Cable on Little Red riding Hood and the Big Bad Banks

1.57.04pm BST (GMT +0100) Tue 22nd Apr 2008

'The Chancellor reminds me a little of a character whom I frequently encounter in the stories I read to my grandchildren-Little Red Riding Hood, who went around trying to be kind and helpful, but ended up being out-manoeuvred and then eaten by a wolf . . '

[Apr 21] Vincent Cable (Twickenham, Liberal Democrat): This is a strange day for a Labour Government. They are announcing that they are advancing billions of pounds to the banks at the same time as they are taking billions of pounds away from low-paid taxpayers. The Chancellor reminds me a little of a character whom I frequently encounter in the stories I read to my grandchildren-Little Red Riding Hood, who went around trying to be kind and helpful, but ended up being out-manoeuvred and then eaten by a wolf. The Chancellor is in the process of being slowly devoured by the British banking system. The banks are not in this position by some unfortunate accident. Their own Institute of- [ Interruption. ]

Michael Martin (Speaker): Order. Hon. Members are entitled to get stories wrong from time to time.

Vincent Cable (Twickenham, Liberal Democrat): The banks are not in this position by accident. The Institute of International Finance, which is the bankers' group, acknowledged only last week that the banks had engaged in substantial bad practice. British banks have, over the past few years, lent too much, too quickly and too carelessly. The correct course of action, which the markets now anticipate, is that the banks should make a rights issue to their shareholders to raise money to offset the losses that they have to own up to. The problem is that chief executives do not want to go to the markets because they face the sack, so they rattle the begging bowl to the Government and hope that the Government will help them out, which they are doing.

The Government have assured us that they are covering risk as a result of the discounts on the transfer of assets. Can the Chancellor tell us what those discounts are? Only two weeks ago, the International Monetary Fund made an independent estimate that residential property in the UK was 25 to 30 per cent. overvalued. That is the IMF's estimate; it has no axe to grind. Any asset-backed mortgages that have a discount of less than 30 per cent. represent a transfer of risk to the taxpayer. As I understand it, the Bank of England will provide a discount of up to 30 per cent. but not beyond it. Will the Chancellor explain that discrepancy?

The statement also says-this was confirmed a few moments ago-that the Bank of England will accept credit cards as part of the transfer mechanism. It is said that they will be accepted because they have a AAA rating but after the complete mess that the rating agencies have made over the past six months and the meaninglessness of the AAA-rating designations, what possible confidence can we have in that assertion?

My main point is this: if the Government are substantially to relax the conditions under which they make liquidity available to the banking system, surely conditions should be attached to that process. The most important condition should be that the banks accept up front and in writing that they will go to the markets to raise money in the way proposed by the Royal Bank of Scotland. Without that, there is no guarantee that the money raised in this way will not sit in the banks and will not be advanced to the markets, to small business and to residential borrowers. Without those guarantees, the package promises to be a liability to the taxpayer and to do little to sustain the domestic economy.

Alistair Darling (Chancellor of the Exchequer, HM Treasury): I always thought that part of the Liberal Democrats' problem was that they believed in fairy tales, but I had not understood that the hon. Gentleman did not know the ending of a fairy tale. I hope that when he goes home this evening he will apologise for misleading his grandchildren-inadvertently, of course-about the end of that nursery story.

The hon. Gentleman's position in relation to the Bank of England's proposals lacks sense, too. The logic of what he is saying is that the Bank of England should not be providing the support. If these were normal circumstances, that would be a perfectly statable case, but these are highly unusual circumstances. We are in a situation, getting on for nine months after the problems first started, in which the mortgage bank security market is virtually non-existent. That is putting particular strain on banks and making them increasingly reluctant to lend to each other and to customers. That cannot be good for any of us as the problem spreads further into the wider economy. That is why I believe that what the Bank is doing is right. It is similar to what other central banks are doing.

On banks that have got themselves into a position in which they need to recapitalise, I agree with the hon. Gentleman that it is important that they disclose their position as quickly as possible. The sooner the world knows the extent of the exposure, the more confidence there will be in our getting back to trading on a normal basis. Banks are doing that in this country and all over the world. However, the Government cannot say to every institution, willy-nilly, "You ought to have a rights issue," because that may not be appropriate for some institutions. When the hon. Gentleman thinks through the logic of his position, I think he will see that what he is proposing does not work.

The Bank of England set out the securities that it will accept in the market notice that it published today, as the shadow Chancellor said. As I said in reply to him, it is up to the Bank of England to decide what securities it will accept and, crucially, what margin it requires in order to protect its interests-and, ultimately, the taxpayers' interests. The measures proposed by the Bank of England are necessary and will be beneficial in helping to get the banking system back into a position in which it functions normally. That will benefit businesses, individuals and mortgage payers in this country.

Related Link:

Little Red Riding Hood from Wikipedia, the free encyclopedia