Month: February 2008

The government – and taxpayers – will pay for the rushed legislation this week

February 23, 2008 8 Comments

I have posted the full transcript of the one hour debate we were allowed on Thursday on Northern Rock, because it illustrates just how damaged Parliament has been by the constant use of timetable motions that are unrealistic.

The Lords passed three amendments to Labour’s bank nationalisation Bill. One wanted the Freedom of Information Act to apply to Northern Rock, just as it applies to the rest of the public sector. One wanted a proper audit report on what we are buying, and a third wanted more detail on the competition arrangements. All three were perfectly reasonable requests. They did not seek to prevent the nationalisation of Northern Rock or some other bank. They were well within the spirit of the decision of the Commons to press ahead with nationalisation, taken a couple of days before.

It was clear these amendments would need a few hours of debate. Each one raised very different issues, worthy of a separate debate. Because the government decided to drive it all through in one hour, they ”grouped” all these amendments together, along with some government amendments. The Opposition offered to sit through the night, as urgency was part of the government’s agenda, even though we could not see the need for the urgency. Alternatively the House could have met on Friday again to discuss Northern Rock, and Friday’s business could have been transferred to a day next week. The government refused to co-operate.

As a result we had one hour. The Chief Secretary to the Treasury occupied half of this with her comments. She took a number of interventions. We needed to intervene for two reasons – firstly because she was not explaining her position clearly and convincingly, and secondly because we knew there would not be time for us to make speeches so several of us chose to make one of our points in this less satisfactory way. The Shadow Spokesman kept his remarks much shorter. This allowed Sir Stuart Bell to speak, and the Lib Dem Spokesman got a few minutes at the end. No Conservative backbencher could make a full speech, No Lib Dem backbencher, and only one Labour backbencher. The front benches had no time to return to the debate to deal with points raised by other MPs.

The Conservative government used timetable motions sparingly. We did so if the Opposition had spent many hours on the first clause or amendment to a Bill, and showed every sign of wishing to delay and prevaricate as much as possible. Most Bills went through with time unlimited, so the Opposition could choose what they wished to talk about, how many of them wished to speak, and for how long. It was a much more democratic way, and ensured that all important amendments and clauses were debated. The government benefited from this, because there are times when Parliament – and those who brief us – made important points that led to a modification or improvement of a measure.

Thursday’s performance reminded me just how much Parliament has lost by ruthless timetabling. There were good issues to discuss. Some of us had things to say. The government had not made its case satisfactorily on why we were to be denied access to information on Northern Rock, and why we were buying it without a proper audit report on what we were buying. The lack of time to discuss it was unreasonable.

There will be a cost to the taxpayer. Rushing into this purchase without proper consideration is likely to mean bigger losses and problems for taxpayers ahead. The Lords unfortunately did not sustain their pressure on the 3 points. The Lib Dems decided they agreed sufficiently with the Bill that they did not want to prolong the dispute even for a few more hours. Once they gave in there was no point the Conservative peers continuing, as they did not have the votes.

Sensible Ministers welcome Parliamentary debate, and listen to commonsense points made by others. Ministers who rush legislation through often live to regret it. The nationalisation of Northern Rock is not the answer, but the beginning of a whole series of new and difficult questions for the government. As Parliament was not able to ask them all and have them cleared up satisfactorily, they will now be determined by events. Events can be much rougher for Ministers to handle.

One day we will find out if Northern Rock is now going to be run down, or if there is a way for a nationalised bank to compete fairly and grow its business. One day we will find out if people are going to be sacked and if so how many. One day we will find out what the true profits and losses have been in recent months. One day we will discover how much cash taxpayers have had to put in, and one day we will find out the full extent of the financial arrangements put in place for the public servants at the top of this company. As so much of this is forbidden fruit at the moment for Parliament, the media will find it so much more tempting to pick it.

One hour debate on Northern Rock

February 22, 2008 0 Comments

7.45 pm

The Chief Secretary to the Treasury (Yvette Cooper): I beg to move, That this House disagrees with the Lords in the said amendment.

Mr. Speaker: With this it will be convenient to take Lords amendments Nos. 2 and 3, and Government motions to disagree thereto, and Lords amendments Nos. 4 to 8.

Yvette Cooper: I thank the Lords for their consideration of the Bill, which has been brought forward in exceptional circumstances. As a result of the consideration by the Delegated Powers and Regulatory Reform Committee, the Government put forward in the Lords a series of amendments to change several orders so that they will be subject to the affirmative resolution procedure. We think that that is the right approach and we therefore accept those Lords amendments.
The Lords passed three amendments with which we wish to disagree and I shall take each in turn. Lords amendment No. 3 is on competition and the role of Office of Fair Trading and—as a result of the consideration both in the Lords and this place—we have had further discussions with the OFT. It may be helpful to inform the House about those discussions.

As we made clear in earlier debates, the Government recognise that we need to ensure that Northern Rock does not enjoy inappropriate or unfair advantages in competition with other banks and building societies. We need to ensure that we are operating in the interests of the taxpayer, but also that we have appropriate competition in the markets.

At EU level, we have been clear that we will need to ensure that the business plan satisfies the EU state aid rules and support for Northern Rock needs to be fully consistent with those guidelines. As we told the House on Second Reading, we will also hold discussions with the British Bankers Association, the Building Societies Association and the Council of Mortgage Lenders before final plans are submitted to the European Commission for state aid approval.

We agreed yesterday that the OFT will publish an annual report assessing any competitive implications of the public support for Northern Rock and, of course, the OFT also has the powers to step in at any time. The OFT is an effective watchdog, overseeing competitiveness in the UK markets. It has wide powers, including powers to investigate whether any market in the UK is distorted by unfair competition. It does not need specific new powers to report on the competitiveness of the banking market.

Therefore, there is no need for Lords amendment No. 3, which would be an unnecessary duplication of the OFT’s powers under the Competition Act 1998 and the Enterprise Act 2002, and the European Commission’s powers under the EU treaties. The amendment is inappropriate and I hope that the House will disagree with it.

Mr. John Redwood (Wokingham) (Con): Does that mean that the Chief Secretary envisages limiting the attractiveness of the rates that can be offered and charged by Northern Rock by reference to the average of its competitors?

Yvette Cooper: As we have repeatedly made clear, it would not be appropriate for Ministers to take decisions about individual products offered by Northern Rock. It is right that Ron Sandler should put forward his business plan, and that will obviously need to be approved by the Government as the shareholder in Northern Rock. Equally, as part of that process, we need to ensure, as we approve that business plan and have discussions with the EU, that we do not have unfair competition. It may well be that the European Commission will set out particular conditions on Northern Rock’s operation, and, of course, we will have to ensure that Northern Rock complies with them.

Bob Spink (Castle Point) (Con): If the British Bankers Association eventually concludes that the arrangements lead to unfair competition, what redress will it have?

Yvette Cooper: Clearly, the issue will be what the OFT concludes and what the EU concludes. Obviously, we will have discussions with the British Bankers Association, but Northern Rock will need to operate in compliance with UK competition law. It will obviously also have to comply with the EU state aid rules.

We have to remember the underpinning purpose of this intervention, which was to secure the financial stability of the banking system. As we have said previously, it would obviously not be in the interests of other banks or consumers for there to be unfair competition. Equally, it would not have been in the interests of other banks or consumers if Northern Rock had gone under in the autumn and there had been a spread of instability across the banking system. Sometimes I think that hon. Members who raise concerns about this are in fact raising concerns about the fact that Government guarantees have been introduced at all.
We think that it was right to introduce those Government guarantees, because we need to safeguard the stability of the wider banking system as part of the need to promote stability across the board. Therefore, I hope that the House will agree to disagree with Lords amendment No. 3.
I turn next to Lords amendment No. 1, which concerns the independent audit. Clearly, there should be an independent audit of Northern Rock. Indeed, an independent audit is currently under way. Northern Rock’s audited annual accounts will be published, after independent audit, by the end of March. That should give the House and the public information on Northern Rock’s assets and liabilities as part of its balance sheet. Northern Rock will continue to be subject to the requirements of the Companies Act 1985 and the Companies Act 2006. That means that the annual reports and accounts must be independently audited and filed with the registrar of companies for public access. We think that that is the appropriate way to conduct the audit.

Mr. Philip Dunne (Ludlow) (Con): Is the Chief Secretary therefore telling us that the audited accounts, which will be published at the end of March, will include the consolidation of the assets and liabilities held within the series of Granite subsidiaries of Northern Rock? If that is the case, will she clarify what she was signally unable to clarify last Tuesday? Will the Government have a call on the assets in the Granite subsidiaries in the event of defaults on its liabilities?

Yvette Cooper: We have set that out repeatedly. Clearly, the accounts will need to be set out in the normal way. The accounts of Northern Rock will need to meet all the ordinary accounting practices. It is right that that should be so. We have also repeatedly made it clear that the Government guarantees apply to Northern Rock and not to Granite. Again, it is right that that should be the case and that is the arrangement that has been set in place.

It is right to think that the appropriate way to conduct the audit is the method I mentioned. To ask the Bank of England to conduct a separate audit would not be appropriate. That is not the Bank’s area of expertise; it is not a professional independent auditor but a central bank. Interestingly, the amendment would not require an independent audit of Northern Rock within three months because it applies to clause 6, whereas the draft order that we have published would be made under clause 3. The amendment would therefore not achieve the intentions of the drafters.

Mr. Alan Beith (Berwick-upon-Tweed) (LD): Does the right hon. Lady recognise that it is the very opacity of conventional accounting that worries people when they are confronted by the existence of operations such as Granite, which did not come to the notice of even quite experienced observers of Northern Rock until a relatively late stage in its life and remains the subject of considerable uncertainty? That is one of the reasons why other forms of audit are being sought.

Yvette Cooper: Many people have raised and discussed issues about Granite on many occasions. If the right hon. Gentleman is pointing to the fact that several people had clearly misunderstood the nature of Granite and changed their understanding yesterday, that is obviously a matter for them. There has been a lot of discussion about the arrangements for Granite; it is a special purpose vehicle—the kind of arrangement that many banks set up—and it is important that its accounting treatment is properly dealt with and is properly transparent in the normal way. The matter has been discussed repeatedly.

Mr. Chris Mullin (Sunderland, South) (Lab) rose—

Jim Cousins (Newcastle upon Tyne, Central) (Lab) rose—

Miss Anne McIntosh (Vale of York) (Con) rose—

Yvette Cooper: I give way to my hon. Friend the Member for Sunderland, South (Mr. Mullin).

Mr. Mullin: I have not yet changed my understanding about Granite, and I put it to my right hon. Friend that at some stage a clear explanation will be needed of the company and its accounting arrangements, and the allegation that it will apparently be allowed to go on sucking assets from Northern Rock even after it is nationalised. That will have to be explained at some point—[Hon. Members: “Now.”] I hope that my right hon. Friend will do so at some point this evening.

Yvette Cooper: Can we be clear? That is not an accurate description of the relationship between Granite and Northern Rock; it is simply not true to say that Granite has a call on the assets of Northern Rock in that way and is, as my hon. Friend put it, sucking out mortgages from the bank. That is not the structural or the contractual relationship between Granite and Northern Rock. I draw the attention of Members to the letter that has been circulated, which my right hon. Friend the Chancellor has put in the Library, and which provides greater clarity on that detail.

I am conscious of the fact that many issues need to be raised. There is an important question about freedom of information that I need to cover as part of this debate.

Adam Price (Carmarthen, East and Dinefwr) (PC): Does the Chief Secretary accept that in this case, given the amount of public money we are talking about, the ordinary requirements for reporting under company law are not sufficient, especially because, as she is aware, there are serious doubts about the robustness of the interim report produced by the company in June? Within a few weeks, the company was running to the Bank of England for a massive loan. That is why we need the extra level of independent auditing.

Yvette Cooper: Let us be clear about the events, including the credit crunch in the summer, which triggered Northern Rock’s particular difficulties. I agree that there is a wider question about the sustainability of the approach that Northern Rock took and its aggressive strategy. As part of our consultation paper about wider reforms to the banking system, we have also discussed the need to look more widely at issues around liquidity, not simply solvency, as part of the regulatory structure. There is obviously a wide series of issues.

The Government have already stepped in to intervene with regard to Northern Rock. The Bank of England has already stepped in to intervene by providing additional loans to Northern Rock at an appropriate point and the Government have provided guarantees. It was right that the Government should do so; it was about protecting the financial stability of the banking system as a whole, as well as dealing with depositors’ interests in Northern Rock. Of course, assessments and analysis have been carried out as part of the lending and guarantees, but the exposure remains the same, as a result of taking Northern Rock into temporary public ownership. The intention at all stages is to be able to try to return the company to the private sector as rapidly as possible. We are talking simply about a temporary arrangement, and that bears on the third amendment.

Mr. George Osborne (Tatton) (Con): Before the right hon. Lady moves off that point, I point out that it has emerged that Northern Rock has a subsidiary based in the Channel Islands that takes offshore deposits. Are we to own a nationalised bank that operates in the Channel Islands and takes offshore deposits?

Yvette Cooper: As we have repeatedly made clear to the hon. Gentleman, we are not taking ownership of Granite. Throughout the process—

Mr. Osborne rose—

Yvette Cooper: Let me finish this point. The hon. Gentleman has repeatedly made completely inaccurate, nonsense points, not simply about Granite but about the overall relationship to Northern Rock, so much so that today’s Financial Times said:

“The argument…put forward by the Conservatives” on Granite“was roundly dismissed on Wednesday by City experts…Analysts said this showed a basic misunderstanding of how securitisations worked.”

The hon. Gentleman has today made a series of completely incorrect claims about the legal status of Northern Rock, which suggests a misunderstanding not simply of securitisations but of UK law.

Mr. Osborne: I would be happy to read out a year’s worth of Financial Times articles about the performance of the Chancellor of the Exchequer, but I want to press the right hon. Lady on the point about the subsidiary of Northern Rock that operates and takes offshore deposits in the Channel Islands; it is not Granite but a subsidiary of the bank. If we nationalise the bank this evening, will the Northern Rock subsidiary in the Channel Islands operate as a Government-owned nationalised bank? After all, I remember that when the Prime Minister was the shadow Chancellor, he made a great point of noting the offshore tax evasion that took place in some parts of the world.

Yvette Cooper: We are clear that we are taking over the legal entity that is Northern Rock—the totality of Northern Rock—and it will pass into the hands of the new board. Ron Sandler will now draw up the business plan and arrangements for the new bank. It is right that he should do so and that it should operate on a commercial basis. Let us be clear about why we have done what we have done: it is in order to save—

[Interruption.]

Mr. Speaker: Order. The right hon. Lady must be allowed to speak.

Yvette Cooper: Thank you, Mr. Speaker. The implication of all the points that Opposition Members have raised is that fundamentally they do not like the fact that Government guarantees were provided for an organisation that continues to operate. They simply want to make opportunist points, providing no serious alternative for the future of Northern Rock or the future of the banking system.

Mr. William Cash (Stone) (Con): Will the Minister give way?

Yvette Cooper: I need to get on to the next amendment.

Mr. Cash: The Minister has an obligation to answer the questions.
Mr. Speaker: Order. The Minister does not have an obligation to answer the hon. Gentleman. She has an obligation to speak to the House, and that is what she is doing.

Yvette Cooper: Thank you, Mr. Speaker. I need to get on to Lords amendment No. 2, which is about the Freedom of Information Act 2000. Again, we do not believe that the amendment would be appropriate. It is important that the public and the House have information about Northern Rock, and as I have made clear, the full, audited annual accounts will be published by the end of March.

Mr. Richard Shepherd (Aldridge-Brownhills) (Con): Will the right hon. Lady give way?

Yvette Cooper: I shall make some progress and set out the points first, if I may, and then I will give way.

Mr. Shepherd rose—

Yvette Cooper: If the hon. Gentleman will take his seat, I will make a little progress with the arguments about freedom of information, and if I have time, I will give way to him later.

Mr. Mark Harper (Forest of Dean) (Con): On a point of order, Mr. Speaker.

Mr. Speaker: I am sure that it is not a point of order, but I will hear it.

Mr. Harper: I have heard the Minister make lots of references to how little time we have. Surely that is governed by the Minister’s business motion, so it is rather pointless for her to complain.

Mr. Speaker: I knew that the hon. Gentleman’s comment would not be a point of order. I call Yvette Cooper.

Yvette Cooper: I appreciate that Opposition Members do not want to hear the points that we are making; they simply want to play games with what we should all recognise is an extremely serious issue concerning the future stability of the banking system and the future of Northern Rock.

In addition to the full, audited annual accounts and the annual report, other information about Northern Rock will be provided. In addition, we have said that we will shortly publish the framework document, which will set out the appropriate operating arrangements between Northern Rock and the Government. We will also—

Mr. Shepherd: Will the Minister give way?

Yvette Cooper: No, I will not until I have made some progress. [Interruption.] The hon. Gentleman will let me make some progress on the points about freedom of information— [Interruption.]

Mr. Speaker: Order. The hon. Member for Aldridge-Brownhills (Mr. Shepherd) is usually a very calm individual. I plead with him to calm himself.

Yvette Cooper: I worry about the hon. Gentleman’s blood pressure. He is getting himself into such an agitated state.

In due course, Ron Sandler will publish his strategic business plan, which will include the overarching strategic aims for Northern Rock. The House will recognise that it would not be appropriate to publish detailed commercially sensitive information and it is right—

Mr. Cash: On a point of order, Mr. Speaker. The Minister has just said that it would not be appropriate for information to be made available that was commercially sensitive. I was in the other House earlier this afternoon where I heard the Minister saying that that was not a matter that he would follow through—

Mr. Speaker: Order. The hon. Gentleman must know that I have enough to do dealing with what is said in this House, without worrying about what is said down the Corridor.

Mr. John Grogan (Selby) (Lab): Will my right hon. Friend give way?

Yvette Cooper: I will give way to my hon. Friend in a moment, but as I have said repeatedly to hon. Members on both sides of the House, I am keen to make a couple of points about freedom of information before taking interventions on it. I hope hon. Members will let me make a little progress.

We believe that it would not be appropriate, however, to apply the provisions of the Freedom of Information Act 2000 to the institution. The bank will not be performing a public function that would make it appropriate to apply the Freedom of Information Act to it.

Mr. Gerald Howarth (Aldershot) (Con): Will the right hon. Lady give way?

Yvette Cooper: In a moment.

We have been clear that we are taking the bank into public ownership not because we believe there is a public function that we need it to fulfil, but in order to safeguard the stability of the financial system and the interests of the taxpayer. I should inform the House that the Bank of England also has an exemption from the Act on the information that it holds in relation to the provision of private banking services and relations services. That is included in schedule 1 in part VI of the Freedom of Information Act, so it is written into the Act. That is important.

Mr. Shepherd: On a point of order, Mr. Speaker. I am sure you will make a judgment on this. It is absurd that a Minister declaims an interpretation of an Act of Parliament that the Government introduced and denies the very content of it.

Mr. Speaker: Order. We must be careful not to abuse the system of points of order. The right hon. Lady is perfectly in order. If she were out of order, I would say so. Believe me, I would be the first to say so. She is in order.

Yvette Cooper: Thank you, Mr. Speaker.

I shall make one more point about the importance of the freedom of information issue, then I shall be happy to take interventions from hon. Members. Let us be clear. We do not want Northern Rock to have to reveal commercially sensitive information that might undermine its position with regard to its competitors. [Interruption.] We do not want it to be in a situation where there is uncertainty about whether particular pieces of information will be protected by commercial confidentiality, or will alternatively be judged to be in the public interest—

Several hon. Members rose —

Yvette Cooper: The lack of certainty could undermine the bank’s position when it is operating against competitors—

Mr. Cash: Will the Minister give way?

Yvette Cooper: —and would not put the taxpayer in a sensible position when it comes to dealing with the need to sell the institution on to the private sector at an appropriate moment.

Several hon. Members rose —

Yvette Cooper: If hon. Members will just calm down and stop—

Mr. Speaker: Order. Two hon. Gentlemen are getting to the stage of beginning to defy the Chair. Once they do that, there will be problems. The hon. Member for Stone (Mr. Cash) has had a good innings this week; he has spoken more than the Minister. He should calm down and listen to the Minister. That will give the official Opposition spokesman the opportunity to speak.

Yvette Cooper: I am happy to give way to hon. Members capable of asking a calm question.

Mr. Tim Boswell (Daventry) (Con): I have not been a regular follower of this issue. Can the Minister explain to me how she can possibly justify saying that the bank is not performing a public function when the whole point of the state intervention that we are sanctioning tonight is—allegedly, and on her own account—to safeguard the stability of the banking system?

Yvette Cooper: We are taking the bank into public ownership for a reason that is in the public interest—that is rather different from the ongoing function that the bank performs. That is a different, private banking function, and we want to get the bank into the private sector as rapidly as possible.

Mr. Grogan: May I tempt my right hon. Friend to see some possible advantages of applying freedom of information to Northern Rock in respect of increasing public confidence in the process? Is it not a fact that section 43 of the Freedom of Information Act specifically exempts commercially sensitive information from the need for disclosure? Does that not deal with the point that worries her?

Yvette Cooper: My hon. Friend makes an important point, but he will recognise that there is a public interest test at the heart of the Freedom of Information Act—and it is right that there should be. It is important that an organisation that needs to function in the commercial markets has some certainty about what the status of different pieces of information will be.

We see the bank as something that is staying in the public sector only on a temporary basis. This is not about a long-term public institution; if it were about such an institution with a long-term history in the public sector and if our intention were to keep it indefinitely in the public sector, that would be a completely different matter and my hon. Friend’s point would be exactly right. However, this is about an institution that we want to get out of the public sector and into the private sector as rapidly as possible. We want to be able to sell it on; we do not want the taxpayer’s interest to be undermined by the fact that the bank might have had to reveal commercially sensitive information or information that could weaken its position when it comes to getting the sale deal agreed.

This is a temporary arrangement, therefore there is a temporary position with regard to the Freedom of Information Act. When the original discussions about the 2000 Act took place, and given all the deep principles rightly embedded in the Act by this Government, we provided for an exemption for the Bank of England precisely around the provision of private banking and related services. The legislation is in the spirit of the Freedom of Information Act; it is not about changing the approach to it. There are the additional interests of taxpayers, so it is right that we do this now to get the operation working effectively and to get the bank back into the private sector.

Mr. Gerald Howarth: I am extremely grateful to the Minister for giving way. I quite understand what she is saying, but it is extremely important that the public should understand one aspect of this issue. In the technical note that the Chancellor of the Exchequer sent to the hon. Member for Twickenham (Dr. Cable), it is mentioned that Northern Rock sold about half of its mortgage assets to Granite between 1999 and 2007. The note explains that Northern Rock will have an obligation to top up in the event that some of those assets are redeemed. Are the public not entitled to know whether some of the best assets of Northern Rock can be siphoned out of the company into Granite, thereby diminishing the value of the taxpayer’s investment?

Yvette Cooper: The hon. Gentleman cites the technical note, but has not read the subsequent sentence, which clearly states:

“There remain high quality assets on Northern Rock’s balance sheet, as well as Granite’s.”

It also states:

“It is a commercial decision for Northern Rock whether to provide new mortgage assets to the Granite financing vehicle or whether to allow the vehicle to run-off in an orderly way.”

Rob Marris (Wolverhampton, South-West) (Lab): Lords amendment No. 2 is basically the same as new clause 2, which was put forward but not reached when the Commons last debated this legislation. Amendment No. 14 was also put forward by the Opposition at that time, and that was discussed. That amendment mentioned provisions to ensure the independent day-to-day management of the business.

Does my right hon. Friend agree that it appears that, first, some right hon. and hon. Members do not realise that the Freedom of Information Act does not cover the private sector and that, secondly, to put forward an amendment asking for independent day-to-day business and then say that freedom of information should cover the bank is a contradictory and silly position?

Yvette Cooper: My hon. Friend makes an important point. There is also, as I understand it, a curious consequence of the way in which the amendment has been drafted. Under the amendment, even after Northern Rock was sent back into the private sector and sold, it would still be subject to the Freedom of Information Act. That is clearly bonkers and shows that it is simply a wrecking amendment designed to prevent it being viable to operate Northern Rock effectively in the public sector in order to be able then to sell it on to the private sector to get the best possible return for the taxpayer.

In the end, this is all about us getting the best return for the taxpayer and getting a proper arrangement that supports the stability of the financial services and banking system. We think that those are important objectives. Opposition Members are simply playing opportunistic games. They are making nonsense claims about Northern Rock, about how the securitisation system works, and about how the legal system works. It is right that we should have a proper debate about this, but it is also right that we should come up with a proper solution to the problems of Northern Rock, which Opposition Members have continually and singularly failed to do.

Mr. Philip Hammond (Runnymede and Weybridge) (Con): We have listened to 30 minutes of rubbish and waffle from the Minister, and we now have precisely 29 minutes left to scrutinise the House of Lords amendments and to consider the very significant points that were raised in the other place. There is clearly no prospect of this measure receiving proper scrutiny in this House. Indeed, the one part of the Bill that has been properly scrutinised is the bit that the Delegated Powers and Regulatory Reform Committee looked at in the House of Lords. The Government have tabled five amendments of their own in recognition of the weakness of the original drafting—testimony to the value of proper scrutiny.

There was no reason at all to impose the farcical timetable that we have had for this Bill. We could have sat through the night tonight; we could have sat tomorrow. The only possible reason was to prevent proper debate and to obscure the extraordinary powers that the Government are taking, not only for Northern Rock but on a wider basis. We are witnessing a shocking abuse of this House’s willingness to expedite legislation in an emergency, with many of the powers in the Bill simply not necessary to resolve the situation of Northern Rock.

The amendments that have come back to us from the Lords fall into three groups: those dealing with transparency, the one dealing with fairness, and those dealing with procedure. Amendments Nos. 1 and 2 deal, respectively, with audit and freedom of information. There is a clear need for an audit of the situation in Northern Rock, including an analysis of the quality of the loan book, which would not necessarily be undertaken in depth in the course of the ordinary statutory audit that the Minister talked about. The public are being asked to buy a pig in a poke. No one is sure what we are getting, how much we are paying, or what we are buying it for.

An additional complication has come to light—that of Granite—and I want to take a minute to touch on that. We are all agreed that some of the best of Northern Rock’s assets are included in Granite, but Granite also includes a Northern Rock seller’s share worth about £5 billion to Northern Rock, which would be an early casualty of a default on the covenants in the Granite documentation, quickly undermining the solvency of Northern Rock. One of the requirements of an auditor would be to look at any impairment to the value of that seller’s share as a result of the change in Northern Rock’s situation. Specifically, Northern Rock must feed Granite with new mortgages; if it fails to do so, the Granite entities will collapse and go into wind-up with all the cash flows diverted to the bondholders, putting the seller’s share, which belongs to Northern Rock, at risk. To try to avoid that, Northern Rock may be forced, if it is not originating new business, to take the good-quality assets that it has within its own portfolio and feed them into Granite. That is the way in which Granite can become a sponge sucking the high-quality assets out of Northern Rock. That is why an audit is so important, and that is why we have consistently argued for an alternative method of dealing with Northern Rock that puts the taxpayer at the top of the pecking order, not at the bottom, which the Chief Secretary’s solution would do.

Lords amendment No. 2 would be unremarkable anywhere but in the wonderland that this Government inhabit. It says that what is a publicly owned company shall be deemed to be a publicly owned company for the purposes of freedom of information. But we know from the draft order that the Government intend to ordain by statute that this particular publicly owned company is not a publicly owned company. We have heard a new definition from the Chief Secretary this evening; she says that it is not a “public purpose company”. The order talks about a “publicly owned company”. At this rate, next week we can anticipate a piece of legislation allowing the Government to designate by order that black is white.
If Granite’s loan book is as good as the Chancellor and the Prime Minister claim, and if, as the Prime Minister said at his press conference on Monday, they have “made at all times the right decisions”, what do they have to fear from an audit? What do they have to fear from a freedom of information request?

Frank Dobson (Holborn and St. Pancras) (Lab): Would the hon. Gentleman accept that the freedom of information request would not be made of Ministers, but of people who, in a competitive market, are trying to run Northern Rock to the advantage of the taxpayer? It might well be to the disadvantage of the taxpayer for information to be disclosed. I suggest that the Tories could come up with a compromise in this case. If this House and the House of Lords insist on freedom of information applying to Northern Rock for the sake of protecting taxpayers, will they agree to apply freedom of information to all the institutions with which Northern Rock would have to compete?
Mr. Hammond: I say to the right hon. Gentleman that there are other companies in the public sector that are subject to the Freedom of Information Act. The concern that he has will not arise because there is an exclusion from freedom of information provisions for commercially sensitive information. Let us be clear: what the Government are seeking to protect is not the commercial secrets of Northern Rock, but the cock-up that they have made of this whole fiasco since last September, which would be in danger of coming out if we got access to Northern Rock’s information through the Freedom of Information Act.

Mr. Cash: Will my hon. Friend give way?

Mr. Hammond: I am going to make some progress because I do not want to do what the Chief Secretary did and take up all the remaining time.

Lords amendment No. 3 would include in the Bill a statutory role for the Office of Fair Trading, which would address a key concern in the City of London and the financial services industry about fairness and competition. The state aid rules are a constraint, but the Government have acknowledged that they are not in themselves a significant constraint. We have had a significant concession from the Government on that issue in the House of Lords, and I am grateful to the Chief Secretary for that. The Government made it clear during the debate in the House of Lords that Northern Rock will not be allowed to abuse its privileged position to act anti-competitively in the marketplace. That is a great victory for us, and for common sense. We would have preferred to see that clarification in the Bill, because when the chips are down and Granite needs topping up, there will be a great temptation to interpret this self-made and self-policed regime flexibly, but it is, none the less, something that we are pleased to acknowledge, and I thank the Chief Secretary for that.
Finally, the Government amendments to clause 13 represent a partial response to the concerns expressed by the Delegated Powers and Regulatory Reform Committee in the House of Lords, but they do not go nearly far enough. The negative resolution procedure is simply not satisfactory for the approval of orders made under this Bill. Where the purpose of the order is to transfer assets, it is no good us coming back to the order and negating it 30 or 40 days after it has come into effect and the damage has been done. The effect of using the negative procedure would be, in practice, to remove all effective parliamentary scrutiny from the process. It would allow the Government to make a transfer of assets by order that Parliament can do nothing about.

There is absolutely no need for the measure. The Government argued in the House of Lords that they may, in an emergency, need to transfer an asset urgently, but they do not need to act immediately in the case of Northern Rock. The shares are suspended and depositors still have access to their accounts. Life goes on. Mortgage holders are paying off their monthly payments and there is no risk to the system. We on the Conservative Benches maintain that this emergency legislation must relate precisely to the emergency situation—if we can call it that—of Northern Rock, not a wider, general purpose that the Government are seeking.
To fail fully to accept the DPRRC recommendations is, I understand, unprecedented without cross-party support. The DPRRC is not some partisan sniping party; it is a highly respected procedural Committee of the House of Lords. The Government’s behaviour on the matter shows up as cynical, hollow rhetoric the Prime Minister’s words back in June about respect for Parliament and the returning of powers to it.

The Government’s rejection of proper scrutiny not only of the Bill, through their timetabling motion, but of Northern Rock, the company that we are buying, through their refusal to accept the amendments, and their steamrollering of order-making powers in the face of the recommendations of a respected independent Committee of the House of Lords speak volumes about this rotten, incompetent and arrogant Government. I urge my hon. Friends to vote against the Government motions in respect of Lords amendments Nos. 1 and 2, and to support the Lords in their decision.
Sir Stuart Bell (Middlesbrough) (Lab): We have had one blessing in disguise, which is that the hon. Member for Runnymede and Weybridge (Mr. Hammond) did not pray in aid the copy of the Financial Times that is on the Dispatch Box before him. I was waiting for him to tell us that he would quote from the Financial Times; indeed, one Opposition Member—I think it may even have been one on the Front Bench—quoted many Financial Times articles. It is a great pity that the Opposition spend so much time reading the Financial Times, but learning so little from it. I am reminded of a saying that Winston Churchill used during the second world war. He quoted Dean Inge, who said, “I’ve had a great many worries; most of them never happened.” The hon. Gentleman’s doomsday scenario bears no relationship to reality.

I followed the Third Reading debate on the Bill, when the House was seriously misled by the hon. Member for Twickenham (Dr. Cable), whose comments on Granite come from another world. The Chief Secretary to the Treasury—

Mr. Deputy Speaker (Sir Michael Lord): Order. The House is very particular about the words that we should not use and “misleading” is one of them, so perhaps the hon. Gentleman would care to withdraw that remark.

Sir Stuart Bell: I am not entirely sure what I am supposed to withdraw. I am not entirely sure what I said— [ Laughter. ]

Mr. Deputy Speaker: Order. It is helpful to the House if hon. Members can remember what they have just said. There was some suggestion of misleading the House and I am sure that that is not what the hon. Gentleman meant.

Sir Stuart Bell: I am grateful, Mr. Deputy Speaker. If I may quote Winston Churchill again, he said, “The best speeches come from the heart.” But if I have unintentionally misled the House, I am happy to—

Mr. Deputy Speaker: Order. It is obviously taking me some time to explain this. Perhaps the hon. Gentleman would like to withdraw the word “misleading”.

Sir Stuart Bell: I am very sorry if I used the word “misleading” in relation to the speech by the hon. Member for Twickenham and of course I withdraw the remark.

I have followed the Opposition most of the evening. They have consistently refused to look any of the arguments in the face when responding to the Chief Secretary. What they are showing is a total misunderstanding of any kind of use of special purpose vehicles in the City of London and any concept of global securitisation. They read the Financial Times, and I can tell them that the City of London will be very disconcerted by their lack of knowledge about what actually happens in the City.

Mr. Dunne: It is revealing to learn that the hon. Gentleman is an expert not only on matters of faith but on global securitisation. As he has criticised the hon. Member for Twickenham (Dr. Cable) for raising the subject of Granite, perhaps he will expand on the final sentence of the technical note from the Treasury which states:
“Northern Rock is not liable for the Granite bonds and bondholders have no access to Northern Rock’s assets.”

If that is the case, why is it that Northern Rock not only controls all the cash flowing into Granite, but has an obligation to top up assets and the seller’s share that it holds in Granite?

Hon. Members: Answer!

Sir Stuart Bell: I am very happy to answer, because the hon. Gentleman has shown his total ignorance of economics as they apply to securitisation. [Interruption.] Yes, he has. That is the nature of a securitisation, and that is the nature of a bond. The hon. Gentleman’s failure to understand that demonstrates the Opposition’s failure to understand anything about the taking of Northern Rock into public ownership, the reasons why it is happening, and the reasons why it is temporary. The hon. Gentleman must understand—although he seems not to wish to understand—that Granite is an independent legal entity. That is a fact from Northern Rock. Granite is owned by its shareholders; Northern Rock owns no shares in Granite. This is a normal procedure.

Angela Browning (Tiverton and Honiton) (Con): I too was present for the Third Reading debate. Can the hon. Gentleman explain this? The technical note states, under the heading “Control of Granite”:
“The contractual structure of Granite is such that it is effectively controlled by Northern Rock as it continues to service the mortgages in Granite and to provide cash management and other administrative services.”

Hon. Members: Answer!

Sir Stuart Bell: That is the principle of securitisation. Securitisation has been here for 20 years. If the House wants a lesson on the concept, let me explain that it began with General Motors. Opposition Members have no understanding of what securitisation means, but everything that the hon. Lady has said is right: that is what securitisation is about. The Opposition’s inability to understand securitisation reveals that they do not understand the City of London, do not understand the financial markets, and do not understand why we are in this position.
Mr. Philip Hammond: Can the hon. Gentleman explain why the Granite entities are consolidated in Northern Rock’s accounts?

Sir Stuart Bell: I understand that at least 40 per cent. of Northern Rock’s mortgages are going across to Granite. Again, we are talking about a concept: the concept of balance sheets and accountability. I must tell Opposition Members that each time they open their mouths they show that they do not understand the City of London, they do not understand accountancy— [Interruption.]

Mr. Deputy Speaker: Order. This is an important matter. The House must listen. [Interruption.] Order. The House must listen to the hon. Member who is addressing it.

Mr. Redwood rose—

Rob Marris (Wolverhampton, South-West) (Lab) rose—

Sir Stuart Bell: I give way to my hon. Friend the Member for Wolverhampton, South-West (Rob Marris).

Rob Marris: I am sure that my hon. Friend will move away from the Granite topic shortly because of the time constraint. I wonder whether he will let us know his opinion of the freedom of information aspect of all this. [Laughter.]

Mr. Deputy Speaker: Order.

Sir Stuart Bell: I am not an expert on witches’ brew. If I were an expert on witches’ brew, I would be an expert on the Freedom of Information Act.

The point is—and the Financial Secretary has already made it—that Northern Rock will not be a public body. Freedom of information legislation requires that sensitive information be defended. The Bank of England has an exemption from the Freedom of Information Act in regard to the provision of private banking and related services. There is no reason why Northern Rock should fall within the purview of the Freedom of Information Act.

Mr. Redwood: The hon. Gentleman is right to say that some securitisation schemes get the obligation off the balance sheet of the company engineering it and into other hands. His problem is that, in this case, that is not what Northern Rock happens to have done. Will he answer the question about the contractual relationship between Northern Rock and Granite which requires the supply of good-quality mortgages where others are paid off, or else become bad-quality mortgages?

Sir Stuart Bell: Again, the right hon. Gentleman does not understand what the Chief Secretary said. Of course there is a top-up principle in the securitisation, because the securitisation is backed by a bond, the bond is bought by the investor, and the bond has an interest—a coupon; of course, it has to be topped up. What the Chief Secretary clearly said is that there are other prime assets within Northern Rock that are not required to be used as that top-up.

I am grateful to my hon. Friend the Member for Wolverhampton, South-West for his comments, because I shall now move on from the Freedom of Information Act 2000 to the question of competition. The Conservatives are not helped by the fact that they have an anti-European attitude and yet they have to fall back on the EU to defend the competition policies that will be enacted in respect of Northern Rock. The point has been made many times—

Mr. Cash: On a point of order, Mr. Deputy Speaker. Does this debate not provide a good illustration of the fact that the entire Bill has been constructed in order to avoid hybrid instruments and the Hybrid Instruments Committee procedure, under which all these matters could be discussed in the proper manner? Is this not the true problem, and it will come out in the hybrid instruments—

Mr. Deputy Speaker: Order. That is not a matter for the Chair.

Sir Stuart Bell: A robust statutory framework is in place at European level to prevent the unfair distortion of competition through Government subsidies, and the Government support of Northern Rock will need to be fully consistent with those guidelines. That should be sufficient assurance for anyone in the City of London to understand that Northern Rock will not have a competitive advantage over other organisations in the banking sector.

Mr. Iain Duncan Smith (Chingford and Woodford Green) (Con): The hon. Gentleman has been a Member of this House for a long time and he has argued endlessly that there should be freedom of information and that we should be open. Does he not feel even the slightest bit ashamed of his Government, as they have driven through this Bill when it is clearly not an emergency? With all his Back-Bench experience and given all the Governments he has seen, does he not feel even a little bit ashamed? Can I tempt him to give his personal opinion of the procedures that his Government have embarked on? Are they not disgraceful?

Sir Stuart Bell: The right hon. Gentleman puts temptation in the way of an hon. Member. It is not for me to yield to the forbidden fruit of Parliament and to be contrary to my Whips Office and my business managers. I would like to say a few additional words, however.

Mr. Beith: Does not what the hon. Gentleman is doing run the risk of ensuring that a party that supports this Bill and that moved the amendment will not contribute to the debate?

Sir Stuart Bell: I have noticed over the years that interventions can take up an enormous amount of time and that many Members make their comments through interventions. As I have been interrupted and I shall continue to be so, I hope that I may make the points that I wish to make before the debate comes to an end.
Miss McIntosh: Perhaps I should draw the House’s attention to my diminishing interest in Northern Rock as a former shareholder. Will the hon. Gentleman answer one question? He is much better versed in the procedures of this House than many Members. Why on this occasion does he choose to rule out the use of a hybrid instrument, which I think would be particularly appropriate to apply?

Sir Stuart Bell: It is not for me to rule that in or out; that is a question for our Front Bench. I have, however, been quietly asked to allow the Liberal spokesman to make an intervention, and I will be happy to do so. Let me simply say that if the Lords spend so much time—two days—on producing amendments such as those we are discussing in this House now, then us having more time would have made very little difference.

Mr. Patrick McLoughlin (West Derbyshire) (Con): On a point of order, Mr. Deputy Speaker. The hon. Gentleman has just informed the House that he has been asked to allow the Liberal Democrats to intervene in this debate, which is very good of the Government. Bearing in mind that it was the Deputy Leader of the House who did that, can you, Mr. Deputy Speaker, enable us to have extra time so these matters can be discussed properly?

Mr. Deputy Speaker: Unfortunately, the answer is no. I am bound by the rules of the House, and interventions such as this simply take up more time.

Mr. Jeremy Browne (Taunton) (LD): What a build up to what will be a great six-minute speech!

The Chief Secretary to the Treasury accused the Liberal Democrats of playing opportunistic games with this Bill. That was a mistake, because if anything we have given the Government guidance throughout on the course of action that they should take. If only they had listened to us a bit earlier, the public purse would be in a lot better condition. As for the hon. Member for Middlesbrough (Sir Stuart Bell), he will have to learn to stand on his own two feet without the guidance of my hon. Friend the Member for Twickenham (Dr. Cable).

Mr. Redwood: What is the Liberal Democrats’ forecast of the first year total cost to the taxpayer of the nationalisation that the hon. Member for Taunton (Mr. Browne) envisages?

Mr. Browne: Let me see whether I can get to that once I have concluded the two substantive points that I wish to discuss, the first of which is on the independent audit and the second of which is on freedom of information.

The Liberal Democrat position is that an independent audit is appropriate, and it is strengthened by the arguments that we have heard about Granite in this House and in the other place. There has been an extremely worrying development, because there still is no feasible alternative to nationalisation, but that does not mean that the Government can sweep the Granite issue under the carpet. Some £8 billion of unsecured loans are on Northern Rock’s balance sheet, but none is on Granite’s, so there is an imbalance that is potentially highly damaging to the taxpayer. We need a new valuation that gives taxpayers confidence that when we undertake to buy this company, we are buying a proposition that offers us a reasonable deal.

Commercial confidentiality is specifically excluded from the freedom of information provisions. The suspicion must be that the Government think that there is something to hide and that they would rather not be exposed by freedom of information. Northern Rock would have benefited from more rather than less scrutiny over the past few years. Some companies in the public sector that have commercial rivals are subject to freedom of information provisions. The Royal Mail is a case in point—it competes with independent, private courier companies—and National Savings and Investments is another example of the phenomenon.
Northern Rock is looking to engage very expensive consultants and it might well pay bonuses to staff, so it seems only reasonable that we are in a position to know the scale of the undertaking being made by its management. The Minister says that the problem is that as this is only a transitory condition and the company will be sold back to the private sector—she was not specific on the precise time scale—it would not be appropriate to subject these measures to freedom of information. Of course there is nothing to prevent the Government from reintroducing provisions to exclude Northern Rock from freedom of information measures when it is sold back into the private sector. We have no assurance of when that will be, and it is surely much better to act on the precautionary principle and for the Government to support the relevant amendment.

In conclusion, the Government are taking an extremely high-handed approach on this matter. The Liberal Democrats have sought to be a wise counsel and good friend to the Government throughout their difficulties over the past five months. That is entirely the spirit in which, in the other place, we supported the amendments before us this evening. We are not seeking to play opportunistic games. We seek to make the legislation, which is being introduced in short order, better than it would otherwise be. Rather than setting their face against good advice from my party and the Conservative party, the Government would do well to be less stubborn and to heed the warnings that we have given them in the past and are putting before the House this evening.

Mr. Duncan Smith: Very little time is left, so I just want to make one particular point. We ought to put the amendments in context. They probe the reality of what the Government are doing. This is not aimed simply at safeguarding commercial interests or the interests of the taxpayer. The main priority of all this secrecy and all this rush is to safeguard the political interests of this Government. They know very well that if freedom of information was allowed, we would find out exactly what had gone on over the past few months. We would know how incompetent and disgraceful their behaviour has been. We would learn something else over the next few months. The Government have set this so that it will go—

It being one hour after the commencement of proceedings on the Lords amendments, Mr. Deputy Speaker put forthwith the Question, pursuant to Order [19 February].

Between a Rock and a load of Granite – how to pay for mortgages

February 22, 2008 7 Comments

In Northern Rock’s 2006 Accounts they reported how well they were doing. They commented “ The low risk nature of Northern Rock’s balance sheet is reflected in the mix of assets…These assets are well funded through a well diversified range of assets.” They looked forward to further low risk growth, and told their shareholders that the new regulations under Basle II would mean they could reduce the amount of money they needed in their business to support the then level of activity. What a difference a year makes.

Last year they put aside £126 million for possible losses on their lending, most of it for the unsecured loans they had offered people on top of their mortgages. This represented just 0.15% of the amounts they had lent. This year I am sure the new management will want to look at this and step it up considerably. They may also wish to record losses on many other features of the Northern Rock business, as prudence would dictate lower values for some of the assets on the balance sheet, and putting money aside for redundancies and future re-financing costs. There is likely to be a lot of red ink spilled as Auditors and new management try to agree what is fair. The taxpayer will take the hit.

The media and political classes have suddenly alighted on the issue of Granite, the offshore financing company that has issued substantial amounts of paper to its investors, and which holds a lot of Northern Rock’s mortgages. In order to understand what is going on , we need to look at how a mortgage bank can raise money to finance its business.

Northern Rock prided itself on using four principal methods to raise money to lend to people, claiming this showed it was prudent and not too dependent on any one method.

The first is to collect money from savers, through so called retail deposits. If you or I put our few hundred pounds into a bank or building society we are letting them use our money to lend to people on mortgage. Some MPs now seem to think this is the right way to finance a mortgage business, and think it is the prudent way. 22% of Northern’s business was paid for by these deposits at end 2006. Paradoxically, it was this method of finance which led Northern Rock to borrow so much money from the taxpayer, because once the small savers lost confidence in the Bank they wanted their money back, leaving Northern short of funds. It is the ultimate example of borrowing short to lend long – many of the small savers place their money with banks like Northern in deposits where they can get their money out in a day, or with a month’s notice. Mortgage banks lend this money on for much longer time periods, usually safe in the knowledge that their depositors will not all want their money back on the same day, and confident that others will come along to deposit.

The second is to borrow from the money markets – so-called wholesale funds. 24% of Northern’s money came from this source at end 2006. Much of this borrowing is also short term, but banks can usually rely on being able to borrow it over and over again, so again it is usually safe to lend it out for much longer periods. This source of funding dried up in the Credit Crunch of September 2006.

The third is securitisation. 43% of Northern’s money came from this source by end 2006. The bank packaged up groups of mortgages, and sold them to a Granite offshore company. The buyers hold a piece of paper in a Granite company, and receive interest payments based on the mortgages within their company. This financing can be arranged for longer time periods, like the mortgages themselves.

The fourth comes from issuing bonds, where the bondholder lends money to the company for a fixed period. These too can be for longer periods than 1 and 2 above. Northern raised £6.2 billion in bonds, offering mortgages as security for those as well so the bondholders would get their money back if anything happened to Northern Rock itself.

Northern’s critics now tell us this was a risky business model, because it entailed borrowing short and lending long. All banking involves an element of that – that is how banks make their money because they can charge more for the longer term loans they make than they have to pay for the short term money they borrow. They can also, of course, charge more for the loans they make to reflect the greater risks of those loans. Northern’s collapse resulted from the sudden drying up of the money markets, followed by the swift withdrawal of too many retail deposits. Two of its four funding methods went wrong.

The sudden fascination with Granite is probably overdone. Northern took the prudent line on reporting Granite. It kept all the loans and all the borrowings on its own balance sheet. It did so because it manages the mortgages in Granite, and because it has to replace any mortgages that fail to meet the standards required, and because it has to top up the Granite companies with new mortgages if the mortgages are repaid too quickly. Northern also has securitisation arrangements through Dolerite Funding and Whinstone, on a more modest scale than Granite. These are also clearly shown in the last Accounts on the balance sheet.

The argument over Granite revolves around the government saying they are not nationalising the Granite companies and the Opposition pointing out that Granite is part of Northern Rock’s balance sheet with obligations from Northern Rock to Granite that will continue. In addition Northern has an £8.4 billion investment in Granite.

The bigger argument will become how much value can taxpayers put on all of this? The 2007 Accounts are likely to look very different from the 2006. I expect to see some hefty write downs in Northern Rock’s asset base. Valuing their share in Granite is just one part of a much more complex and difficult picture. The valuers also have to take into account the interests of all those who have made money available through securitisation to the Northern Rock business.

John Redwood on the foreign policy aspects of the Lisbon Treaty

February 21, 2008 3 Comments

<strong>During last night’s debate on the foreign policy aspects of the Lisbon Treaty, John Redwood raised a number of issues arising from the treaty in relation to Britain’s relationship with the wider world.</strong>

<strong>Mr. Redwood: </strong>It is now quite obvious that we will not be able to debate the second set of amendments, which is what we really wanted to debate. I had stepped out in case we got on to them, but with a vote that will not now be possible. Once again, it is extremely difficult for the House when important and weighty issues such as the defence of the country cannot be debated, because another important group of amendments on foreign policy still need to be disposed of.

Earlier in this debate, the Government’s position lacked clarity. It is quite possible for the Government to come to the House and say that they really think it better to have a common European foreign policy on all the main issues, rather than a British foreign policy. That is not a proposition with which I agree, but it is a perfectly respectable and understandable position. If that is the Government’s position, they will of course want Britain to make compromises and to work more with our partners. They will also want that common foreign policy to be expressed by a single president, high representative or Foreign Minister of Europe and they will want that policy to be represented around the table of the UN Security Council.

As the United Nations begins to understand that that is perhaps the way in which the Government wish to operate, other member states of the United Nations will ask, “Why should these people have three representatives around the table, when there is effectively only one country from the foreign policy point of view and when they’ve tried to get an extra seat by the back door?” The Americans, the Chinese or the Russians might ask, “Wouldn’t it be neater and more sensible to have just the one representative representing the common European policy, rather than the French and British view as well, which should be the same on these occasions?”

For those who wish to see the position clearly, the difference in House is quite simple. There are those who think that having most of this country’s major foreign affairs policy positions agreed with our partners by compromise is the right answer. There are others of us who think that, while we can do that on some things, there are enough differences between our country and the other member states that it is much better to keep things intergovernmental, not to assume that there is nearly always going to be a common foreign policy, not to put Britain under constant pressure not to be the odd voice out or to be different, and to allow the British Prime Minister and the British Foreign Secretary, on all those issues where we have a different view or we have an interest and the other member states do not have a strong interest, to be able to carry on doing what we have always done and to be a senior country in world affairs, because of our history and, most importantly, because ours is one of the few countries that systematically stands up for freedom, decent rights and democracy, and is prepared to back that up with the lives of its young men and women, and with the money of its taxpayers.

We make a large contribution in world affairs, along with our American allies, our French allies and some others who sit around the UN table.

<strong>Mr. Cash: </strong>Does my right hon. Friend agree, as I suspect he would, that there is something utterly pathetic about the situation we have arrived at in this debate? The question whether our young men are to be sent off to war really should be debated. The question of how a common foreign and security policy is being developed is being ignored by the Committee thanks to the means that the Government have employed to frustrate debate—

<strong>The First Deputy Chairman of Ways and Means: </strong>Order. We must return to the debate. I call Mr. Redwood.

<strong>Mr. Gummer:</strong> On a point of order, Mrs. Heal. Is this not a suitable moment for the Government to announce that they will introduce an extra day of consideration on which we may deal with the second part of the debate?

<strong>The First Deputy Chairman:</strong> That is not a point of order for the Chair. I am sure that the right hon. Gentleman’s comments will have been heard.

<strong>Mr. Redwood:</strong> Thank you for those wise words, Mrs. Heal.

Part of the argument on this group of amendments is whether there should be at the UN Security Council table a representative of the EU view. For the life of me, I cannot understand why the other UN member states would want that, unless that high representative or that president of the EU was backed by some effective European force. The whole point of the UN Security Council is the main powers—those countries that can use their diplomacy and influence with other countries—trying to form a common view that the General Assembly will accept. More importantly, the main powers form the most important part of any force that might have to be used by and in the name of the UN to enforce such a common strategy, if one or two other states in the world do not agree and force is unfortunately essential.

In this debate, we have not had enough clarity on the important issue of how on earth the EU could expect to be taken seriously in that seat without having such a force, which we are told would not exist as, we are told, there will be no common army. At the same time, I find it difficult to understand how we could avoid other UN member states making the perfectly reasonable point that, as we were moving towards that common position, and therefore the common use of our military forces, there should be only the one representative around the Security Council table.

There is a perfectly good solution to the problem whereby we will sometimes have a common policy and at other times not—that is, the current situation. If there is a common policy, we have France and Britain with seats. For some time, Germany has held a seat under the elected system. In relation to the position that they are adopting at the Security Council, those countries can pray in aid the additional strength that lots of other European countries agree with them. It is even better if we can join with a big country such as India.

There has been a lot of discussion about India. I happen to think that India is getting close to the point where it should have a seat on the UN Security Council. I hope that there will be discussions and negotiations, and if India wants to assume the responsibilities of a big world power—it is becoming a formidable economic power—I would be happy for Britain to see that take
<strong>20 Feb 2008 : Column 476</strong>
place. I am not happy to see this double banking and double-hatting through the EU, with all the muddle that that implies.

There needs to be a clear decision about whether these matters remain intergovernmental, in which case France and Britain would retain their seats, or whether we are in transit towards a world with a country called Europe that has a single foreign policy on all the things that matter. Then, of course, the balance of arguments would switch heavily and other UN member states would probably take a rather different view.

I hope that the Government will be more honest with the public and with Parliament about just how far the pressures will build for a common foreign policy under the Lisbon treaty as drafted. It is all very well for Ministers to say that the main decisions will remain subject to unanimity; that is true under the text that we are being asked to approve. But we all know what will happen: because the treaty also says that we have to show solidarity and loyalty and form common positions, there will be remorseless pressure on every major foreign policy issue to produce a common position. If it is not in Britain’s interest to agree with the rest, we will be put under pressure and made to feel bad until we agree.

There are four different types of issue. There are ones where we naturally agree with our leading allies in Europe, in which case we can have a common position. There are ones where we care a lot and they do not, where we should be able to do what we want. There are ones where they care a lot and we do not, where they should be able to do what they want without us stopping them, as long as they do not do it in the name of the European Union. Finally, there will be areas where we disagree; in those areas, Britain must retain her independence, and that is not compatible with having a president and a European seat on the Security Council.

Identity cards and freedom

February 21, 2008 17 Comments

This day 56 years ago Parliament ended the ID card scheme introduced to the UK in 1939.

It took a brave and clever Judge to kill it off. In June 1951 Lord Goddard ruled against the continuation of ID cards. In a famous judgement he said:

“It is obvious that the police now, as a matter of routine, demand the production of national registration identity cards whenever they stop or interrogate a motorist for whatever cause. Of course, if they are looking for a stolen car or have reason to believe that a particular motorist is engaged in committing a crime, that is one thing, but to demand a national registration identity card from all and sundry, for instance from a lady who may leave her car outside a shop longer than she should, or some such trivial matter of that sort, is wholly unreasonable. This Act was passed for security purposes….To use Acts of Parliament, passed for particular purposes during war, in times when the war is past….tends to turn law-abiding subjects into law-breakers, which is a most undesirable state of affairs. Further, in this country we have always prided ourselves on the good feeling that exists between police and the public and such action tends to make people resentful of the acts of the police and inclines them, to obstruct the police…”

When Parliament passed the National registration Act in September 1939 it did so for three reasons.. It did so because it was felt we would need rationing, and some favoured a national system using central registration rather than the local shop based system used in the 1st World War. It needed an up to date census for wartime planning as the 1931 census was very out of date by 1939. The government wanted to plan all manpower and needed information of how many people in what trades and occupations lived where. The registration system was part of a grand planning approach to a wartime economy.

Ministers did not claim that registration cards were crucial to our security. Indeed they took other draconian measures to ensure that. Some Germans and Italians were put in prison. Others were monitored by police. Beaches were covered in barbed wire and anti tank devices. Observation and sentry posts were set up where the government feared invasion and intrusion. Commercial flights and shipping to Germany and the occupied territories of Europe stopped.

Against this background it is bizarre that some today tell us ID cards worked in the war to keep us secure, so why shouldn’t they work in peace? Presumably even this authoritarian government does not think it can round up “enemy aliens” as they were called in wartime and put them in prison. Even this government will stop short of physical traps on our beaches, and sentry posts on the streets.

In 1947 Morrison made excellent criticisms of the ID cards. “There are no doubt that they are troublesome documents to some people. They frequently get lost. The dishonest man – the spiv, as he has been called –is generally possessed, I am told, of five or six different identity cards which he produces at his pleasure to meet the changing exigencies of his adventurous career. So in the detection and prevention of crime no case can be made out for the identity card.”

Why can’t this government ditch this hated scheme? The evidence of history shows it is not a good idea, and great socialist luminaries of the past understood the need to protect our freedoms.

John Redwood champions accountability in Northern Rock debate

February 20, 2008 0 Comments

<strong>‘Parliament, accountability and creating better legislation’ were championed by John Redwood in the House yesterday, in the face of yet another affront to Commons proceedings in the form of the ‘Northern Rock’ Bill. He urged the need for a gap between Second Reading of the Bill and the Committee stage, so that MPs from across the House, whether or not agreeing with the Bill in principle, could help the Government produce the best legislation possible, having had time to become sufficiently acquainted with the issues.</strong>

His speech in full, taken from Hansard, follows:

<strong>Mr. John Redwood (Wokingham) (Con):</strong> I rise to speak because I see a disturbing trend: the way in which this legislation is being handled is reminiscent of how European legislation is handled— [ Interruption. ] Labour Members should listen carefully to this, because it is about Parliament, accountability and creating better legislation.

I rise to speak in defence of the Committee stage. All Members with experience in the House will know that the Committee stage provides an opportunity for Members of all parties who are interested, have experience or have been well briefed by outside interests to come to the Committee and make their contribution in order to help the Government to get the legislation right in their own terms.

Obviously, I speak as someone who disagrees with what this legislation is trying to do. However, were there to be a proper Committee stage, I and people like me would be able to join in and to try to get the words and clauses right in order to do what the Government want to do, having vented our anger on Second Reading about what they want to do. In order to have proper Committee proceedings, there has to be a gap between Second Reading and the Committee. I appreciate that in this case, the gap might have to be rather short, for reasons that Ministers have set out, but there could have been a gap so that we could have heard first, on Second Reading, what the Government were trying to achieve, after which those interested could have tried to help the Government pick their way through in Committee.

When I was a Minister putting legislation before the House—I did so relatively infrequently, because I do not think that legislation is a very good idea on many occasions—I was always very grateful for the Committee stage, and for the contributions made by some serious-minded Labour Members. I did not think that I and the draftsmen and women working for me in the Department had a monopoly on all wisdom, so it was helpful to have interested and well-briefed people making suggestions in Committee and trying to get the measure right.

As the House knows, we get only an hour and a half in Committee to debate huge chunks of constitutional treaty, and we are going to get only two and a half hours this evening, if the motion goes through, on an extremely complicated Bill that has implications for the country’s whole banking sector. I urge the Government to think again. The Committee stage is crucial. Members of Parliament need a chance to talk to people outside the House who have real expertise in these areas, and Members with expertise in their own right need the chance to marshal amendments and bring them to the Government’s attention. We need to table probing amendments to see whether the Government have got it right and we need to table amendments to help them get it right. That has not been possible in this case. Will the Government please think again?

During the subsequent debate, John Redwood made a speech in which he reiterated concerns over the Government’s inexplicable rush to pass this legislation, asking why they could not do some due diligence on Northern Rock first – standard procedure for any business take-over – so that the House can know what it is buying. The entire process, in fact, seems to be a list of unknowns in terms of what is being bought, and therefore what the implications might be for the taxpayer. Certainly the £110billion figure currently talked of is probably an optimistic one.

<strong>The speech in full, taken from Hansard, follows.</strong>

<strong>Mr. John Redwood (Wokingham) (Con):</strong> I have declared my interests in the register.

I want to see this business survive, recover and flourish. I quite understand its importance to the north-east. I do not think that the nationalisation model on offer is the way to do that. Indeed, as those on my party’s Front Bench have made clear, it could well be that given the constraints on competition policy and the uncertainty of the Government over the business plan, nationalisation will mean substantial redundancies and a winding down and a scaling back of the business—the very opposite of what Members in the north-east want.

I propose, as I have consistently advised the Government, that the Government and the Bank of England should act as an intelligent and tough bank manager to this business. They are the bank manager, because they are the lender of last resort, and they gave a large loan to the bank when it was in difficulties. What they should have done was taken enough asset protection for the taxpayer so that there was no argument about getting our money back. They should now secure what assets they can, which they need to give us protection, and then agree a timetable for the repayment of the money. They should agree a timetable that makes sense for both parties. Of course, if the parties cannot agree it, they can dictate it because the Bank of England is the only bank that will lend to this business, but it is better to agree it. It should be tough; there should be exacting targets to get the money back.

Under such a course of action, Northern Rock has all sorts of options. It has the opportunity to get money back if the markets get freer and it can refinance. It has the opportunity to get money back through cash flow, profits and the success of its business. If it cannot do either of those things, it can always pay the money back—assuming that enough asset cover has been secured, as we were told originally—because it can sell assets. The pace of the sale and the cash generation should be agreed between the bank manager and the business. The bank manager should lean on the bank to go further and faster, should watch inappropriate spending and should ensure that the bank is not spending unnecessarily on capital expenditure, high wages or elaborate bonuses. People should not be earning bonuses in a business that is under this much pressure. I submit that that is a far better model than the nationalisation model, with all its uncertainties.

As someone who has spent time in business and has, from time to time, bought a company, what I find breathtaking about the business before the House is the lack of the information that a buyer of any size of business would wish to have, let alone the purchaser of the biggest business, in cash terms, ever bought on behalf of the taxpayer. But we do not know the price. We are told that the Government have decided to buy the business without negotiating the price with the sellers—or without deciding what price they are going to impose on the sellers. We are told that we have to rush the legislation through in a week, but the Chancellor cannot even tell us how long it will take the Government to work out the price to complete the deal. It is obvious that they cannot complete the deal until they know the terms of transfer for the shares. Why the rush? Why can we not do some due diligence on the business first, as they will have to, when trying to work out a price for the compensation, so that the House knows what it is buying?

As the shadow Chancellor said, we do not know about the quality of the assets we are buying. There is no analysis of the repossession rate, past and future, or evidence about the quality of the lending made. There is no evidence about how many of the loans are at the 125 per cent. rate and no analysis of the unsecured loans. Such things are the first things someone would ask about if they were thinking of buying such a business. We have no analysis of the properties and the branch network. We have no idea whether there is surplus property, or whether the business needs to carry on with its big capital programme to build new property. There is no environmental report on the state of the properties and no report on the leases, or on the commitments to those property leases. Are they long leases? What would be the cost of paying some of them off if they are on inappropriate property?

There is no duty of due diligence on the people whom we will employ on behalf of the taxpayer. There is no human resource report, or report on the contracts of senior executives. We have no idea of the cancellation costs for senior executives if some proved not to be wanted in future by the new executive team. We have no idea of the number of write-offs and losses that the new executive team will want to record in the first set of accounts to clean everything up and make the task a bit easier. Somebody coming in on a salary of more than £1 million would be unlikely to want to accept everything as a given and to make no adjustments to the accounts.

We do not know from the Treasury what the impact on public borrowing will be. We do not know what the capital expenditure programme is and how much will have to go into public accounts because it cannot be funded out of the cash flows of the business. We know nothing about virtually anything that we are buying or about the risks that we are taking on.

There is no pensions report. We do not know the impact of the pension regulator’s latest idea that pension funds have been understating the longevity of the people in their funds and that the allowance made for that must be increased. The pensions liability, like contracts with the staff and any redundancy payments, will now rest with the taxpayer.

It is a disgrace that no normal financial and due diligence information is available on the business before we commit that huge sum of money. My hon. Friends have been generous in saying that the commitment is £110 billion. It could be more than that sum, which is the stated liability on the balance sheet, but does not include the pension, redundancy, property and environmental liabilities and all the other things that might come out of the woodwork. When one buys a business, one normally agrees a price in principle, fulfils due diligence requirements and either decides that the price is right or agrees a revised price in the light of what one has discovered.

Will Ministers please think again? Will they perform some due diligence duties for the taxpayer? If not, they will rue the day because they will lose us a huge sum of money and end up making unpleasant decisions, which will not suit the north-east.

A bad day for democracy and the North East

February 20, 2008 16 Comments

Yesterday saw another successful government attempt to stifle debate and prevent serious consideration of an important billon bank nationalisation. I was left with just six minutes to try to discuss all the wide ranging issues involved during the Second Reading debate on the principles, whilst the perfunctory two and a quarter hour committee stage left completely inadequate time for all the amendments we needed to consider.

It was a pity. It was a pity for the North East, and for all who wish to see Northern Rock given a chance of a decent future. It was a tragedy for taxpayers, who will now be required to buy a mortgage bank by a government that seems to have no concern for what it is buying, and no idea of how much it will cost taxpayers over the next couple of years.

I would have liked to have spent more time discussing the importance of Northern Rock to the North East, and how the North Eastern economy could be encouraged to branch out more into the usually profitable and successful world of financial and business services. It is good news that Northern Rock took root there. It is bad news that it should be Northern Rock that got into so much financial trouble, and bad news that there are few other large financial institutions anchored in the North East.

We had no chance to look at the way the Bank and government last summer failed to keep markets liquid enough. The Fed in the USA and the ECB in Euroland did a much better job supplying cash to their markets, so no European or US bank got into the problems Northern Rock faced.

We had no chance to discuss the impact of Gordon Brown’s decision to take banking supervision and government debt management away from the Bank of England. In the Conservative Economic Policy Review we warned that once times got more difficult in money markets the UK was uniquely vulnerable to a banking crisis because these reforms left the Bank of England unable to respond quickly in the way it could have done prior to the Brown changes.

Last August we stated in 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, where early regulatory action might have spared a worse problem”

If the danger was obvious from Opposition, why couldn’t the government see it? Why was the Chancellor lecturing the banking sector on how they had misbehaved, and telling them there would be no bail outs, on the eve of this crisis which triggered the biggest bail out ever mounted in the UK? Indeed, there were rumours about which bank was likely to get into difficulties first in the credit crunch; before the run on the Rock began. We did not repeat the rumours because we did not wish to make life more difficult for that institution.

At this late stage, I still urge the government to consider the serious alternative to nationalisation – the Bank of England acting as Northern’s bank manager, until Northern Rock can repay the state loans and refinance itself elsewhere. It removes all the hassle of a government having to take a public view on repossessions, new mortgage offers, staff numbers and pensions. It gives Northern Rock a better chance of a decent future, as it puts some real financial discipline into senior management that is usually lacking in a nationalised industry in the UK. It protects the taxpayer better, and gives more chance of saving and creating new jobs in the North East.

Nationalisation has proved a long and lingering run down for all too many businesses to fall under its spell. Last night there were no reassurances from Ministers about the future of Northern Rock jobs, and no statement of whether they will be running the Bank down or trying to build it up. I suspect they do not know, because so much rests on what the European Competition Commissioner will let a public sector Northern Rock do. It is a pity the government did not settle that first so they could tell Parliament and public, before committing us to such an expensive and a hazardous project as nationalisation.

Parliament sidelined and kept in the dark about Northern Rock

February 19, 2008 14 Comments

I am a businessman by background. I have occasionally bought or sold companies. Never have I been asked to buy a company with so little information available on its assets, liabilities, past and possible future performance as today, when the government wants me to approve the purchase of Northern Rock for taxpayers. Never have I been asked to put my name to such a huge commitment before – placing the taxpayer at risk for more than £110 billion.

They will not tell me how much they wish to pay for the shares. That will be decided after they have announced the purchase and legislated for it! This is not the usual negotiating procedure between buyer and seller.

Because they are compelling sale by the shareholders, they leave taxpayers open to lawsuits. I doubt they will tell us how much of a risk that is, nor will we be given their legal advice to make our own decision about how likely a successful legal challenge for compensation might be.

We will not be told what is the true state of the mortgages that are the banks’ main assets, and we will not be given a schedule of either assets or liabilities. There will be no accountant’s reports, no assessment of the term structure of the loans and assets, and no commentary on the likely movement in the bad debts.

We will not see management accounts for the last year, and we will not have budgets for the next couple of years. We will not even be told what the general outlines of the business plan might be, because they are awaiting clearance from Brussels for how much new trading they can undertake. They will have to be careful about what the bank can offer in the marketplace, as its privileged access to public money leaves it open to allegations of anti competitive trading if it gets the offer wrong.

We will not be given a report on the size of the deficit in the pension scheme and how that has been calculated, nor will we be warned that the pension deficit might be about to get larger in the light of recent regulatory and actuarial comments on how people are all living much longer than has been allowed for in many a pension fund calculation.

There will be no environmental report on the properties with an assessment of risk under Environmental regulation, which any purchaser would need these days. There will be no property report about the leases and freeholds, and the lease and maintenance obligations.

We will not see the main contracts of the very expensive senior staff to be able to review the bonus arrangements and to see how much it will cost taxpayers if we need to terminate some of their employments. We will not receive a Human Resources report on pay, morale and efficiency of the workforce we will inherit.

There will be no survey of customer attitudes or study of the value of the brand post the disturbing changes to it in recent weeks. There will be no report on the relationship with the Trust, on the ability of a public enterprise to sponsor one particular football team or on the extent to which a nationalised company can continue the social and community work Northern Rock performed in its profitable private sector days.

In sum, Parliament will have none of the usual information directors would require as matter of course from acquiring management and their advisers before consenting to an acquisition. Perhaps for that reason Parliament is once again being railroaded and sidelined by the government. It is a farce to allow only one busy Parliamentary day to consider all stages of the Commons procedure for this bill. It means we have had no normal time to read the Bill and table amendments, and if we had there will be insufficient time to debate them. This is rushed debate on a botched nationalisation by a government which has not done its homework. The taxpayer is being put into a deal without knowing the price or the long term risk and cost. Ministers tell us all that taxpayers are risking is guarantee. Not so Ministers – the taxpayer is now liable for every broken window in a branch, every severance and pension payment, every mortgage and loan. If the assets cannot cover the cost of these things taxpayers will have to pay more tax to sort it out.

How Mr Darling lost the government’s economic reputation

February 18, 2008 9 Comments

The Northern Rock crisis has undermined this government’s economic reputation, and deservedly so. They have made mistake after mistake in responding the Credit Crunch and the run on the bank. I have put the main blog entries on Northern Rock from this site together so people can remind themselves of the way the crisis unfolded from last summer. The main errors (highlighted at the time on this site) were:

July 2007 It was clear that credit was too tight and interest rates were too high for comfort. “If the central banks don’t back off soon it could be quite a collapse”. The UK authorities failed to supply enough liquidity to markets or to lower rates.

August 2007 The Credit squeeze became clearer in the markets, and some more City commentators came to appreciate the dangers. The UK authorities still did nothing.

September 1-13 The Fed and the ECB were taking action to relieve the squeeze, but the UK authorities still did nothing.

September 13th The Chancellor makes a stupid speech blaming the banks for poor lending and stating firmly there will be no bail outs of banks in trouble. This was an open invitation to anyone banking with a weaker institution to remove their money whilst they still could.

September 14th onwards Government and Bank of England become lender of last resort to Northern Rock and allow this to become public knowledge, encouraging a run on the bank.

Government fails to arrange a take-over for Northern Rock before the run develops, claiming the legal framework it has put in place does not allow it to.

Government allows the run on Northern Rock to develop, and only when it is very serious does it announce the biggest guarantee and bail out ever attempted in the UK.

Government lends around £25 billion to Northern Rock without being able to assure us it has taken sufficient high quality collateral to ensure taxpayers can get all their money back.
Government fails to set out terms for the loan, including the all important question of when it expects repayment. Government fails to tell us that it has carried out usual banking due diligence and leaves doubt about what power it has exerted to ensure proper monitoring of the loan, strong covenants, and a professional approach to repayment.

Government becomes involved in shareholder discussions and decisions about finding a new management team/new shareholders for the bank and raising new equity for it. These discussions fail to produce an answer acceptable to all concerned, but drag on from September 2007 until February 2008.

Government nationalises the bank, more than doubling the taxpayers’ risk at a stroke and leaving itself open to endless legal disputes and rows about compensation and the way it will run the bank under its ownership.

What should the government have done differently? As this blog shows it should have

1. Made more liquidity available to markets and cut interest rates last summer, to prevent banks like Northern Rock being denied all access to market finance so it did not develop into the crisis we saw.
2. Not lecture the banks on their imperfections when the system was so distressed, as the Chancellor must have known when he spoke
3. Avoid any lender of last resort lending being made public, or cover the lending to one bank by requiring all banks to borrow something so the markets were not spooked about one individual bank – this could have been part of a general liquidity increase and sold sensibly to markets
4. When lending to Northern Rock understand the need to be a strong and firm lender. This meant limiting the sums, and limiting the time of the loan. It meant telling the Board of the bank that they only had so long to find alternative private sector money, and if they could not they had to start selling mortgages and running off their business book to meet the repayments required.
5. Staying out of discussion about new shareholders and new management to increase the chances of something happening, but keeping up the pressure on them to reach a quick solution by demanding early repayment tranches.

At every stage the government made the wrong call. They have now ended up with the worst possible of worlds, and will doubtless run this bank as badly as they have been running Network Rail and the Post Office. In the first case they doubled the costs of running the track quite quickly after nationalising it, and in the second case they have embarked on a large programme of closures having undermined its counters business by their own decisions.

<strong>Click <a href=”http://www.johnredwoodsdiary.com/category/northern-rock/”>here </a>to see the archive of John Redwood’s previous postings on Northern Rock.</strong>

Mr Darling digs an even bigger hole by nationalising the Rock

February 17, 2008 16 Comments

Mr Darling is already in a big hole, thanks to his misjudgements over monetary policy last August and September, the run on Northern Rock, the botched proposals on capital gains tax and the U turn on Non Doms. Now, the man in the hole has decided to more than double its size!

There are ten reasons why nationalising Northern Rock is a bad idea.

1. It more than doubles the amount of money the taxpayer has at risk,from a little over £50 billion to more than £100 billion
2. It means any bad loan Northern Rock owns, the taxpayer will own.
3. It means the taxpayer is now liable for any redundancy payments if Northern Rock has to slim its staff numbers.
4. The taxpayer may have to defend against writs from angry shareholders if the compensation terms are not sufficient.
5. The taxpayer becomes responsible for the pensions deficit for staff
6. The taxpayer has to pay compensation to shareholders at a time when public borrowing is already excessive
7. The Chancellor will have to explain mortgage foreclosures, staff redundancies and other bad news to Parliament each time it happens
8. The amount of total government borrowing will increase as a result of the big increase in the amount of money at risk, and the cash needs of the business.
9. The taxpayer will have to pay any losses, meet any write downs of assets and pay for all capital expenditure of the business.
10. The government and taxpayer may be accused of undercutting other viable financial businesses competing against this bank dependent on public money if they are not careful with their guarantees, subsidies and pricing.

What due diligence will the Chancellor do if any before committing the taxpayer to all these liabilities? What law suits if any is he anticipating from shareholders? What will be the cost of compensation to shareholders? What will his policy be on remuneration for his new state employees and how will that fit in with other public sector remuneration?

Tomorrow we need a statement from the Chancellor. There will be all too many questions, but I fear this botched nationalisation will not come with many convincing answers.