Northern Rock plc Compensation Scheme Order 2008

19:32:00

Lord Davies of Oldham
rose to move, That the draft order laid before the House on 22 February be approved.

The noble Lord said: My Lords, the draft order is made under Section 5 of the Banking (Special Provisions) Act 2008, which was passed last month. Under the provisions of that Act and of the Northern Rock plc Transfer Order 2008, Northern Rock was brought into a period of temporary public ownership on 22 February this year, with shares transferred to the Treasury Solicitor as nominee for the Treasury. Section 5 of the Act requires the Treasury to establish a scheme to determine the amount of any compensation payable to shareholders or to holders of share options.

The House will recognise the need for a fair and proper way of assessing the amount of any compensation that should be paid in those circumstances. The crucial point is that any compensation must be fair, which means that it should be based on a realistic assessment of the shares’ value without public support. Taxpayers should not be expected to pay compensation for value that would not exist without their support.

The Act therefore makes it clear that, in the assessment of the amount of any compensation, two assumptions must be made: first, that all financial assistance provided by the Bank of England or the Treasury is withdrawn; and, secondly, that no further public assistance, beyond ordinary market assistance from the Bank of England, would be provided. In addition, and as provided for by Section 9 of the Act, the order that we are considering today specifies that it should also be assumed that Northern Rock would be unable to continue as a going concern and would be in administration.

It is clear that, if it was not for the financial support from the Government and the Bank of England, not only would Northern Rock not have been able to continue as a going concern but it would have been placed in administration at best. As has been shown by the extensive search undertaken by Northern Rock’s management, with the support of the tripartite authorities, it was not possible to find a private sector solution that met our three principles, particularly that of protecting the taxpayer. If the financial assistance provided by the Government and the Bank of England had been withdrawn, it is clear that Northern Rock would not have been able to secure the substantial amount of alternative funding that would have been required. As a result, it is only fair to make the assumption, when determining the amount of any compensation, not only that public support has been withdrawn but that without that support Northern Rock plc would not be a going concern and would have been placed in administration.

As well as those assumptions, the order sets out that the amount of any compensation payable will be determined by an independent valuer appointed by the Treasury. We intend to advertise for expressions of interest in that position shortly, if the House agrees to the order. The Treasury will then make an appointment in consultation with the Institute of Chartered Accountants in England and Wales. We will of course be looking for someone who is independent of all interested parties, with extensive company valuation skills and the ability to handle the range of relevant stakeholders.

Once an independent valuer has been appointed, they will need to appoint staff and decide on the process to be followed. The valuer will then come to a decision on the amount of any compensation payable, based, of course, on the assumptions that I spoke about a moment ago. Once that assessment has been made, anybody who is affected will be able to ask the valuer to reconsider his or her determination and a revised assessment will then be made. Anyone affected who is dissatisfied with that revised assessment will then be able to refer the matter to the Financial Services and Markets Tribunal.

I hope that I have explained clearly the background to the order and its purpose. As I said, it is right that we should establish a fair way of assessing the amount of any compensation payable to people who have lost their shares or had their share options or certain other rights extinguished as a result of the transfer. Any compensation must be fair and must not overvalue Northern Rock on the basis of public support. Without that support, Northern Rock would not be able to continue as a going concern and would be in administration. If it had not been for the Government’s support since September, that would have been the case long ago and it would certainly have been the case when the transfer was made.

I therefore believe that this order is the fairest way forward. It is fair that the value of any compensation should be determined by an independent valuer, but only on the assumption that public support was no longer available. This order allows for that to happen in a clear way, with opportunities to seek review of the valuer’s decision, and I hope that the House will support it. I beg to move.

Moved, That the draft order laid before the House on 22 February be approved. 12th Report from the Joint Committee on Statutory Instruments, 11th Report from the Merits Committee.—(Lord Davies of Oldham.)

Baroness Noakes
My Lords, I thank the Minister for introducing this order. We are not allowed to debate the main order which took Northern Rock into public ownership because the Government rejected the wise advice of the Delegated Powers Committee and insisted on the use of the negative procedure which means that even if a prayer to annul that Order were passed, it would be of no legal effect.

The Government did accept that the compensation orders which could be made under various sections of the Banking (Special Provisions) Act 2008 would be subject to the affirmative procedure, which is why we are here this evening.

The Merits of Statutory Instruments Committee of your Lordships’ House has drawn the attention of the House to the orders on the grounds that they give rise to issues of public policy likely to be of interest to the House. We are always grateful for the observations of the excellent Merits Committee, but I think that in this instance we were fully alive to the fact that this is not an order merely to be nodded through.

I will focus my remarks on Article 6 of the order which lays down the valuation assumptions that the valuer is to use and restricts the valuer quite considerably. I would like to probe with the Minister why the Government chose to include Article 6, as well as what the Government intend to be the meaning of the Article.

Section 5 of the Act makes it clear that in determining compensation it must be assumed that all financial assistance provided by the Bank of England or the Treasury has been withdrawn and that no future assistance would be provided—apart from ordinary market assistance. The Minister has already referred to that. If that were the only guidance available, a valuer would then have to see whether and to what extent any alternative sources of funds would have been available.

From what little the Government have chosen to put in the public arena about the prolonged and abortive sale negotiations, it appears that there was no deal on offer which could have seen Northern Rock going forward without special financial assistance from the Bank of England or the Government. Therefore, if Treasury or Bank financial support were withdrawn, the likely next step would have been for Northern Rock to be placed in administration. It is not clear beyond peradventure, however, that Northern Rock is not a going concern in some form. Indeed, we must assume that the Government’s rationale for installing the expensive team led by Mr Sandler was to deliver an ongoing viable business. In that light, will the Minister say why the Government put Article 6 in the order, which requires the valuer to assume that the company is in administration and is not a going concern, rather than leaving the valuer to reach a judgment on the basis of the facts as they found them? Is the paragraph concealing some facts about the financial position of Northern Rock that would be relevant to a valuer but which the Government do not want in the public domain, in particular in relation to the “going concern” nature of the business?

I turn to the detail of Article 6. I could not find a definition of the term “in administration” in the order, though I assume that the Government intend this to mean an administration within the Insolvency Act 1986 as amended by the Enterprise Act 2002. Perhaps the Minister could confirm that or indicate what the phrase is intended to mean.

As I am sure the Minister is aware, an administrator is required by the 2002 Act to perform his functions with the objective of,

“rescuing the company as a going concern, or ... achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration), or ... realising property in order to make a distribution to one or more secured or preferential creditors”.

Will the Minister explain how this definition of administration fits with Article 6 of the order? Does Article 6(a), which requires the valuer to assume that Northern Rock,

“is unable to continue as a going concern”,

mean that our hypothetical administration must ignore any possibility of,

“rescuing the company as a going concern”,

as set out in the 2002 Act?

If the valuer must focus only on the second two legs of the 2002 Act—namely, achieving a better result for creditors as a whole or realising property for secured or preferential creditors—will the Minister say what this means in practice? I presume that achieving a better result for creditors might involve some corporate restructuring and creating positive value, which could in turn be sold as a going concern. That may be what Mr Sandler is now working on. I hope that the Minister can shed some light on this, both for the House tonight and for the benefit of the valuer when he or she is appointed and starts work.

Whenever we in this House or my honourable or right honourable friends in another place raised the possibility of administration as an alternative to nationalisation, government Ministers always characterised administration as equivalent to a fire sale—the Minister has used those terms. We never believed that insolvency law provisions relating to administration could or should be seen in such a simplistic light, and I hope that the Minister will tonight confirm that the Government’s use of the assumption of administration in Article 6 is not intended as an instruction to the valuer to perform a fire sale valuation.

I hope that the Minister can also answer a question which is relevant to any valuer and to your Lordships’ understanding of the company, which is now in public ownership. When will we be allowed to see the business plan of Northern Rock? I understand that the plan must be submitted to Brussels by next Monday, and so it must be ready or very nearly so. During the passage of the Act, the Minister referred to:

“The bank’s business plan, which will be developed in the coming weeks and must be agreed with the Government”.
 

He went on:

“I can commit to keep the House fully informed as that planning work reaches a conclusion … a strategic plan will be communicated to the House in due course … there certainly will be no delay”.—[Official Report, 21/2/08; cols. 301-02.]
 

We have not yet seen the business plan.

While we are on the subject of commitments made during the passage of the Act, perhaps the Minister will also tell the House when noble Lords may see the framework agreement which is to set out the Government’s relationships as both shareholder in and lender to Northern Rock. On 21 February, the Minister told my noble friend Lord De Mauley that the framework agreement would be published “as rapidly as possible”, but I believe that, three weeks later, it has not yet seen the light of day.

The Minister will know that the small shareholders, many of whom will have acquired their shares as members of the demutualised Northern Rock Building Society, feel aggrieved by Article 6. They have been confused by repeated assertions by the Government that Northern Rock was a going concern, with a good-quality loan book, and that it was solvent. The shares in Northern Rock continued to be traded on the London Stock Exchange until the Government finally announced their intention to nationalise it. The closing price before that announcement was 90p. Will the Minister put on the record for those small shareholders why the Government are taking away their shares on the basis of assumptions which are at odds with their repeated statements about Northern Rock during the autumn? Will the Minister explain to them how 90p compares with the valuation that they expect to be produced by their Article 6 assumptions?

The Government showed disdain for small shareholders when they nationalised Network Rail—the Minister’s noble friend Lady Vadera famously referred to them as “grannies in blouses”. I hope that the Minister will tonight eschew that disdain and set out fully and for the record why their chosen valuation process is fair and reasonable for small shareholders.

19:45:00

At the other end of the investor spectrum are sophisticated international investors, including hedge funds, and they are equally unhappy about the valuation basis. All of us doubtless read in the weekend newspapers about the legal actions that they are contemplating, including human rights challenges and judicial review. I would not expect the Minister to be able to comment substantively on that today.

However, I would like him to deal with a rather more generic issue which may have a bearing on the compensation settlements. Will he confirm that the UK has entered into a number of bilateral treaties with the aim of protecting investors from the effects of expropriation? Many of these treaties—I believe that there are about 85 in total—are with developing countries, and I expect that the driving force behind them was the desire to protect UK investors from foreign expropriation. But the treaties are bilateral and hence protect foreign investors in the UK in the same way. For example, one of the treaties is with the Hong Kong Special Administrative Region, which still has a dynamic financial community and is home to many hedge funds. Investors who bought Northern Rock shares through Hong Kong entities may well be able to use the bilateral treaty compensation principles which provide, in Article 5, for compensation based on,

“the real value immediately before the deprivation or before the impending deprivation became public knowledge whichever is the earlier”.

That seems to set at 90p a compensation floor for any investors who can take advantage of such a treaty, but there will be a lot of scope for arguing that the “real value” referred to in Article 5 has to eliminate the extent to which the threat of nationalisation was already embedded in that price. A figure of £4 per share has been talked about in the press, but there are other plausible values—perhaps a pre-credit crunch value of £8 or £9 might be argued for. I do not expect the Minister to comment on these values.

The crucial point about these bilateral treaties, on which I should value the Minister’s comments, is that disputes about compensation bypass the UK courts completely. For example, Article 8 of the Hong Kong treaty to which I have referred states that, if no settlement is reached, there is to be arbitration under the arbitration rules of the United Nations Commission on International Trade Law.

Have the Government considered the impact of these bilateral treaties? Do they believe that it would be tenable to have two or more incompatible valuations proceeding in respect of the same class of shares? Or, perhaps more pertinently, do the Government believe that they can get away with an internationally arbitrated value for powerful institutional shareholders while paying a smaller sum to a small shareholder in the north-east, resulting from Article 6 valuation assumptions?

I would now like to ask the Minister about the appointment of an independent valuer. As a member of the Institute of Chartered Accountants in England and Wales, I suppose that I should be flattered that that institute should be consulted. But, actually, I can see little point in this bit of the process, though it has been suggested that the Government needed the help of the institute to persuade people of quality to consider the job because of the reputation risk involved.

Of much more importance is how the valuer will be selected. I hope that the Government will not think about making this appointment without a competitive tender. That is not the same as an “expression of interest”, which is the phrase the Minister used when introducing the order. This contract will be valuable to the person appointed and his or her firm. The valuation process will doubtless drag on for years as all appeal avenues are exhausted—and time costs money . How will the Treasury determine value for money if it has not carried out a competitive tender?

The Minister would not expect any debate on Northern Rock to take place without some reference to Granite. The Government have not explicitly included Granite within the nationalisation order, as has been debated at some length. The Chancellor asserted in his letter to Mr Vince Cable that:

“Granite and only Granite is liable to its bondholders under any scenario. The Government have not provided any guarantee arrangements to Granite's bondholders”.

It now appears that the Government were being economical with the truth. The analysis by the Office for National Statistics given last week to the Treasury Select Committee in another place is as follows:

“The securitisation structure leads ... to the financial risks and rewards associated with [Granite's] assets remaining with Northern Rock plc”.

Since Northern Rock plc is owned by the Government, Granite’s liabilities are now de facto those of the Government. Will the Minister confirm that this valuation process cannot ignore Granite, and, indeed, will have to reflect the full amount of Granite’s assets and liabilities?

Since we are talking about the liabilities of Northern Rock, will the Minister confirm—what has been widely reported in the press—that the Chancellor in his Budget statement tomorrow will try to ignore or footnote Northern Rock's liabilities? The Minister may try to wriggle out of this and tell me to wait until tomorrow. But the Minister will know that if the Chancellor does try to ignore the fact that Northern Rock’s liabilities are those of the public sector, as the ONS has already determined, he will be unmasked as the biggest fiddler of figures of all time. His predecessor, the Prime Minister, was adept at cooking the books but never on such a large scale.

Our party’s plans are for independent auditing of fiscal rules which would stop any such cynical manipulation. We look forward to the day when we can restore decency in government reporting.

Lord Newby
My Lords, the discussion so far has rightly concentrated on paragraph 6 of the order before us. I cannot match the erudition of the noble Baroness, Lady Noakes, on the definitions used in that paragraph, but surely the reality those words reflect is that without government intervention Northern Rock would have gone bust in September of last year. Therefore, is not the effect of that, and of those assumptions, to value the shares at zero? If that, as it appears, is the case, I would be grateful if the Minister could say a bit more about what he envisages the valuer doing. Why does he need staff to do it? How long is it going to take to do it? And how much is the process likely to cost?

The Minister may recall that my colleague Vince Cable pointed out at an early stage that if the Government had only taken his advice on nationalisation, they would have saved millions of pounds in fees for Goldman Sachs. In order not to make the same mistake again, will the Government accept an offer from my noble friend Lord Oakeshott to value Northern Rock shares for nothing, and to do so extremely quickly?

There has been much speculation about legal action. Shareholders, both small and large, have contemplated legal action. I suspect that for the hedge funds they have to proceed with legal action to cover the fact that they made a huge bet and lost. For small shareholders, it seems to me that legal action poses a number of risks. First, they are, understandably, very frustrated at the situation in which they find themselves. Whether or not the shares are valued at nothing, they are clearly going to be valued at virtually nothing. They quite understandably are, first, looking to see who to blame, and, secondly, against whom they have a course of action. It seems to me that there is a real danger that they may go down a legal route and put in a lot of money pursuing legal avenues which are offered to them by unscrupulous lawyers who see this as a way of making a significant amount of fee income. I hope very much—I do not expect the Minister to comment on this; it is obviously up to small shareholders to decide what they are going to do—that they are dissuaded from spending significant amounts of their own money on legal actions which are almost certainly bound to fail.

The noble Baroness, Lady Noakes, asked the Minister about two documents which featured quite large in our debates on the nationalisation Bill. The first was the framework agreement. The framework agreement is, as it were, the instructions from the Government to Ron Sandler about how they want Northern Rock to  be run. It is not the business plan. When we were discussing the matter with Ministers and officials on the day of Second Reading, we were given the impression that this document was virtually completed and that it might be ready for scrutiny by your Lordships when we came to Committee stage and took the Bill through the following day. That was, bar a day, three weeks ago. As the noble Baroness, Lady Noakes, said, we find it extremely surprising that what must be, by definition, a short document—possibly it has not been concluded—has not been put in the public domain. We feel that the Government gave the House the impression that this document was ready to be put in the public domain within days of our discussions, if not hours, and it would be very interesting to know why that framework document has not hit the Library at least.

The second document is the business plan. As the noble Baroness said, we understand that that has to be submitted within the week. I would again like to have an assurance from the Minister that when that business plan goes to Brussels it will be available for public scrutiny.

Finally—it is almost like a coda to any discussion on Northern Rock—the noble Baroness raised a big issue about Granite and the fact that the ONS has been able to give a degree of clarity about Granite which Ministers, either by accident or design, have completely failed to do on the Floors of both Houses and in the letter sent to my colleague in another place, Vince Cable. Perhaps I may repeat her questions. Will the Minister confirm that ONS has decided that all the assets of Granite will be included in the Northern Rock debts which will sit on the Government’s books, and that the total amount is therefore in the order of £90 billion? There is still a reasonable amount of confusion about a number of aspects of Granite, but if the Minister could at least give confirmation about that issue, it would be one less area of confusion to which we would need to return in the future.

Viscount Trenchard
My Lords, I am also grateful to the Minister for the opportunity to debate this order. I agree very much with what my noble friend Lady Noakes and the noble Lord, Lord Newby, have said, so I will be brief. I would like to make one or two additional points.

Although we are grateful for the Opposition to debate the order on compensation, it is a great pity that your Lordships’ House and another place have been denied the opportunity to debate under the affirmative procedure either this main transfer or a further main transfer. I am extremely disturbed that the taxpayer is therefore at risk that, without any scrutiny by your Lordships' House, it would be possible that an equivalently large financial institution could be taken into public ownership under the order.

20:00:00

As the noble Lord, Lord Newby, correctly said, Northern Rock would have gone bust without the Government stepping in to nationalise it last autumn. However, as your Lordships know, there was a serious  approach by a major financial institution. Although the Minister has told us that no serious proposal was ever received, it is clear to me that if the Government had responded with more positive indications of the kind of financial support they would have been prepared to give to an inquirer at that time, it is extremely likely that that institution would have come forward with a firm proposal.

Much has been said about the subject of Granite and I do not want to repeat what many noble Lords have already pointed out. However, it is clear that Granite should have been included in the nationalisation. Note 22 to the consolidated accounts of Northern Rock at 31 December 2006 says:

“Although the Company has no direct or indirect ownership interest in these companies”—

that is, the “SPEs”—

“they are regarded as legal subsidiaries under UK companies legislation”.

If they are regarded as legal subsidiaries of Northern Rock plc, that means that they are clearly legal subsidiaries owned by the shareholder of Northern Rock plc; that is, the Government.

I should like briefly to address the question of the Government's adviser, Goldman Sachs. I feel that the public have not been informed enough about the basis on which Goldman Sachs was appointed as adviser to the Government, what its remit was, or indeed whether it was paid a success fee. In other words, was the ultimate decision on the solution for Northern Rock regarded as a success or not? I wonder whether the selection of an independent valuer under this order will be subject to a similar kind of process as the appointment of the Government's investment bank advisers.

I should like to comment on the Northern Rock Foundation. Like my noble friend Lady Noakes, I do not understand why it was necessary for the Government to convert the foundation shares. In any event, the Government have committed to continue to pay charitable donations from Northern Rock—or they have required the new Northern Rock management to continue to pay, regardless of whether it makes a profit, £15 million in each of the next three years to the Northern Rock Foundation. I rather wonder why. I do not for a moment wish to suggest that the charitable causes in the north-east and in Cumbria which have been supported by the Northern Rock Foundation are not entirely worthy. Indeed, as the former chairman of Northern Rock pointed out in his chairman’s statement in 2006, Northern Rock was the third most charitable FTSE 100 company. But why should the taxpayer, who already makes his own decision about which charities he supports, be bound by that?

I can well understand why the former management needed such a potent poison pill to protect itself against takeover, which I understand was the purpose of the establishment of the Northern Rock Foundation and the obligation on the company to pay 5 per cent of pre-tax profits to the foundation, but I do not think that it is right for the taxpayer to bear this additional obligation and burden—insignificant though it is in comparison with the vast liability and obligation which the taxpayer has taken on—to pay £15 million a year to the Northern Rock Foundation.

The valuer must of course provide for the public interest to be entirely repaid before the shareholders receive compensation, but I am satisfied that that will be the case. But I ask the Minister to say a little about the Northern Rock Foundation and why—if the foundation is being preserved, and if Northern Rock under government ownership will continue to fund the privatisation although it does not need a poison pill any more—the foundation shares had to be converted to ordinary shares.

Viscount Eccles
My Lords, I am a member of the Merits Committee and, as it happens, of the Delegated Powers Committee. I do not intend to speak on the points made by either of those committees but shall start with a general point on this order.

In the Explanatory Memorandum, and indeed in the impact assessment, the Treasury has chosen to say, under “Policy Background”:

“The purpose of the Act is to enable the Government to act to secure the continued stability of the UK financial system”.
 

In the impact assessment, in answer to the question,

“Why is government intervention necessary?”,
 

the Treasury says,

“for the purposes of maintaining stability in the UK financial system”.

I suggest to the Minister that that was a mistake by the Treasury, because it is over the top. The fact was that a FTSE 100 company with a 7.5 per cent market share chose, at times when people were already issuing plenty of warning signals, to increase its market share to 20 per cent by underselling the market. When the history book is written, it will be shown that Northern Rock’s behaviour was in fact no threat to the financial stability of the UK system. To keep on telling the world that it was is not helping the British economy, the City of London or, indeed, the whole system of financial regulation which applies in this country.

I am fully aware—the whole House is—of the multiplicity of questions that the noble Lord, Lord Davies of Oldham, is expected to answer. But even when my noble friend Lady Noakes puts a ball right down the middle of the pitch, maybe with a bit of in-swing on it, heading towards the stumps, the noble Lord kicks it aside. It is true that in Oldham they do not recognise the LBW rule; they cry from the stands, “Give the lad a chance” and carry on with the game. The noble Lord is already facing a huge number of questions. There are 26 Written Questions in last Friday's House of Lords edition of Written Questions. Although none of them goes directly towards the compensation order, there is one tabled by the noble Lord, Lord Barnett, who is not in his place, to which I shall return later. But before that I should like to try to illustrate one or two of the difficulties of assessing the value of Northern Rock shares.

Article 3 of Part 2 of the order is headed:

“Transfer of Northern Rock shares”,
 

and refers to,

“compensation payable by the Treasury to persons who held shares … immediately before they were transferred”.

However, at the moment immediately before they were transferred they were suspended but there was an unofficial market in the shares. Between September—reference has been made to September already—and February, five months elapsed during which many changes in shareholding took place. Some of them were no doubt undertaken at the risk of the people who decided to buy. I declare an interest as a trustee of a charity that sold its small holding of Northern Rock shares for somewhere between £2 and £3 in the middle of the five-month period on the ground that it was better to be safe than sorry. So when the assessor reads Article 6(a), which states,

“unable to continue as a going concern”,

he will have to throw his mind back to September because in February Northern Rock was a going concern because the Bank of England had lent it a lot of money. There was no doubt that it was trading and the directors had not issued any statement to the effect that it was not a going concern. So it was only in September last year, on the assumption that the Bank of England did not lend Northern Rock money, that it would not have been at that time a going concern. I rather agree with my noble friend Lady Noakes that it is a pretty open question whether it would have been in administration. Nevertheless, the assessor has to try to determine what was thought by the market to be the value of the shares immediately before transfer when the Bill was already known about. What was the value of the shares back in September according to the assumptions in this order and what about the market in the shares in the five months between the one event and the other? I think that somebody will argue that there was a false market on occasions during those five months.

As regards the 26 Questions, I return to the one which is relevant to the order; namely, that of the noble Lord, Lord Barnett,

“to ask Her Majesty’s Government whether they will publish the due diligence undertaken on Northern Rock”.

I dare say that the noble Lord, Lord Davies, will say, “I shall answer that question when I have to. I do not have to answer it this evening and I am not sure what the answer will be”. However, I believe that the assessor will need to know what was the due diligence done by the Bank of England and the Treasury which led to the decision that the Bank of England would lend money and that the Treasury would guarantee the depositors. I do not see how you bridge the gap between last September and February and the matter of compensation without understanding the work that was done then. Of course, the noble Lord, Lord Barnett, may also have in mind the due diligence done by Virgin and Goldman Sachs’s reports on due diligence. We have asked before when Parliament will know about the due diligence. Will it ever be published and, if so, when is that likely to be?

Finally, I reinforce the point made by the noble Lord, Lord Newby. Exactly how long is this process expected to take with the valuation, the questioning of the valuation and perhaps an appearance before the tribunal and the complications of different jurisdictions, which has already been mentioned? I am sure that Her Majesty’s Treasury will have given the Government an estimate of the length of time this will take. Are the Government willing to tell us what that estimate is?

20:15:00

Lord Desai
My Lords, whenever we discuss Northern Rock it is like Groundhog Day in that the same questions and assumptions turn up. People are desperate to understand what happened. For me it is straightforward. Had there been any chance of making Northern Rock work, sooner or later a private company would have found a plan that was acceptable to the Government. As regards what was alleged to have happened with Lloyds-TSB, even at the time it was clear to everyone—certainly to me—that it would not have got beyond first base under the EC rules on competitiveness. I do not think that anybody could take that bid seriously.

It is quite straightforward: the bank collapsed, the Government had to save it and now we are trying to pretend that it had some value independently of the circumstances. What we have seen in the market apart from Northern Rock are hedge funds such as Peloton, worth $3 billion one day and nothing three days later. We have seen what has happened to the Carlyle corporation, which borrowed 31 times its assets and is therefore about to go bust. If people do irresponsible things they will go bust, and if shareholders put their money in such companies they do not get anything out of it, whether they are in Hong Kong or elsewhere. If shareholders invest in a company that goes bust, they do not get anything out of it. It is not a case of the UK Government confiscating these assets; they are worth nothing. I hope that my noble friend will put the record straight. It is very difficult for the assessor to say in one day that the value is zero. One has to pretend that this is a rather difficult problem and at least take a couple of days over it. However, there is no great mystery about what the assessor has to do. The sooner that is done, the better.

Lord Davies of Oldham
My Lords, I am grateful to all noble Lords who contributed to the debate. As my noble friend Lord Desai indicated, we are covering some ground that we have traversed in the not too distant past. I accept entirely the cricketing analogy used by the noble Viscount, Lord Eccles, with reference to the noble Baroness, Lady Noakes. She is a specialist in reverse swing. She is able to perplex Ministers, and certainly myself, even when I think I am on secure ground, as I did on this occasion. However, it ill behoves him to upbraid Oldham’s British cricket connections. After all, it produced one of the finest England opening batsmen and captains of recent years, Michael Atherton. All I seek to do is keep bat and pad close together when I am dealing with these issues, not to disregard the rules of the game.

The noble Baroness began by asking about the valuation assumptions in Article 6, and she raised the issue of administration. We make it clear in Article 6 what has been the government position all along on Northern Rock. It is not a going concern, because only public support enabled it to get through the problems of cash-flow difficulties from the summer of last year. The first limb of the statutory objective for administration refers to the possibility of rescuing the company as a going concern. We are clear that the support that was given to Northern Rock, which has kept it going over recent months, has been a reflection of the fact that without that support Northern Rock would have gone into administration.

I know that the Opposition indicate that that would have been at very limited cost and that it did not necessarily mean a fire sale of the assets. It would certainly mean a far more difficult situation as far as Northern Rock is concerned than the one that we are facing at present because of the judicious action of the Government, after seeing whether the private sector thought that Northern Rock was a going concern. Without going into too much detail about the travails of the past, let us be absolutely clear that as far as Virgin was concerned regarding Northern Rock, there was a huge price to be paid in public support. The public did not get anything back until Northern Rock had made £2.7 billion profit. That was a reflection of the fact that as far as Virgin—a private sector company—committing its resources to Northern Rock was concerned, it did not think that it was viable to do so at that time without this huge underpinning government subsidy.

I rest my case there. It is quite clear that Northern Rock was not a going concern, and therefore we are asking the valuer to look at the issues against that background. Why against that background? I do not see how any noble Lord can seriously argue that the taxpayer should be underwriting additional value for the shareholders in circumstances where Northern Rock was not a going concern. Of course, the valuer has his job to do regarding the assessment of Northern Rock’s value. I want to reassure the noble Baroness that we will ensure a competition for the appointment of the valuer; I take on board her point that it is a valuable contract and it should be open to competitive tender. We intend that that should be so. Clearly, the valuer has a challenging role to play, and we all recognise that. It is not going to be done in a matter of weeks; it will be a long process. I indicated in my opening statement the rights of shareholders with regard to the valuer and his initial assessment and any potential challenge to that. They have also the right to go to the tribunal if they disagree with the valuer, so their rights are safeguarded in those terms.

The Government are determined that all shareholders shall be equal with regard to the position of Northern Rock. I have heard the reflections, which were also made in the other place, that certain international treaties will safeguard shareholders based abroad and give them more favourable treatment than other shareholders. First, that is not so. Secondly, in all equity, it ought not to be so. I cannot think of anything being less fair to the ordinary small shareholder. The noble Baroness began her remarks by saying that we should consider the small shareholders first; at least she considered them first in her representation. Nothing could be more offensive to the small shareholder than the idea that someone based abroad would be able to take advantage of bilateral treaties that were designed to—and this has been accurately reflected in discussion today—safeguard, on the whole, British taxpayers regarding regimes that can act on occasion in an extremely arbitrary and unfair manner. We can all think of illustrations where property has been appropriated without any recognition of obligations to others. For British shareholders, this is not the case as far as the United Kingdom is concerned. We honour our obligations and it will be appreciated that, in honouring them, we will be able to express before any conceivable court the fact that all Northern Rock shareholders are treated equally.

There is the particular position of the Northern Rock Foundation, raised by the noble Viscount, Lord Trenchard. The foundation is a special case; after all, it is a section of Northern Rock in which there are shares devoted to charitable purposes. If he is saying that the Government ought to have treated that position four-square with every other shareholder in Northern Rock, with no particular respect for the foundation, he indicates scant regard for the value of the Northern Rock Foundation’s charitable role. The Government felt duty-bound to guarantee £15 million a year for three years. This is not a massive sum as a percentage of what the Northern Rock Foundation enjoyed under the best years of the bank, but is nevertheless a figure that it could expect to receive in years of relatively poor activity. The Government would have been open to criticism if they had shown that particular charitable function of Northern Rock no regard whatsoever. The criticism would have been voiced in all parts of the Chamber.

The issue of Granite has raised its attractive head yet again. I emphasise once again that everyone knows the nature of the category of securitisation vehicle into which Granite falls. Everyone knows that these vehicles exist for other banks and building societies, in order that they should be able to realise value from mortgages more rapidly than they would over the duration of the mortgage period. It is quite clear that the Office for National Statistics regards Granite as being included in the accounts of Northern Rock. That does not mean that it is to be included in the liabilities to the Government, because the Government have not taken Granite into public ownership. They are not responsible for the debts to bond holders, who are the massive majority of shareholders in Granite.

Although it appears on the nation’s balance sheet at present, the issue that the noble Baroness has to address—as do her colleagues in the Commons—is not whether Northern Rock appearing on the public accounts together with Granite is an embarrassment to the Government. Let me say that it is a short-term embarrassment to the Government because the Government will resolve this issue in due course. It would be a greater embarrassment if the Opposition had to spell out how the resources—which now, in the national accounts, have to be devoted to Northern Rock on the debit side—would be withdrawn from the Government’s spending side. If the Government are being pressed to take account of Northern Rock in the national accounts in a matter of weeks, and therefore to take out of the Government’s spending pattern the very significant resources and obligations that Northern Rock represents, I can only say that the Opposition, not the Government, should answer the questions.

Baroness Noakes
My Lords, it is not for the Opposition to answer such questions, but we have never suggested that the inclusion of Northern Rock’s liabilities properly in the Government’s accounts would lead to either tax increases or expenditure cuts. We are asking the Government to report honestly on the effects of what they have done, which is to take Northern Rock into public ownership and, with it, all its liabilities, including those of Granite, thereby busting their own fiscal rules. That is the point we have been making and no other.

20:30:00

Lord Davies of Oldham
My Lords, I am grateful to the noble Baroness for rephrasing it in those terms—it has not always been expressed by opposition spokesmen in quite those terms in public print. However, I accept what she says and the answer, which I have already given, is straightforward: the taxpayer is not underwriting Granite and is not responsible for any losses which Granite might incur. That is the answer with regard to the bond holders.

The noble Lord, Lord Newby, pressed me further, as did the noble Baroness in her opening remarks, on the question of the timing of the business plan and framework agreement. I am grateful to him for distinguishing effectively between the two. The framework agreement traces how the relationships to Northern Rock will obtain in the future when Northern Rock is at arm’s length from the Government and is responsible for its own business plan. It is the business plan that has to be submitted to Brussels. We recognise that during the passage of the legislation there were constant calls for both the agreement and the business plan to be made public. That will be done all in good time. It is of course necessary that these documents come into the public domain, but it will be appreciated that at present the issues relating to the business plan have to be agreed with Brussels and we have to pass the test with the European Commission. The framework agreement will come into the public domain in the very near future and I cannot be any more precise than that.

Baroness Noakes
My Lords, during the passage of the Bill, the Minister used the words “as rapidly as possible” in relation to the framework agreement. Indeed, he implied that it might even be available before the Bill completed its passage through the House and then retracted from that. I do not understand why he is now using the time-honoured formula “as soon as possible”, which usually means some distance into the future. What is so difficult about publishing the framework agreement, which governs the relationships between government, shareholder, lender and Northern Rock? What is the problem with that? We will come back to the business plan as a separate matter but let us just deal with the framework agreement.

Lord Davies of Oldham
My Lords, these issues are not quite as easily resolved as the noble Baroness suggests. She will appreciate that we have one fixed date for this work—17 March in Brussels, or it may be 16 March but the House will forgive me if I am one day out. However, it will certainly be next week in Brussels, and that will help to dictate the time at which we make public the framework agreement.

The noble Viscount, Lord Trenchard, asked me about other aspects that should be made public. I think he will realise that there is a difference between the framework agreement, the business plan and the arrangement with Goldman Sachs. I have just had confirmed to me 17 March as the date in Brussels. The arrangement with Goldman Sachs was a private arrangement between the Government and the company for some very difficult work to be carried out, and I do not see how the noble Viscount can make out that the details of that need to be in the public domain at present. However, it will be appreciated that the Government believe that every arrangement should at some stage be in the public domain, and of course aspects of the Freedom of Information Act will guarantee that in any case.

The noble Viscount commented, as did the noble Viscount, Lord Eccles, on the process that the Government followed from last September. Of course the Bank of England carried out due diligence when it was proposing to lend £30 billion of the nation’s money, and a very thorough examination was carried out at that time. It will be recognised that since August last year—in fact, some time before that—the Treasury has been involved in intensive work on Northern Rock. I cannot give him the answer that I owe, first, to my noble friend Lord Barnett about how much detail I am able to identify on due diligence. If the House thought that the Government had entered into this enterprise with such significant national resources without being involved in due diligence on the survey of Northern Rock’s condition, that would be greatly underestimating the Government; they will be able to stand that test on any occasion when it presents itself.

On Question, Motion agreed to.