Vince Cable on Northern Rock and Granite

11.43.00am GMT Wed 20th Feb 2008

. . 11:11 pm: Vincent Cable: I had not intended to speak at length at all, having made my points, but I am prompted to by the important speech that we have just heard from the hon. Member for Hayes and Harlington (John McDonnell). Alarm bells rang slightly for me when I heard the mention of Granite on Second Reading, but its full significance did not dawn on me at the time.

I do not think that the problem is quite that identified in the hon. Gentleman's point about tax status. The problem is that Granite is a separate institution that, as I understand it, securitises the best assets of the bank. The best mortgages of the bank are wrapped up in the Granite vehicle. We are being told that in some way that is being hived off to the benefit of person or persons unknown, apparently, to the Minister.

What is going on here appears to be not the public ownership of Northern Rock but an asset-stripping operation designed to benefit someone-we do not know who. That is a serious development, and unless we get a proper explanation by tomorrow morning of what exactly is going on-

Philip Dunne (Ludlow, Conservative): If I may, I want to see if I can help the hon. Gentleman to understand the true implications of Granite's not being included in the nationalisation. My understanding is that Northern Rock retains a seller's share in the packages of mortgages provided to Granite to provide security for the debt obligations that Granite issues, and that that package of mortgages will have to be refreshed continually by Northern Rock as mortgages are redeemed or repaid or come to the end of their natural lives. If Northern Rock fails to supply continuing fresh mortgages into Granite, the liabilities will crystallise, there will be a default in Granite and the entire securitised debt obligations will implode and will have to be sold off on a fire sale basis, with proceeds going to the bondholders. At that point, the seller's share held by Northern Rock will also be part of the fire sale and will become of much lesser value than its stated asset value in the books. Guess who will pay the bill, if Granite is not included in the nationalisation? The taxpayer.

Alan Haselhurst (Saffron Walden, Deputy-Speaker): Order. That was a very generous intervention.

Vincent Cable: I am trying to absorb the hon. Gentleman's analysis, and I hope that he will repeat it at greater length. My understanding is that the remainder of the assets of Northern Rock, outside Granite, consist of unsecured mortgages and the so-called Together mortgages-those at 125 per cent. of value-or, in other words, the rubbish. That is what the Government have acquired. We now need a rapid and thorough explanation of exactly what has gone on, as otherwise the Bill can be stopped in the other place.

John Maples (Stratford-on-Avon, Conservative): The problem is actually worse than the hon. Gentleman has described, as Granite's loan-to-value ratio is more than 100 per cent. Mortgages are placed in Granite to securitise a loan that is for a smaller amount so, if the security had to be exercised, the mortgages could be sold at a discount. I think that what is left is actually worse than the hon. Gentleman is making out.

Vincent Cable: We are all getting a rapid education. Perhaps the hon. Member for Hayes and Harlington can tell us more.

John McDonnell (Hayes & Harlington, Labour): I may not have explained the point that I was trying to make well enough. My view is that the motivation was a tax avoidance dodge, but the problem is that the liability, which is on a significant scale, now rests with the public purse. As a result, the people who will gain are the participants in Granite. The ones who will lose, and who are in jeopardy, are those who retain an interest in Northern Rock-that is, the taxpayer, and the workers who may lose their jobs.

Vincent Cable: These are big questions, and we are not getting any answers. I see that the Minister has fled the Chamber to get an urgent briefing from the Treasury. Unless the Paymaster General can give us a proper explanation, it is clear that an Exocet has landed somewhere in the middle of the Government's proposals. The Government need to come up with some proper explanations overnight, as otherwise they will be in serious difficulty in the other place tomorrow.

I could make many other points but I shall restrict myself to two, as I think that we have highlighted a critical issue that we need to focus on.

Gerald Howarth (Aldershot, Conservative): On a point of order, Mr. Deputy Speaker. It is perfectly apparent that a key part of this nationalisation is wholly uncertain. Something has come to light that means that the House cannot reach a serious decision on this matter. The Minister has fled the Chamber, presumably to go and get advice. Would it not be sensible to suspend proceedings until she is able to inform the House on this very important consideration? [ Interruption. ]

Alan Haselhurst (Saffron Walden, Deputy-Speaker): Order. It would be unfortunate if the debate were to become ragged at this hour, bearing in mind the seriousness of the issues under discussion, both in the course of the day and at this moment. I think that the hon. Member for Twickenham (Dr. Cable) put his finger on it when he said that there will be further debate before the legislation is finally approved by Parliament. [ Interruption. ] Order. If matters are still being raised at this stage, there will be further opportunities to discuss them. This is a matter of debate.

Vincent Cable: I apologise if I have contributed to the raggedness of the discussion, but important issues have been raised. However, perhaps I should reduce the temperature by moving on to other points.

. . 11:51 pm

Philip Dunne (Ludlow, Conservative): I am pleased that the Chief Secretary is back in her place to hear the final observations. I should like to repeat the point about the impact on Granite that she missed when she stepped out of the Chamber. Earlier, she said that Granite would be excluded from the Bill and thereby from the nationalisation. As the hon. Member for Twickenham (Dr. Cable) and other hon. Members remarked, that leaves a gaping hole in the nationalisation programme.

Yvette Cooper (Chief Secretary, HM Treasury): indicated dissent.

Philip Dunne (Ludlow, Conservative): The Chief Secretary shakes her head, so I hope that she will take the opportunity to clarify the matter.

Northern Rock owns a seller's share of the mortgages that are supplied to Granite to underlie the securitisation package to provide funding back to Northern Rock. If the security package is not continually replenished with fresh mortgages for Granite, Granite's structure will implode. That is the contractual basis of the securitisation documentation. If default occurs, the seller's share in Northern Rock will also have to be sold at a fire sale price to fulfil obligations. If there is insufficient confidence that new mortgages will be put into Granite through the mechanism under national ownership, which requires continuing business flows, the Government and the taxpayer are at significant risk of sustaining a much larger loss than the Government have let the House believe. It is important that the Chief Secretary tackles that point.

Alan Beith (Berwick-upon-Tweed, Liberal Democrat): Would the hon. Gentleman be prepared to take an intervention from the Chief Secretary or to allow a couple of minutes at the end of the debate for her to respond? Many of us are genuinely anxious to hear her comments about that point.

Philip Dunne (Ludlow, Conservative): The Chief Secretary is more than welcome to correct the impression if it is wrong.

Yvette Cooper (Chief Secretary, HM Treasury): We have made the position on Granite clear. We said throughout Second Reading that it is a separate legal entity, which will not be covered by the order, and was equally not covered by Government guarantees. We made that clear from the beginning. The assessment of what was in the interests of the public sector and the taxpayer took all that into account. The private sector proposals and temporary public sector ownership were fully assessed. On that basis, we are clear that it is right to take Northern Rock into temporary public sector ownership to protect the financial stability of the system and the taxpayer's interests.

Philip Dunne (Ludlow, Conservative): That is about as clear as mud. Granite has the contractual ability to suck assets out of Northern Rock, which will be in national ownership.

Stephen Dorrell (Charnwood, Conservative): The only assets worth having.

Philip Dunne (Ludlow, Conservative): Indeed. The quality of the assets in Granite is higher than the quality of the assets remaining in Northern Rock, and it will have the ability to take what other good assets remain in Northern Rock.

. . 11:56 pm

Kenneth Clarke (Rushcliffe, Conservative): . . The most extraordinary thing that has emerged-it did so clearly only really on Third Reading, although it was referred to yesterday-is that the Prime Minister is perhaps now as bemused as we all are about precisely what assets we are nationalising. It has become clear that we are not acquiring the assets in Granite. I think that my hon. Friend the Member for Ludlow (Mr. Dunne) is the only Member in the Chamber with a comprehensive knowledge of the arrangements, but the Minister could neither add nor subtract anything from what he said.

The best assets are in Granite-it looks as though there is a contract enabling more assets to be drawn in-and it is the rubbish in the assets that we are now nationalising. Where is all the constant assurance that we have had on the authority of the Financial Services Authority that this is a quality loan book? We have been reassured that it is an asset that is to be taken into public ownership and well managed, under the Government's wise direction, by the new managers that they have put in place. I would advise the Minister-

It being Midnight, Mr. Deputy Speaker put forthwith the Question already proposed from the Chair, pursuant to order [this day].

The House divided: Ayes 293, Noes 167.

[Extracted from the pages linked to: http://www.theyworkforyou.com/debates/?d=2008-02-19]: [Feb 19] Banking (Special Provisions) Bill: