Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 680-699)



  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 investors.

  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 been included?

  (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?

  684. Correct.

  (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 I right?

  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 in?

  (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 fundamentally different.

  689. But they have turned out to be, have they not?

  (Mr Thomas) There are people who say so.

  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 thing.

  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 that.

  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 else?

  (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 questions.

  Mr Mudie: Stick with the question you asked.


  699. We want to find out why after 1999 it became Frankenstein's monster.

  (Mr Thomas) I think they were using bank gearing long before that. I do not think there is a watershed like that.

  Mr Mudie: It was the extent of bank gearing.

  Chairman: Exactly.

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