From Wednesday, 5.15pm, Hansard records:
Lord Oakeshott of Seagrove Bay, during a debate on the Queens Speech:
I spoke in the debate on the gracious Speech one year ago and focused on the dangers of debt—personal, corporate and public. I gave some pretty stark warnings. They were not perhaps in the flesh-creeping premier league of those of my honourable friend our shadow Chancellor, Vincent Cable, but they were serious. I was especially worried about the overpriced housing market forcing families into debt, and about the spectre of tax privilege and secret private equity funds gobbling up well run British businesses and loading them with vast debts. However, never in my darkest nightmares did I foresee what I think is the first ever nationwide run on a bank in British history—Overend and Gurney was a side show compared to Northern Rock—with more than £20 billion of taxpayers’ money poured so far into what I fear will turn out to be the Northern Rock black hole. There is no end in sight and no government grip to protect these vast sums, which are more than we spend on primary education and more than our entire aid budget.
I declare an interest as a pension fund manager with 31 years’ experience of investing in shares and property markets. I have seen a few companies going wrong during that time. Perhaps I can share with noble Lords a few home truths which should have been obvious to the great and good, but were not. When a financial company grows its business fourfold in five years, and when it shoots up by 55 per cent in the first eight months of this year so that it overtakes the Halifax with a 20 per cent share of the mortgage market, it is a break-neck rate of expansion. Old-fashioned textbooks used to call it overtrading. You can do it only by taking very big risks, whether you are selling loans or insurance. It is the easiest trick in the book to sell them cheaper or on softer terms than the competition, and in the short run you get away with it. The crunch comes when conditions turn against you, the loans have to be repaid or you have to pay out on the insurance policies. Independent Insurance, your Lordships may have seen, also did a Northern Rock—it came from nowhere to grab a vast market share a few years ago. Its competitors were highly sceptical about its margins and the chickens have now come home to roost there.
I have with me the briefing memorandum, Project Wing, which Northern Rock’s advisers have just put out. They tried to use injunctions last night to prevent newspapers such as the Evening Standard, the Guardian, the FT and the Telegraph publishing it but, as a taxpayer sharing in the £20 billion loan propping up Northern Rock, I think that I am entitled to see that document and to tell your Lordships a certain amount of what the bank’s advisers say.
It is pretty hairy stuff. Northern Rock has what are called “together” unsecured loan accounts of £3.3 billion and standalone unsecured loan accounts of another £4.5 billion outstanding. It then claims that it writes only prime mortgage business on its balance sheet. The giveaway in the memorandum is the bank’s stating that the growth has been possible through attractive products and pricing. The problem is that it has been far too attractive. Northern Rock has been pumping out mortgages at unsustainably low interest rates, and as the credit-worthy borrowers who have taken out Northern Rock mortgages during this dash for growth come to the end of their fixed-term mortgages, they will all start to remortgage elsewhere, leaving Northern Rock with an ever increasing proportion of lower-quality loans in a falling housing market.
Its arrears have been low during the past few years because, in a raging-bull market, if borrowers start to struggle, they just sell their house and walk away with the profit. But when house prices are falling, as they clearly are today all over Britain, loans of 100 per cent or more of a house’s value, such as the loan of 127 per cent that I was offered when I rang up three or four weeks ago—taxpayer’s money—quickly turn toxic. They have repossession risk written all over them. The British taxpayer is effectively underwriting a substantial slice of a falling housing market.
There is a clear conflict of interest between the directors of Northern Rock, whose duty is to the shareholders, and the Government, who must minimise the risk to the taxpayer. It is simply outrageous that the board and management of Northern Rock are still in charge, still being paid and running up vast fees, and are leading the process of inviting offers for the bank. The tail is wagging the dog, and it is high time that the Government took full control and put in bankers and auditors to go through the books and limit taxpayers’ losses. This is already a major financial scandal, and with every day that Darling dithers it is getting worse.
