funds who bet that the Government would cave in and do something like this. In the mean time, taxpayers, not least those in the north-east, have been taken for an extremely expensive ride.
8.51 pm
Lord Davies of Oldham: My Lords, I am grateful to the noble Lords for their contributions. I give an undertaking to respond to those questions I am not able to cover in the limited time available, save for those which I am going to exclude because of their commercial sensitivity. A great deal of this obviously obtains within that framework. Contrary to the contentions by both opposition spokespersons, it will be recognised that the Government are involved in the very challenging and interesting process of drawing up the specifications and terms to be met. The Government have been quite clear on their principles right from the beginning and they intend to fulfil them. However, the terms under which the guarantees will be met by any new owner of the bank and the arrangements under which they obtain cannot at this stage be put into the public arena, as noble Lords opposite would expect were they to give this a moment’s reflection.
I am not sure the noble Baroness bothers about detail a great deal. Yet again the Conservative Opposition trot out this canard that Lloyds TSB made a clearly defined offer on how to solve this problem in the autumn of last year and that the Government prevaricated or did not see fit to take immediate action on that proposal, as if they have clearly documented proof of the nature of this bid and of how substantial this bid was. I give way to the noble Baroness.
Baroness Noakes: My Lords, I would not like the Minister to get carried away on this subject. I merely quoted the Governor of the Bank of England in relation to the potential Lloyds TSB transaction. Perhaps he did not listen carefully.
Lord Davies of Oldham: My Lords, all I am emphasising is that the Government are criticised frequently for not having taken up this option when the governor indicated in very reserved terms the nature of the proposal. It was never a fully fledged bid and is merely, as I have indicated, a canard such as the Official Opposition are prone to display whenever these Statements are made and in all Questions on these areas without there being any real substance to their position.
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