---

HM Treasury

My hon. Friend the Member for Gosport (Sir Peter Viggers) makes an extremely important point about treating the causes rather than the symptoms of the problem and removing the toxic liabilities from the banks, but nowhere is that addressed in the central Government supplementary estimate that we are considering. On the technical point that I raised with the Minister, I understand that the vast bulk of this is cash accounting, but if there is a resource accounting element that is not provided for, the whole thing might fall. I am sure that his officials have considered that, but I am surprised that only £1,000 was included, whereas perhaps it should have been, say, £10,000 to cover all eventualities. In the course of the next three hours, assuming that the debate runs its full course, we will write a blank cheque to the Government for £42.2 billion—an increase in the cash estimate for the year of nearly 10 per cent. That is an unprecedented increase in an out-of-turn supplementary estimate. During those three hours, we will have spent £234 million of taxpayers' money per minute, yet what we know of how that money is to be spent is sketchy at best. It equates to £1,361 for each and every taxpayer in the country. It is to be spent as the Government want without proper debate or consideration, and without full parliamentary scrutiny. It is like the Government taking £1,300 of our money along to the local casino and betting it on black, hoping that it will not turn out to be red. On the roulette wheel, at least one knows the odds, but in this situation we have no idea what the possible return, if any, will be for the taxpayer. This supplementary estimate is part of the Government's £500 billion bail-out of the banks. It is the biggest bail-out in the world so far, paid for by the biggest peacetime increase in debt. It will lead to the Government's debt rising to 50 per cent. of gross domestic product—in other words, £8,200 for every man, woman, child and baby in the country. It asks us to approve an enormous amount of borrowing to support and bail out irresponsible banks. Only now are members of the public beginning to realise just what the Government are about. I recently received an e-mail from a constituent, which I should like to read because it adds light to the situation:"““My partner brought it to my attention about a small banking situation where she accidentally missed a credit card payment to a major bank, who is in line for government/tax payers backing. A letter was posted to her with an amended payment figure and date of 20th october, but last friday the bank was on the telephone to her, high pressure, demanding cards and payment, luckily, she is not easily scared and told them otherwise!""My issue is, in the light of the current banking problems, and WE the public are footing the bill for the banks errors in judgment, should it be ““assumed”” by the banks that just because they are in dire straights, everyone else is. It is not as if my partner is an habitual late payer, it was a one off.""I feel that these banks should be humbled to the public in some way and not come on heavy handed at the slightest opportunity. With government intervention should these issues be taken into consideration? How many other people are being submitted to this style of treatment?…Yours sincerely,""Mark Grinter.””" We can all relate to that. Anyone who has ever run a small business will know how unsympathetic, ruthless and heavy-handed banks can be, literally putting companies into liquidation at the drop of a hat. Yet taxpayers are being asked to bail out the banks to the tune of £1,361 each. It strikes me that it is a duty of Parliament not to write a blank cheque, but to scrutinise the Government's proposals in much greater detail. This out-of-turn supplementary estimate is the first opportunity we have had to scrutinise the Government's banking recapitalisation plans. Indeed, it is the first time that many Back Benchers have even had the opportunity to discuss the issue. Yes, there have been a number of statements from the Chancellor, but on each and every occasion Back Benchers have been left standing. Many Members have not been able to put even one question to the Chancellor about the extraordinary amount of expenditure that we are considering in this Government supply estimate. Things are different in America. Full congressional scrutiny took place and the revised package was far better than the original one proposed by the Executive. But in this mother of Parliaments, no time has been allocated to debate a substantive motion on which the Government could be defeated. The Government are spending the most extraordinary amounts of our money in nationalising, or part-nationalising, certain banks. Today's three-hour debate will be the first time that many Back Benchers have had an opportunity to discuss the matter. I find it quite extraordinary that this week we have found it possible, on non-substantive motions, to discuss democracy and human rights, access to primary care trusts, local government and energy providers. We have had hours and hours of debate on what are no doubt important issues, but clearly they are not as important as the biggest financial crisis in 100 years, with the Government heading from boom to bust at breakneck speed. I might be the only Member of the House who thinks that the Government's proposals have significant flaws, and that there should have been a far more market-oriented solution, but there should have been proper thought and consultation, and detailed proposals should have been brought to this House. I am sure that if that debate had occurred, many Members would have made improvements to the package. If we pass the supplementary estimate today, the Government will be able to do what they want with £42.2 billion of our money. I turn to the proposed, out-of-turn supplementary estimate we are considering. As I have said, we know little detail of how the £42.2 billion will be spent. Some detail on the estimate is outlined in House of Commons document 1061, and some supplementary information was provided by the Chancellor, who placed in the Library a number of documents two days ago. It was rather difficult at the time to get hold of the documents, but they were eventually released. The documents were the preference share subscription agreements between the Commissioners of Her Majesty's Treasury and the Royal Bank of Scotland plc, the preference share subscription agreements between the Commissioners of Her Majesty's Treasury and HBOS plc, and the preference share subscription agreements between the Commissioners of Her Majesty's Treasury and Lloyds TSB Group plc. In addition, we were provided with the placing and open offer agreements between the Royal Bank of Scotland plc and UBS Ltd, and Merrill Lynch International and the Commissioners of Her Majesty's Treasury and the placing and open offer agreement between HBOS plc and Morgan Stanley & Co. plc, and Dresdner Kleinwort Ltd and the Commissioners of Her Majesty's Treasury. We were also provided with the placing and open offer agreement between Lloyds TSB and ““blank””, and ““blank”” and the Commissioners of Her Majesty's Treasury. We have not even been told which merchant banks will be involved with the Lloyds TSB agreement. We know in broad terms that the estimate deals with £42.2 billion, and it is broken down as follows. RfR 1 of the supplementary estimates is entitled:"““Raising the rate of sustainable growth and achieving rising prosperity and better quality of life with economic and employment opportunities for all””—" a rather strange way to raise the issue of the biggest banking collapse this country has ever seen. The section ““Reason for change”” refers to"““Changes relating to movements in budgets””" and"““Changes in annual managed expenditure””." The detail is as follows. First, the £4.6 billion for the transfer of the retail deposit book and the branch network of Bradford & Bingley plc to Abbey National plc following the Bradford & Bingley plc Transfer of Securities and Property etc. Order 2008 No. 2546—in other words, the cost of allowing Bradford & Bingley to collapse. Interestingly, that is a totally different approach from that taken to the nationalisation of Northern Rock or the part-nationalisation of the Royal Bank of Scotland, HBOS or Lloyds TSB. There is a significant lack of consistency on the part of the Government, which was raised by the hon. Member for Twickenham (Dr. Cable). That lack of consistency has been a trend throughout this ordeal. Secondly, we have the £0.6 billion to ING under the Transfer of Rights and Liabilities to ING Order 2008 No. 2666. In other words, money to protect depositors in Icelandic banks. Thirdly, and this is where we turn to the capitalisation of the banks that has been discussed in recent days, we have the purchase of shares in Royal Bank of Scotland—£20 billion broken down into £15 billion of ordinary shares and £5 billion of preference shares. Fourthly, we have the purchase of shares in HBOS at £11.5 billion, of which £8.5 billion is in ordinary shares and £3 billion is in preference shares. Fifthly, we have the purchase of shares in Lloyds TSB at £5.5 billion, of which £4.5 billion is ordinary shares, and £1 billion is preference shares. When one says that quite quickly, it does not seem to be very much, but when we think of the enormity of what we are discussing, we can see that it is quite staggering. I know that other Members intend to speak, so I will not comment on the £4.6 billion relating to the Bradford & Bingley or the £0.6 billion relating to the Icelandic banks. I want to talk about the huge investments of taxpayers' money into the three commercial banks, and the market capitalisation of the banks. First, I would like to discuss how the capitalisations relate to the money we are proposing to inject. On 14 October, according to the Library, the market capitalisation of RBS was £10.9 billion, but we are proposing to spend nearly double that amount in taxpayers' money—£20 billion. The HBOS market capitalisation was £4.9 billion, and the proposed capital injection is twice that amount at £11.5 billion. Finally, Lloyds TSB's market capitalisation was £9.7 billion and the proposed injection is £5 billion—just over half of the market capitalisation. Those are extraordinary injections of cash, which are significantly disproportionate to existing market capitalisation. It is not clear how we reached such low market capitalisation. The last reported profits for those banks were: RBS—£9.9 billion; HBOS—£5.5 billion, and Lloyds TSB—£4 billion. The auditors' reports on those banks included no qualification, and it appears that the auditors will have signed off the companies' assets at a much higher value than they are now worth. The role of rating agencies in the fiasco should also be considered, but such issues should have been properly debated before we arrived at the mega supplementary estimate that we are being asked to approve today. How can we approve a blank cheque for £42.2 billion when we do not know the true strength of the three banks to which the estimate refers? It is impossible that due diligence was exercised. The ideas seem to have been thought up on the back of an envelope during night-long meetings. The detail of the offer and subscription agreements shows the folly of that. Let us make a UK-America comparison. Later, I want to consider in detail the individual estimates that the various documents show, but the British Government's proposal clearly differs significantly from the American package that was announced last night. The latter is market oriented and designed to benefit the American taxpayer and the larger economy. The British Government's approach neither protects the taxpayer's interests nor allows the banks to recover—it is deeply flawed. There have been huge regulatory failures to control the banks over many years and a huge bubble of debt has ensued. It appears that the banks have been lending more and more debt between themselves, which has little or no value. The boom was built on debt and was therefore bound to crash. If a small prick is made in a big balloon, the whole thing will collapse. The housing market's collapse has pricked the balloon and all the financial air is rushing out. The out-of-turn supplementary estimate constitutes an attempt to put a patch over the escaping air, but it does nothing to tackle over-lending, which is the root of the problem. How could it be right to lend mortgages of 125 per cent. of the value of property? How could it be right to allow self-certified mortgages or lend five or six times a person's annual income? The position was made worse by the insistence that there would never be a return to boom and bust—that was the Prime Minister's mantra. That was clearly nonsense because it defied economics and trade cycles, but it encouraged ordinary people in this country to take on more and more debt because they believed that the value of their houses would always increase. The banks were happy to lend because they thought that the value of assets would always go up. The Prime Minister must accept a great deal of responsibility for that boom. The £42.2 billion in the supplementary estimate is the colossal price that we are paying for his incompetence. Many people will ask why we are protecting the banks and bank jobs at colossal risk when we allow other companies to go to the wall. The employees of XL travel or Travel City Direct and others in that group, who lost their jobs overnight, must wonder why they are being asked to bail out bankers. Today, it was announced that total unemployment had increased to 1,792,000—5.7 per cent. of all those economically active. Inflation is running at 5.2 per cent., which is more than twice the Government's required rate, and house prices are in a nose dive. All those factors form a significant background to the out-of-turn supplementary estimate. I believe that British taxpayers will be outraged if we approve the estimate today without proper and due consideration of the relevant issues. In my constituency, 1,721 people are on jobseeker's allowance—in 1997 the figure was 1,643. In Wellingborough, we have therefore already reverted to the position of 11 years ago. The unemployed in Wellingborough must be astounded at the amount of money they are effectively being asked to spend in the estimates. It is difficult for hon. Members and the public to accept the Government's consistently moving the goalposts. We are considering estimates, but proposals for spending the money change from day to day. I have no faith, given our limited knowledge today, that the money will spent in the way that we think—it could be spent totally differently. Let me illustrate the point with some of the Chancellor's statements. When he discussed the nationalisation of Northern Rock on 18 February, he said:"““I want to set out the reasons for the decisions that I have made and to outline what the new legislation will do. Before that, let me remind the House that last September there was almost universal agreement that the Government were right to intervene ""to save this bank to stop its problems spreading to the wider banking system. There was also an agreement that, ultimately, the long-term future of the bank must lie in the private sector. Even those who advocated nationalisation in the autumn did so on the basis that this could be only a temporary step—a stepping stone—to return the bank to the private sector, when market conditions made that possible… The Bill potentially applies to a range of financial institutions, but I want to make it clear that the Government have no intention at present to use it to bring any institution other than Northern Rock into temporary public ownership.””—[Official Report, 18 February 2008; Vol. 472, c. 21-2.]" Clearly, the Government's position then was that nationalisation was a one-off—an individual, specific situation—and that the bank should be returned quickly to the private sector. It was to be a temporary stepping stone, not long-term nationalisation; a one-off, not a problem with the whole banking system. However, on 6 October, the Chancellor made a statement to Parliament on the financial markets. He said:"““We need, too, to work with other countries to tackle the causes of these problems, as well as dealing with their consequences. Let me briefly remind the House of what we have done to stabilise the banking system as a whole. Since April, the Bank of England, with support from the Government, has introduced the special liquidity scheme providing funding to the banks. The Government have made available in excess of £100 billion of long-term funding to be lent through the scheme, and the Bank of England has extended it until January. I am willing to make further resources available as necessary and the Governor has made it clear that""'In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity'””.—[Official Report, 6 October 2008; Vol. 480, c. 21-2.]" The goalposts had been moved. The problem was no longer the temporary nationalisation of one bank but liquidity in the banking system. Two days later, on 8 October, the Chancellor made a statement entitled, ““Financial Stability””, and the goal posts were moved again. He said:"““I also said that the Government were ready, with the resources and the commitment, to do whatever was necessary—in terms of liquidity and capital—to maintain stability in the banking system. That is why today I put forward measures designed to restore confidence in the banking system and to put banks on a stronger footing.""There are three strands to what I have outlined today: first, to provide sufficient liquidity now; secondly, to make available new capital to UK banks and building societies to strengthen their resources and to restructure their finances, while maintaining their support for the real economy; and thirdly to ensure that the banking system has the funds necessary to maintain lending in the medium term.””" He continued:"““The eight major UK banks have today announced that, in aggregate, they plan to increase their capital by £25 billion. Banks can raise that capital in the open market, in the usual way, or they can raise it through the newly created bank recapitalisation fund. Other eligible banks and building societies can also take part.""Through the fund, the Government stand ready to buy preference shares in the participating banks. Preference shares rank above the stock of ordinary shareholders. The Government will receive a fixed regular payment for holding those shares and will get better protection against any future losses. In addition to that, the fund will be ready to provide at least another £25 billion of capital to strengthen the balance sheets of any interested bank. The taxpayer, therefore, will be fully rewarded for that investment.””—[Official Report, 8 October 2008; Vol. 480, c. 277-278.]" The goalposts were therefore moved, to £25 billion of preference shares with regular dividend payments—not a direct investment in common stock, but an investment in preference stock. I could understand that logic, but the position has changed significantly in the current estimates, which are not the same as the position set out in that statement. The Chancellor came to the House with another statement on 13 October—his most recent statement to the House. If I read a few lines from that statement, hon. Members will see that the goalposts have moved yet again. The statement was entitled ““Financial Markets””.