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The bank has to be viable for the future. That is the basis of the negotiations and the drawing-up of the terms for the bank, but there are very clear principles that what must be proposed is a safeguard for public money. It will be recognised that the Government are
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The noble Baroness suggested that very little has been achieved, but it will be appreciated that the Government are working to the timetable that we established in the autumn. We expect the process to produce bids by 4 February, which will then be subjected to the clear criteria that the Government are establishing. We will be in time to meet the other signal obligation under which the Government are operating. That other time constraint is that there is a defined time period in which state aid to the private sector is available. That period runs out for this process on 16 March, and the Government are working towards obtaining solutions to these issues and a successful bid, should it prove to be so, well within that timeframe.
The noble Lord, Lord Newby, suggests that precious little has been achieved. He referred to the Goldman Sachs exercise as a begging bowl that is devoid of any product. He will recognise that the arrangements being proposed are dependent upon the potential sale of bonds that will be created to underpin the position of the bank, and a great deal of work has been necessary in order to establish the viability of that potential solution. It will depend on whether the private sector produces bids that meet our other criteria in order that it can act on this basis. Far from the Government standing idly by, we have carried out the necessary preparation over these past two months to ensure the viability of the bids as well as the clarity of the terms on which any bid needs to be established.
The noble Lord also suggested that any reference to the Northern Rock Foundation was vacuous. We would have been subjected to the most intense criticism if we had left the foundation out altogether. We make it clear that we expect the issue of the foundation to play a part in the negotiations. At this stage—and I do not think that the House, in all its fairness, would expect anything else—we cannot give detailed answers about the basis upon which negotiations will take place with two private bidders in the field, with the possibility that the bank itself might make a bid for its management for the future and other bids potentially coming in. It would be ludicrous to expect the Government to spell all that out in great detail now. However, we are making clear the exact principles on which we propose to consider the bids that must be submitted by 4 February. I hope the House will recognise that that is as much as any reasonable Government could do in these circumstances.
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9 pm
Lord Clinton-Davis: My Lords, is it not clear that the Tory Opposition are absolutely bankrupt of any positive ideas? The statement we heard from the noble Baroness represented that very clearly. Since, as I understand it, the European Commission has to approve either a private transaction or nationalisation, when do the Government hope to be able to make the appropriate application—on or before 17 March?
Lord Davies of Oldham: My Lords, I am grateful to my noble friend for making explicit that which the whole House will have realised. It is easy for the Official Opposition to criticise the Government’s constructive approach to what we all recognise is a fundamentally difficult problem that is very significant in terms of the financial structure without having the slightest idea of how the problem should be solved, apart from time to time indulging in red herrings which mean nothing in terms of a real solution.
My noble friend is also right to emphasise, as I sought to make clear earlier, that the Government are working against tight time constraints. We need to meet the deadline of the middle of March as far as the European Commission is concerned. The plans for the consideration and processing of the bids are governed by that requirement.
Lord Higgins: My Lords, right at the beginning of this sad tale, the Governor of the Bank of England stressed the importance of moral hazard and emphasised that if the bank were bailed out, there was a danger that others would expect the same treatment in the future. What do the Government think the present situation is doing for maintaining financial stability in the light of the view which the Governor of the Bank of England originally expressed?
The people who have really gained are clearly Northern Rock’s directors and board. The Government now seem almost to excuse them, saying that it was all a problem of global turbulence. But that has not been true of any other bank. Other banks have taken losses but they have not had to ask for government aid on such a scale. Right at the beginning, after the Bank of England had bailed it out, Northern Rock was considering issuing a dividend. On top of that, as has been pointed out repeatedly, it has continued making loans of 100 per cent of the value of a property and adding more and more to the burden to which the Government are exposed.
Can the Minister tell us exactly what is proposed in the plan which he has put forward? The Government are saying that the loan book is good but that they cannot do anything with it unless there is a government guarantee. In effect, the Government seem to be giving a guarantee which enables them to issue gilt-edged securities—the Minister will correct me if I am wrong—and hoping that they then get paid back out of the gilt-edged securities which they themselves have issued. Is that right or is it not?
Can the Minister tell us what the rate of interest will be on the bonds which it is proposed to issue? Will it be the same as on gilt-edged, will it be more or will it be less? That is the reality of the situation. This is in no sense a private-sector solution. It is a
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Lord Davies of Oldham: My Lords, a great deal of the noble Lord’s challenge revolves around where the moral hazard is and whether there are any constraints on how this bank operates in the future? On the moral hazard, one issue that was abundantly clear to the nation was the sight of investors queuing outside a bank. That represented a distinct threat not just to Northern Rock, but to banks that could and would be signalling difficulties. After all, we all recognise, as the noble Lord has said, that the exposure to sub-prime lending across the world has caused a great deal of writing down of bank assets in these past few months.
The danger would be that the public would see their investment in banks that were perfectly safe and secure—and could meet their obligations—but which, nevertheless, could suffer very considerable damage from the contagion of a run upon them, in the classic way of investors seeking to take out their money. That emblem was clear from the moment that the Northern Rock crisis broke. If there is one achievement which clearly exonerates the Government, it is that they put a stop to that position. We made it quite clear that investors are safe and intend to ensure that they are.
Having said that, does that mean that those managing the banks can carry on with reckless conduct? No, my Lords, on two grounds—one is that it will be clear that the terms on which the bank will operate with government guarantee in future will put severe constraints on their ability to act; for instance, the declaration of a dividend, to which, I think, the noble Lord referred.
The noble Lord, Lord Higgins, also made reference to—and, again, I am obliged to say—a somewhat dated canard in these issues. I think the noble Lord, Lord Newby, brought it up first and can one think of a more self-respecting citizen than the noble Lord? The noble Lord said, “Isn’t it outrageous that the bank came to me and suggested that it was prepared to offer me something above the level of property?”. Well, of course it did. I have not the slightest doubt that the noble Lord has other assets, although not privy to his personal affairs. He is bound to be a better credit risk than the classic sub-prime borrower whom the bank was being asked to avoid.
Lord Newby: My Lords, I am grateful for the noble Lord’s assessment of my character. However, I ought to point out, for the record, that Northern Rock made no inquiry into my other assets. I would have been extremely surprised if it had done.
Lord Davies of Oldham: My Lords, the noble Lord may also recognise—I am not sure how the approach came to him—that it is not beyond the wit of
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Therefore, it will not do to suggest that the bank has been acting recklessly since the crisis developed. The bank is all too well aware of the intense scrutiny of its operations by both the FSA and the Bank of England—to say nothing of the Treasury. I insist that the arrangements obtaining for the bank’s operation in future will make it clear that it will have to operate within procedures that are satisfactory to the Government.
I understand the point made by the noble Lord, Lord Higgins—will the bank be able to act in a reckless way, the moral hazard having been taken away by government action? The answer is no. I want to assure the House that the terms on which the agreement will be drawn up and on which bidders will bid will make it quite clear that those who are directing the bank will be subject to governance over the way in which they conduct certain aspects of their activity.
Lord Oakeshott of Seagrove Bay: My Lords—
Lord Dearing: My Lords, we have not yet heard from these Benches.
Lord Bach: My Lords, we can hear from the Cross-Bencher and the Liberal Democrat.
Lord Dearing: My Lords, the opposition parties are right to hold the Government powerfully to account and ask penetrating questions about what is intended. But when I look at the situation and try to think of a better hole to go to, whatever the reason we are in it, I cannot. However, administration followed by a fire sale—no. As for temporary nationalisation then denationalisation, as someone who was responsible for nationalising an industry—possibly the last major one to be nationalised, the aircraft and shipbuilding industry—I cannot think of anything more troublesome, costly and time-consuming, and less likely to result in the effective management of the business. Those who are temporarily in charge will not feel able to take decisions that are needed lest it is contrary to their ability to sell the thing later and those who come in have entirely different ideas. I have seen this happen to the steel industry. It is not the best way.
Lord Dearing: My Lords, I would like to ask the Government more. Others have made Statements. I said to the Minister in a corridor discussion after the announcement on 19 November that if the Government are going to do this, they should share in the benefits, and they have done so. I would like the Government to say more about the scale of their equity interest in the current company to justify the high risk that they are taking.
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Lord Davies of Oldham: My Lords, I am grateful to the noble Lord for introducing a note of clear realism into the options available. He has identified why the Government are pursuing this strategy. On the extent to which the Government, having produced such guarantees, will be able to reap rewards in the future, of course that is the basis for the discussions that will go on with regard to the bids. It will be made quite clear that the Government will have a share in the equity, which will enable them to gain from any potential success of the bank in the future.
Lord Oakeshott of Seagrove Bay: My Lords, I have three quick questions—one on fees, one on the treatment of the national account and one on the term sheet. Starting with the term sheet, I did not hear the Minister give an answer to the pertinent question asked by the noble Baroness, Lady Noakes, about whether the term sheet will be available. I can confirm from these Benches that we are very interested. Indeed, the more I think about it, the more I fancy having a whip round with a few of my friends in the City, raising a couple of hundred million and having a go. It is very important that this term sheet is made immediately available to any interested bidders. Otherwise, Mr Brown's mate Richard Branson is getting a clear run. It is very important that it is made available.
On the national accounts, the Statement stated:
What is the definition of “temporary” for this purpose?
Finally, on fees, Goldman Sachs points out that it is acting as financial adviser to the members of the tripartite authority only and is not responsible for anyone else. Clearly, the taxpayer will be stung with its fees. How much has it run up so far? What is the Government's current estimate? It is there any cap? What is the total cost of Slaughter and May’s fees and the other professional advisers? If the Minister does not know, would he please write to me by the end of this week?
Lord Davies of Oldham: My Lords, I will write to the noble Lord. I have additional information, but he should not hold out too much hope that I have a great deal that I am prepared to see in the public arena as early as that. The term sheet will certainly be produced in very short order. After all, as the whole House will appreciate, our bidders need to know the terms on which they can bid. That is different from saying that this should necessarily be fully in the public domain. After all, these negotiations will continue. The noble Lord will recognise our reservations about putting that into the public domain at such a sensitive time, given also the shortness of time in which we are operating. We expect these bids to be under consideration from 4 February onwards.
On the national accounts, we looked very carefully at the definition of what appeared on the public accounts balance sheet; it is for the Office for National Statistics to reach judgments on these matters. The Government’s intention is that the crucial areas of
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Lord Desai: My Lords, the Government are to be congratulated on having protected the depositors of Northern Rock. Given the fragility of the financial markets, and given that Citibank, Merrill Lynch and various others have made huge losses, it is not surprising that Northern Rock was in the same boat. Will my noble friend assure me that depositors’ interests will be given priority, and that the shareholders who have taken a punt on Northern Rock should not be treated at all kindly, because the first interest must always be depositors, and financial stability the second?
Lord Davies of Oldham: My Lords, I am grateful to my noble friend; he has accurately defined the exact principles on which the Government intend to act. The initial action was the decision to guarantee all investors in the bank when the crisis first broke. Shareholders have their role to play and their interests should be looked at, but it is quite clear, as I have indicated, that the guarantee to investors must remain a constant, absolutely fundamental, basis of the arrangements. Secondly, the taxpayers’ interests need to be safeguarded. As the noble Lord will appreciate, the position of the shareholders comes third, after those two considerations.
Lord Stewartby: My Lords, the noble Lord helpfully made some comments about the Lloyds TSB proposals of a few months back. As he correctly says, these were not fully worked out proposals. The impression that was gained in public was that the shutters had suddenly come down on Lloyds’ ideas and that no attempt was made by the Chancellor to follow them through. Those proposals, if implemented in accordance with what was known about them, would have meant a much smaller sum of taxpayers’ money being put at risk, and would have tidied up the situation much more swiftly. They would also have avoided a great deal of the damage that has been done to the reputation of the City of London.
Lord Davies of Oldham: My Lords, the noble Lord has accurately identified the potential benefits of the proposal. The problem that faced the Government was that the proposal was not worked through fully enough for it to be a realistic runner. These were not circumstances where the Government were careless of the need to find an early solution; that is exactly what the Government sought to do in those dire days last autumn. As I indicated to the House earlier, I am afraid that Lloyds’ proposal simply did not meet the Government’s fundamental requirements at that time.
Viscount Trenchard: My Lords, perhaps I may ask the Minister about an additional point. There are many additional points that I would ask about, because the Statement has not been prepared or drafted with the usual excellence that one would have expected of a document coming out of Her Majesty’s Treasury.
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- “in the current circumstances, to attract a wide range of investors on acceptable terms that protect the public interest, a guarantee is necessary”.
How can a public guarantee protect the public interest?
Lord Davies of Oldham: My Lords, the noble Viscount will recognise the extent to which Northern Rock has been supported by the Bank of England loan and by government guarantee. That clearly safeguards the public interest; if Northern Rock had not been offered any form of support at all, the fundamental principle, as far as investors in Northern Rock are concerned, is that they would have been at grave risk of losing a great deal of their money and the implications for the financial system more widely is that instead of there being a controlled degree of financial instability, we would have increased it. It is easier now to suggest that that gain can be discounted, but the noble Viscount will recall the circumstance we were all in last Autumn and why it was necessary to prevent a run on banks that would have destabilised the financial system in a cruel way.
Lord Bach: My Lords, I beg to move that the House do now adjourn during pleasure until 9.25 pm.
Moved accordingly, and, on Question, Motion agreed to.
[The Sitting was suspended from 9.22 to 9.25 pm.]
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