Banking (S.I., 2008, No. 432)

I shall not repeat all the arguments about the history of the nationalisation of the bank, which we have heard several times before. I simply reiterate our basic position. We believed from the outset that temporary public ownership was necessary and inevitable once the Government had made large-scale loans and guarantees, and it was certainly preferable to a bad private sale, which is what was on offer. On that point, I noted from several interventions from those on the Conservative Benches flattering reference to the Bear Stearns arrangement as a private sector solution. It was not a private sector solution at all. It is underwritten by $30 billion of American Government guarantees. What was impressive about it was the speed with which it was negotiated, but it was a public sector solution to a private sector problem and it remains so, albeit under private ownership. If people are looking to the United States for inspiration, the extent of the taxpayer commitment in the United States in terms of underwriting mortgage securities is far greater than any that has been undertaken in this country. We can admire the speed with which the crisis was handled, but let us not try to pretend that it was in any sense a private sector solution. It was not. Because of the time constraints and because we have been over the historical ground before, I shall pick up a few points which are relevant from today's information from the accounts of the company, and make some reference to the business plan, which we have in rather skeletal form, and some brief reference to the quality of the assets of the company. I agree with the point that the hon. Member for Fareham (Mr. Hoban) made. I have for a long time shared his doubts about the quality of the loan book. Now we are hearing anecdotes about it, although we have no hard and fast evidence on that subject. As far as the accounts are concerned, one thing to emerge clearly from the balance sheet is the very rapid expansion of lending that took place last year, from £87 billion to £99 billion. We now have that in black and white. Much of it was undertaken in the earlier part of last year; there was a rapid spurt in mortgage lending growth at the approach to the peak of the market. That, of course, is the source of all the problems that the bank subsequently got itself into. There is a link between that and the issue raised by the hon. Member for Hayes and Harlington (John McDonnell) in an intervention about the remuneration of the senior executives responsible for that spurt in lending, which was the source of the problem. I note that the accounts refer to the fact that Mr. Applegarth's payments are substantially less than what he would otherwise have been due on the termination of his employment. I would love to ask him what on earth he would have been paid if the thing had turned out well—he has got £750,000, plus a cheap loan, plus a £2.5 million pension pot as reward for failure of the most abject and embarrassing kind. The Minister is right: not a great deal can be done about something that was undertaken when the bank was under private ownership and that is now subject to contractual arrangements. However, it sends the most appalling signal—not just to the work force, but to the shareholders who have lost everything. We need at least to record that. The other thing that the balance sheet brings out is the size of the Bank of England loan, which is £28.5 billion. It is the first time that I have seen the figure in black and white. One of the problems has been that in the past we have had to deduce the figure indirectly from the accounts of the Bank of England. It is very odd that the Bank refuses to disclose that important piece of information and that we have eventually got it in precise terms from the balance sheet of the company. That is an odd approach to freedom of information, and I hope that it will be rectified. The other issue, which has already been touched on several times, is the profit and loss account, the summary and the operating and financial review, and the deterioration that took place between the £626 million profit and the £167 million loss. Several items are worth commenting on. For the most part, we are talking about exceptional items. There is a very large sum—£127 million—for non-recurring administrative expenses, and a large chunk of that is for professional fees. I do not know whether the Chief Secretary is responding to the debate, but if she is, will she explain the process by which the professional fees of the lawyers and advisers have translated through to the bank? As I understand it, the Treasury was given bills of something in the order of £75 million from the various bidding parties—Goldman Sachs and others. Some of those have been accepted and some rejected, but it seems that as much as £50 million may well have made its way to the company. It would be useful to have some reassurance that the more outrageous claims have been pruned out—because some of them were outrageous. The largest quantitative sums were the impairment charges, which were £658 million. That sounds like an awful lot of money, but it is a great deal less than 1 per cent. of the assets. Given the doubts that are now beginning to creep in about the quality of the assets, the figure strikes me as conservative rather than very large. A second set of questions relates to the business plan. The hon. Member for Fareham made the right points on that: there is clearly a tension between the attempts to get taxpayers' money back as quickly as possible and preparing the company for eventual sale. If the two objectives are not in direct competition, they are certainly in tension. I understand that the current management are redeeming mortgages and realising cash from that, and also trying to sell them on to other banks; inevitably, the better-quality mortgages are being sold on. That raises the issue of whether the latter stages of the repayment of the taxpayer will be achieved. The question that we need to answer is about not merely whether there is a general commitment to repay the taxpayer by 2010, but what the specific staging posts are, and how much we can expect to be repaid and when. The third set of points relates to the quality of the assets. My understanding of this has advanced a little since our previous debate, much of which centred on Granite. There was concern that the Granite mechanism potentially transferred into the Granite vehicle the bank's better-quality mortgages. When I talked to the new chairman about this—I think it is public knowledge and I am not breaching any confidentiality in the conversation—he sought to reassure me that there is a computer model at the bank that ensures that the mortgages that go into Granite are chosen entirely at random, so they are a mixture of good and bad. If so, there may well be problems with Granite but they will not result in the sort of cumulative impairment that we were worried about. None the less, there are clearly problems with many of the mortgages that were advanced last year, and I would expect the repossession problem and the difficulties flowing from that to get progressively worse over the next year or so. Let me say a little about a controversial matter. Several of us have had e-mails during the day from shareholders who see this transfer order as a mechanism for raising again the issue of compensation. I support the Government's view that the argument that there needs to be some kind of fair settlement in the direction of generous compensation is unrealistic. The simple fact is that the valuation of the shares before nationalisation was based almost entirely on artificial Government support, and it is unrealistic to expect substantial compensation in those conditions. The hon. Member for Fareham talked about the helpful certainty of the Bear Stearns compensation. I am sure he followed that as closely as I did, but my understanding was that the shareholders were offered about 2 per cent. of the value of the shares and, after a lot of negotiation over a two or three-day period, that was increased to about 10 per cent. However, it was virtually wiped out. It is unrealistic and unfair to imagine that such rescues can be accompanied by generous compensation of shareholders. Last week, we had an indication of continuing problems in the financial markets. This is clearly not just a Northern Rock problem; many of the other banks are rocky as well. As has happened in the United States, we will get continuing pressure from the rest of the banking system for the public sector to take over the risks and for it to retain the potential upsides of any improvement. The Governor of the Bank of England is under a lot of pressure from the City and financial commentators to take over poor assets and poor mortgages in return for liquidity. He is absolutely right to take a strong line on that. I believe that the Bank of England's position has changed slightly and it is now willing to accept mortgage assets in return for liquidity while insisting that they are of very high quality.