Malcolm Chisholm: HBOS

Debate on HBOS Malcolm Chisholm (Edinburgh North and Leith) (Lab): I do not need to remind members today of the importance of the financial services sector to the Scottish economy in general and to Edinburgh in particular. In the first seven years of this century, our financial services sector grew by 60 per cent. Seven of the top 20 Scottish companies are in the sector and up to one in 10 Scottish jobs depends on it. Here in Edinburgh, which is the second-largest financial services centre in the UK, thousands of people are employed in the sector, including 6,500 HBOS employees.

I know that we are all united today in our determination both to protect HBOS's customers and to preserve as many jobs as possible here in Scotland. I hope that the new company that is about to be formed by the merger will engage immediately in comprehensive talks with the recognised trade unions and, as soon as possible, give a guarantee that there will be no compulsory redundancies. We are concerned not just about jobs in general but about having headquarters functions in Edinburgh, with as much decision making as possible done in Scotland, up to and including new corporate headquarters. I wish the First Minister well in the presentation that he is to make about that.

Of course, we are looking forward not just to any old decisions but to correct decisions, based on a correct analysis of what is going on. Correct decision making and analysis are important for bankers, and there have certainly been deficiencies in that regard, as the president of the Chartered Institute of Bankers in Scotland argued last night. I submit that it is also important that we politicians have a correct analysis of what has been going on.

The Government and its supporters have tended to say thatwe should not discuss contentious matters in the chamber today, but they werethe first to make contentious assertions about "spivs and speculators" and theyblamed the UK Government for not acting in, as they see it, a decisive fashion.They have also claimed how much better it would all have been in an independentScotland. It is important that the issues are addressed today.

We have to challenge a simplistic analysis that is based only on blaming "spivsand speculators". Of course we should criticise them, and short selling shouldhave been suspended, but only 3 per cent of HBOS shares were shorted last week,compared with 5 per cent of Barclays shares. Short selling was not the fundamentalcause of the problem, as many eminent economists have emphasised in the pastfew days. For example, Michael Moss, a research professor at the University ofGlasgow who has written several books on Scottish financial institutions, said:

"To blame speculators, as Alex Salmond did, is lunacy."

The First Minister:
I do not know whether Malcolm Chisholm had the opportunityto hear the Prime Minister's speech yesterday, but he made a ferocious attackon speculators. Was that also lunacy?

Malcolm Chisholm:
I also criticised spivs and speculators about 30 seconds ago.It is one thing to criticise them but another to say that short selling was thefundamental issue.

I would be the first to praise HBOS for the support thatit has given to many enterprises, to voluntary organisations such as the PROP-StressCentre in Pilton in my constituency, and to thousands of customers. However,HBOS got into difficulty because of fundamental business mistakes, as one ofthe First Minister's advisers, Professor John Kay, emphasised the other night.It was overreliant on the wholesale market and there was an unsustainable gapbetween its deposits and loans, many of which were risky. Investors have beentaking fright for months, which was why the £4 billion rights issue was sucha failure. It was shareholders far more than spivs who repudiated the bank.

The First Minister:
We should be a bit careful about believing that wholesalemarkets are not legitimate. Does the member accept that, in terms of quantity,the reliance on the wholesale market of HBOS and Lloyds TSB as separate organisationswill be exactly the same as that of any new merged company if it accepts theGovernment's strictures not to withdraw from the mortgage market?

Malcolm Chisholm:
Of course, all banks have to rely on wholesale markets, butit is about the extent of the exposure, particularly in the past year since thestart of the credit crunch.

If the First Minister was wrong about "spivs and speculators",he was equally wrong about the role of the UK Government. There was no requestfor a line of credit last week, and the UK Government got it right to act andgive guarantees on the merger. We can argue for the relocation of the headquartersbecause the new company will be a UK institution. We should also argue that theBank of Scotland should remain as a legally constituted bank with a separatelicence and board within the new larger organisation, in the same way as LloydsTSB, which currently has a separate legal entity in Scotland and a separate board

More generally and fundamentally, we need to recast the financial system usingdifferent principles, with much tighter regulation. As Will Hutton said lastnight, a small country such as Scotland cannot do that, but the UK can. The UKcan also lead the case for new global standards on supervision that match theglobal flows of capital.

Last week was the nearest that we have come to 1929 since 1929, and we must respondwith the urgency and radicalism that are required, unlike in the 1930s. Thatwill no doubt include lowering interest rates and redefining the objectives ofmonetary policy, but what is crucial in the context of today's debate is thatit must involve much greater financial transparency and much more effective financialregulation. September 24th 2008, (Columns 11117-9)