With your permission, Mr. Speaker, I should like to make a statement on Northern Rock. The House will understand that it was necessary to issue a statement to the markets with our proposals before the start of trading this morning in the usual way. Copies of that statement and the accompanying Treasury press release are available in the Vote Office.
Next week, I shall publish proposals for strengthening depositor protection and the supervision of banks, but today let me set out how we intend to meet the previously stated objectives of the Government, the Financial Services Authority and the Bank of England with regard to Northern Rock, as well as the background against which we make our proposals.
The proposal that I set out today for a solution to Northern Rock, which is underpinned by Government support, is one that best meets our objectives of protecting taxpayers and depositors and maintaining financial stability. I will set out the reasons for that in greater detail. In the meantime, I can confirm that the existing Government guarantee arrangements to depositors will remain in place. Savers’ money, therefore, remains safe and secure.
The House will recall that at the end of last summer, following the problems in the US mortgage market, Northern Rock found it increasingly difficult and then impossible to raise the billions of pounds that it needed to finance its business. It was completely exposed; it had no plan B. Northern Rock was therefore forced to ask the Bank of England for support to allow it to continue to operate. The Government agreed to that support because, in the then prevailing conditions, there was a serious risk that other parts of the banking system would be destabilised. That support was successful and prevented further contagion, and the decision was wholeheartedly supported by right hon. and hon. Members of this House.
As the House knows, the Government have announced guarantee arrangements for depositors’ money saved with Northern Rock. In October and December, we also provided further guarantees and funding arrangements to give the company the time that it needed to try to find a solution to its problems. At that time, I said that I would ask Northern Rock to come back with proposals no later than mid-February this year. Those guarantee arrangements, including the extension in December, have not been called and there has therefore been no cost to the taxpayer. However, the arrangements remain necessary and will be in place for the time being.
Equally, Bank of England lending is secured against Northern Rock’s assets such as high quality mortgages, assessed by the Financial Services Authority as being of good quality. Again, there has therefore been no cost to the taxpayer. Let me make it clear that the Government’s position, which I reiterated most recently during the Treasury Committee sitting on 10 January, is that a private sector solution for Northern Rock is the preferable route for meeting our three objectives, but that that cannot be at any cost. If it does not prove possible to secure a proposal that meets our stated objectives and conditions, it will be necessary to take Northern Rock into temporary public ownership. For that reason, it would be irresponsible to rule that out.
Despite intensive efforts over the last few months, and as a result of uncertain market conditions across the world, it has proved impossible for Northern Rock to find a purely commercial solution. In the autumn, market conditions were such that banks became increasingly reluctant to lend on terms that would have been acceptable. As the House will be aware, banks right across the world are having to make substantial provisions. While conditions are better now than they were before Christmas, they remain difficult, and the Government’s financial advisers believe that there is no chance of achieving a private sector deal backed entirely with private finance in the near future.
Before I turn to my proposal, let me first deal with the question of putting the company into administration, as some have suggested. Administration would mean that control would immediately pass to an administrator who would look to realise the value of the company’s assets, which, under current market conditions, would amount to a fire sale. It could also exacerbate current market turbulence, and costs would be significant. I have therefore rejected such a proposal.
My proposal today is one in which Northern Rock is owned and run in the private sector as a commercial bank, and where the Government provide a backstop guarantee to make private financing possible in the current market conditions. I believe that this company should be managed within private sector disciplines and management, provided that we can do so on terms that properly protect taxpayers’ interests.
Let me now set out in greater detail how this proposal will meet our objectives of protecting the taxpayer, protecting consumers and promoting financial stability. Northern Rock would raise the funds that it needs from investors by selling assets. The Treasury would guarantee payment to those investors in the event that the assets were insufficient to meet its obligations, for which Northern Rock would pay the Treasury a fee. In this arrangement, shareholders and other providers of capital in Northern Rock accept the first risk, with the Government acting as a backstop. According to the Financial Services Authority, Northern Rock has a good quality loan book. In normal market conditions, such a guarantee would be unnecessary. However, in the current circumstances, to attract a wide range of investors on acceptable terms that protect the public interest, a guarantee is necessary. If this proposal is accepted, it would mean that all of the Bank of England’s current loan facilities for the company are repaid in full, with interest, up front, upon completion of the transaction.
Our willingness to put this support in place depends entirely on the terms on which a deal can be struck. I will authorise support for the private sector only if the public interest will be better served than through taking the company into temporary public ownership. In addition to this, any acceptable proposal would need to comply with clear conditions. The company will need to demonstrate how it can operate sustainably in future without Government support, and we will favour proposals that reach that point quickly. New private sector capital will be needed, so that the private sector—not the taxpayer—takes the burden of risk for commercial success or failure. So long as the Government continue to provide a backstop guarantee, we will require restrictions on any sale of the company and on dividend payments.
To allow this financing structure to be explored, the Treasury and the Bank of England will make arrangements to extend the Bank of England’s loan facility until 17 March, by which time we must submit a restructuring plan to the European Commission. The proposals would involve private sector participation in the financing of Northern Rock and would also provide the taxpayer with the ability to share in the potential upside returns, as business conditions improve, in return for the financial support provided to the company.
The Government will make their decision as to which proposal we can, as provider of support, accept, and with the Bank of England and the FSA, we will consider proposals received by 4 February from potential interested parties, including the company itself. Any proposals, either as a result of this support or public ownership, are highly likely to need state aid clearance and will therefore be dependent on approval by the European Commission.
The Government have already started discussions with the company and with the two parties that have publicly stated an interest in the company. The Government are also ready to have discussions with any other interested parties.
Let me make it clear that if the solution I have outlined proves not to be possible on terms that protect the public interest, then a temporary period of public ownership will be necessary. Legislation is being prepared, should it be necessary, and would make provision for an independent valuer to decide on the level of compensation to be made to shareholders. The principles for assessing that compensation would be based on the company’s not receiving public support and on all specific financial assistance from the Bank of England or Government having come to an end. This is set out more fully in the statement to the markets issued earlier today.
It is for the independent Office for National Statistics to determine whether Northern Rock is classified to the public sector in the national accounts. Any liabilities classified to the public sector would be temporary and backed by significant assets, and do not represent any meaningful measure of fiscal sustainability. The code for fiscal stability, underpinned by legislation passed by this House, provides for such situations. We would also address the future of the Northern Rock Foundation in the event of temporary public ownership.
The proposal that I have outlined today meets our stated objectives of protecting the taxpayer, protecting depositors and maintaining financial stability.
Northern Rock got into the difficulties it faced because of global market conditions. The Government agreed to Bank of England support for Northern Rock because of the destabilising risk to the rest of the financial system and also provided guarantees to protect depositors. Both of those objectives have been met. We now need to reach a solution that leaves the greatest risk with the company, yet will allow taxpayers to profit from any future sale.
Ideally, the best solution would have been a private sector one without any Government support, but in the current uncertain market conditions, that is not possible. Administration, with the resulting fire sale of the company’s assets, would not be in the public interest. Temporary public ownership—nationalisation—remains an option, however even those who advocate it now see it as a stepping-stone to the return of Northern Rock to the private sector, which would involve Government support. In the meantime, the company would require continuing financial support, which would leave the public sector bearing all of the risk.
The proposal I have outlined today is the right one. It provides a Government guarantee that enables a commercial solution in which the private sector raises finance and bears risk. It also offers the prospect of withdrawing Government support more quickly and is therefore most likely to meet our stated objectives and conditions. I commend this statement to the House.
May I thank the Chancellor for finally telling Parliament what the Prime Minister told his press pack, and apparently Richard Branson, on his way to China last Friday? Nothing of substance that the Chancellor said today is not already plastered over this morning’s newspapers and blogs, once again reminding us of how marginal a figure the Chancellor now cuts in this process. Let us also remind ourselves of the huge damage that the first bank run for 140 years has done to Britain. The Chancellor prayed in aid in his statement the advice of his financial advisers, Goldman Sachs. This is what Goldman Sachs is advising its other clients:
“The Northern Rock factor has badly dented the UK’s reputation for being the world’s pre-eminent financial centre”.
I welcome the fact that the right hon. Gentleman now implicitly agrees with me that full nationalisation would destroy that reputation altogether. To use his own language, I am glad that what looked like the Chancellor’s plan A just a week ago has, after Prime Minister’s questions, become the Government’s plan B.
The Chancellor should be more straight with people about the real consequences of his latest attempt to get out of the mess created by Labour’s economic incompetence—[Interruption.] Can he confirm that he wants the taxpayers of Britain to provide—[Interruption.]
Can the Chancellor confirm that he wants the taxpayers of Britain to provide a £25 billion mortgage to Northern Rock for years to come? Add in the guarantees to depositors and that figure comes to £55 billion. That is £2,000 for every family in the country: a second mortgage on every home to rescue the reputation of this Government. No British Government have ever provided taxpayers’ support on this scale to a private company. It is bigger than British Leyland, bigger than British Steel—this is back to the 1970s. Life in Brown’s Britain is like an episode of “Life On Mars”.
Can the Chancellor answer questions on these three specific issues? First, will he stop pretending that this is, as he said in the final paragraph of his statement, a commercial solution? In truth, it is a part-nationalisation because the Government take the bulk of the risk and the private sector takes the bulk of the upside. Alliance and Leicester has gone into the market and borrowed at 7 per cent., but thanks to the taxpayer, Northern Rock’s new owners will be borrowing at Government rates. If it goes under, of course, it will be the British taxpayer who pays the price. It is no wonder that Northern Rock’s shares have soared 40 per cent. on a day on which the stock market has fallen.
The second issue I want to press the Chancellor on is the growing risk to the taxpayer that this deal represents. Will he confirm that the difference in the cost of capital means that Northern Rock will be getting an effective Government subsidy for years to come? Some estimate that the subsidy is worth more than £1 billion in total. That is more than 20 times the cost of funding this year’s police pay settlement in full. What is his estimate? How much will the fee that he mentioned recoup of that £1 billion subsidy? Will he confirm that buried away in his statement is the proposal that the bonds issued by the Government can be used not just to repay the Bank of England loan, but to provide adequate liquidity for the company? How much could that cost?
What does this whole deal mean for public finances? We already have the worst budget deficit in Europe, and we have learned from today’s dismal public finance figures that the Treasury has borrowed £44 billion so far this year, exceeding the estimates given by the Chancellor to this House. Will he confirm, as he admits, that if the ONS treats the Government as the true economic owner of the liabilities, he will shatter the sustainable investment rule? He says that the measure is only temporary, but the whole point of the deal is that it could be permanent. As ever, the Government’s answer to every economic problem is further debt.
The third and final issue for the Chancellor to consider is how long the Northern Rock saga will go on. The right hon. Gentleman’s statement made no mention of the length of term of the bonds, yet the press have been briefed by the Prime Minister’s travelling entourage that they will last for five years. Which is it? Will the Chancellor tell Parliament what someone else is telling the press on the other side of the world? What will the time scale be?
In September, the Chancellor said that he was providing a little short-term support to help Northern Rock get through its difficulties. Since then, we have had five months of dithering. Today, the taxpayer could possibly be in hock for five years. The Government could have secured a private sale before the bank run. They could have done today’s deal back in September, if they were so keen on it, at a much cheaper price. They could have passed legislation to protect retail depositors, as we proposed, back in October. They could have considered the options of a Bank of England-led reconstruction. Labour Members dismissed that, but when the Chancellor unveils his plans next week he will suggest that in future crises the FSA has the powers to take organisations such as Northern Rock into an effective form of administration. Labour Members will all be voting for that in a couple of weeks’ time.
Of course, the Chancellor did none of those things. He dithered and delayed. The result is that the British taxpayer is being asked to lend billions of pounds for years to come to salvage the reputation of the Prime Minister and his Chancellor. Labour is saddling everyone in Britain with a second mortgage, and that is the price that we are all now paying for its economic incompetence.
Listening to the shadow Chancellor, it is clear that he has not a clue what he would do. He has no constructive policies to offer. At least the hon. Member for Twickenham (Dr. Cable), who speaks for the Liberal Democrats, has a statable case and a policy. The principal Opposition party has no policy whatsoever. Indeed, ever since Northern Rock got into these difficulties, it has been clear that the official Opposition’s position has been completely incoherent and inconsistent.
Last September, when we offered Bank of England support to Northern Rock, the Leader of the Opposition said that he wholeheartedly supported it. Two days later, he said that he backed the guarantees and supported the Bank of England action. However, all last autumn, at every opportunity, the official Opposition sought to run away from the consequences of making that decision. Even last weekend, the Leader of the Opposition said that he ruled out nationalisation, but on Monday, when he was asked about nationalisation and administration, he said that he needed to consider both options. Far from ruling out negotiation, he was ready to consider both options.
On the subject of administration, it is interesting that last week we heard day after day that the Conservatives had two policies. The first was that the Governor of the Bank of England should restructure the bank—by the way, the bank would have to be nationalised to allow the Bank of England to have the necessary control to do that. The alternative policy was to put the bank into administration—in other words, to bankrupt the thing. It is interesting that the shadow Chancellor should talk about administration last week, because two months earlier he said:
“The winding up of the bank would pose a significant risk to the tax payers money”.
That was his position in November, but it is completely different today.
On the subject of the shadow Chancellor’s questions, I have set out my proposals, which will form the basis of negotiations in the discussions with both the bidders who have expressed an interest in acquiring the bank or in being part of its future as well as with the board. Obviously the terms and conditions clearly need to be discussed and negotiated. I shall continue to report to the House to ensure that it is kept fully informed.
I have to tell the shadow Chancellor—I appreciate that he is starting from a position where he has no position—that it would be ideal if we could find a purely commercial solution to the problem. However, in the current conditions, there is no way that that will be possible in the foreseeable future. One could put the bank into administration, but that would happen at a considerable cost and could exacerbate market conditions.
One could take the bank into temporary public ownership, but, during that period, the Government would continue to be at risk and public support would be needed to get the bank out of temporary nationalisation into a commercial future.
Alternatively, we could pursue a chance of getting commercial money, whereby people can invest in the bank and bear the first risk and the taxpayer can gain when market conditions improve. I believe that that is the right thing to do, and that my position is properly thought out and worth exploring. The Opposition have shown that they are bereft of ideas.
Unlike the shadow Chancellor, the people of the north-east of England recognise that, first, the Government’s first responsibility is for the stability of our financial markets in this country and, secondly, the long-term interests of Northern Rock and the consequential jobs are also key issues. Contrary to the views that are likely to be expressed by Liberal Democrat Members, people in the north-east do not perceive premature nationalisation as a way forward that will meet either principal objective.
Will my right hon. Friend agree to meet a delegation of workers’ representatives from the bank so that they can express their concerns and hear more about the Government’s proposals?
I am grateful to my hon. Friend. Of course, I would be happy to meet him and representatives of the bank’s work force. I fully understand that it is an uncertain time for them. I therefore hope that the Government’s proposals today will enable an acceptable solution to be found. As I said to hon. Members, there are many difficulties to overcome and we must proceed cautiously, but I believe that we are doing the right thing.
My hon. Friend is also right that the Government’s objective throughout has been to ensure stability. In the past 10 years, there has been sustained growth in the wider economy, with historically low interest—and, therefore, mortgage—rates, and record numbers of people in work. That has been reflected in the financial markets. We had to respond to difficult circumstances, which started in the United States sub-prime market and have affected markets throughout the world. As all hon. Members concede, we are going through a difficult period. Everything we do should be geared towards greater stability. The Conservative party’s proposals would not add to that.
I congratulate the Chancellor on brilliant originality. The Government, through their bond guarantees, are solemnly undertaking to repay the Government. The taxpayer is standing behind the taxpayer and we have a private sector solution without private money as well as nationalisation of liabilities and losses and privatisation of profits. It requires a special sort of genius to dream up such an idea and I hope that the Government’s financial advisers have been well rewarded.
I am tempted to recall the Danish economist, Hans Christian Andersen, who told the story of the two conmen who visited a particularly credulous king to sell him an imaginary suit of gold to cover his nakedness. We have a naked King Gordon, desperately trying to cover his embarrassment over the “n” word “nationalisation”.
It was said this morning in the City that the financial value in the insurance markets of the guarantee of the bonds was £2 billion. Since the private buyers are not providing that money, where will it come from? Are we talking about a guarantee of a guarantee? How else will it be funded?
The Chancellor said that there would be a profit-sharing arrangement between taxpayers and the private owner, but no numbers were given. Is it true, as the Financial Times reported this morning, that the proposal is likely to be for a 5 to 10 per cent. Government equity stake, with 95 to 90 per cent. of the uplift going to the private owner? If the proposal is of that order of magnitude, what is the position, if there is to be profit sharing, of the Northern Rock Foundation? The Chancellor mentioned it in the context not of profit sharing but of nationalisation.
Since we have heard from the north-east of England, the Chancellor will know that the Treasury’s private sale document made not a single, solitary reference to jobs or the future of the region, so what is its role under the proposals?
This morning, the BBC’s political correspondent described Mr. Branson as the “cat what got the cream”. I do not know what that is, but Mr. Branson appears to be the Government’s preferred bidder. Can the Chancellor tell us what Mr. Branson is going to contribute? My understanding is that he is proposing to put in £250 million in kind, not cash, to acquire a bank worth £100 billion, or 40 times that value. He has never run a bank, and I believe that the profits will be routed through a Caribbean tax haven, so what benefit does the taxpayer derive from his participation?
Finally, as the Conservative spokesman has already noted, Northern Rock shares have soared, while the British and other international stock markets have fallen. The only cheerful faces this morning were those of the two equity fund investors who made a speculative punt on Northern Rock a few months ago and have now recouped their investment. Meanwhile, the taxpayer in being taken for a very big ride. That will continue until the Government adopt the honest, transparent solution of taking the bank into public ownership.
As I said earlier, the hon. Gentleman has argued for the nationalisation of Northern Rock for some time, but he would accept that if the Government do that, many of the issues that he has raised still come into play. He has said on a number of occasions that he does not think that the long-term future of the bank lies in being publicly owned. He sees nationalisation as a temporary step back into the public sector, and I agree that if it came to that, that would be precisely the position that we should adopt, because the long-term future of the bank cannot lie with being run by the Government.
The hon. Gentleman must accept, therefore, that if the bank is nationalised, the risks to which he referred will remain with the Government, and that money from the private sector investors does not come immediately into the bank, so the Government will have to fund that. In any event, if the bank is subsequently transferred into the private sector, which he and I agree would be the right thing to do, under current market conditions it is likely that similar Government guarantees to those that I am proposing today would have to apply then, too.
The difference between the hon. Gentleman and me is that he wants to nationalise today. I believe that the better option, if we can do this on the right terms and conditions—the hon. Gentleman raises some very fair points about this—is to explore whether we can bring those private investors into Northern Rock now, which would enable the Bank of England’s lending to be repaid with interest, which is one of the demands that has been made time and time again in the House, and rightly so.
The hon. Gentleman raised a number of points about profit sharing and the financing details, which can be resolved only during the course of negotiation. As I said to the shadow Chancellor, I will of course keep the House informed about that. In relation to the prospective bidders, two have publicly expressed an interest and the Government are talking to both of them, while the company’s existing board is also considering proposals. All those will be considered, along with any others that are made in the next few days.
It has been suggested that Mr. Branson is putting £250 million of his own money into the company by selling Virgin Money to Northern Rock, but estimates in the City indicate that that company is worth about £50 million. I would not like to think that Richard Branson was getting that £250 million from what Northern Rock was paying him for a company that is worth only £50 million, so transparency is of the utmost importance for the Government and others. I would encourage the Chancellor to have other companies coming in before 4 February, so that we can have a vibrant exchange and a vibrant sale.
On 19 November, the Chancellor told me that he would seek to pursue the interests of the taxpayer, promote financial stability and safeguard consumers. Is he satisfied that today’s new proposal gives equal weight to those three objectives? If he is, will he say how he will ensure that?
As I said in my statement just a few moments ago, what I am proposing today is consistent with the statement of principles that I published on 19 November—that is, to protect the taxpayer’s interest, which is extremely important; to look after the interests of the depositors, which has always been a concern; and to achieve wider stability. All the proposals that are currently available—that is, the board’s proposal and the Virgin and Olivant bids—involve those companies raising money from investors. In other words, they will have to put money into the company to ensure that it can continue to operate. The proposal that I have set out today will also mean that the Bank of England’s money that has been lent to Northern Rock can be repaid with interest, which is precisely what we wanted to achieve.
My right hon. Friend mentioned the final proposal, but we have not got to that stage yet. That is something that needs to be discussed, which is why negotiations are taking place. I made a point of saying in my statement that all options need to remain on the table, including that of a temporary period of public ownership, because there are conditions in relation to what I am proposing today. We need to ensure that we look after the interests of taxpayers as well as ensuring wider stability and continuing to look after the depositors. These are difficult times, and the conditions are not ideal, but I believe that what I am suggesting is the best way possible to proceed, and that the proposals ought to be supported on that basis.
Does the Chancellor agree that, a few months ago, it was obvious that, in order to protect financial stability, it would be necessary to give guarantees to depositors and to achieve a quick, orderly work-out of the situation at minimum risk to taxpayers, in circumstances in which it has long been obvious that no purely private sector or commercial solution was going to be remotely possible? After five months of delay, are we not now being offered a proposal that will be of benefit to the shareholders in Northern Rock, including hedge funds, who will find that their shares have been given a value by this statement that they would not otherwise have had, and to future investors in Northern Rock, whoever they might be, who will find that the Government and the taxpayer are taking on an open-ended commitment to take all the principal risk involved? This is surely the result of dithering and delay, and of political considerations getting in the way of the speedy decision making and the orderly work-out that could have been achieved even before Christmas.
I agree with the first part of what the right hon. and learned Gentleman said. It was necessary for the Bank of England to intervene, and it was right to offer guarantees on the depositors’ money. We have common ground on those points. Throughout last autumn, considerable efforts were made to find a solution to the problems at Northern Rock, either by merger or by acquisition or through other proposals. Some interest was initially expressed by other banks and financial institutions but, as the financial markets tightened last autumn, it became increasingly obvious that that solution was not going to be possible. In the late autumn, interest was expressed by Virgin, by Olivant and then by another private equity group which subsequently withdrew. It became obvious to us that, without some degree of Government support, nothing was going to happen. That is why we commissioned Goldman Sachs to advise us.
I agree with the right hon. and learned Gentleman that, had it been possible to get a quick sale in the autumn, that option would have been highly desirable. Unfortunately, the conditions in the financial markets made that totally impossible. It would have been far more preferable, as I said in my statement, if we could have found a purely commercial solution. However, that is not going to be possible in the foreseeable future, as I am sure he recognises.
Whoever the future owner of Northern Rock might be, will the Chancellor assure me and the people of the north-east that he is in this for the long haul and that he will prevent the dumping of its assets—its workers and its mortgage book—into a falling market, where they will be bound to fetch far less than they are worth?
That is precisely what would happen if the company were to be put into administration as the shadow Chancellor has suggested. In the current conditions, which are there for all to see, if the administrator were required to start realising the company’s assets, there would undoubtedly be a loss, given the present mortgage conditions and today’s market. That was recognised by the shadow Chancellor himself only two months ago. He has changed his tune now, and we shall wait with great interest to see what his policy will be tomorrow morning. I do not expect that he has any more idea about that than I do.
The Chancellor was reminded by my hon. Friend the Member for Twickenham (Dr. Cable) of the importance of the Northern Rock Foundation, which is of immense value to communities throughout the region. What assessment has he made of the potential impact of his current proposals on the Northern Rock Foundation and its share of profits?
The Northern Rock Foundation is very important not just to the north-east of England but to the north-west as well. The proposed bidders in the company are well aware of this issue and how greatly the foundation is valued. I cannot today say precisely what will happen, but I can tell the right hon. Gentleman that we take this matter extremely seriously. The Northern Rock Foundation derived a great deal of income from Northern Rock plc, so for very obvious reasons there is bound to be a difference in the future. I recognise the foundation’s importance and it has already had meetings with Treasury officials; those discussions will continue.
I welcome the Chancellor’s statement. Many others in the north-east as well as myself believe that this is a practical, realistic and imaginative solution to a problem that is not the making of anyone in the House but whose consequences we face in the financial markets. It secures the objective of protecting the taxpayer and offers real hope of long-term viability for a company that is very important for the north-east. Those of us who represent north-east constituencies will have many thousands of constituents who work for the company. I welcome the proposal; above all, it will end the damaging uncertainty that the company has faced—[Interruption.] I am asked what is the question. Does the Chancellor agree that ending the uncertainty is the most important consideration because it has been a critical factor in causing the damage? The Chancellor’s deadline is welcome, so let us hope that we can get a private buyer in place by then.
On the last point, I said in my statement at the beginning of October, when guarantee arrangements were put in place, that I wanted the company to come back by mid-February at the latest. We have a deadline in respect of state aid approvals of the middle of March, so matters do need to be brought to a head. As I said in response to the right hon. and learned Member for Rushcliffe (Mr. Clarke), market conditions over the last few months have been extremely difficult. While they are better now, a great deal of uncertainty remains. I agree with my hon. Friend about the importance of Northern Rock to the north-east of England. Not just the foundation, but the bank itself is an important employer. We still have a lot of ground to cover with difficult negotiations ahead. That is why I say that all options remain on the table. I will not rule out the option of a temporary period of public ownership, but I greatly take to heart what my hon. Friend said.
Is the Chancellor aware that the Swedish taxpayer still owns 20 per cent. of Sweden’s largest bank 16 years after the Government stepped in there? He told the exchange this morning that he expects Northern Rock to operate without Government support “in due course”. How would he define “in due course”?
As I said to the shadow Chancellor, and in my statement, I want to bring about a position whereby the company can stand on its own feet as quickly as possible. I cannot today—these discussions are continuing—set out a specific timetable, but it is important for the Government to provide backstop back-up to the bank’s proposals. I would have a great deal more sympathy and listen with greater interest to the hon. Gentleman and his colleagues if they actually had a solution themselves, but it is becoming increasingly clear that they have no idea what they would do. I do have a plan.
It was perfectly appropriate for the Chancellor to refer in his statement to uncertain financial conditions throughout the world, which are enduring, long-lasting and perturbing the markets to this day. It is also perfectly right to defend the taxpayer and depositors. Building on the questions put by my hon. Friends the Members for Newcastle upon Tyne, North (Mr. Henderson), for Houghton and Washington, East (Mr. Kemp) and for Newcastle upon Tyne, Central (Jim Cousins), when the Chancellor meets representatives of the work force, will he tell them that his patient approach to solving this difficult problem is also in their interests?
As I have said on several occasions, having taken the difficult decision to provide support to Northern Rock in the first place last September, we must have the conviction to see it through. I am therefore disappointed that, having received wholehearted support from the Leader of the Opposition—he has now departed from the Chamber, but I am sure that he will remember those words—he is now running away from it.
Does the Chancellor appreciate the irony that the present world credit crisis is largely due to excessive securitisation of loans—a bankers’ ramp, which he is now joining? Does he hope that the Chinese will start buying his loans to Northern Rock when he has securitised them into bonds?
Not exactly, no. The difficulties in the US sub-prime market, which started the present problems, were primarily caused by the fact that, it would appear, too many lenders did not know whom they had lent to and had no idea of the true value of the assets on which those loans were secured. Securitisation in itself is not a bad thing, as I am sure the hon. Gentleman would agree. What matters is whether lenders know what they are doing. If only some of those who had lent to householders in America over the past few years had realised that those borrowers did not have enough income to support the loan repayments, and their houses were not worth anything like what was claimed, we might not be in the difficulties that we are in today.
I am sure that the 1,100 Northern Rock employees based in my constituency will welcome the Chancellor’s statement today. May I press him a little further, however, on the future of the Northern Rock Foundation? In his statement, he says that he will address it, “in the event of temporary public ownership”. However, many people in the north-east, especially those voluntary organisations that are dependent on the help that they receive from the Northern Rock Foundation, will want him to press the interests of the foundation regardless of whom the owner is. Please will he clarify that point?
Yes, we will. I said earlier to the right hon. Member for Berwick-upon-Tweed (Mr. Beith) that I recognise the importance of the foundation. My point was that in the event that we had to take the bank into a period of public ownership, we would have to provide for that. If the proposals as set out today come to fruition, I know that the company and the bidders are acutely aware of the importance of the foundation and will want to do what they can to help. This is one of the many problems that need to be sorted out and addressed, but I assure my hon. Friend and other Members who represent north-east constituencies that we are well aware of the problem and will do whatever we can to help. These are, however, difficult decisions and difficult times.
I cannot tell you, Mr. Speaker, how much more confident we feel now that we know Chancellor Baldrick has a cunning plan. Does the Chancellor not think that allowing one of the potential bidders for Northern Rock to go on a visit to China and have an unminuted discussion about Northern Rock with the Prime Minister smacks of impropriety at almost any level?
Is my right hon. Friend aware that he can safely ignore the opportunism of those on the Conservative Front Bench and particularly their irresponsible attitude to administration? As he nears the final stage of the complex and difficult negotiations in which he is involved, will he take it from us that we look to him to get the best possible deal for the public sector in those negotiations, and that the position that he has taken on a temporary period of nationalisation will greatly strengthen his hand in doing so?
I am grateful to my hon. Friend for his support. I agree with his comments about administration. I also agree that our proposals today represent an opportunity to try to resolve the matter. As I said, however, many matters still need to be discussed, and I hope that we can get on with that over the next few weeks.
When £25 billion was first advanced by the Bank of England, it did not appear that the usual banking disciplines over how and when the money would be repaid were put in place. Now the Chancellor says that he can get the money back with interest, which is welcome, but at the expense of a guarantee. Will he now put in place proper banking disciplines so that the guarantees can be run off quickly, as the market will allow, and taxpayers do not have the guarantee hanging around their heads in perpetuity?
As I said a few moments ago, I hope that the guarantees can be lifted as soon as is appropriate. That will be one of the subjects under discussion.
I agree wholeheartedly with what the right hon. Gentleman said on 15 January:
“Putting Northern Rock into administration could lead to a fire sale of assets, and might result in taxpayers not getting all our money back.”
I could not have put it better myself. The right hon. Gentleman might like to have a word with his colleague.
Given that the consequences of the sub-prime market fiasco which brought down Gord—Northern Rock—
Brought down Gordon Brown!
Given that those consequences have now spread more deeply across the economy with the undermining of the bond insurers, when will my right hon. Friend tackle the real underlying causes of the debacle, namely the use of securitisation with no proper risk management and no cross-border supervision, weak and inadequate banking regulation, the widespread use of exotic financial derivatives which are frankly designed to deceive, and an auditing system that involves far too cosy a relationship with the banks themselves?
As I said in my statement, I will publish proposals for strengthening the banking supervisory system next week, but as I told the hon. Member for Louth and Horncastle (Sir Peter Tapsell) a few moments ago, I do not think that securitisation in itself is a problem. The problem arises when institutions do not know what they are doing: when they are lending money and do not know the true value of the asset against which they are lending, and when they cannot be confident that repayments will be made. Those problems need to be tackled at national level, but—as I have also said on a number of occasions—they need to be tackled at international level as well. That is why we have made proposals to the International Monetary Fund and to the Financial Stability Forum, which we will discuss at the G7 in Tokyo in about three weeks’ time.
The run on Northern Rock— although not the reason for it—coincided with the Bank of England’s not increasing liquidity last September, a month after the Government knew of Northern Rock’s liquidity difficulties and after the European Central Bank and the United States Federal Reserve had increased liquidity. Since that period, the Government have announced new powers for the Financial Services Authority and consulted on protection of depositors’ savings.
The Chancellor told us today that he would make a statement on some of those matters next week. May I ask him whether the necessary changes to protect depositors’ savings—the changes to the tripartite arrangement, with new powers for the FSA and clear rules for liquidity—will be in place before an acquisition or a nationalisation? It would be perverse if £50 billion of taxpayers’ money continued to be used to guarantee liabilities in one form or another, and the changes that the Government wish to see were not in place before a takeover or nationalisation.
The proposals that I will publish next week will require primary legislation. As the hon. Gentleman will know, that will inevitably take a few months, but I told the Treasury Committee that I wanted the legislation to be on the statute book before the end of the current parliamentary Session. I do not want to hold up any solution in relation to Northern Rock until all that is done. If the proposals I have outlined today bore fruit, the money lent by the Bank of England would be repaid in full; but I think we should proceed on the basis that we will get the legislation on the statute book during this Session if we can, and I hope that we will have all-party support for that.
The shadow Chancellor has accused my right hon. Friend the Chancellor of dithering. Let me tell my right hon. Friend that I welcome the calm and considered way in which he has gone about his decision making, in stark contrast to the flip-flopping, contradictory, incompetent positions adopted by the Conservatives. Can he give an indication of the disruption that would be experienced by home owners with Northern Rock mortgages if Northern Rock went into administration, as was advocated by the shadow Chancellor as recently as last week?
The Chancellor repeatedly reassured the House that Northern Rock has a good quality loan book. I have no doubt that most of its old loans are well secured, but is it entirely credible that a company that increased its loan book by 50 per cent. at the top of the market in the year before banks stopped lending to it, did so without hoovering up some sub-prime mortgages as well as prime mortgages? Given that bad mortgages cannot be secured against good mortgages, does the Chancellor accept that he is accepting, on behalf of the taxpayer, the risk of all the bad mortgages in that loan book?
Is the Chancellor aware that, along with many others, I am pleased that he has not ruled out public ownership? Way back when Ted Heath was the Prime Minister, the Tories had a cunning plan: they decided to take over Rolls-Royce. It turned out to be the wise thing to do, and we supported him in the Lobby—in fact, we ran in there. Then, in 1975, the Labour Government had to intervene to save Burmah Oil. Some of us would much rather see public ownership than the handing over of large sums of money to Mr. Goody Two-Shoes Branson, because we might not get it back.
My hon. Friend’s position does not entirely surprise me. I was in school when Rolls-Royce was nationalised in, I think, 1971. I have set out my position. A limited period of public ownership must remain on the table, but what I am proposing could, if we can get the right terms and conditions, prove a better deal in the long term.
I very much welcome the approach that my right hon. Friend has set out, which has both protected people’s savings and jobs and prevented the contagion spreading from Northern Rock to other banks, which was a genuine risk last autumn. When my right hon. Friend comes forward with proposals for tighter supervision and regulation, will he also look at the rating agencies, which have a major role in assessing the risks posed to different investors?
Yes. The Financial Stability Forum is looking at rating agencies. I discussed a range of matters with my French, German and Italian counterparts when we met in Paris last week; one of them was what further changes might be made to credit rating agencies. I have always regarded them as an aid to decision making. When a bank or any other financial institution makes a decision as to whether to lend, it should certainly take a credit rating agency’s advice into account, but it should also exercise its own judgment and not rely totally on what the credit rating agency says. There are other issues in relation to possible conflicts of interest which also need to be looked at.
We have just come through one of the tightest comprehensive spending reviews since this Government came to office. One of the reasons for that is the current strain on public finances. Will the borrowing rules be relaxed to allow borrowing above planned borrowing for next year in order to finance this deal, or will there be a reduction in planned borrowing for infrastructure projects—and if so, which Departments does the Chancellor intend to delve into in order to finance this?
The Chancellor emphasised in his statement the importance of taxpayers being able to share in the upside returns. Will he confirm that that would require the Government to take a shareholding in Northern Rock, and if so will he say what his minimum requirements would be in relation to such equity participation?
It would not require it, but one of the things that we will need to discuss over the next few weeks is what mechanisms would best ensure that if the company were sold and there were an upside return, the taxpayer could benefit to reflect the fact that we are providing backstop guarantees.
As I have said on a number of occasions, the management of a company is a matter for its shareholders—its owners. The Government have never been in a position to say to a privately run company that so-and-so should be a director or manager and so-and-so should not. But I am clear about the fact that whatever changes occur, part of the restructuring will involve ensuring that we put in place a strong management who know what they are doing.
The Chancellor said that the Bank of England’s lending will be repaid in full, but at what point does he propose to authorise it to publish full details of that lending?
Again, I have said on a number of occasions that I will consider that when it is appropriate to do so. What I want to avoid is providing a running commentary on Bank of England support. I look forward to hearing what the Treasury Committee has to say, but I think that some sympathy exists for that approach. If we are successfully to allow for Bank of England intervention, we need to be able to act in a way that does not immediately draw attention to a bank and cause the very difficulties that we are trying to avoid.
I think I am right in saying that some 50 business men and women accompanied the Prime Minister on his visit to China and India. The discussions with the Virgin group, Olivant and the board started today, once the statement had been issued to the stock exchange. Of course we had to tell the board on Friday night what we were proposing, because of its obligations to the market. The discussions with the two bidders could not start until after that.
Does the Chancellor agree with the assessment of the BBC’s business editor that the arrangements that he has announced this afternoon amount to a public “subsidy” of £1 billion for Northern Rock? If not, what figure would he put upon it?
As I have explained on a number of occasions this afternoon, the discussions that will now follow from my publication of proposals will determine to what extent, at what rate and how much the Government will provide backstop finance. Once those discussions have concluded, I will be able to report to the House.