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Northern Rock

Volume 698: debated on Monday 21 January 2008

My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

“With your permission, Mr Speaker, I would 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.

“I shall next week publish proposals for strengthening depositor protection and the supervision of banks. Today, let me set out how we intend to meet the previously stated objectives of the Government, the Financial Services Authority and the Bank of England with regard to Northern Rock, as well as the background against which we make our proposals. The proposals I set out today for a commercial solution to Northern Rock—underpinned by Government support—best meet our objectives of protecting taxpayers and depositors, and maintaining financial stability. I will set out the reasons for this in greater detail.

“I can confirm that the existing government guarantee arrangements to depositors will remain in place. Savers’ money remains safe and secure. As the House will recall, at the end of last summer, following the problems in the US mortgage market, Northern Rock found it increasingly difficult and then impossible to raise the billions of pounds it needed to finance its business. It was completely exposed. It had no Plan B. Northern Rock was forced to ask the Bank of England for support to allow it to continue to operate. The Government agreed to that support because, in the then prevailing conditions, there was a serious risk that other parts of the banking system would be destabilised. That support was successful and prevented further contagion. That decision was wholeheartedly supported by right honourable and honourable Members of this House.

“As the House knows, the Government have announced guarantee arrangements for depositors’ money saved with Northern Rock. In October and December we also provided further guarantees and funding arrangements in order to give the company the time it needed to try and find a solution to its problems, as I informed the House. At that time I said that I would ask Northern Rock to come back with proposals no later than mid-February this year. These guarantee arrangements, including the extension in December, have not been called and there has been no cost to the taxpayer. However, these arrangements remain necessary and will be in place for the time being. Equally, Bank of England lending is secured against Northern Rock’s assets, such as high quality mortgages, which are assessed by the Financial Services Authority as being of good quality. Again, there has been no cost to the taxpayer.

“Let me make it clear that the Government’s position—which I reiterated most recently in the Treasury Select Committee on 10 January—is that a private-sector solution for Northern Rock is the preferable route for meeting our three objectives, but this cannot be at any cost. If it does not prove possible to secure a proposal that meets our stated objectives and conditions, it would be necessary to take Northern Rock into temporary public ownership. For that reason it would be irresponsible to rule it out.

“Despite intensive efforts over the past few months, and as a result of uncertain market conditions across the world, it has proved impossible for Northern 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, right across the world, banks are reporting substantial losses. Whilst 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 with private-sector disciplines and management, provided that we can do so on terms that properly protect taxpayers' interests.

“Let me now set out in greater detail how this proposal will meet our objectives of protecting the taxpayer, protecting consumers and promoting financial stability. Northern Rock would raise the funds it needs from investors by selling assets. The Treasury would guarantee payment to those investors in the event that the assets were insufficient to meet its obligations, for which Northern Rock would pay the Treasury a fee. In this arrangement, shareholders and other providers of capital in Northern Rock accept the first risk, with the Government acting as a backstop.

“According to the Financial Services Authority, Northern Rock has a good quality loan book. In normal market circumstances, such a guarantee would be unnecessary. However, in the current circumstances, to attract a wide range of investors on acceptable terms that protect the public interest, a guarantee is necessary.

“If this proposal is accepted, it would mean that all of the Bank of England's current loan facilities for the company are repaid in full, with interest, upfront, on completion of the transaction.

“Our willingness to put that support in place depends entirely on the terms on which a deal can be struck. I will authorise support for the private sector only if the public interest will be better served than through taking the company into temporary public ownership.

“In addition, any acceptable proposal would also need to comply with clear conditions. The company will need to demonstrate how it can operate sustainably in future without any government support and we will favour proposals that reach that point quickly. 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. As 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 that financing structure to be explored, the Treasury and the Bank of England will make arrangements to extend the Bank of England's loan facility until 17 March, by when we must submit a restructuring plan to the European Commission.

“The proposals would involve private sector participation in the financing of Northern Rock and would also provide the taxpayer with the ability to share in the potential upside returns, as business conditions improve, in return for the financial support provided to the company.

“The Government will make our decision as to which proposal we can, as provider of support accept, and, with the Bank of England and the Financial Services Authority, we will consider proposals received by 4 February from potential interested parties, including the company itself.

“Any proposals as a result of either that support or public ownership are highly likely to need state aid clearance and will therefore be dependant on approval by the European Commission.

“The Government have already started discussions with the company and with the two parties who have publicly stated an interest in the company. The Government are also ready to have discussions with any other interested parties.

“Let me make it clear: if the solution that I have outlined proves not to be possible on terms that protect the public interest, a temporary period of public ownership will be necessary. Legislation is being prepared, should it be necessary, and would make provision for an independent valuer to decide on the level of compensation to be made to shareholders. The principles for assessing that compensation would be based on the company not receiving public support and that all specific financial assistance from the Bank of England or the Government had come to an end. That is set out more fully in the statement to the markets today.

“It is for the independent Office for National Statistics to determine whether Northern Rock is classified to the public sector in the national accounts. Any liabilities classified to the public sector would be temporary and backed by significant assets and do not represent any meaningful measure of fiscal sustainability. The code for fiscal stability—set out in legislation passed by this House—provides for such situations. We would also address the future of the Northern Rock Foundation, in the event of temporary public ownership.

“The proposal that I have outlined today meets our stated objectives of protecting the taxpayer, protecting depositors and maintaining financial stability. Northern Rock got into the difficulties it faced because of global market conditions. The Government agreed to Bank of England support for Northern Rock because of the destabilising risk to the rest of the financial system, and also provided guarantees to protect depositors. Both objectives have been met. We now need to reach a solution which 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 solution without any government support, but in current uncertain market conditions that is not possible. Administration, with the resulting fire sale of the company’s assets, would not be in the public interest. Temporary public ownership—nationalisation—remains an option. However, even those who advocate that now see it as a stepping stone to returning Northern Rock to the private sector that would involve government support. In the mean time, it would still require continuing financial support and it would leave the public sector bearing all the risk. The proposal that I have outlined today is the right one. It provides a government guarantee that enables a commercial solution in which the private sector raises finance and bears risk. It also offers the prospect of withdrawing government support more quickly and is therefore most likely to meet our stated objectives and conditions. I commend this Statement to the House”.

My Lords, that concludes the Statement.

My Lords, I thank the Minister for repeating the Statement on Northern Rock made in another place. The Minister last repeated a Statement on Northern Rock two months ago. How does today’s Statement differ from that of two months ago? Courtesy of some leaked documents at the time, we knew even then that the Government’s advisers were talking about the continuation of government support beyond an initial deal. The Government did not deny that then but hid behind the assertion that a potential private sector deal could not be,

“transacted in the full glare of publicity”.—[Official Report, 19/11/07; col. 698.]

Far from the “full glare of publicity”, we have had the deep darkness of Hades surrounding this deal—except when the Government have chosen to brief the press, as they have been frantically doing all weekend.

Two months ago, the Minister assured the House that the Government would protect the interests of taxpayers. We now know that the Government have made no progress in protecting the interests of taxpayers in the last two months. There is no private sector deal at present. In desperation the Government have agreed to continue to use taxpayers’ money to support the Northern Rock balance sheet in the hope that there might be a deal to be done. As a result of the Statement, taxpayers will continue to bear significant risk, but for longer—and that is certainly no improvement on the risk profile at present.

Can the Minister explain why the Government are now prepared to keep taxpayers’ money behind Northern Rock for an unspecified time? The Governor of the Bank of England was very clear in relation to the possible Lloyds TSB transaction last summer, which required some £30 billion at bank rate for a mere two years. The governor said:

“I don’t think that it took the Chancellor very long to recognise that this was something which central banks don’t do, it’s also something that governments don’t do”—

except that U-turns on principles are exactly what this Government do all the time.

Those clever bankers who advise the Government may have come up with something that sounds as if the debt will be refinanced. However, through the guarantees, all the risk remains with the taxpayer. We had expected something more substantive in reducing the risk to taxpayers’ money from this Statement.

The Statement refers to the proposals being a “commercial solution” to Northern Rock, although later they are described as not being a “purely” commercial transaction. What the Government are proposing is a million miles from the commercial solution. It is a political solution that uses taxpayers’ money to avoid the truth that there is no genuinely commercial solution available. Further, today’s Statement gives us no real information. How much money will be tied up in these new guaranteed loan notes, and for how long? Is it just the existing lending or will even more taxpayers’ money be going in under cover of guaranteed loan notes? The Statement talks of arrangement fees and expenses, which the BBC’s business editor estimated this morning could amount to £1 billion at market rates. Will the Minister tell us what the fees and expenses are expected to total, and how Northern Rock will pay them? Will the Government have to lend Northern Rock even more money for that purpose?

This morning’s press release said that a terms sheet of the principal terms and conditions will be provided to interested parties shortly. Can the Minister tell us when that will be? We know that “shortly” is one of those words in the Government’s lexicon that can assume a variety of meanings. More importantly, I can assure the Minister that we on these Benches, and I expect those on the Benches of the noble Lord, Lord Newby, as well, are very interested in this. Will the Minister commit to making the terms sheet available to Parliament?

Two months ago, the Government talked about Northern Rock financing in terms of maintaining wider financial stability. Can the Minister explain how Northern Rock now impacts on wider financial stability? When the Government first guaranteed the retail deposits, they brought to an end the run on Northern Rock. What other impact could Northern Rock now have on financial stability? Are there any remaining financial stability issues? Is it not true that the only real issue left is the Labour Party’s political interest in avoiding the truth that its strategy and actions for Northern Rock have failed?

While we must never forget that it was Northern Rock’s reckless management that caused the problems in the first place, we must not let this fig leaf of an announcement get away from the fact that the tripartite arrangements invented by the Prime Minister failed their first real test. The Government have made noises about improvements that they will make for the future, but they have done nothing. They have not yet explained exactly what went wrong last summer, and they have not published the correspondence between the tripartite authorities. They have told us that they have identified which committee room in the Cabinet Office will be used for future financial crises, but they have not said precisely what proposals they will bring forward to deal with the impediments to effective action that the Governor of the Bank of England identified in his evidence to the Treasury Select Committee of another place. They have issued a vacuous consultation on depositor protection, but have not yet made proposals that Parliament can progress.

This Statement also takes us for the first time to the N-word: nationalisation. We regard nationalisation as a signal of the complete failure of the Government’s handling of Northern Rock. The Government have borrowed the Liberal Democrats’ idea of “temporary public ownership” as if that is something different from nationalisation, and that it is something which can be arranged to order. If the combined efforts of all those involved to date have failed to come up with a solution which keeps Northern Rock in the private sector, what hope is there of a crippled nationalised business being returned to the private sector on a successful and timely basis? The history of public ownership is not a good one. The fact is that nationalised industries have destroyed value. Can the Minister tell us what makes the Government believe that, under their control, nationalisation would be both temporary and not value-destroying? We simply do not believe that they can achieve that.

I have asked the Minister a number of detailed questions, but I am well aware that the likelihood of him answering them all is low. I am sure that he will try to answer them all, but I hope that he will make a commitment to respond in writing to all noble Lords who have taken part in this debate with those that he fails to answer completely.

My Lords, I, too, thank the Minister for repeating the Statement. When the Minister last made a Statement on Northern Rock a couple of months ago, we argued that the private sector solution which the Government were then pursuing was unobtainable. Since then, events have proved us right.

First, the two consortia bidding to take over the bank conspicuously failed to raise the cash which they were happily reassuring everyone they could relatively easily do. Then, in order to give them a little help, the Government appointed Goldman Sachs to take the begging bowl round the world on their behalf to try to raise the cash for the two consortia, which by this time were sitting pathetically on the sideline. Goldman Sachs has been round the world and its begging bowl remains empty. That is why we have today’s Statement.

What we have has been described by some people as a public/private partnership and by others as a partial nationalisation. The truth is that we have a nationalisation of the risk and a privatisation of the profits. The original proposals were that the bidding consortia would raise £15 billion up front to repay part of the debt that the Bank of England had already made available to Northern Rock. It is now clear that they will not have to repay a penny up front. This demonstrates the folly of the Government’s earlier position, which was maintained for a number of months against all the evidence. It was always clear to most commentators in the City and to many people in your Lordships’ House that the ability of the two consortia that were left standing two months ago to raise the billions of pounds they claimed was very small, and so it has proved.

As the noble Baroness, Lady Noakes, said, the Statement is remarkably vague as to figures. Indeed, not a single figure is mentioned in the entire Statement except for two dates on which future action is planned. We know that any decision about the future of Northern Rock will be delayed by a further four to six weeks, during which time the market, particularly the housing market, is likely to fall further, and the costs of having dithered on Northern Rock will have increased yet again.

The noble Baroness referred to the terms sheet being available shortly. Unless I am mistaken, anyone wishing to put in a bid on the revised basis has a fortnight in which to do so. So if the terms sheet is not available today, a day or two will make a huge difference to the ability of anyone to make an informed bid. I therefore repeat the noble Baroness’s question about what, in the context of the announcement, “shortly” means.

Given that the Government are single-handedly keeping Northern Rock afloat, it would seem logical that they should reap any benefits of turning the company round. They say in the Statement that they intend to take some of the up-side that might accrue if the bank has a successful future, but it is completely unclear how much of the profit the Government intend to benefit from. Is the Financial Times right, for example, in saying that the Government’s equity stake will be no more than 5 to 10 per cent? Such a figure would obviously leave 90 to 95 per cent to a private buyer. What is the logic in those figures? Given that the Government are the only ones keeping this institution going, that seems a completely unacceptable ratio.

On shares of profit, can the Minister be clearer about the future of the Northern Rock Foundation? The Statement contains the wonderful phrase:

“We would also address the future of the Northern Rock Foundation”.

That is completely meaningless. What does it mean? What is the point of putting into a Statement something which is so vacuous that no one in the north-east can take any comfort from it? Talking of the north-east, the Statement is completely silent on the Government’s thoughts about the future of the Northern Rock workforce.

Do the Government agree with the BBC’s political correspondent who said today that Richard Branson was behaving like the cat who got the cream? Could we be clear about exactly what he and the other consortium are currently offering in order to take over Northern Rock? Is it the case that they are both proposing to take over a bank with assets allegedly worth £100 billion for an investment either in cash or in kind of no more than £250 million—one-400th of the value of the assets they would acquire? If those figures are even broadly right, how can the Government justify that?

Noble Lords will be aware that equity markets today have seen heavy losses around the world and glum faces among investors. Two investors, however, have a happy smile across their face. They are the hedge funds who bet that the Government would cave in and do something like this. In the mean time, taxpayers, not least those in the north-east, have been taken for an extremely expensive ride.

My Lords, I am grateful to the noble Lords for their contributions. I give an undertaking to respond to those questions I am not able to cover in the limited time available, save for those which I am going to exclude because of their commercial sensitivity. A great deal of this obviously obtains within that framework. Contrary to the contentions by both opposition spokespersons, it will be recognised that the Government are involved in the very challenging and interesting process of drawing up the specifications and terms to be met. The Government have been quite clear on their principles right from the beginning and they intend to fulfil them. However, the terms under which the guarantees will be met by any new owner of the bank and the arrangements under which they obtain cannot at this stage be put into the public arena, as noble Lords opposite would expect were they to give this a moment’s reflection.

I am not sure the noble Baroness bothers about detail a great deal. Yet again the Conservative Opposition trot out this canard that Lloyds TSB made a clearly defined offer on how to solve this problem in the autumn of last year and that the Government prevaricated or did not see fit to take immediate action on that proposal, as if they have clearly documented proof of the nature of this bid and of how substantial this bid was. I give way to the noble Baroness.

My Lords, I would not like the Minister to get carried away on this subject. I merely quoted the Governor of the Bank of England in relation to the potential Lloyds TSB transaction. Perhaps he did not listen carefully.

My Lords, all I am emphasising is that the Government are criticised frequently for not having taken up this option when the governor indicated in very reserved terms the nature of the proposal. It was never a fully fledged bid and is merely, as I have indicated, a canard such as the Official Opposition are prone to display whenever these Statements are made and in all Questions on these areas without there being any real substance to their position.

The bank has to be viable for the future. That is the basis of the negotiations and the drawing-up of the terms for the bank, but there are very clear principles that what must be proposed is a safeguard for public money. It will be recognised that the Government are working towards a solution in which the repayment of the Bank of England loan would begin forthwith after the new arrangements were in place, if they were successfully established. That solution would mean that the public had a stake in the developing equity if the bank was successful while, if the bank ran into serious trouble, as a private sector bank it would expect that the private investors would take first risk. If we did not do that we would be open to the challenge, which has emerged from the Liberal Benches in the past, that what is being constructed is an automatic underwriting by the public purse of gains that the private sector will take, and which will be of no value to the public at all. That is exactly the issue we are seeking to resolve.

The noble Baroness suggested that very little has been achieved, but it will be appreciated that the Government are working to the timetable that we established in the autumn. We expect the process to produce bids by 4 February, which will then be subjected to the clear criteria that the Government are establishing. We will be in time to meet the other signal obligation under which the Government are operating. That other time constraint is that there is a defined time period in which state aid to the private sector is available. That period runs out for this process on 16 March, and the Government are working towards obtaining solutions to these issues and a successful bid, should it prove to be so, well within that timeframe.

The noble Lord, Lord Newby, suggests that precious little has been achieved. He referred to the Goldman Sachs exercise as a begging bowl that is devoid of any product. He will recognise that the arrangements being proposed are dependent upon the potential sale of bonds that will be created to underpin the position of the bank, and a great deal of work has been necessary in order to establish the viability of that potential solution. It will depend on whether the private sector produces bids that meet our other criteria in order that it can act on this basis. Far from the Government standing idly by, we have carried out the necessary preparation over these past two months to ensure the viability of the bids as well as the clarity of the terms on which any bid needs to be established.

The noble Lord also suggested that any reference to the Northern Rock Foundation was vacuous. We would have been subjected to the most intense criticism if we had left the foundation out altogether. We make it clear that we expect the issue of the foundation to play a part in the negotiations. At this stage—and I do not think that the House, in all its fairness, would expect anything else—we cannot give detailed answers about the basis upon which negotiations will take place with two private bidders in the field, with the possibility that the bank itself might make a bid for its management for the future and other bids potentially coming in. It would be ludicrous to expect the Government to spell all that out in great detail now. However, we are making clear the exact principles on which we propose to consider the bids that must be submitted by 4 February. I hope the House will recognise that that is as much as any reasonable Government could do in these circumstances.

My Lords, is it not clear that the Tory Opposition are absolutely bankrupt of any positive ideas? The statement we heard from the noble Baroness represented that very clearly. Since, as I understand it, the European Commission has to approve either a private transaction or nationalisation, when do the Government hope to be able to make the appropriate application—on or before 17 March?

My Lords, I am grateful to my noble friend for making explicit that which the whole House will have realised. It is easy for the Official Opposition to criticise the Government’s constructive approach to what we all recognise is a fundamentally difficult problem that is very significant in terms of the financial structure without having the slightest idea of how the problem should be solved, apart from time to time indulging in red herrings which mean nothing in terms of a real solution.

My noble friend is also right to emphasise, as I sought to make clear earlier, that the Government are working against tight time constraints. We need to meet the deadline of the middle of March as far as the European Commission is concerned. The plans for the consideration and processing of the bids are governed by that requirement.

My Lords, right at the beginning of this sad tale, the Governor of the Bank of England stressed the importance of moral hazard and emphasised that if the bank were bailed out, there was a danger that others would expect the same treatment in the future. What do the Government think the present situation is doing for maintaining financial stability in the light of the view which the Governor of the Bank of England originally expressed?

The people who have really gained are clearly Northern Rock’s directors and board. The Government now seem almost to excuse them, saying that it was all a problem of global turbulence. But that has not been true of any other bank. Other banks have taken losses but they have not had to ask for government aid on such a scale. Right at the beginning, after the Bank of England had bailed it out, Northern Rock was considering issuing a dividend. On top of that, as has been pointed out repeatedly, it has continued making loans of 100 per cent of the value of a property and adding more and more to the burden to which the Government are exposed.

Can the Minister tell us exactly what is proposed in the plan which he has put forward? The Government are saying that the loan book is good but that they cannot do anything with it unless there is a government guarantee. In effect, the Government seem to be giving a guarantee which enables them to issue gilt-edged securities—the Minister will correct me if I am wrong—and hoping that they then get paid back out of the gilt-edged securities which they themselves have issued. Is that right or is it not?

Can the Minister tell us what the rate of interest will be on the bonds which it is proposed to issue? Will it be the same as on gilt-edged, will it be more or will it be less? That is the reality of the situation. This is in no sense a private-sector solution. It is a government solution, backed by the Government and their credibility. A most extraordinary paragraph in the document issued by the Government says that the proposal would have the potential to ensure that the loan was paid up and the Government got their money back upfront and as soon as the funds were available. Is that really true? If they manage to float off the loan book in the way described, will the Government get their money back, upfront, as soon as the funds are available?

My Lords, a great deal of the noble Lord’s challenge revolves around where the moral hazard is and whether there are any constraints on how this bank operates in the future? On the moral hazard, one issue that was abundantly clear to the nation was the sight of investors queuing outside a bank. That represented a distinct threat not just to Northern Rock, but to banks that could and would be signalling difficulties. After all, we all recognise, as the noble Lord has said, that the exposure to sub-prime lending across the world has caused a great deal of writing down of bank assets in these past few months.

The danger would be that the public would see their investment in banks that were perfectly safe and secure—and could meet their obligations—but which, nevertheless, could suffer very considerable damage from the contagion of a run upon them, in the classic way of investors seeking to take out their money. That emblem was clear from the moment that the Northern Rock crisis broke. If there is one achievement which clearly exonerates the Government, it is that they put a stop to that position. We made it quite clear that investors are safe and intend to ensure that they are.

Having said that, does that mean that those managing the banks can carry on with reckless conduct? No, my Lords, on two grounds—one is that it will be clear that the terms on which the bank will operate with government guarantee in future will put severe constraints on their ability to act; for instance, the declaration of a dividend, to which, I think, the noble Lord referred.

The noble Lord, Lord Higgins, also made reference to—and, again, I am obliged to say—a somewhat dated canard in these issues. I think the noble Lord, Lord Newby, brought it up first and can one think of a more self-respecting citizen than the noble Lord? The noble Lord said, “Isn’t it outrageous that the bank came to me and suggested that it was prepared to offer me something above the level of property?”. Well, of course it did. I have not the slightest doubt that the noble Lord has other assets, although not privy to his personal affairs. He is bound to be a better credit risk than the classic sub-prime borrower whom the bank was being asked to avoid.

My Lords, I am grateful for the noble Lord’s assessment of my character. However, I ought to point out, for the record, that Northern Rock made no inquiry into my other assets. I would have been extremely surprised if it had done.

My Lords, the noble Lord may also recognise—I am not sure how the approach came to him—that it is not beyond the wit of organisations to look at postcodes and existing housing and to work out whether the individual fits into the sub-prime category of being maximum risk or that of the hugely reputable noble Lord, Lord Newby, to whom I, let alone the bank, would be prepared to lend 125 per cent against certain assets.

Therefore, it will not do to suggest that the bank has been acting recklessly since the crisis developed. The bank is all too well aware of the intense scrutiny of its operations by both the FSA and the Bank of England—to say nothing of the Treasury. I insist that the arrangements obtaining for the bank’s operation in future will make it clear that it will have to operate within procedures that are satisfactory to the Government.

I understand the point made by the noble Lord, Lord Higgins—will the bank be able to act in a reckless way, the moral hazard having been taken away by government action? The answer is no. I want to assure the House that the terms on which the agreement will be drawn up and on which bidders will bid will make it quite clear that those who are directing the bank will be subject to governance over the way in which they conduct certain aspects of their activity.

My Lords, the opposition parties are right to hold the Government powerfully to account and ask penetrating questions about what is intended. But when I look at the situation and try to think of a better hole to go to, whatever the reason we are in it, I cannot. However, administration followed by a fire sale—no. As for temporary nationalisation then denationalisation, as someone who was responsible for nationalising an industry—possibly the last major one to be nationalised, the aircraft and shipbuilding industry—I cannot think of anything more troublesome, costly and time-consuming, and less likely to result in the effective management of the business. Those who are temporarily in charge will not feel able to take decisions that are needed lest it is contrary to their ability to sell the thing later and those who come in have entirely different ideas. I have seen this happen to the steel industry. It is not the best way.

My Lords, I would like to ask the Government more. Others have made Statements. I said to the Minister in a corridor discussion after the announcement on 19 November that if the Government are going to do this, they should share in the benefits, and they have done so. I would like the Government to say more about the scale of their equity interest in the current company to justify the high risk that they are taking.

My Lords, I am grateful to the noble Lord for introducing a note of clear realism into the options available. He has identified why the Government are pursuing this strategy. On the extent to which the Government, having produced such guarantees, will be able to reap rewards in the future, of course that is the basis for the discussions that will go on with regard to the bids. It will be made quite clear that the Government will have a share in the equity, which will enable them to gain from any potential success of the bank in the future.

My Lords, I have three quick questions—one on fees, one on the treatment of the national account and one on the term sheet. Starting with the term sheet, I did not hear the Minister give an answer to the pertinent question asked by the noble Baroness, Lady Noakes, about whether the term sheet will be available. I can confirm from these Benches that we are very interested. Indeed, the more I think about it, the more I fancy having a whip round with a few of my friends in the City, raising a couple of hundred million and having a go. It is very important that this term sheet is made immediately available to any interested bidders. Otherwise, Mr Brown's mate Richard Branson is getting a clear run. It is very important that it is made available.

On the national accounts, the Statement stated:

“Any liabilities classifieds to the public sector would be temporary”.

What is the definition of “temporary” for this purpose?

Finally, on fees, Goldman Sachs points out that it is acting as financial adviser to the members of the tripartite authority only and is not responsible for anyone else. Clearly, the taxpayer will be stung with its fees. How much has it run up so far? What is the Government's current estimate? It is there any cap? What is the total cost of Slaughter and May’s fees and the other professional advisers? If the Minister does not know, would he please write to me by the end of this week?

My Lords, I will write to the noble Lord. I have additional information, but he should not hold out too much hope that I have a great deal that I am prepared to see in the public arena as early as that. The term sheet will certainly be produced in very short order. After all, as the whole House will appreciate, our bidders need to know the terms on which they can bid. That is different from saying that this should necessarily be fully in the public domain. After all, these negotiations will continue. The noble Lord will recognise our reservations about putting that into the public domain at such a sensitive time, given also the shortness of time in which we are operating. We expect these bids to be under consideration from 4 February onwards.

On the national accounts, we looked very carefully at the definition of what appeared on the public accounts balance sheet; it is for the Office for National Statistics to reach judgments on these matters. The Government’s intention is that the crucial areas of support should be reduced as rapidly as possible. When I say temporary, I cannot put a particular date on that. On Goldman Sachs and its fees, the noble Lord cannot expect that to be made public at this stage, but no doubt all these things will be public in due course.

My Lords, the Government are to be congratulated on having protected the depositors of Northern Rock. Given the fragility of the financial markets, and given that Citibank, Merrill Lynch and various others have made huge losses, it is not surprising that Northern Rock was in the same boat. Will my noble friend assure me that depositors’ interests will be given priority, and that the shareholders who have taken a punt on Northern Rock should not be treated at all kindly, because the first interest must always be depositors, and financial stability the second?

My Lords, I am grateful to my noble friend; he has accurately defined the exact principles on which the Government intend to act. The initial action was the decision to guarantee all investors in the bank when the crisis first broke. Shareholders have their role to play and their interests should be looked at, but it is quite clear, as I have indicated, that the guarantee to investors must remain a constant, absolutely fundamental, basis of the arrangements. Secondly, the taxpayers’ interests need to be safeguarded. As the noble Lord will appreciate, the position of the shareholders comes third, after those two considerations.

My Lords, the noble Lord helpfully made some comments about the Lloyds TSB proposals of a few months back. As he correctly says, these were not fully worked out proposals. The impression that was gained in public was that the shutters had suddenly come down on Lloyds’ ideas and that no attempt was made by the Chancellor to follow them through. Those proposals, if implemented in accordance with what was known about them, would have meant a much smaller sum of taxpayers’ money being put at risk, and would have tidied up the situation much more swiftly. They would also have avoided a great deal of the damage that has been done to the reputation of the City of London.

My Lords, the noble Lord has accurately identified the potential benefits of the proposal. The problem that faced the Government was that the proposal was not worked through fully enough for it to be a realistic runner. These were not circumstances where the Government were careless of the need to find an early solution; that is exactly what the Government sought to do in those dire days last autumn. As I indicated to the House earlier, I am afraid that Lloyds’ proposal simply did not meet the Government’s fundamental requirements at that time.

My Lords, perhaps I may ask the Minister about an additional point. There are many additional points that I would ask about, because the Statement has not been prepared or drafted with the usual excellence that one would have expected of a document coming out of Her Majesty’s Treasury. Although I have been a banker for some 34 years, I had great difficulty in understanding many paragraphs in the Statement; indeed, I am certain that it means something quite different from what it actually says.

The Statement says that,

“in the current circumstances, to attract a wide range of investors on acceptable terms that protect the public interest, a guarantee is necessary”.

How can a public guarantee protect the public interest?

My Lords, the noble Viscount will recognise the extent to which Northern Rock has been supported by the Bank of England loan and by government guarantee. That clearly safeguards the public interest; if Northern Rock had not been offered any form of support at all, the fundamental principle, as far as investors in Northern Rock are concerned, is that they would have been at grave risk of losing a great deal of their money and the implications for the financial system more widely is that instead of there being a controlled degree of financial instability, we would have increased it. It is easier now to suggest that that gain can be discounted, but the noble Viscount will recall the circumstance we were all in last Autumn and why it was necessary to prevent a run on banks that would have destabilised the financial system in a cruel way.

My Lords, I beg to move that the House do now adjourn during pleasure until 9.25 pm.

Moved accordingly, and, on Question, Motion agreed to.

[The Sitting was suspended from 9.22 to 9.25 pm.]