Rt Hon Lord Lilley

    Date of Proceeding: 19.02.2008
    Reference: 472 c207-8
    Member: Lilley, Peter
    Title: Banking (Special Provisions) Bill
    Description: The Government spent five months or more in prevarication before putting a Bill before the House. In so doing, they were primarily driven by political considerations. They were determined to avoid the current outcome if possible-and not simply because they thought that it would be bad as far as managing Northern Rock was concerned. Above all, they thought that it would be bad for the Labour party’s image to be associated with nationalisation, hence the fact that even now they try not to use the word. That is a bad reason for long delay, but the Government are making a virtue of the delay, saying that it was good to consider all options, and that essentially there was no hurry.

    There was no hurry until Sunday. Suddenly, on Sunday, it was essential to do everything in a day. Why? Again, I suspect, it was not because of any need on the part of the company. No detailed indications have been given by Ministers as to why the rush is necessary. The real reason is political. Because of the huge embarrassment of a Labour Government-a supposedly new Labour Government-reverting to the mechanism of nationalisation, they have decided to ram the Bill through in a day and minimise any discussion that we can have and the ensuing publicity in the press.

    Was that necessary? No, as we know from the experience of Rolls-Royce. The Rolls-Royce Bill was more specific, and although it did not take a hugely
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    long time to complete its passage through Parliament, it took longer than the Banking (Special Provisions) Bill will take. It was not necessary for the then Government to dress it up as a Bill to take over the whole of the aerospace industry; they made it a two-clause Bill to take over Rolls-Royce. There has been no explanation from Ministers about why a similar procedure has not been followed today.

    Those were five wasted months because all that time Ministers could and should have been planning the tentative business model that would be adopted under nationalisation, administration or a Bank of England-led reconstruction. We are not told what the business model will be, not even in the broadest outline-whether it is one of growth or contraction, consolidation or business as normal. Nor have the Government spelled out how they will deal with the problems of competition and competition law. So we have had five wasted months, then suddenly one shameful undemocratic day of ramming the Bill through Parliament.

    I shall say a little about the lessons in prevention and regulation that emerge from the issue. The problem arose because of the marketing of sub-prime mortgages through special investment vehicles. That triggered the closing of the market on which Northern Rock relied, and raised fears about Northern Rock itself because it was thought to be involved to some degree in that business. When such problems arise, we ought always to look elsewhere and see where they have not arisen and why.

    Spain is a notable exception. No Spanish banks have any of the problems that I described. No Spanish banks have reported losses from sub-prime loans. Despite the fact that the Spanish property market is overheated and will probably cause problems of its own, Spanish banks did not suffer from the problem. Why? It is because Spanish banking law, as a consequence of past problems of failure to consolidate off-balance sheet debt, insists that all such debts and obligations are consolidated and revealed. There is a lesson for us there, but nothing in the Bill learns from that and makes sure that we do not suffer from those problems in the future.

    The regulatory approach adopted by the FSA appears to need to change. There are two possible approaches for a regulatory body. One is to be essentially routine-to consider every case in the same way and adopt a box-ticking approach to regulation. That is what regulators will do if they are left to their own devices. What they ought to be doing, however, is focusing the bulk of their effort on areas where there is some reason for concern.

    There was some reason for concern in Northern Rock. It was pursuing a very unusual policy. It increased its loan book by 50 per cent. in a year at the peak of the market. It offered the lowest mortgage rates and some of the highest interest rates. It offered 125 per cent. mortgages. It has, I believe, £1 billion of unsecured debt on its balance sheet. We are assured none the less, on the say-so of the FSA, but with the endorsement of the Chancellor, that it has a fine, high-quality loan book. I wonder whether he stands by that. In response to my question yesterday about why, if Northern Rock has a high-quality loan book, it is the
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    most active in the field of repossessions, he failed to restate his assurance that Northern Rock has a high-quality loan book.

    We ought to be examining the regulatory procedures and learning from abroad. One of the lessons from the Continental Illinois problem was the diagnosis that the regulator had relied on the information and procedures supplied by the bank for auditing its loans. I rather suspect that the FSA did much the same and the Chancellor no better, but we ought to establish procedures that look for a problem, rather than ask for reassurance from the management.

    Mr. Redwood: Was it not an international and global problem and was not the regulatory failure the failure of the Basel agreement, which said to every bank, “Go for growth off-balance sheet. Go to growth by securitisation”, in order to ensure less regulatory capital for that route?

    I am sure that my right hon. Friend is right, but it was possible to stand out against that, as the Spanish authorities did, and all credit to them.

    We need to know more from the Government about the quality of the loan book and about the reason for the relatively high level of repossessions by Northern Rock compared with any other high street bank before we go ahead and authorise the public sector to take on huge obligations permanently through nationalisation.

    The Conservative party is clearly opposed to nationalisation as the normal way of running large businesses. We are not absolutist about that. I revealed to the House the other day in another debate that I was probably the last Minister to nationalise anything. I had to do so after Saddam Hussein invaded Kuwait. I nationalised all the Iraqi Government-owned assets in this country. It took me five minutes to make the decision, not five months, and I was dealing with the problems created by the leader of an enemy Government rather than the leader of my own, which I appreciate is the problem that the Chancellor has had to put up with.

    There is not a strong case for the nationalisation to which the Government have finally resorted, because it gives rise to inevitable conflicts. With ownership come responsibilities, and the Government as owner will not be able to escape those responsibilities. [Interruption.] My hon. Friend the Member for Tatton (Mr. Osborne) in an admirably clear and forensic speech spelled out what we would do and why we would not do what the Government are doing, and I support him.

    I would be extremely reluctant to put myself in the position that the Chancellor will be in when it comes to the issue, for example, of repossessions. When he was in opposition and there was a serious level of repossessions in the 1990s, he urged institutions to exercise social responsibility. As owner of a bank that is most active in the field of repossessions, will he require his managers to exercise social responsibility? Yesterday he said no-he was going to take on the role of Pontius Pilate and tell the management to carry on.

    Severe conflicts of interest are created. The Chancellor is paying Mr. Sandler £1.2 million a year-the two top people between them £2 million a year-and asking them none the less to get rid of that profitable way of life rapidly. Will they really have an incentive to bring the bank back to private ownership speedily? Unless they think that they will continue in their role when it is privatised, perhaps not. Many conflicts will arise from the decision, which the Government have not thought through, which they are not giving the House the opportunity to consider, and which will mean that in the long run Northern Rock moves from being Northern Rock to a national millstone.