Examination of Witnesses(Questions 680-699)|
TUESDAY 29 OCTOBER
680. Okay, no major qualifications. When you
started marketing these new products to private clients, were
they marketed in a fundamentally different way, flagging up the
fact we had a different type of product from the pre-1999 product?
(Mr Hall) First of all, there is a slight
misconception in that there is no marketing in Brewin Dolphin,
we are not salesmen, we are investment advisers to individual
681. I will take the word "marketing"
out and replace it with "advice".
(Mr Hall) Yes.
682. Was the advice being given to private investors
in some way fundamentally different, reflecting the fact a tranche
of bank debt had been brought into splits which hitherto had not
(Mr Hall) No.
683. Why not?
(Mr Thomas) Because I have studied the
subject quite a long time, would you mind if I answered your question?
We come down to the qualifications. I think I am right in saying
that your concept is there was a sort of additive, a lump of extra
borrowing, stuck on top of existing zeros. Yes? So your conception
then would be that you had gearing either in the form of borrowings
or in the form of zeros or in a combination of the two?
(Mr Thomas) I would suggest to you that
because of the coverage of this subject you are differentiating
very strongly between a geared zero and a non-geared zero. Am
685. I am doing the questioning here! I would
be grateful if you tried to answer my question, which was, why
were post-99 clients not advised of the fundamental change in
the structure of the product it was being suggested they invested
(Mr Thomas) To begin with, if I am answering
that question, I was not responsible
686. It is moving along the row now, four to
the right and now it is moving back to the left, I am happy to
take an answer from anyone.
(Mrs Bowden) I can give you a fairly
simple answer, from the point of view of the private client executive
I do not think there was a huge shift in perception at that time.
687. What does that mean? That you did not notice?
(Mrs Bowden) Across the industry I think
the market professionals as a whole did not see a huge shift in
the way perhaps you are suggesting.
688. So is this the heart of the matter really?
We can well understand that sophisticated people to whom you say
you are marketing the product might have been expected to read
the small print. What seems unacceptable to a large number of
us around the table was that huge numbers of these products were
being sold to people who could not reasonably be expected to know
and who were relying on your advice. They were being given advice
that the pre-1999 and post-1999 product were the same, indeed
they were not even being allowed to consider the possibility that
the product had changed. I am asking why you did not tell them
the products were different and you are saying there was a difference
in perception. You are saying there was not perceived to be a
risk. What you are saying is that even though in-house you had
probably the world's leading expert on these things, so we are
told in the Sunday newspapers, Mr Thomas somehow or other failed
to notify anybody else in the firm that he was now producing a
fundamentally different product. Correct?
(Mr Thomas) I did not think they were
689. But they have turned out to be, have they
(Mr Thomas) There are people who say
690. What about you, Mr Thomas?
(Mr Thomas) I would say that the cover
for the bank borrowings was there in ample quantity. The cover
for the zeros was there in ample quantity. I do not think the
level of gearing was unsafe. What has happened is that people
have pointed after the event, when the markets have fallen and
when the assets were no longer covering these things, to the fact
that the zero which is geared by a bank loan is now is very dangerous
691. Your last remark was that a zero covered
by a bank loan is "now a very dangerous thing".
(Mr Thomas) Any level of gearing like
90 per cent on a sub-equity is dangerous.
692. Did you not spot that when you created
these things in 1999?
(Mr Thomas) But the gearing was not like
693. So how did this gearing come about? Where
did this borrowing come from? Did it seep in by accident? What
happened, was it not, was that you realised you could borrow more
cheaply from banks than you could by traditional methods. Then
you used to be able to borrow at eight or nine per cent and now
you found yourself able to borrow at six but you did not recognise
the price that was attached to that change in method of borrowing,
the price being that the banks could call the money in. Correct?
(Mr Thomas) I do not think it ever worried
any board or any accountant
694. Was that a yes or a no to that question?
I am not saying did other people get it wrong; I am saying did
you get it wrong?
(Mr Thomas) I am saying, in common with
everybody else round the table in each one of those design sessions,
nobody noticed that.
695. Including you?
(Mr Thomas) Including me.
696. So you made a fundamental mistake. Not
only did you misunderstand the product that you had created but
you did not notify all the people in the same firm you were working
with when they were selling this to private investors. Correct?
(Mr Thomas) With the numbers at that
time it did not show up at all.
697. So we have now really got to the nub of
this disaster, have we not?
(Mr Thomas) I do not think so, sir.
698. Where is the nub of this disaster? Somewhere
(Mr Hall) There was a huge increase in
gearing when the assets fell, was that not correct?
(Mr Thomas) Yes.
Mr Tyrie: I have not got any further
Mr Mudie: Stick with the question you
699. We want to find out why after 1999 it became
(Mr Thomas) I think they were using bank
gearing long before that. I do not think there is a watershed
Mr Mudie: It was the extent of bank gearing.