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 that we should not discuss contentious matters in the chamber today, but they were the first to make contentious assertions about "spivs and speculators" and they blamed 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 independent Scotland. It is important that the issues are addressed today.

We have to challenge a simplistic analysis that is based only on blaming "spivs and speculators". Of course we should criticise them, and short selling should have 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 fundamental cause of the problem, as many eminent economists have emphasised in the past few days. For example, Michael Moss, a research professor at the University of Glasgow 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 opportunity to hear the Prime Minister's speech yesterday, but he made a ferocious attack on 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 the fundamental issue.

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

The First Minister:
We should be a bit careful about believing that wholesale markets 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 organisations will be exactly the same as that of any new merged company if it accepts the Government's strictures not to withdraw from the mortgage market?

Malcolm Chisholm:
Of course, all banks have to rely on wholesale markets, but it is about the extent of the exposure, particularly in the past year since the start 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 request for a line of credit last week, and the UK Government got it right to act and give guarantees on the merger. We can argue for the relocation of the headquarters because the new company will be a UK institution. We should also argue that the Bank of Scotland should remain as a legally constituted bank with a separate licence and board within the new larger organisation, in the same way as Lloyds TSB, which currently has a separate legal entity in Scotland and a separate board

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

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