Financial Services (Banking Reform) Bill

Debate between Andrew Bridgen and Peter Tapsell

Monday 11th March 2013 Commons Chamber

[Sir Peter Tapsell (Louth and Horncastle) (Con)]

I asked Harold Macmillan what the secret was of making a good speech in the House of Commons and he said, “I once asked David Lloyd George that very question and the answer I got was, ‘Don’t say anything interesting or important in the first five minutes of your speech—just wait for the Chamber to fill.” I am not sure that that will happen this afternoon, which is a pity because I believe that if this Bill finishes up as the Act I hope it will be, it will be the most important Bill of the whole of this Parliament. It may stop the second shoe falling, as it did in 1931, to use the phrase of the time. After the stock market crash of 1929 came the slump and the 1931 crisis.

In 2007-08—but in 2008 in particular—we saw the greatest financial crisis since the 1930s, which resulted in almost a decade of slump that was only solved by Adolf Hitler. If we can get this Bill right and make sure that 2008 is not repeated, it will be an enormous achievement.

Hank Paulson is the former head of Goldman Sachs and was US Treasury Secretary at the time of the 2008 crisis. If hon. Members read his book, they will see that the critical day was 15 September 2008. He says that everybody who mattered in finance was in his room and that, although he is a big man who was a famous university footballer in his youth, the stress and strain was so great that during the course of the conference he had to leave the room twice to vomit. He writes that on that day capitalism was on the verge of total collapse. I think that people have forgotten the seriousness of that crisis.

I believe that crisis was more important than 9/11. As it happens, I woke up in my club in New York on the morning of 9/11, so taking part in this Second Reading debate means that, during the course of my life, I have been present at two very important events. The fact is that the 2008 crisis ruined the lives of millions of people all over the country. Many of my constituents are suffering real hardship as a result of the measures that had to be taken to deal with the effects of the crisis, and the same is true right across the world. We really must prevent it from ever happening again, but I fear that there is a real danger that it could happen again.

The high spirits—to put it at its most polite—of investment bankers do not seem to be unabated. Many banks are in a weak state, including, as we heard only three or four days ago, Goldman Sachs itself. Some major European banks are close to bankruptcy. This Bill is a belated but welcome attempt to prevent the banking crisis of 2008 from happening again.

The Opposition spokesman is the hon. Member for Nottingham East (Chris Leslie) and in far-off days I was the hon. Member for Nottingham West, so we have a certain amount in common. Our views on regulation also have a great deal more in common than he has indicated. There is no reason why he should know what my views are on anything—nobody really does and I only do on a day-to-day basis. He should look up a speech that I made on 16 July 1984. I spoke for 40 minutes—in those days, Back Benchers were allowed to make proper speeches—and strongly opposed the deregulation of that time, which, in those days, was called big bang. Deregulation had suddenly became tremendously fashionable. Lady Thatcher, Keith Joseph and all the monetarists were terribly keen on it, but one of the reasons why I resigned from the Opposition Front Bench on which the hon. Gentleman now sits and why I refused to serve in Margaret Thatcher’s Government is that I disagreed with it.

I reread my speech last night and if the hon. Gentleman reads it, he will see that I predicted, very clearly and unbelievably presciently—I was much younger and more alert then, and knew how to put points so much better than I do now—exactly what would happen and the reasons why. I also predicted the tremendous decline in the moral standards of the financial world that would result from the internationalisation and Americanisation of the City of London. That, of course, is what, unfortunately, happened.

In that speech against big bang, I opposed the absorption of high street banks, merchant banks and stockbroker firms—I was a partner in one—into universal banks, free to speculate, on their own account, with the money of depositors and large sums of borrowed money in what is now called leverage, which we and America pronounce differently. I will not go into the arguments about ratios, except to point out that, even as respectable a hedge fund as Carlyle was dealing on a ratio of 30:1. The leverage situation was one of the causes of this disaster.

At the beginning of this Parliament I described the banks as today’s over-mighty subjects and that is what they are. They have been strongly lobbying the Vickers commission and the Treasury not to deal effectively with the bank that is too big to fail. I take the view that if a bank is too big to fail because of the systemic effect that would have, it is too big to exist at all and should be broken up now. As a start, I strongly support the recent recommendation of the Governor of the Bank of England to break up the Royal Bank of Scotland.

Glass-Steagall imposed an absolute separation between commercial banking and investment banking. It also banned proprietary trading in commercial banking. The essence of Glass-Steagall in 1933, by which Roosevelt managed to save the American banking system, was to root out conflicts of interest, which are the evil at the heart of universal banking. Banks were told that they had to choose between servicing a client and promoting their own short-term interests. Combining the two inevitably creates conflicts of interest that lead to many other problems. That is what Mr Paul Volcker, unquestionably the most distinguished and experienced banker in the world, urged on America in what became known as the Volcker rule and on our Parliamentary Commission on Banking Standards, which has been chaired so ably and brilliantly by my hon. Friend the Member for Chichester (Mr Tyrie).

I read the accounts of what is being said and the questions that are being put at the parliamentary commission with great jealousy, although I do not want to be co-opted on to it. Its second report reached me just before lunch, and I chose lunch. However, I will read the report and all the subsequent reports with the greatest possible interest. I find it difficult to understand how anyone who has read the complete account of Mr Volcker’s evidence to my hon. Friend’s commission, as I did at the time that it was published, could fail to be persuaded that we need, in effect, a complete return to Glass-Steagall.

What I mean by a complete return to Glass-Steagall is that we should have none of this nonsense of ring-fencing, which used to be called Chinese walls. It never works. Chinese walls turned out to be papier-mâché. I worked in the City for 40 years and I promise Members that it is impossible to make that work.

[Andrew Bridgen]

Does the Father of the House remember that it was President Bill Clinton who relaxed the Glass-Steagall rules in return for the American banks lending to sub-prime borrowers? Were not the seeds of the financial crisis sown at that point?

[Sir Peter Tapsell]

Yes, they were. The American banks turned mortgages for people who could not afford to pay the interest into derivatives disguised as bonds and then sold packets of them—500 or so—all over the world. They could not have done that under Glass-Steagall. That really makes the point, so perhaps I ought to sit down now.