Cerberus Capital Management: Purchase of Distressed Assets

Danny Kinahan Excerpts

Wednesday 22nd February 2017 Westminster Hall

[Peter Dowd (Bootle) (Lab)]

It is, as ever, a pleasure to serve under your stewardship, Mr Owen.

Hon. Members have already made excellent points in the debate, particularly the hon. Member for East Lothian (George Kerevan), who I know has been interested in this matter for some time and has a great deal of knowledge of it. I appreciate that he has enabled us to have the opportunity to consider this matter and that he has shared his thoughtful views, which were, as always, penetrating.

This matter has its origins in the financial crisis. I do not want to regurgitate the debate about the origin of that crisis, but increasingly it is apparent that it is not simply about the claims, for example, that the last Labour Government “maxed out” on the country’s credit card—a hackneyed claim, if ever there was one, and one that does not go to the heart of why this situation has occurred.

The 2008 crisis almost brought down the world’s financial system; it took huge taxpayer-financed bail-outs to shore up the industry. In that regard—this relates to the last point that the hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin), the Scottish National party spokesman, made—it is important that taxpayers get value for money when assets are sold. The process must be as open and transparent as possible, and it must stand up to scrutiny at the time and thereafter, especially when public services across the board are under such strain. The Government ought not to sell on assets when the people at the other end of the process are going to be treated unfairly and unjustly at some point. That is not acceptable. As has been said, the Government have a duty of care.

I will concentrate my comments today on the here and now, as other Members have covered the pertinent background and context of this matter, for which I am grateful. I will not repeat what they have said, other than to say that issues about on-selling, the plight of customers, business models, tax avoidance, the cost to the taxpayer, the regulatory issues and—fundamentally—the duty of care to people and businesses have gone completely and utterly out of the window.

The Government’s response to the Public Accounts Committee’s 24th report of this Parliament was sandwiched in between the PAC’s reports on “Universal Credit and fraud and error”, and the “UnitingCare Partnership contract”, and those reports do not exactly show Government management in those policy areas to be particularly competent either. I believe that the PAC’s report on this matter is a good place to start, as it is the current Government who made the decision to dispose of this £13.5 billion of mortgages and loans to Cerberus.

As you know, Mr Owen, in Greek mythology Cerberus was the three-headed “hound of Hades” who guarded the doors of hell, to stop the dead from leaving and the living from getting in. That is a metaphor for this organisation; it stops people from leaving. It gets them by the throat and they are trapped forever, and that is not acceptable. I am not sure what to make of that name for a company, but it is well worth leaving that in the air for people to ponder on for a moment.

As hon. Members will be aware, we have been led to understand that the sale of these assets represented the Government’s largest ever financial asset sale, and we have been told that it was “value for money”. I would expect the Government to claim nothing less, so there is no surprise in their making that statement. However, it prompts the question: what evidence have the Government given to support that assessment? The answer is, “Very little”.

If the Government’s claims stack up, why are they so reluctant to accept certain recommendations set out in that PAC report, not least those on the issue of transparency? Why have the Government rejected the recommendations regarding the setting up of an independent panel of valuation experts for all major sales, to review and challenge valuations in advance of all large asset sales and the reliability of the organisations that those assets are going to? If that had been done in this instance, we might not be in this situation. Surely such an evaluation would vindicate the Government’s position that what they did was correct, above board and transparent, and that no one is any worse off for the decision they took. However, that has not happened.

Similarly, the Opposition find it difficult to understand why, if the Government are committed to tackling tax avoidance and evasion, they rejected the PAC’s recommendations that Government Departments should be required “as far as possible” to discount gains from tax avoidance that may be factored into bids, and that the Treasury should produce unambiguous guidance, for both selling Departments and potential bidders, on how tax will be taken into consideration as part of a sale or a contract award. The Government have done nothing about those recommendations either, and their answer to the PAC’s report is incredibly vague. It goes around and around in a circle, and no one can break into it.

Nevertheless, the Government are proud of their enormous financial asset sale, claiming, as I have said, that it was a good deal for the taxpayer. I am not convinced about that, and it certainly was not a good deal for the end users who were on the receiving end of it.

It is true that the National Audit Office said that some aspects of the sale were conducted appropriately, but the NAO also raised a number of key concerns about the Government’s approach. Mortgage holders who are worried about the future will not have been reassured by anything that the Government have done, and the NAO pointed out:

“While the mortgages and loans are currently owned by FCA-licensed entities, they, like any…mortgage, could be sold in the future to an entity which is not regulated. If…customers needed to seek redress, they would have to do so under the Consumer Rights Act”.

That is not right. The Government have a duty of care, but they did not seem to care, as they wanted these assets off the books.

It does not stop there. The NAO criticised other aspects of the sale, saying, for example, that UK Asset Resolution Ltd’s

“limited competitive tendering in the procurement process for its financial adviser was not good practice.”

That refers to the sale of assets, which was not done under appropriate good practice. Similarly, the financial advising company involved—Credit Suisse—also acted as financing bank to the bidder. The NAO said of that:

“Due to a potential conflict of interest, this had not been permitted under previous sales.”

So I ask the Minister—what of that? Or is that detail unimportant?

When it comes to people’s lives and businesses, and for example to public sector staffing, we should note that, according to the NAO:

“UKAR identified an alternative sale option which had a higher…valuation.”

So the assets might have gone to someone more appropriate, but UKAR

“did not have enough staff capacity to run multiple transactions concurrently”.

There is something wrong with that situation, and it goes to the heart of the duty of care not only to the taxpayer but to the people affected by this matter, who in effect got a double whammy.

The Government have a lackadaisical attitude to this matter; indeed, it borders on the insouciant. Surely, given that there was such value for money for the taxpayer, it is not unreasonable to ask how it can be that our hospitals and schools are in a state of crisis and starved of funding, because they are being affected by this as well. When Opposition Members hear the phrase “value for money”, which has been rammed down our throats time after time in relation to this matter, we ask, “Which values?”, and, “For whom?”

This week, NHS trusts posted a massive deficit of almost £1 billion at the end of the third quarter, and yet we are told that this sale is value for money. Meanwhile, social care is in crisis, with 1.2 million elderly people needing care, but we are still told that this is value for money. Selling off assets not in the interests of the many, not in the interests of the taxpayer and not in the interests of the people sitting behind us in Westminster Hall today, but just to fund a failed deficit reduction programme, is not acceptable. It is a false saving.

Finally, the Government say that they will learn lessons from these reports, and I applaud them for that. The question is, when will they share those lessons with the rest of us and prevent this dreadful scam from ever happening again?

[Danny Kinahan (South Antrim) (UUP)]

Will the hon. Gentleman give way?

[Albert Owen (in the Chair)]

Order. The hon. Gentleman has finished speaking. I will call the Minister, who may want to give way to you.

[The Economic Secretary to the Treasury (Simon Kirby)]

It is a pleasure to serve under your chairmanship, Mr Owen. I congratulate the hon. Member for East Lothian (George Kerevan) on securing this debate. I will give way if the hon. Member for South Antrim (Danny Kinahan) wishes to contribute.

[Danny Kinahan (South Antrim) (UUP)]

I want to ensure that we are going to put in place or ask for regulations to stop people being able to move from one side of a deal to another. It does happen, and we need transparency and the duty of care. Will the Minister look at the issue? One person moved from being on the board to being on the other side and making money out of the deal. They were then caught taking a bribe in a car. We need a very clear system.

[Simon Kirby]

It is the long-standing policy of this Government to unwind the interventions made in the financial sector during the banking crisis of 2007-09 and return the assets acquired then to the private sector. That is a key part of restoring normality to the financial system, but in that we need to ensure value for money in getting back taxpayers’ money. We are making good progress in that. UK Asset Resolution, which is responsible for the assets of the former Northern Rock and Bradford & Bingley, has already reduced its balance sheet from £116 billion in 2010 to £37 billion last year. The sale of £13 billion of former Northern Rock mortgages to Cerberus Capital Management was another important step along the way.

As with any transaction of such complexity, the sale required careful analysis and meticulous planning. First and foremost, the Government had to consider whether the sale would meet one fundamental condition: good value for money for the British taxpayer. Secondly, however, the deal needed to ensure the continued fair treatment of existing customers. In this case, they held around 270,000 mortgages and unsecured loans. We are confident that as a result of the detailed preparation we conducted, those conditions were fully met.

It is perhaps worth providing a brief outline of the processes followed. The sale was initially announced at the 2015 Budget, following various expressions of interest and favourable market conditions. A full sales process was then launched that summer. It attracted a good level of competition, with multiple bidders involved, as the National Audit Office noted. At each stage of the process, experts in UKAR worked closely with UK Financial Investments and independent external advisers to assess against the four main criteria used in any public sale, namely: propriety, regularity, feasibility and value for money. Cerberus is an active buyer of assets across the UK and elsewhere, and UKAR carried out thorough due diligence before it was selected. Its bid represented a £280 million premium to the book value of the loans, and, importantly, it maintained the fair treatment of customers.