John Redwood Searches for Answers on Northern Rock

In the debate on Northern Rock last night, John Redwood tried to get some answers on the likely consequences of the Government’s business plan for the bank. In response the Chief Secretary to the Treasury was unable, or unwilling, to reveal the likely losses to be incurred by the proposals, whether or not the Treasury would be subsiding the losses, and if so how this would be reconciled to competition law.

Mr Redwood also highlighted the inherent contradiction in the Government’s position. While he has every confidence that the £24bn loan could be regained, the measures taken to achieve this will make the business harder to sell in the long run.

The three exchanges and John Redwood’s speech, taken from Hansard, follow.

Mr. John Redwood (Wokingham) (Con): Does my hon. Friend agree that there is a contradiction in that rapid repayment of the Treasury money requires contracting the business, whereas fattening the business up for resale requires growing it? It is quite difficult to understand how the management can do both.

Mr. Hoban: Indeed. My right hon. Friend identifies an important issue at the heart of the matter. The business plan before us today in the form of the Chancellor’s written ministerial statement talks about repayment of the loan, but does not provide a date by which Northern Rock will exit public ownership. There is a contradiction there, but the first priority must be to repay the loans to eliminate the taxpayer’s exposure.

Mr. Redwood: Surely the Chief Secretary can see that, if the Bank of England had simply acted as bank manager, and provided tough love to Northern Rock and managed it through it, we as taxpayers would not have had to absorb all the responsibilities and potential losses of sacking staff and losing on current trading. Will she confirm that she is accepting a business plan that means that the taxpayer will have to pay the losses in 2008, 2009 and 2010? Why do we need those as well?

Yvette Cooper: The right hon. Gentleman describes what he says would have been “tough love” by the Bank of England in managing it through. I presume that he is talking about the proposal, which Opposition Members have described, of a Bank of England-led administration. That would effectively use powers that do not currently exist. We think that there is a strong case for introducing a new special resolution regime, and that that would be the right thing to do. However, it would involve major changes to the law and the current approach to insolvency and failing or troubled banks. It is right that such proposals should be consulted on seriously and introduced through legislation. For Opposition Members to pray in aid powers that simply do not exist on the statute book, and think that they would somehow magically come to the rescue of Northern Rock, is pie in the sky and irresponsible. They are simply not facing up to the serious problems that Northern Rock faced.

Mr. Redwood: Does that not mean that, as the business will lose money for the next three years, it will receive a Treasury subsidy to compete against others in the market that will not have that luxury?

Yvette Cooper: Once again, I have to remind Opposition Members that the decision that they supported in the autumn to support Northern Rock through Bank of England loans and Government guarantees exposed the taxpayer. Those decisions were supported by hon. Members at the time, and there are consequences that flow from that. As a result of those decisions at the time, it is important to ensure that the taxpayer’s exposure is limited and their interest is protected. Opposition Members have singularly failed to make any proposal that would protect the taxpayer’s interest as a result of those decisions.

Mr. John Redwood (Wokingham) (Con): It was a great pity that the Chief Secretary decided to devote so much energy to rather silly and clumsy partisanship and to claiming that we do not have any better ideas about how to tackle the position, instead of doing what the House expected of her and telling us a little about the challenges and difficulties that lie ahead if the business stays in the public sector. It probably will if we are unsuccessful in persuading the Government otherwise.

The Chief Secretary constantly asks, “What was the other option?” There was an easy other option, for which I have argued throughout the crisis, from when it broke in the summer. Of course, the Bank of England had to step in when there was a run and act as lender of last resort. However, the Bank of England—and, if necessary, the Treasury, working with it—should subsequently have been the intelligent bank manager of the business. It had a natural relationship with Northern Rock as its banker.

As a banker, it could have taken all the collateral it needed to ensure that taxpayers’ money would never be at risk. It could have guided and influenced the business plan so that it had an impact on phasing the repayments and the way in which they would be made. It did not have to take over the bank’s ownership, with all the other liabilities and risks. It did not have to take responsibility for the staff or future trading. It should have concentrated on lending the least amount needed to get the bank through the immediate problem, and having the best possible security for the taxpayer and the best possible supervision and management overlooking the board, as a bank manager should do, to ensure that the money would be repaid in good time. That was the obvious thing to do.

The problem with the current model is that the Government are trying to do two contradictory things. Of course, the Chief Secretary is right to tell the House that she views getting back the £24 billion—the remaining outstanding loan, we were told tonight—as an urgent priority. I suspect that she can do that and I wish her every success. We all represent taxpayers and it is important that we get the money back. It is also important that the Bank of England get its money back as quickly as possible because it is a small bank trying to deal with a large and complex system. All the time that it is so committed to Northern Rock, it does not have the firepower that it needs to deal with the obvious imperfections and difficulties in the money market.

How can we get the money back? The Government and the bank’s recently appointed management admit that the money will be repaid—we trust in reasonable time—by squeezing the business, perhaps halving it, getting people to repay their mortgages early because they remortgaged with someone else and making sure that new advances are not made through Northern Rock to replace advances that are maturing as people pay them off, so that business can be transferred to other organisations in the financial world, and some of the assets can perhaps be sold on, as appropriate.

That is a perfectly good working model for getting the Treasury money back, but it is not what the owners of a bank would be doing if they were trying to sell it on to someone else for maximum value. Indeed, doing so will diminish the value of the assets under control, because the bank will have to battle constantly to cut its costs, by sacking its staff and reducing its administrative overheads, to bring it closer to the reality of the falling revenue. Instead of having one or two years of rising profits before returning the business to the private market, which would be best for securing a good price, we have been told tonight that it will definitely have three years of losses. We know, too, that it will have a much smaller business, so it will be quite difficult for it to explain how it can suddenly turn all that round.