Vince Cable Quizzes Chancellor On Northern Rock

11.30.00am GMT Tue 20th Nov 2007

[Nov 19] . . Vincent Cable (Twickenham, Liberal Democrat): I do not know whether the Chancellor has been singing in the bath, but he does bear an increasing resemblance to the former Conservative Chancellor, Norman Lamont, who presided over a comparable financial disaster.

I want to focus on the £24 billion loan-£900 for every taxpayer-which is over and above the £18 billion deposit guarantee, which is less controversial and which we all support. The former Prime Minister, Tony Blair, was widely criticised for advancing £800 million for the millennium dome. In the past few weeks, the Government have provided the equivalent of 30 millennium domes to this bank, without even the prospect of a decent pop concert at the end of it.

The key question, which I put to the Prime Minister last week, is this: is the lending secured? He said that it was. Will the Chancellor confirm, however, that that is not the case? Of the loan, £13 billion has a first charge security, although at a more relaxed standard than is normal; £11 billion, however, is wholly unsecured. Half the assets of the bank have been packaged up by a company called Granite, which is registered in the Channel Islands and has the first claim on the assets. The remainder is a collection of mortgages, many of which were advanced at the peak of the property market and are now of declining value. I therefore return to the question that I put to the Prime Minister, and that has been partially put to the Chancellor already. Will he stand up and give an absolute guarantee that the loan will be repaid in full, with full interest, within the lifetime of this Parliament?

Will the Chancellor also comment on the management of the company? Does not Mr. Adam Applegarth, who has just been dismissed, now have a pension pot of £2 million and various bonuses, which are underwritten by the taxpayer? Will the Government explain how they got into a position in which they have entrusted £24 billion to a management team that was discredited, that led the bank into its present crisis, and whose chief executive showed such contempt for his own bank that he sold his own shares to invest in a country estate and a Ferrari for his wife? That is not the only conflict of interest. An attempt is being made to sell the bank, led by the company. The company has a clear conflict of interest. It is in the interests of the directors and the management to maximise the taxpayer's contribution. The taxpayer's money is being used to prop up the bank, and to provide a profit opportunity for spivs in the City.

Let us consider the alternatives. The ideal outcome- [Interruption.]

Michael Martin (Speaker): Order. The hon. Gentleman must be allowed to ask his questions.

Vincent Cable: The ideal outcome would be the sale of the bank, as a going concern, to a private operator who could maintain the employment in the north-east and the brand, and repay the Government in full. It is clear from this morning's bids, however, that that is a fantasy and will not happen, which leaves us with two very unpalatable options. The first option is liquidation of the bank-putting it into administration-which I think we all agree would be a disaster. It would devastate the north-east, the shareholders would get nothing, and the Government would lose a great deal of money. Should not the Government therefore consider the other option, which is temporarily assuming full control of the bank? That would eliminate the conflict of interest, it would provide a breathing space enabling- [Interruption.] It would provide a breathing space- [Interruption.]

Michael Martin (Speaker): Order. I must now stop the hon. Gentleman.

Alistair Darling (Chancellor of the Exchequer, HM Treasury): I note that over the weekend the hon. Gentleman changed his position on Northern Rock several times. On Saturday he was calling for full-scale nationalisation, by yesterday he was calling for reluctant nationalisation; and today it was reluctant nationalisation for a very short period. This afternoon, having denounced the City, he went on to press for a quick sale to the very people whom he had denounced.

I understand full well that the board and the shareholders have a particular interest with regard to Northern Rock-I made that clear in my statement-but we, the Government, have an interest in protecting not just financial stability but the taxpayer's money that is being lent. The reason that we insist on our interests being upheld is that we would have to agree with any proposal for the future of Northern Rock. If we do not like a proposal, we can say no to it. We can veto it because, through the Bank of England, we are by far the major creditor.

I believe, however, that simply plumping for one solution today-and presumably, by extension, not bothering even to consider any of the expressions of interest that have been received-would be extremely short-sighted and foolish. Would it not be better to use the time that we have to establish whether those expressions of interest can be translated into a firm proposal that would both help the company and, crucially, protect the public interest? I think that that would be far the better course, and it is the one that I propose to pursue.

[ends]; snagged from: http://tinyurl.com/yqjcbw

See also Vince Cable's article in the Guardian, Nov 20,: ' . . Second, emergency lending has been advanced at a rapid rate without, it would appear, consistently strong security. As much as £11bn appears to enjoy no security beyond a hopeful expression of faith in the assets of the bank. But half the bank's assets have already been pledged elsewhere (to Granite, an entity with a Channel Islands address), which has packaged up a lot of the bank's mortgage assets. Much of the remaining collateral consists of mortgages that were advanced at the peak of the housing boom and whose value is now in question.

. . Another possibility which I believe must be seriously considered is for the government to take the bank over, temporarily. It can thereby stabilise the position, avoid being held to ransom by fortune hunters in the City or the shareholders. Public ownership would also create time for an orderly sale, either through flotation or to a mutually assured Northern Rock, operating as it did in happier times before conversion.

Anyone advocating this option can be pilloried, as I have been, as an advocate of old-fashioned nationalisation. I am frequently described as an Orange Book Liberal Democrat, for whom this is an improbable criticism. I don't believe in general that governments should be running banks. But both in the UK and the US this approach has been used before to safeguard the public interest. There are tough options to be faced, and a period of public ownership may be the least worst option available. It is a test of Gordon Brown's and Alistair Darling's political maturity, as well as their financial competence, as to whether they can navigate through this dangerous crisis without ideological preconceptions getting in the way.'

Snagged from: http://www.guardian.co.uk/commentisfree/story/0,,2213858,00.html