The most enormous hole in the government's nationalisation programme for Northern Rock appeared late last night in the Commons. I am pleased to have been the catalyst. As Hansard puts it (and it's worth reproducing in full) before I comment in my next blog on the implications of this:
John McDonnell (Hayes and Harlington) (Lab): I first wish to make it clear that I welcome the Bill. In fact, with the greatest respect to the hon. Member for Twickenham (Dr. Cable), I think that I was the first MP to call for nationalisation, although that is hardly surprising because I have been calling for the nationalisation of the financial sector for 30 years or more. However, I was astounded when my right hon. Friend the Chancellor said on Second Reading that the Granite operation was not included in the legislation.
From my reading of the Treasury Committee's brief reference to Granite and the advice received from accountants in the tax justice campaign, my understanding of the scheme-even its name suggests that it was a great wheeze-is that several of the directors at Northern Rock established an offshore vehicle to avoid tax. It was still on the balance sheet of Northern Rock and they securitised a large percentage of their assets in it and received about 50 per cent. of their funding from it. As a result and as far as I am concerned, Granite is a creature of Northern Rock and therefore is part of the asset base of the bank and its operations.
Mr. Alan Beith (Berwick-upon-Tweed) (LD): It should not go without mention that one feature of the arrangement was a purported benefit to a charity for handicapped children in the north-east, which has so far received no money from it whatever.
John McDonnell: I understand the issue that the right hon. Gentleman raises, and I have seen reports about it. It is an issue that needs to be exposed and examined, but my concern is the greater issue. Those who took that decision will be exempted from their responsibilities as a result of this legislation. They deliberately undertook an exercise of tax avoidance and tried to maximise the profits for their company. As a result, they enhanced their own benefits in salaries and bonuses through a scheme that is completely exempt from the Bill. The taxpayer and the community will pick up some of the liabilities from that exercise and those who have profiteered through Granite will be completely exempt of liabilities. They will walk away with their profits secure, while others suffer. Some of the constituents of my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) may lose their jobs and some people may have their homes repossessed. Yet the Granite scheme has enabled those people to walk away scot-free.
I tell my right hon. Friend the Chief Secretary that when there are discussions in the future about further legislation and regulation, we will need to take into account what happened with regard to Granite. We will need to consider how to prevent tax exemption and tax avoidance regimes being used in such a way at the cost of the long-term interest of the workers involved and of those people who are dependent on mortgages from a company such as Northern Rock. If there is any way in which Granite can be brought within the ambit of future legislation, the Government should examine that matter.
Ms Abbott: Does my hon. Friend agree that when the Government are considering future legislation they should also consider the long-standing and vexed issue of conflict of interest when it comes to audit? A firm such as PricewaterhouseCoopers will make a lot more money out of its consultancy on securitisation than out of the audit. In banking collapse after banking collapse, we see auditors who see no problem in continuing to trouser their consultancy fees.
John McDonnell: I hope that that is one issue that the Treasury Committee will come back to at some future stage when it further examines transparency within the financial arrangements of such companies and the City itself.
I support the legislation, but I believe that we have missed an opportunity to nail down one of the devices that has been used by Northern Rock and its directors to avoid their long-term responsibilities to its work force, to those who have borrowed from the company and to this country and its taxpayers. I regret that such a measure was not contained actively in the Bill.
Dr. 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-
Mr. Philip Dunne (Ludlow) (Con): 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.
Mr. Deputy Speaker (Sir Alan Haselhurst): Order. That was a very generous intervention.
Dr. 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.
Mr. John Maples (Stratford-on-Avon) (Con): 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.
Dr. Cable: We are all getting a rapid education. Perhaps the hon. Member for Hayes and Harlington can tell us more.
John McDonnell: 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.
Dr. 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.
Mr. Gerald Howarth: 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?
After which debate was, effectively, guillotined.