Taken before the Treasury Committee
on Tuesday 16 October 2007
John McFall, in the Chair
Mr Graham Brady
Mr Colin Breed
Mr Philip Dunne
Mr Michael Fallon
Ms Sally Keeble
Mr Andrew Love
Mr George Mudie
Mr Siôn Simon
Mr Mark Todd
Witnesses: Dr Matt Ridley, Chairman, Mr Adam Applegarth, Chief Executive, Sir Ian Gibson, Senior Non-Executive Director, and Sir Derek Wanless, Non-Executive Director, Northern Rock, gave evidence.
Q384 Chairman: Good morning and welcome to our inquiry into Financial Stability and Transparency. Can you introduce yourselves, please, for the shorthand writer.
Sir Ian Gibson: Ian Gibson, I am a Non-Executive Director and Senior Independent Director at Northern Rock.
Dr Ridley: Matt Ridley, I am Chairman of Northern Rock.
Mr Applegarth: Adam Applegarth, I am Chief Executive.
Sir Derek Wanless: Derek Wanless, Non-Executive Director.
Q385 Chairman: Good morning to you. Mr Ridley, how were you given the Chairman's job?
Dr Ridley: The Board chose me as Chairman three years ago. I had been on the Board for 13 years before that and in 2004 they chose me as Chairman.
Q386 Chairman: What competences and experience did you bring to the job?
Dr Ridley: I am a businessman and I am on a number of different boards involving a number of different businesses. I had spent at that point ten years on the Board of Northern Rock, including during the transition from a building society to a bank.
Q387 Chairman: Were you involved in any banking businesses?
Dr Ridley: Apart from Northern Rock I was not involved in any other banking businesses.
Q388 Chairman: Are you at ease with the business model that Northern Rock has adopted?
Dr Ridley: The Northern Rock business model was a good one in that it allowed us to achieve good credit quality on our loan book and steady growth for a number of years. That business model proved unable to cope with an unexpected, unpredicted seizure of the money markets in August.
Q389 Chairman: Were you aware of the risks to the business at any time? When did you start becoming aware of the risks to the business?
Dr Ridley: I was fully aware of the risks throughout. We have a Risk Committee and we are continually assessing the risks to the business and stress testing against different risks. We were aware earlier in the year of the risk of tightening in the credit markets and we expected that our good credit quality and our diverse funding platform would stand us in good stead under those circumstances.
Q390 Chairman: So when were you aware of the risks? What date did you really start discussing the risks to the business?
Dr Ridley: As I say ---
Q391 Chairman: When did you start discussing the one that got you into this jam?
Dr Ridley: I started discussing it with the Chief Executive on 10 August, the day after the markets first froze, and during the next few days we discussed it in increasing detail as it became clear that this freezing was less and less and likely to be temporary.
Chairman: Okay. Michael?
Q392 Mr Fallon: Dr Ridley, you wrote to Members of Parliament on 24 September saying: "We have no sub-prime loans." Can you explain why this advertisement appeared by Northern Rock saying: "Open for sub-prime business" in the summer?
Dr Ridley: Yes I can.
Q393 Mr Fallon: Including an advertisement for "sub-prime products, dedicated sub-prime underwriting and processing teams: call our sub-prime support unit". How can you say that you had no sub-prime loans? Do you know what is going on in your bank?
Dr Ridley: Yes I do. We introduce sub-prime loans to a third party. We do not hold those sub-prime loans on our balance sheet.
Q394 Mr Fallon: So the statement "We have no sub-prime loans" can be reconciled with saying "Open for sub-prime business", can it?
Dr Ridley: Yes it can. We are an introducer of sub-prime loans to a third party and that is what that advertisement is about.
Q395 Mr Fallon: You make money out of sub-prime loans then?
Dr Ridley: We have made a small amount of money out of a very small range of sub-prime loans during this year.
Q396 Mr Fallon: You are playing with words here; I thought you were a journalist. You have a sub-prime business?
Dr Ridley: I said in my letter that we have no sub-prime loans; it is true - we introduce sub-prime loans to a third party.
Q397 Mr Fallon: So you are running a sub-prime business?
Dr Ridley: We have no sub-prime loans on the balance sheet of Northern Rock.
Q398 Mr Fallon: Mr Applegarth, why was it decided a month after the first profits warning, as late as the end of July, to increase the dividend at the expense of the balance sheet?
Mr Applegarth: Because we had just completed our Basle II two and a half year process and under that, and in consultation with the FSA, it meant that we had surplus capital and therefore that could be repatriated to shareholders through increasing the dividend.
Q399 Mr Fallon: Was that not exactly the wrong time to weaken the balance sheet?
Mr Applegarth: No, what hit us was a liquidity squeeze, not a credit crunch, and really dividends and capital are to do with credit. It was a global liquidity squeeze that hit us.
Q400 Mr Fallon: You do not now regret that decision?
Mr Applegarth: It was a very sound decision. It had no relation to what hit us. What hit us was the freezing of global liquid markets.
Q401 Mr Fallon: Your business model, Dr Ridley, was described by the FSA Chairman as "extreme". You were borrowing 75% of your funding from the capital markets; you failed to insure against any increase in the inter-bank rate; you failed to hedge the period between taking out a mortgage and its completion, because presumably you thought rates had peaked. This was not banking; this was a heavily leveraged bet on interest rates was it not?
Dr Ridley: I think it is worth clarifying what the funding side of our balance sheet was. It is true that we had a smaller retail deposit book than many other institutions, although there are many like us overseas. As the Chairman of the FSA also said, in terms of the short and medium term wholesale funding, as a ratio of our balance sheet assets, we were not an outlier. Most of our wholesale funding was in the form of securitised bonds and covered bonds, which are long-term funding. The average maturity is longer than the average life of a mortgage on our books.
Q402 Mr Fallon: But why did you not see the risk of capital markets closing to you? Why did you not insure against the danger of illiquidity?
Dr Ridley: We saw that there was a risk of tightening in the credit markets and we prepared for that. What we did not expect was that there would be no flight to quality in that process. In other words, we expected that as markets became tighter and as pricing for risk changed that low-risk prime UK mortgages (and we have below half the industry average of arrears on our mortgage book) and such a low-risk book would remain easier to fund than sub-prime mortgages elsewhere. That is why we were very determined to keep the credit quality of our book high, in order to be able to attract funding.
Q403 Mr Fallon: But a very high proportion of your funding was dependent on the capital market, a much higher proportion than other lenders?
Dr Ridley: We were dependent on, as I said, the wholesale markets but also the securitisation market and the covered bond market. We deliberately diversified our funding platform so that we would have those three different types of funding and indeed a diversified programme within the wholesale funding, and geographically we had programmes in the United States, Europe, the Far East, Canada and Australia. That was deliberately so that if one market closed we would still have access to others. The idea that all markets would close simultaneously was unforeseen by any major authority.
Q404 Mr Fallon: But a heavily leveraged bet on the movement of interest rates and on capital markets remaining open for an over-exposed model like this seems to me a fairly basic banking error, is it not?
Dr Ridley: We were subject to a completely unpredicted and unpredictable closing of the world credit markets. Our model was entirely transparent to the market and to the regulator. It was discussed regularly with both and it was not at the time seen as running a particularly high risk in terms of liquidity.
Q405 Mr Fallon: But it was your duty as Chairman and as a Board to ensure that your bank was liquid.
Dr Ridley: We reviewed liquidity regularly and we reviewed our policy on liquidity and our policy on funding regularly.
Q406 Mr Fallon: But you were wrong?
Dr Ridley: We were hit by an unexpected and unpredictable concatenation of events.
Q407 Mr Fallon: So you are the Chairman of a bank that ran out of money and that caused the first bank run in this country for 150 years; you have had to borrow billions of pounds of public money from the Bank of England; you have damaged the good name of British banking; why are you still clinging to office?
Dr Ridley: I would like to say that what has happened has been extremely distressing to us, as it has been to our other stakeholders, shareholders, employees and creditors. In view of what has happened I am extremely keen to try and turn the situation round and develop a stable future for Northern Rock. I am working night and day to achieve that. I serve at the behest of the Board and if they think that they can do better by asking for my resignation, it will be available to them.
Q408 Mr Fallon: But this is a humiliation. Has none of the Board any sense of honour? Has nobody offered to resign?
Dr Ridley: I would like at this point perhaps to suggest that Sir Ian Gibson answers that question.
Q409 Chairman: No, you answer it Dr Ridley, that is what you are here for.
Dr Ridley: Yes indeed, I was going to say I will give a quick answer to it first. I have made it clear to the Senior Independent Director, as is his role, that my resignation is available to him as soon as he thinks it is in the interests of the company, its shareholders, creditors, employees and other stakeholders that I go.
Q410 Chairman: You did say that you discussed the risk on this issue with the Chief Executive on 10 August; that is correct?
Dr Ridley: Correct.
Q411 Chairman: And that this was unpredicted. You have said that two or three times to Mr Fallon.
Dr Ridley: Yes.
Q412 Chairman: But were you aware of the Bank of England's April 2007 Report on Financial Stability and were you aware of the Financial Risk Outlook from the FSA in January 2007?
Dr Ridley: Yes, I was aware of both of those reports.
Q413 Chairman: Did it influence Board decisions?
Dr Ridley: It did influence Board decisions.
Q414 Chairman: What did you do from January to April?
Dr Ridley: We did a number of things. We prepared to sell some of our asset books, as you will know because of announcements we made at the half year - our commercial loan book and our unsecured loan book and ---
Q415 Chairman: I would suggest to you, Dr Ridley, you failed because if you look at the Bank of England statement it is very clear, in late April it says that: "Recent developments in the US sub-prime mortgage market have highlighted how credit risk assessment can be impaired in these markets and how participants can be hit by sharp reductions in market liquidity. It is important therefore that firms stress test and we take them into account ..." That was in April so what you did from April to 10 August seemed to have no effect whatsoever on the position that you found yourself in, so you did not take corrective action that was successful?
Dr Ridley: As you say, that report was about the pricing for credit risk in the markets as well as liquidity and we ensured that our funding was ---
Q416 Chairman: But Dr Ridley, let us forget about the words here, this talks specifically about reductions in market liquidity. You are telling us that this was unpredicted, but this was informed to you by the Bank of England in April, you were warned, and from April to 10 August you did not have a successful strategy, is that correct, or otherwise you would not have found yourself in this position?
Dr Ridley: We were not warned of a complete freezing of all global liquidity markets.
Q417 Chairman: Let me just read it to you again. It says here "... how participants can be hit by sharp reductions in market liquidity". If that is not a red alert warning I do not know what is a red alert warning.
Dr Ridley: There were sharp reductions in liquidity after 9/11 in 2001. That lasted for a matter of days. Our model was extremely robust in those conditions. What was not expected was that all global markets would shut down and remain shut down for as long as they have.
Q418 Chairman: So really what you are saying to us is that the corrective action you took from April, if there was corrective action, was not sufficient to avert this crisis?
Dr Ridley: The corrective action we took from April was designed for a tightening of the credit markets and a tightening of liquidity in those markets; it was not designed for a complete shutdown of the global markets.
Q419 Chairman: It said "sharp reductions in market liquidity". In other words, it is a real warning and you did not seem to take up what that meant and therefore found yourselves in this humiliating position on 10 August. That is really the answer to the Committee.
Dr Ridley: We were in constant dialogue with the FSA.
Chairman: We will go on to that later on. The main point is made there. Colin?
Q420 Mr Breed: Mr Applegarth, can you just confirm a few things. Did you and do continue to lend up to 125% of the value of the property valuation on mortgages?
Mr Applegarth: No, we lend secured up to 95% but then we also sell unsecured lending as well.
Q421 Mr Breed: So the total borrowing that somebody has can be as much as 125% of the underlying value of the security?
Mr Applegarth: It could but only 95% is actually secured against the property.
Q422 Mr Breed: And do you lend up to five or six times the income of an applicant?
Mr Applegarth: Theoretically yes, but it has to be a very high-quality applicant to get that loan. It accounts for about 1% of our loaning.
Q423 Mr Breed: Do you consider the lending policy prudent?
Mr Applegarth: Yes I do because there is a great deal of difference between phoning up and asking the maximum you can get and actually going through and applying and qualifying for a loan, so all applicants are very heavily credit scored, both at point of sale and on a monthly behavioural rescore, and I think the evidence shows up in the actual quality of the loan book and the fact that our arrears for the last 15 years have been consistently around half the industry average.
Q424 Mr Breed: Your arrears in the past have been below the industry average. Bearing in mind the increase in the volume of your business is in the first six months of this year, it is fairly unlikely for arrears to start to appear within a few months of advancing a loan, do you believe that the quality of your loan book is going to continue to reveal in the future arrears and defaults at half or so the industry average, based upon the significant amount of business that you have taken in the first six months of this year?
Mr Applegarth: I do because one of the exercises you have to do in order to get your Basle II approval is to actually go through your credit scoring dynamically and take a loan from point of sale and go through arrears and possessions and feed it back. I think the last 18 months can be characterised for us as learning the lessons from our lending and applying them back into front end loans. You can track each time cohort of lending as you go along, and it looks like the last 18 months lending is actually better quality than the previous two to three years.
Q425 Mr Breed: Do you think it is believable that any institution which advances up to 125% of property value and lends to people five or six times their income is actually likely to have a record of arrears and defaults of something like half the industry average?
Mr Applegarth: It depends if you are a picky lender or not and, yes, we are a picky lender. If you take the extremes of lending policy, it sounds racy; if you look at what happens in practice, it is not, so for the last 15 years our arrears have been around half the industry average.
Q426 Mr Breed: On that basis it would not have been too difficult to offload your loan book on to a welcoming market with such a fantastic record?
Mr Applegarth: That is what we started doing, following up the answer the Chairman gave before. On the back of the warning signs, you saw us announce a change in strategy with the interim results that were slowing down the rate of asset growth, which we had done from the third month of this year, and we announced that we were going to sell various higher risk asset books on the balance sheet. We completed the sale of the commercial loan book, which is about a £2 billion loan book, over three stages, with the first stage actually taking place after 9 August.
Q427 Mr Breed: So in the third month of this year you began to realise that things were not going very well?
Mr Applegarth: In the third month of the year we picked up the warning signs that the US sub-prime position was meaning a tightening in pricing and therefore we slowed down the rate of growth and we gave new guidance against our profits for the year, recognising the tightening in pricing.
Q428 Mr Breed: So in the five months between March and August, when obviously things were getting tighter and more difficult, you still had not managed to successfully ensure that the bank did not run out of money?
Mr Applegarth: We slowed down the rate of lending, we announced a strategy where we were removing higher risk assets off the balance sheet but, in the event, it could not cope with the complete closure of markets on a global basis.
Q429 Mr Breed: When was the first time that you contacted the FSA and expressed your concerns about this possible problem that you would have?
Mr Applegarth: Our traders first noted a dislocation in the market on 9 August. We first formally contacted the FSA two working days later.
Q430 Mr Breed: So in the third month, in March, and presumably in April, May, June and July, you did not advise the FSA and at no time during that period of time did you have to complete a return to them which might indicate certain liquidity problems?
Mr Applegarth: Sorry, I answered the question thinking that you meant when did we first inform the FSA after the dislocation of the markets on 9 August.
Q431 Mr Breed: When did you first inform that FSA that felt you might have a particular problem? I might have assumed it would have been in March?
Mr Applegarth: We notified the FSA about a change in our strategy. We are on something called a close and continuous relationship so as we changed the strategy so we told them. We are in very regular ---
Q432 Mr Breed: Was that in March?
Mr Applegarth: It will have been in March and before because we were discussing with the FSA as part of our Basle II process and they came to our Board meeting in January, I think it was, and we took them through what we were intending to do going forward in terms of moving to a slower growth model.
Q433 Mr Breed: So they came to your Board meeting in January and they satisfied themselves that it was all right. You kept in close and continuous touch with them, so between March and August you and the FSA between you still failed to ensure that the bank was able to continue to trade with a liquid liability book?
Mr Applegarth: We certainly failed to foresee the global closedown in liquid markets.
Q434 Mr Breed: And the FSA did not point that out to you at any of the meetings between March and August?
Mr Applegarth: I do not know of anybody who foresaw the global freeze.
Q435 Mr Breed: Do you have a Risk Committee?
Mr Applegarth: Yes we do.
Q436 Mr Breed: Who is the Chairman of the Risk Committee?
Mr Applegarth: Sir Derek is.
Q437 Mr Breed: Sir Derek, were you entirely happy that during that period of time the Risk Committee operated satisfactorily and reviewed its risks so that it could ensure that the bank could continue to trade?
Sir Derek Wanless: The Risk Committee and the Board discussed the strategy on a continuing basis. I am perfectly happy, yes, with that.
Q438 Mr Breed: You are satisfied that you had the right strategy for that particular period between March and August?
Sir Derek Wanless: We talked from the time about the funding strategy, which was an annual look at all of our funding sources, about both retail and wholesale funding, and we talked about the ways in which that strategy was robust against many circumstances.
Q439 Mr Breed: Were you in contact with the FSA?
Sir Derek Wanless: I was not personally in contact with the FSA. The Risk Committee is a Board Committee which meets three times a year.
Q440 Mr Breed: The FSA did not contact you or talk to you about the risk profile of the bank?
Sir Derek Wanless: The FSA at this stage were talking extensively to the executive about the ICAAP process and Basle II and the executive were talking to the Board on a regular basis on where that process had got to.
Q441 Chairman: Mr Ridley, what was the business plan agreed in 2006 regarding the amount of mortgage lending that the company would do in 2007?
Dr Ridley: We planned in 2007 to grow our mortgage lending at a slightly slower rate than we had in 2006 to increase the assets on the balance sheet by about 20%.
Q442 Chairman: So what was the mortgage lending in terms of share of the market in 2006?
Dr Ridley: We did not target a particular share of the market but at the end of 2006 we had 7.5% of the UK mortgage market.
Q443 Chairman: And you ended up in 2007 with about 19% of the market?
Dr Ridley: No, those are two different figures. 7.5% is the share of the total UK mortgage market; 19% is the share of net new lending that was done in the first half of 2007.
Q444 Chairman: The reason I am asking that is that I looked at HBOS - they are one of the largest lenders - and they took 8% net lending in the first half of 2007? Is that correct?
Dr Ridley: If you are right, yes.
Q445 Chairman: But you ended up taking 19% at the end of the day, so was it not a case of looking at the market and then taking a punt to increase the amount because other big mortgage lenders had more conservative estimates about what they would take in the market?
Dr Ridley: As I say, we did not increase the rate of mortgage lending in the first half of 2007. It was at exactly the same growth rate as the average had been over the ten years since we converted from a building society.
Q446 Chairman: But it grew three times as much as any other company. That is general knowledge.
Dr Ridley: One of the reasons for that is because we have become very good over the past few years at retaining our customers. We are unique in this industry in offering the same mortgage deals to existing customers ---
Q447 Chairman: One of the questions is, Sir Derek, have you the funding in place to support this? Where were the cautious voices?
Sir Derek Wanless: The plan that was put to the Board, which the Board approved, was a funding and a lending plan, it was a complete plan for the business, and on the funding side we opened up new retail sources of funding, in Denmark for example. We had products in the UK, too, which were being successful, as well as having the diverse range of wholesale lending which meant that effectively we were funding around the world.
Q448 Mr Todd: I may have misheard you, Mr Applegarth, but I think you said that after the warning signs appeared in the spring you took action to slow the growth of loans; is that right?
Mr Applegarth: It is.
Q449 Mr Todd: How do you reconcile that with what your Chairman has just said about the market share that Northern Rock were achieving in this period, which he said was much the same as in previous years and according to the business plan? It does not sound as if any slowing action was communicated to him. It is hard to visualise, bearing in mind the fact that you were taking 19% of the new mortgage market, that that indicated slowing down, but perhaps you can tell us how that is reconciled.
Mr Applegarth: Yes, surely they are consistent. Our market share of the gross market is under 10% and, as the Chairman said, we retain our customers increasingly well, and that is what gave you the net lending market share. We started slowing lending down but, as you know, it takes about two and a half to three months to move house and therefore the actions you take have a delayed impact, so by the end of the year our balance sheet growth, once we had completed the asset sales, would have been somewhere around 16% or 17% versus the figures of the half year, which are higher.
Q450 Mr Todd: So we will not really see the effects of the actions that you may have taken in the spring until the end of the year? Is that what you are suggesting?
Mr Applegarth: You saw some of the actions in the pipeline of new business waiting to come through at the half year, and that was ironically one of the things we were criticised for at the half year - because we were going to deliver lower growth than the markets had been assuming.
Q451 Mr Todd: So what sort of growth were you attempting then in this period after March when you were taking this remedial action that you referred to earlier?
Mr Applegarth: We would have ended the year with an asset growth of around 16% or 17% but that was dependent on removing ---
Q452 Mr Todd: And that is not an aggressive growth rate?
Mr Applegarth: It is a noticeably slower rate of asset growth than the previous ten years where we had averaged between 20% and 22%.
Q453 Mr Todd: I suppose I must have been running dull businesses in the past, but certainly a growth rate of 16%, which in real terms is 12% or 13%, would have seemed pretty aggressive to me.
Mr Applegarth: It depends from where you start. If you start as a small lender the percentage sounds a big number. It would be different if you had a much greater balance sheet.
Q454 Mr Todd: I am hearing incredulity around me but, anyway, can we turn to the stress-testing exercise. You probably have read the evidence of the FSA to us on this. The FSA did not do a full stress test on you in late 2006/early 2007 and actually combined their stress-testing exercise with their Basle II exercise with you; is that correct?
Mr Applegarth: It is indeed, and as part of Basle II, which is a two and a half year process, you have to run a whole series of stress tests, including for example a 40% house price fall. Of course I read the FSA evidence, but what was not stress-tested was the event that was deemed implausible of the global markets all freezing at the same time, with rapid speed and for a long duration.
Q455 Mr Todd: No, the FSA have not said that they alerted you to that possibility, however, they did - quoting Mr Sants - say that they had advised you that you needed to take into account more extreme scenarios than the ones you were presumably using at the moment. Did you a) take any note of what that they said and b) if you did, what in concrete terms did that suggest to you?
Mr Applegarth: Yes of course we did because we had to satisfy them in order to get our Basle II approval. The extra tests they asked us to do were primarily to do with credit, such as the example I gave of the 40% house price fall. What we did not stress test and did not foresee was what was deemed implausible, which was the rapid and long-lasting closure of global markets. That was not stress-tested, no.
Q456 Mr Todd: But nevertheless I think it is fair to say the FSA did not feel that your stress testing model was adequate at the time they reviewed you under the Basle II process?
Mr Applegarth: There are always things you can do better and that was a continual process and had been for the previous ten years with them.
Q457 Mr Todd: So it was a rather mild "there are things we can do better" but no specific criticisms or suggestions were made? However, they did suggest various other tests which included a dramatic fall in house prices, which I must admit I would have said was rather less likely than some of the events we have seen but still those were the only concrete proposals they made?
Mr Applegarth: I think you would describe it as work in progress as opposed to a red flag.
Q458 Mr Todd: Just turning to Sir Derek, did the Risk Committee review the advice that the FSA had given in the Basle II process on risk stress testing?
Sir Derek Wanless: The Risk Committee in fact the Board ---
Q459 Mr Todd: You said they only met three times a year.
Sir Derek Wanless: The Board looked at what the FSA said when they gave us the accreditation under the Basle II arrangement and they made an adjustment to the capital. It is an assessment of Northern Rock's own model so they made an adjustment to capital in respect of credit concentration risk, which was their major concern. They also mentioned pension risk, securitisation risk and stress-testing, in that order of priority.
Q460 Mr Todd: Right. You have emphasised to us how unpredictable and unpredicted the events have been. Can you explain why you are the only substantial business of this kind that has encountered this difficulty?
Mr Applegarth: I do not think we are the only business to encounter this difficulty.
Q461 Mr Todd: Of substance and scale. I recognise there are some smaller operators who have struggled too.
Mr Applegarth: I think one of the features is the fact that it was a global ---
Q462 Mr Todd: --- In the UK and under the governance of the regulatory system here in the UK?
Mr Applegarth: It has been reported that over 150 banks in Europe were able to access the ECB, and that will of course include bigger UK operators who have franchises across in Europe, so they have been able to access ECB funds.
Q463 Mr Todd: But that is of course a mechanism of risk management, is it not, that they are able to gain access to other markets? Is that not so? You emphasise the difference between themselves and yourself, but that would of course be a matter of risk which your Board might have considered, the fact that you would not have had the access that was available to some of your competitors; is that right?
Mr Applegarth: Indeed, and that is why we have worked very hard over the previous decade to try and diversify our funding platform by geography and product. That is why we moved to having four funding platforms - retail cash deposits, covered bonds, securitisation and traditional wholesale - and it is why in each of those markets we look to diversify by geography. So for securitisation for example not only did we tap the UK but we tapped Europe, the Far East and America. If you look at traditional wholesale, we tapped American, European, Asian and Australian markets. Cash deposits, as Sir Derek has already said, we moved across to Ireland and across to Denmark, so we broadened our funding platform to try and increase stability.
Q464 Mr Todd: Just one last thing, you will know that the Governor when he saw us emphasised the message of moral hazard in taking action to deal with a crisis of this kind. Do you think he has perhaps a moral message for the way in which your bank has been governed, that this is an inappropriate model which should not receive support on a free basis?
Mr Applegarth: The facility of lender of last resort is there for businesses that are solvent and viable but have a short-term liquidity squeeze, so the lender of last resort is designed for the situation we find ourselves in. Of course what severely hammered us was the retail run that followed the announcement of that.
Q465 Chairman: Mr Wanless, if I could ask for clarification, 7.5% was Northern Rock's share of the total mortgage lending market at the end of 2006; is that correct?
Sir Derek Wanless: Our share of the total mortgage market, yes.
Q466 Chairman: And at the present time it is just under 10%?
Sir Derek Wanless: The discrepancies are about gross and net and the share of the stock. In terms of net share, we have had 19% in the first half of the net change in the mortgage market.
Q467 Chairman: Of new mortgage lending.
Sir Derek Wanless: Of the new mortgage market, which is the gross mortgage market; on how much new lending is done, we had less than 10%.
Q468 Chairman: That is quite an aggressive approach, is it not?
Sir Derek Wanless: Less than 10% of the market.
Q469 Chairman: But 19% of new mortgage lending, that is what you had.
Sir Derek Wanless: No, we had less than 10% of gross mortgage lending, that is to say new mortgage lending.
Q470 Chairman: What I am saying to you is 19% of new mortgage lending ---
Sir Derek Wanless: 19% of net which is the difference between the new lending and what is repaid.
Q471 Chairman: Was that not an aggressive approach?
Sir Derek Wanless: As I think the Chairman said earlier, the target that we had was an asset growth target, not a market share target.
Q472 Chairman: The reason I am asking that, Mr Wanless, is I looked up the BBC website before I came and you are the only one with experience of retail banking but it was with NatWest, and what the BBC were saying in their website was that you "were seen as having driven NatWest into an ill-advised series of deals, in particular a foray into the highly competitive US market, and a move to expand its financial market presence." They said during his tenure at NatWest, Wanless made ill-advised forays into investment banking in US markets whilst losing market share. In 1997 a £90 million trading loss was uncovered in NatWest Markets, the bank's investment bank, which many commentators blamed on the investment bank's quality of management. The trader who ran up the £90 million loss had been trading since 2004, which meant that he was overlooked by NatWest's review of its risk control in 2005, but at the time you insisted that things were going well generally. As we know, NatWest was taken over in a hostile takeover by the Royal Bank of Scotland, so I am putting it to you maybe the risk you missed here was the risk that you missed with Northern Rock, and your voice should have been a cautious voice against this aggressive strategy.
Sir Derek Wanless: The strategy has been a strategy in place since I joined the Northern Rock Board in 2000. It is a strategy which the Board discussed and, as we have said, we discussed the funding aspects of that and indeed the credit control aspects of that on a very regular basis.
Q473 Chairman: But there was an aggressive strategy?
Sir Derek Wanless: The strategy was a growth strategy which was communicated to the market so that everyone knew what Northern Rock was seeking to achieve, and it was a strategy where we put in place on the funding side of the business a diverse series of funding sources.
Q474 John Thurso: Mr Applegarth, listening to you all here today, you sound like frightfully reasonably chaps who have been the ghastly victims of some unforeseeable financial tsunami, yet the plain fact is you are in charge of the only bank that has had a run on it for 150 years. Do you actually accept you have done anything wrong?
Mr Applegarth: I feel great regret for the anxiety our retail customers have seen. It was a good business model but, clearly, it could not deal with the unforeseen global freezing of the liquid markets.
Q475 John Thurso: You keep saying it was unforeseen yet this Committee has been discussing it for six months. We discussed it when we were in America. We discussed it in open session. Lots of people were talking about the risks that were coming. Why is nobody else in this crisis? Why are you the only ones?
Mr Applegarth: I do not think we are the only ones, as evidenced by the number of banks who had to approach the ECB for exactly the same type of borrowing facility ---
Q476 John Thurso: None of them has lost their brand; none of them is up for sale; none of them is, frankly, destroyed by what has happened. You are the only real, serious casualty. Was it a question of the way you were running the bank? Was it a question of the way we regulate? What caused this?
Mr Applegarth: I think the fundamental cause was the speed and duration and the global nature of the liquidity freeze, heightened for us by the fact that we did not have access to the same type of borrowing facilities that have been available for American banks from the US Reserve and for the European banks from the ECB.
Q477 John Thurso: So there was nothing you could have done to mitigate this risk?
Mr Applegarth: No.
Q478 John Thurso: No action you could have taken that could have mitigated this risk?
Mr Applegarth: No.
Q479 John Thurso: Sir Derek, how did you set about in your Risk Committees of 17 April and 17 July examining the future risks? What is the process your Committee had to look at risks that were coming up?
Sir Derek Wanless: There was not a meeting in April; there was a meeting in July of the Risk Committee.
Q480 John Thurso: There was no meeting in April? According to the letter we had from the FSA there was a meeting on 17 April, but they have obviously got it wrong.
Sir Derek Wanless: There was no meeting of the Risk Committee then. It may be they are referring ---
Q481 John Thurso: There was one in July?
Sir Derek Wanless: It may be they are referring to meetings of the Asset and Liability Committee, which is an executive committee which meets monthly in Northern Rock.
Q482 John Thurso: I am sorry, I have got letter here from the FA and in it they said under the heading "Risk Committee" that the Committee met on the following dates in 2006 and 2007. I will not quote the 2006 dates but 13 February, 17 April and 17 July are the quoted dates for the Risk Committee meetings in 2007, so they got that wrong?
Sir Derek Wanless: Yes, and we can confirm to you if you wish the precise dates of the meetings.
Q483 John Thurso: Your meeting was in July.
Sir Derek Wanless: We met in July.
Q484 John Thurso: What discussions did you have?
Sir Derek Wanless: At that meeting in July we talked about, sorry in June, we met in June. You gave me two months and neither of them was right. We met at the end of June and we discussed the quality of the credit portfolio, we discussed the Treasury position and we discussed operational risk. We took a report from the head of risk management in the company, as we always did, about the activity he had underway and particularly about the ICAAP activity, which was the main focus of his activity at the time.
Q485 John Thurso: Did you discuss liquidity and the way in which you would be refinancing at all? Was that seen as a risk at that time?
Sir Derek Wanless: Treasury management was there and discussed it at each of the meetings. Not long before that meeting we had had our second Granite transaction of this year, which was heavily oversubscribed. Although the Committee this morning is talking a lot about what happened after March, in fact in May this year we had a Granite issue of over £4 billion, which was heavily oversubscribed, so there was no indication that our paper, which we regarded as high quality (which is why the Risk Committee paid such attention to credit risk) was damaged by what was happening.
Q486 Peter Viggers: What would your advice be for other institutions in the light of the experience you have gone through in liquidity and how they should assess risk?
Sir Derek Wanless: Clearly, as with every other aspect of risk, you take everything that has happened in the world that you can look at looking backwards, and it is much easier with hindsight, but I suspect the way other organisations will look at their risk management in respect of liquidity will depend very much on how the authorities react to what has happened, and what happens, both on a global and a UK basis, in terms of the way the authorities are going to handle liquidity in future.
Q487 John Thurso: Do you think that the regulations should be amended to have tighter liquidity rules?
Sir Derek Wanless: I think the BBA has sent to this Committee its thoughts about the matter, because clearly there is a great deal of work to be done to work out how a sub-prime crisis in the US became a run on a bank in the UK, and the whole chain of events, and what could have been done by whom at which stage in that chain of events is something that the authorities are clearly giving a great deal of attention to.
Q488 Chairman: If I could add on to John's question, the Annual Report for 2006 at page 51 talks about the liquidity risk question. It says here clearly that the FSA liquidity rules require the group to be able to meet its sterling obligations without recourse to the wholesale money markets for period of at least five business days. On 9 August how many days' liquidity did you hold?
Mr Applegarth: We were still funding from 9 August until 14 September but the duration came down, so based on the levels of funding we had, we still had two or three months' worth of funding. The reason we went to the Bank of England for a facility was as a backstop facility. We had not intended to draw down but of course we had to in the light of the retail run.
Q489 Chairman: So you had two or three months' liquidity?
Mr Applegarth: Yes ---
Q490 Chairman: So there was no problem then?
Mr Applegarth: The problem we had was you could not tell how long the markets were going to be closed and it was a reasonable and proper thing to do to put a backstop facility in place.
Q491 Chairman: Had that increased or decreased since the start of the year?
Mr Applegarth: It had actually increased since the half year because we increased our liquidity by £2.3 billion at the half year stage.
Q492 Chairman: I would like a note on that please.
Mr Applegarth: Of course.
Q493 Peter Viggers: Who is currently running Northern Rock?
Dr Ridley: The Board is running Northern Rock and Adam and his executive team are managing the operations.
Q494 Peter Viggers: And how much public money has been advanced to Northern Rock?
Dr Ridley: The borrowings have been reported in the press and the sums involved ---
Q495 Peter Viggers: Perhaps you would tell us.
Dr Ridley: I think the sums involved that have been reported of around £13 billion are approximately correct.
Q496 Peter Viggers: And what conditions in terms of management were put on the company on that money being advanced?
Dr Ridley: In terms of who was to be in charge of the company and so on?
Q497 Peter Viggers: Exactly?
Dr Ridley: No particular conditions.
Q498 Peter Viggers: So this amount of public money was advanced to the people who had put the bank in this position without any management controls being put on you at all?
Dr Ridley: The authorities recognised that it is for the Board, and through the Board responsibility to its shareholders, to run its own business.
Sir Ian Gibson: Could I comment there, Chairman. The FSA in particular but also the Bank are at present involved, as you would expect, in a considerably closer relationship with all the executives of the bank and they have been visitors to and demanders of information from the bank in considerable detail since before the issue of the facility and right through including today, and therefore whilst the management of the bank remains with the executive and the supervision of the executive with the Board, we would not suggest that the authorities are not involved in considerable detail in overseeing what we do.
Q499 Peter Viggers: Drawing on my own ministerial experience, in a similar situation we bound the company in question hand and foot so that the management could not take executive decisions without our authority. Has something like that happened to Northern Rock?
Dr Ridley: We are certainly, as Sir Ian said, in close consultation on every decision of significance with the authorities, yes. It would be foolish not to be.
Q500 Peter Viggers: Has a formal structure been put in hand which would prevent you from taking certain executive decisions without the FSA's authority?
Dr Ridley: I would not say a formal structure has, but there are regular and formal links which enable the authorities to consult with us and us with them on every decision.
Peter Viggers: Would it be in order, Chairman, to ask for a note on this in due course?
Chairman: Yes of course.
Q501 Peter Viggers: One specific question: Countrywide, a US mortgage bank, relied in a similar fashion to Northern Rock on short-term funding but chose to take out insurance against liquidity drying up. Is liquidity insurance available here? Did you consider it and why did you not take it out?
Mr Applegarth: I think the first thing to say is that our funding platform is broader than Countrywide's in that we have the four funding vehicles. We did have some insurance in place but clearly it was inadequate to cope with the retail run. It was not the same volume of insurance as Countrywide had put in place but we did have swing-land and standby facilities put in place. They were smaller because we have a more diverse funding platform.
Q502 Chairman: Just to add on to the question from Peter, you say you have £13 billion presently from the Bank of England?
Dr Ridley: Correct.
Q503 Chairman: Do you have an idea of the maximum amount you may need to borrow in the future?
Dr Ridley: I do not think that is a number that we would publicly wish to divulge. It depends enormously on how things turn out and on different scenarios.
Q504 Chairman: Do you think you will have to go back to the Bank of England?
Dr Ridley: We are talking continuously to the Bank of England.
Q505 Chairman: But my question is do you think you will have to go back to the Bank of England for more?
Dr Ridley: We put in place a second facility about a week ago, as was announced by them and by us, which gives us the opportunity to draw down on that until February.
Q506 Chairman: So you could be going back to the Bank of England for more?
Dr Ridley: As I say, it is a continuous process.
Q507 Chairman: But you could be going back to the Bank of England for more?
Dr Ridley: Yes.
Q508 Chairman: That is fine. The point about Countrywide that Peter made, it was the Governor of the Bank of England who made that speech in Belfast last week. He is very clear here when he says "It is a Tale of Two Banks - of similar size and facing similar difficulties - just a few weeks apart. On 17 August Countrywide was able to claim on that insurance and draw down £$11.5 billion of committed credit lines. Northern Rock had not taken out anything like that level of liquidity insurance". So that was really a failure on your part? You got yourself into a situation which Countrywide did not get themselves into; is that correct, Dr Ridley?
Dr Ridley: As the Chief Executive said, we took steps to ensure that we would not need so much insurance by diversifying our funding platforms more than Countrywide.
Q509 Chairman: But Countrywide did not get themselves into this situation; you got yourselves in this situation; there is a lesson there for you, surely?
Dr Ridley: Yes.
Chairman: So you failed. Sally?
Q510 Ms Keeble: I wanted to ask some more about the liquidity and the wholesale borrowing. Dr Ridley, you said that your borrowing on the wholesale market was long term. What was the profile of your borrowing exactly?
Dr Ridley: The covered bonds have an average life of something like seven or eight years.
Q511 Ms Keeble: And what percentage did you have of that?
Dr Ridley: They were about 7% or 8% of the funding. Securitised bonds, which is what we call the Granite programme, had an average maturity of about three and a half years. That is about 46% of our borrowing. The rest of the wholesale borrowing was in the medium-term markets. Its maturity profile was fairly long by the standards of most banks, ie mostly 90 days plus.
Q512 Ms Keeble: Exactly, it was three months plus. You obviously were able to fulfil the requirements on liquidity of 5% in five days, and you had two to three months, Adam Applegarth said, but after that you had a very large amount of loans falling due, did you not? Your profile looks like that?
Dr Ridley: We had a high level of wholesale maturities in August. That was because we were expecting to do a securitisation in early September which would have brought in £3 or £4 billion worth of liquidity, so inevitably you tend to slightly run down your other wholesale book as the securitisation approaches.
Q513 Ms Keeble: But you actually had a problem - and I am not sure if this was by volume or by number - in that just over 50% was between three and seven years, so the other 50% of your exposure in the wholesale markets was very much shorter?
Dr Ridley: I think that 50% refers to the proportion of the balance sheet and of course there is a large retail deposit book in there which technically is short-term funding, as we saw during the run.
Q514 Ms Keeble: But your exposure to the wholesale markets was 75%, was it not, and about half of that was three and a half to seven years, you are saying, and half of that was longer and it was just over the three months; is that not right?
Dr Ridley: Rather more than half of that was in securitisation and covered bonds.
Q515 Ms Keeble: You said earlier that your borrowing on the wholesale markets was longer than your lending, but most mortgages must be longer term than three and a half years or three to six months?
Dr Ridley: One of the features of the mortgage market recently has been that people re-mortgage fairly often and this means that the average length of time that a mortgage stays on our balance sheet and on most banks' balance sheets has recently come down and I think - and the Chief Executive will correct me - it is about three years at the moment.
Mr Applegarth: The average life of a mortgage product is three years.
Q516 Ms Keeble: And what number are actually three years?
Mr Applegarth: That is the average life of our mortgage book. You will have something like 60% in our two-year fixes and the rest are obviously longer than three years, they tend to be five-year fixes. The average life of our funding was about three and a half years. As the Chairman said, of our funding, 50% was securitisation, which had an average life of three and a half years; 10% was covered bonds, which had an average life of about seven years; and of our wholesale borrowings, which is 25%, half of that had a duration longer than one year and the other half was less than one year's duration.
Q517 Ms Keeble: I agree that the profile of some of your wholesale borrowing is similar to some other banks and building societies, but the difference is that your exposure was greater because it was 75% so it actually looks that you were not borrowing long and lending short; you were actually borrowing short and lending long.
Mr Applegarth: I would not agree with that. The average life of a mortgage product is three years and one month and the average life of our funding was three and a half years.
Q518 Ms Keeble: But you had half of your borrowing falling due round within round about three to six months, did you not?
Mr Applegarth: We had 10% of our borrowings which had a maturity of less than one year; we had 10% of our borrowings that were over one year; we had 50% of our borrowings that were three and a half years; and we had 10% of our borrowings with an average life of seven years.
Q519 Ms Keeble: And what were the different interest rates involved?
Mr Applegarth: The average rate on securitisation for the stock was about LIBOR plus ten basis points; the average price for covered bonds, which is the seven year, was about LIBOR plus one basis point; the average price of longer term wholesale was about LIBOR plus five; the average rate for shorter, ie less than year, was about LIBOR flat.
Q520 Ms Keeble: How did that compare with the interest rates on the lending that you were doing?
Mr Applegarth: The interest rates on our lending, including fees that are effective interest rate were about LIBOR plus 90 basis points.
Q521 Ms Keeble: Because looking at the profile of the business falling due, I have to say again it would be helpful if we could see the graphs as you had them because looking at the profiles it looks very much as if you were borrowing short on the markets and that business was falling due at the same time as you were lending quite long, or longer, which obviously looks unsustainable?
Mr Applegarth: If that was the case it would be, but it was not, and maybe I can write and give you the liquidity level.
Q522 Ms Keeble: If we can have the figures and if we can have the exact profile of the business, I think that would be very helpful.
Mr Applegarth: I am very happy to.
Q523 Ms Keeble: Moody's Investors Services noted in August 2006 that your funding profile remained your biggest challenge and the relative lack of retail funding was the one that was most likely to put a negative pressure on your ratings in the future. How did you react to those concerns and what assessment did you make of those?
Mr Applegarth: One of the things we have been able to do with Moody's, by moving into securitisation and lengthening the maturity of our funding, is to encourage Moody's and we actually got upgraded by Moody's to double A-3 on the back of our longer funding profile.
Q524 Ms Keeble: When you said you lengthened it, what by and when?
Mr Applegarth: Effectively by adding securitisation. We started securitisation back in 1999 and then we introduced covered bonds in 2004. Both of those have maturities considerably longer than traditional wholesales. On covered bonds in particular we have only done deals of a minimum of five years' duration and a maximum of 15, which is how you get the average life of seven years, so it was by introducing securitisation and covered bonds that lengthened the maturity of our funding that Moody's actually upgraded us.
Q525 Ms Keeble: Also your share price fell by 20% between February and June this year. What assessment did you make of that?
Mr Applegarth: I think you can ascribe the share price fall to the matters that the Chairman was highlighting earlier in terms of the tightening of the credit markets, so you saw the price of funding increase, you saw a slowdown of our lending in the second quarter and therefore clearly people were assuming that in volume terms our profits would be lower over the next two years than had previously been the case, and indeed that was confirmed when we did a pre-close statement to the market at the end of June.
Q526 Ms Keeble: You had some warnings then that there was suspicion about your business model and how robust it was, and you were already seeing the impact of that on the business, so what did you do as a result of that?
Mr Applegarth: We had certainly some warnings that the credit markets were tightening and therefore the price of funding was increasing, so the action was to change our strategy and announce that publicly to the market. That was one of the reasons why the share price was coming down around the half year because we had made extremely transparent the change in strategy, so we were slowing down lending, we were removing high-risk assets from the balance sheet and we had announced a programme to sell commercial lending; our unsecured lending books and our commercial buy-to-let books.
Q527 Ms Keeble: Do you regret now with hindsight, which is always a wonderful thing, that you put so much reliance on wholesale funding?
Mr Applegarth: Hindsight is a wonderful thing. It is distressing that the global freeze was not in a year's time when we had slowed down the lending and removed assets off the balance sheet.
Q528 Ms Keeble: Would you accept that to some people it looks suspiciously like gambling?
Mr Applegarth: No I do not accept that because I think we reacted reasonably and properly to what we were seeing in the market place in terms of the tightening of the credit spreads, and therefore we slowed down the rate of asset growth and publicly announced a change in strategy, even though we knew that would mean lower profit growth going forward, because it was the right thing to do.
Q529 Chairman: But other banks' share prices were not falling at the same rate as yours. You mentioned my comment on the credit crunch but it does seem a wee bit unreal to us. It seems that you were out of step with all other banks here, you say that it was only because a global credit crunch, which nobody foresaw by the way, that you find yourselves in this position. It does seem a wee bit unreal to us as a Committee that you are the only bank in this country to have precipitated a bank run in 140 years, so there really must be something deeper at stake here. If I could extrapolate from your point, at the end of the day I think you are blaming the Bank of England because you did not get a credit line early on?
Mr Applegarth: We certainly did not have access to a facility that is available to European banks and American banks, and that would have helped us, but it was a sensible and prudent thing to do to put the backstop facility in place. Ironically, it was the announcements and the leaking of the backstop that caused the retail run and it was the retail run that reduced our liquidity.
Q530 Chairman: It had to be announced. At the end of the day you are blaming Mervyn King.
Mr Applegarth: I am not blaming anybody. The cause was the chain of events from worries about the credit quality on US sub-primes linked all the way through to a UK-only prime lender.
Chairman: At the same time, Mervyn King points out that Countrywide in Los Angeles had a different strategy from yourself and did not get into that position. Andy?
Q531 Mr Love: Dr Ridley, would you agree that whatever else happens in the future that the good name of Northern Rock will be a casualty of your failures?
Dr Ridley: I would agree that there is some damage to the brand of Northern Rock and that is a matter of enormous distress to me and my colleagues. I am part of the group, so is Adam, who took Northern Rock through flotation in 1997 and we were very proud of the decisions we took on that occasion to make Northern Rock into a good corporate citizen. We have created 3,500 jobs since then. We have set up the Northern Rock Foundation and Adam and I were on the Board that took that decision.
Q532 Mr Love: I understand all of that but with all the financial services organisations and others that you are now talking to about the future of Northern Rock, are any of them suggesting that they will retain the name "Northern Rock" into the future? Is there anybody that is suggesting that Northern Rock will survive as a name?
Dr Ridley: That is a matter for them, not for us, but it is true to say that on the retail funding side, the name Northern Rock is unlikely to continue. It is worth pointing out that on the mortgage lending side all our feedback from other brokers is that they know we are a good and responsible and careful lender, and that has not changed.
Q533 Mr Love: I think you are accepting that Northern Rock is now finished as a name. I have just returned from the United States and New York and Washington and all they wanted to know about was Northern Rock. They have not heard of any other British banks but they know about Northern Rock and they know about the queues outside your bank over a period of time. Do you fully understand the depth of the reputational damage you have done to the banking system in the United Kingdom?
Dr Ridley: I fully understand and it causes me enormous distress. As I said, we had tried very hard to be a good corporate citizens, creating jobs in this country, delivering fair and good deals to customers, and giving 5% of our profits to charity.
Q534 Mr Love: Where does your share price stand today compared with the high earlier this year? Is it a quarter, is it a fifth, is it a tenth, where do you stand in terms of your share price?
Dr Ridley: I think it is about a sixth.
Q535 Mr Love: So your share value is about a sixth of what it was; your name is in the dustbin of history; the reputational damage you have done to the British banking industry is severe. Can I turn to Sir Ian Gibson, why have you not accepted his resignation, thinking about all of those things that have happened in the last few months?
Sir Ian Gibson: Perhaps it would be helpful at this point Chairman, if I explain the process that I have followed about resignations from the Board.
Q536 Chairman: Sure.
Sir Ian Gibson: First, back on 30 August I asked Board members, both executive and non-executive, if they would be willing and would present their resignations available because that might well have affected the ability to reach some corporate solution, which we were actively seeking at that time. All of them did and those have been on the record in the Board minutes from that point. Later, in the days of the run, the Chief Executive to the Chairman and the Chairman to me similarly said they would be willing to resign. In the week following the run, starting on the Monday following, I consulted with brokers, with shareholders, with other board colleagues and said, "Is this what you believe is right because if it is it is clearly what the Board is prepared to do?" At that point there was no contradictory feedback, the overwhelming feedback was: "You can worry about that later. What you need to do right now is direct the bank through a crisis, find a way to keep people motivated within the place, and respond to customers through that crisis, and when the immediate crisis is passed, Ian, then that is the time you think about the make-up of the Board." That is what I shared with colleagues, that is what I shared with the authorities, and that is what I continue to do with the Board. It is an issue I discuss weekly.
Q537 Mr Love: When you come to share that with the shareholders at the annual meeting, do you think they will be as sympathetic?
Sir Ian Gibson: Yes I do.
Q538 Mr Love: We will find out when you get to that. Can I move on to Mr Applegarth. We have already heard that over the first six months of this year one in five of all mortgages, including remortgages, were sold by Northern Rock, and if you just take new mortgages I think it was one in ten. By anybody's estimation that is aggressive lending. You said earlier on that the quality of your book for that six-month period was probably better than it was previously because of lessons you had learned. Would you like to think again about that statement? Are you putting your name and your reputation on the quality of the lending you have done earlier this year?
Mr Applegarth: Yes, it is really a fallout from the work we had to do over the previous two and a half years in order to get a Basle II waiver. You have to show that you dynamically manage scorecards from new lending all the way through to arrears and possessions and put that information back into your front end score cards, so, yes, I am quite happy with that statement.
Q539 Mr Love: We mentioned earlier the Together product that you have where you give up to 95% secured against a home and the rest, 30% I think it is, in unsecured lending. What is the level of loans you have as a result of this Together project?
Mr Applegarth: The Together project, you are quite right, is a first-time buyer product which allows them to buy their home and also pay for furniture, so it is a secured loan bundled together with an unsecured loan. There are two separate products. It accounts for about 20% of our share of stock. Its three month plus arrears at the half year stage were 0.84% which is still lower than the industry average for secured from the CML, which is 1.06, so it is for us a higher risk book and therefore it is charged at a slight premium but it still performs better than the industry average.
Q540 Mr Love: So far, one has to say. Can I just ask you, it is said that the management of Northern Rock were incentivised through the growth in the volume of the business that you were undertaking. Do you see any problems related to that, the fact it was that aggressive lending on which was based the salaries of the senior management and the organisation?
Mr Applegarth: The salaries incentives were linked to profit growth and total shareholder returns and whether that is judged as shareholder returns or as earnings per share ---
Q541 Mr Love: It was mentioned earlier that some of the products that you sell are multiples of up to six times income, we have talked about Together at about 125% including the unsecured part of the loan. If we look at the experience in the United States - and I know that that is not always apposite - if we take that experience and the incentives towards aggressive lending and the securitisation process that you were heavily involved with, what is now emerging (and they are at a further stage than we are in this process) is some very imprudent lending. Are you totally confident that there has been no imprudent lending within all of these different products that you have been selling over the recent period?
Mr Applegarth: Yes I am in that somebody phoning up to ask for your maximum lending criteria is not the same as somebody going all the way through a loan application. We are renowned as a picky lender. One of the frustrating things about this is I had always assumed that if there were liquidity problems there would be a flight to quality and therefore the more transparent you could be about the quality of your assets and the higher quality assets you had then you would be in a better position which is, why for example on the Granite securitisation that you mentioned we provide so much data on it on a monthly basis. We provide management information of something like 250 pages on all the details of the credit quality behind Granite and you have to do that in order to get the AAA rating.
Q542 Mr Love: Can I ask you finally in relation to going forward, there have been quite a lot of reports about Northern Rock not being as competitive as it was. Partly that is related to the tightening of your lending criteria but also in relation to some of the benefits that you gave - £500 or £1,000 towards the costs. Are you confident that in the climate going forward the levels of profitability you have seen in the past will continue or are you projecting a significant reduction in the profitability of Northern Rock?
Mr Applegarth: We are forecasting lower profits than previously, and that is what we announced at the half-year stage, and that is why you saw the share price come down because an aftermath of the tightening of the credit markets was that the price of funding went up. Clearly we have slowed our lending because we are short of liquid funds.
Q543 Mr Love: But these additions that you gave in the past, the £500 and £1,000 depending on the type of mortgage, the free valuations and all the other incentives, to take out a mortgage with Northern Rock, have you stopped doing that simply because of the tightness of your liquidity or is that a reassessment of the amount of risk that you were taking on in relation to some of the mortgages?
Mr Applegarth: No, the prime driver has been the lack of liquidity and therefore we have had to slow down lending. You adjust price and policy to slow down the lending and that is exactly what we have done.
Q544 Chairman: To get back to you, Sir Ian, it seems to me anyway to be an arrogant view here from Northern Rock in that you are not really out of step with anyone else and you just found yourself in this position because of the global markets, and to a number of us it seems that you are in denial. The gossip that I have picked up in the past few weeks with lots of people talking to me is that as the Non-Executive Director you are the only one with any shred of credibility here and people are depending on you to see this situation through. Given that is the case, and I have respect for your past business background, is there not a case here for more humility in your approach about how Northern Rock got into the situation and how we are going to see this bank coming out at the end of the day so that the interests of shareholders, including those of ordinary people in the North East who have invested in it, are secured?
Sir Ian Gibson: Chairman, there is absolutely no arrogance, let me assure you, on my part and on the part of the Board of which I am part. There is shock and there is distress. That is reflected in part, although with high morale, in the workforce in Gosforth and in Sunderland. These are people who are trying damned hard to serve their customers and secure their future, and we are very aware of that. Are there lessons to be learnt? I am very sure there are. I think those lessons go far beyond this institution. As you all know, we can only deal with the world as we know it. We dealt pretty well with the world as we knew it; and the world has changed. That has been an enormous shock and one that this Board has not finished coping with yet. It has acquired time until February next year to create the best solution for its shareholders, for its stakeholders, for its employees as best it can, and that it will do and it will do it whether it comprises some or all of the individuals that are there now or some others, but it will do it. There is no arrogance; there is shock and dismay.
Q545 Chairman: You will understand there is shock and dismay throughout the country as well.
Sir Ian Gibson: Yes.
Q546 Mr Simon: Dr Ridley, we hear talk about an inquiry or even a public inquiry into the tripartite arrangements. Were there to be such a "dodge-the-blame" fest what would be the main things that you could imagine yourself telling it?
Dr Ridley: The tripartite arrangements are not really a matter for me obviously; they are for the Government and for those institutions. As far as we understand it, we were perfectly clear that our supervisor was the FSA and it was the FSA that we were to keep informed about our position and through them they would inform the Treasury and the Bank of England. Additionally, we felt it important to get our view directly to the Bank of England as soon as we could about what would help avoid a disaster for ourselves.
Q547 Mr Simon: Get your view to them?
Dr Ridley: In addition to speaking to them through the FSA, it was our view that it was important to speak to them directly, and the FSA knew about that and that was quite above board.
Q548 Mr Simon: When did you start speaking to the Bank directly?
Dr Ridley: I spoke to the Governor of the Bank of England on 16 August.
Q549 Mr Simon: Were you speaking to the Treasury directly as well?
Dr Ridley: I was not speaking to the Treasury directly, no. We knew that our views were being communicated to the Treasury directly through the FSA.
Q550 Mr Simon: Was anybody at Northern Rock speaking directly to the Treasury?
Dr Ridley: In due course, yes, we did have direct contact with the Treasury. In the initial stages it was through the FSA.
Q551 Mr Simon: So when and who began to speak to the Treasury?
Dr Ridley: During the period of the retail run we were speaking to them but I cannot remember when the exact first contact was.
Q552 Mr Simon: Who is "we"?
Dr Ridley: I think it was probably me that made the first call to the Chancellor's office during the retail run.
Q553 Mr Simon: So initially you were speaking directly to the Bank from the 16th, not at that stage to the Treasury, although later, and generally felt yourself to be communicating with the Treasury via the FSA?
Dr Ridley: Correct.
Q554 Mr Simon: When talking to the Bank and the Treasury, did you feel you were speaking to different beasts, to whom you had to speak in a different way?
Dr Ridley: Inevitably, they have different responsibilities and there were different issues to discuss with them.
Q555 Mr Simon: Did you get the sense that there was a poisonous relationship between the two of them?
Dr Ridley: No.
Q556 Mr Simon: When the FSA were here, they were very clear that the tripartite arrangements had worked admirably well. Do you think that the tripartite arrangements worked extremely well and successfully and ought to be admired and perhaps recommended as a model throughout the world?
Dr Ridley: I really cannot comment on that because---
Q557 Mr Simon: Why not? Clearly, you are not responsible for the tripartite arrangements and that is a matter for them and you are a matter for you but, obviously, as a matter of public policy, you have had an interaction with these arrangements in a way that nobody else has, an importance that is absolutely remarkable, with a whole set of outputs which everybody wants to avoid. Obviously, your view on the tripartite arrangements - you are not just a bloke; it is a particularly important view and we would like to hear it.
Dr Ridley: As I said, it is up to them how their arrangements worked among themselves. As I have said, we were quite clear that we had a good communications link with the FSA, with the Bank and later with the Treasury.
Q558 Mr Simon: How did their arrangements work for you? How did they work for the country?
Dr Ridley: Inevitably, as we have discussed, the leak of the announcement of the facility and the effect that had on our retail depositors was not a happy outcome. I am not here to blame that on the particular tripartite arrangements. That is about events.
Q559 Mr Simon: I am not suggesting that you are trying to blame anybody and I am not trying to get you to blame anybody. The problem with this whole debate is that nobody wants to take responsibility for anything and nobody wants to talk about what anybody else might or might not do differently. So far all we have is a whole series of people saying "Everything went fine. Nothing that anybody did could or should have been done any differently." You have said today that there is no way that you could have done anything different, the FSA could not have done anything different, no-one could have done anything different, in which case, with the same set of circumstances again, it will happen again.
Mr Applegarth: I think the actions we took since 9 August were entirely reasonable and proper. One of the problems we had is that it was not a UK problem; it was a global issue, and I think there are lessons to be learned about, if you have a global issue, how you get coordination between each of the geographic areas. Clearly, the extremely distressing retail run is not a success although, because it was not a UK-only issue, it is difficult to judge---
Q560 Mr Simon: It only happened in the UK though, did it not?
Mr Applegarth: No, the global freezing happened worldwide.
Q561 Mr Simon: No, the retail run on the bank, your bank.
Mr Applegarth: Absolutely, and it is a chain of events from---
Q562 Mr Simon: If you cannot tell us what to do about this, and the FSA cannot tell us and the Bank cannot tell us, who is going to tell us? What is the answer?
Mr Applegarth: I was trying to suggest that perhaps one of the issues - and I have to say that I would like to agree with big chunks of BBA letter that they circulated to you, particularly the globalisation aspect, because if each individual geographic area acts on its own, you will get dislocations in actions and facilities between different geographic areas. Because this was a global issue, the tripartite being judged against a global issue is somewhat unfair but I think there are major lessons to be learned in how you tie up each of the different geographic areas.
Q563 Mr Simon: You think that is the answer?
Mr Applegarth: For this particular set of circumstances, it has to be part of the answer.
Q564 Mr Simon: Who is going to do this tying up?
Mr Applegarth: Really, that is a matter for the authorities, is it not? I would imagine it would be led by the Treasury and the Bank of England.
Q565 Mr Simon: The Treasury and the Bank? Not the FSA?
Mr Applegarth: I do not think I know enough to comment as to who should be the right person.
Q566 Mr Simon: Somebody must know something about this. You said, Dr Ridley, that you are quite clear that the FSA was the regulator, although you would never know that to talk to the FSA. You said you were quite clear that it was them you were talking to mainly, because they are the supervisory body. The next group that you spoke to was the Bank, and last, and presumably least, the Treasury. Do you think this might have been avoided if it had been the other way round, if, instead of a tripartite arrangement where nobody was responsible for anything, the Treasury was responsible for dealing with you, sorting out the liquidity early and making sure that this did not happen?
Dr Ridley: I think that is a hypothetical question and---
Q567 Mr Simon: Clearly it is a hypothetical question. You are a scientist. There is no other way to seek to make sure that this does not happen again, is there?
Dr Ridley: No, there is. As Adam has suggested, the British Bankers Association has made suggestions which we think are sensible for looking at these issues and for learning lessons from them. There is a division of responsibility between managing liquidity in the markets between the Bank and supervising individual institutions in the FSA. As far as we were concerned, there was not a problem of communicating our position between those two institutions. We were able to communicate to both.
Q568 Mr Dunne: I would like to pursue some of the line of questioning of Mr Simon as to what could have been done in the specific circumstances to have prevented the run on the bank in the case of Northern Rock. If we can start by the relationship between the Bank and the FSA and reporting the liquidity constraints, can you tell us when you first identified to the FSA a specific liquidity problem emerging for Northern Rock?
Dr Ridley: I will let Adam answer that because he had the first contact with them.
Mr Applegarth: Yes, of course. We first noticed dislocation in the market on 9 August and we waited one working day before contacting the regulator, so that would be 13 August. From then it was a very close relationship, including two formal calls a day to update them on the position.
Q569 Mr Dunne: So neither the Risk Committee, chaired by Sir Derek, nor the Board, nor the operations of your own internal treasury had noticed any tightening in market conditions between April and 9 August?
Mr Applegarth: No, I am not saying that. We certainly noticed the tightening of conditions and that is why we announced to the market publicly a change in strategy for lower growth and removing assets from the balance sheet. What we did not have any foresight of is the closure of the markets. We have managed and lived through various closures. The chairman has already mentioned we were doing a securitisation issue in the middle of 9/11. I remember going back to the Asian banking crisis, but this is the first time that you had seen a very rapid and very widespread, both in terms of geography and in terms of product, closure of the market. So yes, of course we noticed the fact and we reacted to it. What we had not foreseen is the complete closure of liquid markets on such a wide basis, whether it is commercial paper, asset-backed commercial paper, securitisation, covered bond, medium-term note and even the cash deposit markets in the UK and US effectively---
Q570 Mr Dunne: At what point did you first discuss with the FSA or the Bank of England the opportunity to tap the lender of last resort facility?
Mr Applegarth: We first contacted the FSA on 13 August, and then---
Q571 Mr Dunne: To discuss that issue?
Mr Applegarth: No, to discuss the issue of liquidity, and then I have to say we did a vast range of things to try and get liquidity, whether it was raising it in different markets, because at that point you could not tell that the markets were completely closed. You actually did see two small covered bond issues get away in August before that market closed. On 9 August you could not foretell the extent and depth of the closure. In terms of the facility of lender of last resort, once we tried to raise liquidity, once we had tried to repo assets, once we had gone down the route of trying to find a safe haven for the company, because we started that on 16 August---
Q572 Mr Dunne: Stop there then. At what point did you start seeking an acquirer for the business?
Mr Applegarth: 16 August.
Q573 Mr Dunne: Those discussions ran in parallel with all of these other events?
Mr Applegarth: We were trying to do all things at the same time, yes.
Q574 Mr Dunne: You have not given me a date yet when you discussed the lender of last resort facility. Could you do that, and could you tell me whether or not the third party approached the Bank of England to secure a similar facility?
Mr Applegarth: Yes, we had been talking with the Bank of England from the middle of August in terms of what if, what would be a backstop facility, so we were talking, as you would expect, because it is a prudent thing to do to put a backstop facility in place in case of all the other actions in place. That would have been the middle of August.
Dr Ridley: Can I just interject there? In my first conversation with the Governor of the Bank of England on 16 August the lender of last resort was mentioned as a theoretical possibility at that stage.
Q575 Mr Dunne: What was the response of the Bank of England at that stage?
Dr Ridley: It was mentioned by him.
Q576 Mr Dunne: That that was an opportunity which they might make available?
Dr Ridley: If we got to the point where liquidity continued to be a problem and the markets remained closed, then of course that was available and would need to be discussed.
Mr Applegarth: But as a last resort, so their encouragement to us was the work we were doing to try and find liquidity or find a solution. It was lender of last resort. It had to be a last resort.
Q577 Mr Dunne: What I am trying to get to is that the decision to provide that facility was taken after it was too late, after you had had a run on the bank. Why was that decision not confronted before the run on the bank, either by yourselves or a third party?
Mr Applegarth: It was actually taken before the run on the bank. It was the announcement of the facility being leaked that actually was the start of the run. The run effectively started on 14 September. Our corporate activity ceased on 10 September and therefore between the 10th and the leak late on the 13th, that was when we were putting in place the lender of last resort. We had intended to announce that on the following Monday but clearly, the leak meant we had to rapidly accelerate and therefore our communication plans had to be rapidly accelerated and they were not as smooth as they would have been had there been a Monday announcement.
Q578 Mr Dunne: Had a third-party acquirer been granted the facility, in your opinion, would that have prevented the run on the bank?
Mr Applegarth: Had a facility been granted, I am led to believe that we would have had a bid to consider and I suspect that, had an offer been made with a big retail brand, then the run would not have taken place, yes.
Q579 Mr Dunne: So with hindsight, you would be recommending that the Bank of England consider relaxing its arrangements; the moral hazard argument that prevented that decision from being taken would have stopped the run on the bank.
Mr Applegarth: I have a little difficulty understanding the moral hazard argument. All I know is from Northern Rock's point of view, and avoiding the shock and the huge distress of a retail run, it would not have taken place, in my view, for what it is worth, if we had been able to announce an offer with a big retail brand.
Q580 Mr Dunne: Can we just touch on the leak for a moment? Where do you believe the leak came from?
Mr Applegarth: That is a hugely difficult question because I cannot answer it. All I know is we had not even signed the facility when the leak took place. My treasurer was going down with the company secretary to go through the negotiations through the night of the 13th. The facility was actually only signed late in the night of the 13th or early in the morning on the 14th, and yet the leak took place on the evening of the 13th, so it caused immense difficulties.
Q581 Mr Dunne: Do you believe it is likely to have come from the people in the know within the bank or its advisers?
Mr Applegarth: All I know is it did not come from us.
Q582 Mr Dunne: Or your advisers?
Mr Applegarth: Or our advisers. It is massively not in our interest.
Q583 Mr Dunne: Is there any evidence of any other information that you supplied to either your regulator or to the Bank of England getting into the public domain?
Mr Applegarth: Yes, there have been things appearing in the public domain that have been provided to third parties but I cannot say where the leak was because, as you can imagine, there are a huge number of advisers on both sides. I am not just talking about PR advice; I am talking about banking advisers, accountants, lawyers. It is impossible to tell where they have come from. All I know is that there have been three leaks that have been massively damaging to the business and it has not been in our interests to leak them. So I am confident it has not come from us.
Q584 Mr Dunne: Had the facility existed, as we have discussed earlier, in the US or the Continent to have covert funding lines available to you, would we have avoided the run on the bank?
Mr Applegarth: I think if we had been able to borrow on the lines that we did, which is basically using our mortgage and our mortgage assets as collateral, which is what they do across in - I will just take the ECB as an example. The ECB has had over 150 institutions borrow on a similar line and, because it is not public, then clearly you have not had the shocking retail run that we have had to experience. So I suspect the answer is yes.
Q585 Mr Dunne: You had no mechanism available to you because you were not regulated by the ECB to be able to approach them yourselves as an alternative?
Mr Applegarth: No. We have a branch across in Ireland and had we had more time, we might have been able to put in place the legal documentation and provide the collateral through the Irish branch. The trouble is that would have taken two or three months and in trying to put the backstop facility in from the Bank of England, we were trying to put a sensible and prudent backstop in place that we thought we might not have to draw down on because we were actually still funding - not fully funding, and duration was noticeably shorter but we were still funding until 13 September, but I think it would have been a gamble to have relied on getting documentation and collateral in place through the Irish branch. Had we done that a year ago, then we would have been able to do that, but we had not.
Q586 Jim Cousins: I wonder if I could just ask you, Dr Ridley, before the matter was raised with the Bank and the FSA on 13 August, that is to say, the sustainability of your situation, did the Bank or the FSA ever approach you with questions about the sustainability of your situation?
Dr Ridley: Not in relation to a particular change of liquidity. The FSA was in continuous contact with us, as we have made clear, throughout the Basle II process and we were talking about risk and stress-testing throughout the process, so there was a two-way dialogue but no, we did not take a particular course saying "Markets are getting particularly difficult, we think liquidity is going to dry up" or anything like that, if that is what you are referring to.
Q587 Jim Cousins: So the first doubt about the sustainability of your situation came from you to them?
Dr Ridley: Correct.
Q588 Jim Cousins: The Chancellor, in his statement on the 11 October, Mr Applegarth, said "We" - and by that I think he meant not just the Treasury but the FSA, the Bank and Treasury together - "did everything that we could to try and resolve the situation without special support becoming necessary." In your answer that you have just given to one of my colleagues it is plain that you take the view that there were other things that could have been done that might have avoided special support becoming necessary.
Mr Applegarth: I think it is undoubtedly true that in the period from 9 August to 14 September we went through a wide programme of attempts to get liquidity, whether it was by raising liquidity, repo-ing, but additionally, before we went to the Bank as a lender of last resort, we did start on 16 August corporate activity. It is my view that, had the facility had been granted to a major high street retail bank ahead of us having to get the facility, that would have stopped a retail run, but that is my view.
Q589 Jim Cousins: I would now like to ask you, Dr Ridley and Mr Applegarth, about the guarantee to depositors, which of course was given by the Treasury, and subsequently of course extended to new deposits that had been created. What was asked from you in return for this guarantee to depositors?
Dr Ridley: I do not quite follow the question.
Q590 Jim Cousins: The question is a very clear one. A depositor guarantee was given by the Government to existing depositors and subsequently it was extended to new deposits. What was asked of you in exchange for that guarantee?
Mr Applegarth: The first guarantee was for existing customers and that was later clarified to include customers returning to their account. That was important to us, because that allowed us to refund penalties to the customers, and that facility is still available until the end of October to make sure that customers who paid a penalty have not been disadvantaged. For new customers, in order for us not to be advantaged versus our competitors, we have to pay a fee for each new deposit coming to us to make sure that we are not at a commercial advantage versus our competitors, who do not have such a guarantee for new customers.
Q591 Jim Cousins: Apart from that fee, nothing was asked of you?
Mr Applegarth: Explicitly, no.
Q592 Jim Cousins: Implicitly?
Mr Applegarth: As Sir Ian and the chairman made plain, our communication to the regulator is extremely close, of course, as our contact in the tripartite. They passed that information to the Bank of England extremely swiftly---
Q593 Jim Cousins: I am talking here about the Treasury, the Government's guarantee to depositors. What implicit understandings were reached between the Treasury, the Government and yourselves at the time that the deposits were guaranteed?
Mr Applegarth: For the facility and guarantee to be in place we had to provide a viable business plan, which is extremely closely monitored and scrutinised - that is where the "implicit" comes from - to make sure we are performing as per the plan we had to provide to make sure we are viable and solvent for the facility and guarantee to be given. The only explicit requirement for the guarantee is for the new depositors.
Q594 Jim Cousins: Can I stop you? I want us to be clear about this. I am not talking about the facility guarantee that was given by the Bank. I am talking about the guarantee to depositors which was given by the Government.
Mr Applegarth: It is to do with new deposits and it is the fee we have to pay to attract new deposits.
Q595 Jim Cousins: What implicit understanding was reached between you and the Government at the time that guarantee to depositors was given?
Mr Applegarth: It is the same as we had to put in place for the facility to be granted, which was the delivery of the viable and solvent business plan.
Q596 Jim Cousins: So there were no additional requirements asked of you in exchange for the guarantee to depositors?
Mr Applegarth: For existing customers, no. For new customers, yes.
Q597 Jim Cousins: At the time the guarantee to depositors was given, was any indication given to you that that guarantee might in any way be time limited?
Mr Applegarth: Yes. The form of words used was "during the current financial difficulties".
Q598 Jim Cousins: What did you understand by that phrase?
Mr Applegarth: The foreseeable future, during the period when markets were dislocated.
Q599 Jim Cousins: Let us be clear about this. The lending facility is clearly time-limited at February 2008. Is the guarantee to depositors subject to any such time limit?
Mr Applegarth: It does not have such an explicit time limit. The phrase of words used both in the public announcement and to us was "during the current financial difficulties".
Q600 Jim Cousins: At the time the deposit guarantee was given was there any indication that if there were to be a merger, break-up, takeover, what you will, of the company, a safe haven, to use Dr Ridley's earlier term, that the guarantee to depositors would be terminated or limited?
Mr Applegarth: I think that will be a matter between any such party and the Treasury. Therefore I do not think I am able to comment on that.
Q601 Jim Cousins: You submitted your business plan to the Treasury at the same time as the guarantee to depositors was given but at that stage in your discussions with them, in the event of merger, break-up, takeover, call it what you will, no indication was given that the guarantee to depositors would be terminated?
Mr Applegarth: No. The form of words used was "whilst the financial difficulties continued".
Q602 Jim Cousins: Do you recognize there must be an early settlement of the future direction of the bank?
Dr Ridley: The benefit of the second facility is that it gives us until February 2008 to sort out the future of Northern Rock. Yes, that gives us the time to make sure that there is not a precipitate solution to the future of Northern Rock and it gives us the time to keep all our strategic options open and to discuss all of the options, including sale of the bank, or sale of part of the bank, or an independent future with a different funding arrangement.
Q603 Jim Cousins: What is going to guide you?
Dr Ridley: What is going to guide me?
Q604 Jim Cousins: In the period between now and February 2008, what is going to be the priority? What is your guiding light going to be?
Dr Ridley: My guiding light and the guiding light for the Board is going to be responsibility for the interests of the shareholders, the creditors, the employees and all other stakeholders.
Q605 Jim Cousins: How many of your employees are actually shareholders as well?
Dr Ridley: Approximately 75%.
Q606 Mr Mudie: Since we are near the end, can I just give you a last chance, certainly in my eyes, to come away from denial, because even that eloquent speech of Sir Ian referred to things happening, lessons being learned, and then he went worldwide. You can accuse us of hindsight. You now have hindsight. What would you have done differently to avoid what happened?
Mr Applegarth: The trouble with hindsight is, if we had had it, other people would have had it too and you would not have had the events take place. As for the denial, I do not think the Board, certainly none of the executives, are not in denial at all. We are deeply scarred by what has happened.
Q607 Mr Mudie: I know you are scarred and I know you regret it and I accept that you sincerely regret it. The chairman is distressed and I accept that and I accept the sincerity of it but what have you learned and what would you have done? People looking at you would say - you must be used to it in Newcastle. The manager comes out: it is all somebody else's fault. At the end of the day somebody says to him "Aye, but what are you going to do to make sure it never happens again?" Newcastle managers do not seem to learn that lesson. What would Northern Rock do? What would you do? What are you saying to us as a Committee? What lessons have you learned, not about the world, not about Europe but about Northern Rock?
Mr Applegarth: I think in essence it is to follow the revised strategy we announced to the market at the end of June in terms of moving to a lower growth model, because life has changed; you will not see the level of liquidity and pricing that you have seen over the previous decade be repeated going forwards. Therefore, I think the answer to the question is pursuing the revised strategy we put in place at the end of June/start of July, even though it meant the share price went down because the profits were likely to be lower.
Q608 Mr Mudie: That just suggests lower growth. What about the total lack of liquidity that you keep coming back to that caused your problem? Even with a lower rate of growth that could still happen. It has been put to you; no higher authority than Mervyn King has pointed out that you should have ensured. You say you had some insurance.
Mr Applegarth: We had some insurance. We had the equivalent of about $3 billion and it was plainly insufficient. I think an additional lesson to be learned is that we had already begun the process of diversifying by geography and product all our funding streams. Had we had more diverse retail funding, including in particular funding through a branch within the euro zone, that would have allowed us access to the ECB facilities and not simply to be dependent on the UK facilities. That is an additional lesson for me.
Q609 Mr Mudie: That is something that I have some sympathy with. If you had realised earlier your Irish connection to Europe, and used it, do you think if you had had the facility European banks had and which the Bank of England later on, after your run, actually gave British banks, would you have gone through this crisis?
Mr Applegarth: It seems to have worked in Europe. Within Europe there are a number of business models that actually have a greater dependence on wholesale funding than we do and they have not had the same issues we have had, so I would suspect so, yes.
Q610 Mr Mudie: Just let me go to something Jim and Philip raised, this question of when you realised you were in trouble in August, you said you looked, obviously, at trying to open up lines of liquidity, you started discussions with the Bank in terms of last resort. Did you look for a market solution during August?
Mr Applegarth: Yes, we did. In terms of looking for liquidity, it was not simply---
Q611 Mr Mudie: No, I am really after a market solution. Did you look for a market solution in terms of, as Jim referred to, takeovers and mergers?
Mr Applegarth: Yes, we looked at two types of commercial solution. The first was using our assets to borrow and to get greater liquidity. I would describe that as repo-ing and we did a limited amount of that. The second was what I would describe as corporate activity, trying to find a safe haven, and we started that on 16 August, so a week after the markets became dislocated.
Q612 Mr Mudie: Did you have any interest?
Mr Applegarth: Yes.
Q613 Mr Mudie: Could you enlarge?
Mr Applegarth: Yes, there was one main high street clearer, which is why the question I was asked before, if you were able to find a safe haven, in my view, had it been an offer - not a completed transaction but an offer - from a major high street clearer, I think you would not have seen the retail run, in my view.
Q614 Mr Mudie: Why did you not get one? You have told us how sound your business is, which I accept. You have a very largely sensible lending policy. It was your borrowing policy that was to blame. You had a very good book. Why could you not secure a safe haven?
Mr Applegarth: Primarily because the main high street clearer concerned would also have wanted it. Equally they could not tell, because it still has not finished, how long the markets were going to be closed and therefore they asked for a backstop facility in case the markets remained closed for X months to make sure they had sufficient liquidity to cover the liquidity issues we had.
Q615 Mr Mudie: Who did they ask?
Mr Applegarth: The central bank.
Q616 Mr Mudie: When?
Mr Applegarth: The corporate activity talks broke down on 10 September, so I imagine just before 10 September.
Q617 Mr Mudie: So specifically on 10 September the bank - and I presume the Bank of England - said no?
Mr Applegarth: That is what we were led to understand, yes.
Q618 Mr Mudie: Then seven days later they would have said yes.
Mr Applegarth: We were on the night of the 13th, so it is only three days later, going through the process of putting the documentation in place in order to be able to announce the Monday after, which I think is a week after, yes.
Q619 Mr Mudie: After the 13th, was your safe haven still interested if they could have got the guarantee from the Bank? Did you keep lines open to the safe haven?
Mr Applegarth: The Bank made it explicit after the retail run had started, the facility to us would be transferable. Understandably, in the middle of a retail run it is difficult to find a safe haven.
Q620 Mr Mudie: Specifically when did they tell you that the facility was transferable?
Mr Applegarth: The Governor made it clear on that weekend, so that would be 15-16 September.
Q621 Mr Brady: The Governor of the Bank was very clear with us that the freedom of manoeuvre the Bank had was severely constrained by EC legislation, including the Market Abuses Directive, the Takeover Code and some other things. Could you talk us through the discussions you had with the Bank and the FSA specifically about the disclosure requirements relating to the lender of last resort?
Mr Applegarth: We were in the process of taking legal advice about whether such a facility would have to be covert or overt. The Board had not actually made that decision but our advisers were, I think, giving us clear advice that it would have to be overt and the FSA told us that their view was the same. So both our legal advisers and the FSA came to the same guidance for us.
Q622 Mr Brady: So you had both come to that conclusion independently. It was not that Northern Rock was saying "We will have to disclose this even if others want it to remain covert"?
Mr Applegarth: I think that is fair, yes.
Q623 Mr Brady: Looking again at the question of why the run happened, there has been some talk about the leak of the facility. Do you think the run would have been avoided had the leak not happened, if you had had those extra few days?
Dr Ridley: Yes, the answer to your question is that had the leak had not happened and we had been able to announce on the Monday the facility with the Bank of England in a measured fashion, with full communication plans in place, undoubtedly there would have been some concern - a lot of concern - to many of our customers but we think it would have been considerably less than it was in the way that it came about. Nonetheless, I think it is worth reflecting that all of us, both here and in the authorities, were surprised by the degree to which the announcement of a facility from the Bank of England - not the use of it but the existence of a facility - and the reassurances that went with it about us being a solvent and profitable business did not have a sufficiently reassuring effect on customers.
Mr Applegarth: I slightly disagree with that. I think there are three things that would have stopped the run. The first is had we found a safe haven with a major retail brand and had that offer in place. The second is had we been able to borrow using the same type of facility that we have used but general. So had the facility not been bespoke to us but a general facility, I think that would have stopped it. Had the bespoke facility been covert, that would have stopped it but I do not think that last one could have happened. I think the chairman is right in that the probability of a retail run would have been lessened had we been able to do the announcement as we had intended on the Monday, to be able to put facilities in place and also to actually improve our ability to get the money to the customers. One of the things we had intended to do over that weekend was to widen the bandwidth on the internet account so you would not have had so much frustration from our internet customers. We would have been able to get the money back to customers better. I still think it would have been unsettling for retail customers just based on the language used. As soon as you have language used in terms of "lender of last resort" and "liquidity problems", that would frighten me as a retail customer.
Dr Ridley: I agree.
Q624 Mr Brady: You say that a covert facility would not have been possible - not possible because of the legal or regulatory requirements or not possible for the purely practical reason that it simply would have come into the public domain by one means or another?
Mr Applegarth: I think both of those. Firstly, the legal advice that we were getting that it was most probably announceable, and that was the FSA's view as well, and secondly, and secondly, because there were so many people involved, in practical terms it would have leaked, and having seen what has happened since 13 September and what has got in the public domain, I think that is a pretty strong probability.
Q625 Mr Brady: Albeit despite sensible clarification of the position that the leak was not solely responsible for the run---
Dr Ridley: I am sorry. I did not mean to imply that at all.
Q626 Mr Brady: No, I completely accept that. Given the clarification that took place, if the leak was not solely responsible for the run, it did clearly exacerbate it; it did take some of that time away from you and clearly therefore it is a hugely important factor in the way events developed. You said in response to an earlier question that you are very confident, you know the leak did not come from you, you are very confident, I think the implication was, did not come from Northern Rock. What kind of inquiry have you mounted within Northern Rock, including presumably your advisers, to establish with absolute certainty that the leak did not originate there?
Mr Applegarth: I do not think you can establish with absolute certainty that it did not, because you do not have monitored telephone calls and whilst you can ask to see written correspondence, that does not stop somebody briefing. Given that it was massively not in our interests or our advisers' interests to leak it, and given the clear answers we have been given when we asked the people concerned, because we kept it down to as small a bunch as possible within the company advisers who knew, as far as is certain, I am sure that it did not come from us.
Q627 Mr Brady: What steps have you taken to establish where it did come from?
Mr Applegarth: None outside our company.
Q628 Mr Brady: Do you propose to?
Mr Applegarth: I do not see how we can.
Q629 Mr Brady: Sorry, you said not outside the company. What steps have you taken within the company?
Mr Applegarth: Clearly, we have gone to the people who knew about it, who were employed by us, either on our payroll or as advisers, and asked them. You cannot prove or disprove that somebody gave a verbal briefing.
Q630 Mr Brady: Do you have a view as to where the leak did come from?
Mr Applegarth: Other than I am pretty damn sure it did not come from inside Northern Rock or our advisers, no.
Q631 Chairman: Could I just go back to Sir Derek Wanless and ask about the Risk Committee which he chaired: did it have the specific policies for managing liquidity risk?
Sir Derek Wanless: The Risk Committee is a strategic level committee of the Board which meets three times a year. The issues about liquidity and treasury risks were set out by the Board and the Risk Committee monitored that on a regular basis at each of its meetings.
Q632 Chairman: Did you have an active management policy for measuring liquidity risk? That is what I am asking you.
Sir Derek Wanless: We have reports on liquidity risk which the committee sees.
Q633 Chairman: If you had an active policy, why did it not work? The thing is, I want to get back to the Bank of England and the FSA. The Bank of England said in April, "It is important that firms stress-test and take those stress tests into account." Secondly, the January 2007 FSA report says about risks for firms and markets that "if economic conditions were to deteriorate, this could lead to crowded exits, draining liquidity from the market and causing erratic price swings in commodities, etc." Did you as a Risk Committee study those comments?
Sir Derek Wanless: We looked as a Board at the issues of our funding strategy and what the risks were.
Q634 Chairman: I am asking specifically were the FSA and the Bank of England reports discussed by your committee in terms of liquidity and how it could seize up?
Sir Derek Wanless: Those reports were discussed as part of the ICAAP work. For the whole of this period we were working with the FSA on our ICAAP.
Q635 Chairman: So what did you do when the FSA in January said that it could lead to crowded exits, draining liquidity from the markets?
Sir Derek Wanless: As we explained earlier, we---
Q636 Chairman: No, you see, your explanation is not sufficient because at the end of the day, you found yourself in a position where no-one else in the UK found themselves. That is what we are talking about as a Committee, that this is unreal. What did you do as a committee in terms of that liquidity?
Sir Derek Wanless: We were going through a process at the time of scenario stress-testing which involved looking at 20 scenarios which the Board had signed off. Fifteen of those scenarios involved liquidity risk, including two where securitisation became a particular problem. What did not happen was that we stress-tested the scenario of what has actually happened, which is, as we said earlier, that there was an unprecedented and unpredictable change in the market basis.
Q637 Chairman: Can I ask then, in terms of stress tests, do you think stress tests should now include more extreme scenarios such as the one you that you have recently faced?
Sir Derek Wanless: Clearly, this now having happened to everybody will stress-test---
Q638 Chairman: So your stress tests were insufficient?
Sir Derek Wanless: Our stress tests at the time were exactly what they should have been, that we agreed with the FSA---
Q639 Chairman: No, no, no. At the end of the day, here we find ourselves in a situation where you are the first bank to have a run in 140 years. Were your stress tests sufficient? That is the question.
Sir Derek Wanless: Our stress tests at the time were sufficient. That is the point I am making.
Q640 Chairman: So they were sufficient and you got yourself into this situation. Why did not other banks in the country not get themselves into it? Why are you alone? This is the question we as a Committee are asking. Why are you alone here, Sir Derek?
Sir Derek Wanless: What we are required to do is to look at---
Q641 Chairman: Why are you alone, of all banks?
Sir Derek Wanless: I think we went earlier through the issue of what might have been happening in other banks.
Q642 Chairman: Why are you alone? That is the question. Why do you stand on your own? Why are you an orphan in the banking sector?
Sir Derek Wanless: We do not know precisely what the position was in other banks. Clearly, we are the only bank that has had a run.
Q643 Chairman: You are the only one who went to the Bank of England.
Sir Derek Wanless: We are the only bank who have had a run. That was crystal clear.
Q644 Chairman: You see, I put it to you that - and this was mentioned in one of the newspapers this morning - when rival mortgage banks were scaling back their lending in 2007, you were accelerating yours. As the Daily Telegraph said this morning, almost one in five loans in the first half were provided by yourselves, and therefore that decision to expand aggressively is key to this situation. You as a Risk Committee and you as the chairman of the Risk Committee did not do your job, Sir Derek. If you had done your job, you would have brought to the attention of the Board the comments of the FSA in January, the comments of the Bank of England in April and then had a strategy early on in that year to deal with the situation where you did not find yourself in the iniquitous position of being the only bank in the United Kingdom to face this situation and going cap in hand to the Bank of England, to end up in a situation where your bank is effectively nationalised; it is the taxpayer that is supporting your bank at the moment.
Sir Derek Wanless: The position is not like that at all. The position is we were stress-testing, plausible stress tests---
Q645 Chairman: You were stress-testing but your stress-testing was not enough, because you ended up in this inglorious situation.
Sir Derek Wanless: Our stress-testing was, as stress-testing, plausible and---
Q646 Chairman: This is unreal.
Sir Derek Wanless: No. The position is, and it was confirmed to you by the FSA, who said no reasonable professional would have forecast the set of circumstances that happened. They also---
Q647 Chairman: The FSA never said to us that no-one could have found themselves in this position but Northern Rock, so the FSA did not come here and give you support as Northern Rock so do not try and kid us on that.
Sir Derek Wanless: I am not. The FSA said, and others have said too, that what has actually happened, the sequence of events, was not something which was regarded as a plausible stress test at the time. The FSA were talking to us all through that period. We as a Board were looking at the scenarios which we were stress-testing. Of course, since this has happened people will do different stress tests but the stress---
Q648 Chairman: The FSA said to us that they have to learn lessons on stress-testing. Implicit in that is the fact that your stress-testing was not enough and that is how you found yourself in this embarrassing situation, and you, as the chairman of the Risk Committee, should have been alert earlier on in the year when the FSA and the Bank of England were giving these warnings, and I put it to you that you were not doing your job.
Sir Derek Wanless: No, we have made it clear that the stress-testing was tested against a tightening of the credit markets, which we expected, and our strategy, as Mr Applegarth explained earlier, was actually slowing down the growth of assets and selling books, for example, the commercial lending book. So we were taking action through the half-year. We did not foresee the unprecedented and unforeseeable changes and the sequence of events that have happened. That is very clear.
Q649 Chairman: So at the end of the day your answer to us is unsatisfactory. You do not really know how you got yourself in this situation where you are alone in the United Kingdom.
Sir Derek Wanless: No, we know exactly---
Q650 Chairman: You, as the chairman of the Risk Committee, did not do your job.
Sir Derek Wanless: The Risk Committee and the Board did its job, in my view, properly through this period.
Q651 Chairman: It did its job and it ended up in this hugely embarrassing situation, causing pain to people in the North-East, not least your employers in the community. But you did your job. That is what you are saying to me this morning.
Sir Derek Wanless: What I am saying to you is there is a sequence of events that go through from sub-prime problems in the States to the run on Northern Rock which requires a good deal of careful analysis to find out what the issues are.
Q652 Chairman: You are out of step with every other retail organisation in this country and you have no adequate answer to this Committee as to why you stand on your own.
Sir Derek Wanless: We were an outlier in terms of wholesale lending in total, securitisation in total. That is true and the figures show that. We were not an outlier in terms of maturity, the structure of the wholesale lending.
Chairman: You ended up in disgrace. That is the issue.
Q653 Mr Fallon: You have made it clear that you stress-tested some aspects of securitisation, Sir Derek. Because you were over-dependent on the wholesale markets, what you did not stress-test were movements in the interbank rate. That was the position, was it not? This whole business model was a gamble on interest rate movements.
Sir Derek Wanless: No, it was not and is not a gamble in that sort of way. The issue that has happened is a complete drying up of liquidity, not an issue about price. We expected the price would change in the marketplace and that the tightening that the chairman referred to would be a tightening of pricing in the marketplace and therefore it would cost us more to raise securitisation. That was something we expected and it was something that we were planning for.
Q654 Mr Fallon: You mean you were ready for any kind of increase in the interbank rate?
Sir Derek Wanless: We were ready for foreseeable changes in our securitisation pricing. If you look at the prices of our securitisation, if you look at what happened in May, when we raised £4 billion through a Granite issue, it was oversubscribed and at attractive prices. There was no indication at that time, as late as May, that good-quality UK mortgages, put into a securitisation vehicle, was going to be a difficulty in terms of raising funds.
Q655 Mr Fallon: So there was no increase possible in the interbank rate and you did not stress-test?
Sir Derek Wanless: We have not had a problem with change in the interbank rate since August. The issue certainly affects profitability but that is not the issue we are here to talk about. Certainly our underlying profitability is impacted by changes in margins but we had actually taken a good deal of action as early as January of this year to prevent any mismatch in interest rates from hitting our bottom line.
Q656 Mr Fallon: It was your job and your Risk Committee's job to assess properly the risk of illiquidity and to ensure the Board was prepared against it. You failed and that is why you have ended up dependent on £13 billion worth of public money.
Sir Derek Wanless: We take at each time, because we only have foresight, not hindsight... When we looked at our funding strategy and had a very clear strategy which said the first line of defence is good credit quality. The first line of defence is to make sure we have available so we can securitise or put into covered bonds good-quality mortgage assets and that we have. Nobody has criticised, in fact people have indicated to you, I think, that we have good-quality assets. That was the first issue, so that the markets would distinguish between what were clearly very poor US sub-prime loans and good-quality UK loans. The first line of defence. The second line of defence was to increase our retail deposits, which we did both in the UK through a different product range and also in Denmark through opening a subsidiary there which was successful in raising funds. We then opened up a securitisation covered bond and wholesale markets geographically round the world. To have tested the scenario which said that what would happen was all of those markets and all of those geographies would close and be closed for a prolonged period - because clearly we can cope with short periods of closure of those markets - was unprecedented and unforeseeable and therefore it was not in our stress tests.
Q657 Mr Fallon: Do the four of you realise the damage you have done to British banking?
Dr Ridley: We realise very acutely the pain and distress that has been caused to our customers and to others in the banking industry, yes.
Q658 Chairman: Can I just ask Sir Derek again, to follow that up, 75-80% of your business is depending on mortgage. Is that right?
Sir Derek Wanless: On securitisation, on non-retail.
Q659 Chairman: These are public figures. Let us look at HBOS. They are the biggest mortgage lender and only 20% of their profit is gained from it, so diversification is important. You were not diversified enough, Sir Derek. That was how you got yourself as a company into this situation. It was too late.
Sir Derek Wanless: The company has had a very successful strategy, which---
Q660 Chairman: You were not diversified the enough. That is the point I am making to you.
Sir Derek Wanless: The company strategy has been very clearly articulated and it is to concentrate on mortgage and---
Q661 Chairman: Exactly, so you were not diversified enough in the case of a crisis.
Sir Derek Wanless: No, that strategy has been a very successful strategy.
Q662 Chairman: You only had one well to go to where other companies had a number of other wells, HBOS and others, and that is the situation, and that is what you did not see as a company or you ignored as a company. You only had one well from which to drink.
Sir Derek Wanless: That is simply not true, and those who comment on the shares, the analysts, talk about our well-diversified funding stream. Retail, wholesale, covered bonds, securitisation gave us channels which opened up markets around the world and nobody has foreseen that all of those markets would close at the same time.
Q663 Chairman: Sir Derek, again, this is unreal. You depended for 75-80% of your business on mortgages. Other reputable companies were diversifying and, as I say, in the case of HBOS, they only depended on it for 20% of their profits. If you had diversified, if you had sat with an ambitious chief executive and said, "Look, Adam, don't put all your apples in the one basket because we are going to end up in a car crash here" and things could have helped.
Sir Derek Wanless: That is simply not the way that we saw it or any---
Q664 Chairman: It is the way everybody else in the way UK sees it.
Sir Derek Wanless: No commentators saw that. The model that we described for the business, which was a concentration on mortgage business, was a very clear, transparent model---
Chairman: Sir Derek, I have spoken to chief executives of major banks---
Jim Cousins: Which ones, Chair?
Chairman: I am not saying which ones.
Jim Cousins: We have had 20 minutes grandstanding from you. Do you not think that is quite sufficient? What other banks have you talked to, Chairman?
Chairman: I am saying diversification is important.
Jim Cousins: You are telling this Committee you have talked to other banks who are cleverer. Please tell this Committee what other banks they were.
Q665 Chairman: I am not saying. The point is, Sir Derek, they are saying that diversification is important.
Sir Derek Wanless: We had a model which was simple and well understood. It was sold to the market as a model which concentrated on mortgages. A few years ago we sold our credit card business because it was a risky business. We have this year sold our commercial finance business. There is a concentration mortgage assets. That concentration was well known to all of those people with whom we do business.
Q666 Mr Breed: Mr Applegarth, when did you qualify as a banker?
Mr Applegarth: I am not a qualified banker.
Q667 Mr Breed: The period that I am most interested in is the period between March and August, during which time you had certain changes of policy, you sold off the commercial book, and you issued a profits warning. The Risk Committee seemed to carry on as normal; it did not have any increased meetings. Everything was going along as if you thought it was normal. There was the so-called close control of the FSA, which seemed to me anyway to be non-existent, and in the end you contacted the FSA on 13 August. During the whole of this period of time what discussions or meetings took place with your external auditors?
Mr Applegarth: Our external auditors' first point of contact is the finance director and they have a series of regular meetings with the external auditors, so there would be at least monthly formally, but the contact was much more frequent than that.
Q668 Mr Breed: So the external auditors were well aware of the situation on at least a monthly basis between March and August, yet it appears to me that they sent a letter expressing their concern about the liquidity and everything else, I think, on 11 September, which seems to be somewhat late.
Sir Derek Wanless: If I may, as the chairman of the Audit Committee, answer that---
Q669 Mr Breed: So you are chairman of the Audit Committee as well as the Risk Committee?
Sir Derek Wanless: Yes, I am. The auditors did the normal job in the interim results signing off. There were no liquidity issues which the auditors needed to pay special attention to at the time of the interim results in July.
Q670 Mr Breed: So the auditors felt no need at any time to alert the FSA or the Bank of England as such about any concerns they might have had in the figures that they were seeing from Northern Rock?
Sir Derek Wanless: You would have to ask the auditors but I would be astonished if they did because they did not alert us to any issues at that stage.
Q671 Mr Breed: Do you think their letter of 11 September was timely?
Sir Derek Wanless: I am not quite sure exactly which letter you are referring to.
Q672 Mr Breed: Bearing in mind you had a liquidity crisis on 9 August, it seems about a month later they decided to send a letter.
Sir Derek Wanless: The auditors were in contact with the company and knew well that the company were keeping the tripartite informed, as we mentioned earlier.
Q673 Mr Breed: So they felt no need whatsoever to express an opinion.
Sir Derek Wanless: You would have to direct that to them.
Q674 Mr Breed: Who are your auditors?
Sir Derek Wanless: PWC.
Q675 Mr Love: I am going to make a very big assumption, which is that you, as the operators of Northern Rock, understand Northern Rock depositors better than anyone else. What I am trying to get to the bottom of is the psychology of what happened on that Monday morning. I am going to make the assumption again that there is some evidence, that you have got your employees to talk to these depositors about why they were withdrawing their money. I want to be clear first of all, because there seems to be a difference of view between the chairman and the chief executive about whether or not the BBC leak was instrumental in what happened. I think you were saying Mr Applegarth that you thought that the difficulties you would have had would have probably led to that although it might have been exacerbated by the BBC. Dr Ridley, you said that you thought if you could have handled it, it would have been okay. Can we get clarity? Are we moving towards Mr Applegarth's view of things?
Dr Ridley: Just be clear, I never said that if there had been no leak everything would have been okay. I simply said, which was exactly what Mr Applegarth said, that the management of the communication on the Monday morning would have enabled the shock to depositors to be slightly less.
Q676 Mr Love: You mentioned, Mr Applegarth, a number of things that you thought could have helped. Let me ask you about one of the ones that was raised by us with the Governor of the Bank of England and subsequently now by the Chancellor, deposit insurance, both in terms of time and in terms of the coverage. Would that have made the difference?
Mr Applegarth: I think it must be true that if the depositors' scheme guaranteed 100% at a higher level, that would have reduced the probability of withdrawals. That must be true.
Q677 Mr Love: How about the time? Were people coming to you? This is anecdotally what we have been told through the media. The rational view was "There is a run started on the bank - better get your money out early otherwise it's going to be tied up for months on end." Is that what your employees were being told by depositors who came for their money?
Mr Applegarth: I can understand readily the logic of somebody who has their life savings invested in an institution and who sees pictures of people queuing outside the door and they go and join that queue. That is quite a logical reaction. One of the problems with the depositors' scheme was it is not simple to explain, in that the existing scheme was until recently guaranteed up to £2,000 and then a certain percentage up to another. It does not lend to sound bites when you are trying to deal with customers either on the telephone or queuing outside your branch.
Q678 Mr Love: Was that an issue that was raised consistently by those depositors who were queuing? I am just asking. I do not know whether you gathered any evidence from this process. It might help with the psychology of all of this.
Mr Applegarth: The first set of evidence we tried to collect was what issues they were having actually getting the money out. It was not just queuing outside the branches, because that was actually the least money going out, although it was the most visible sign of a retail run. It was what was happening with internet withdrawals, what was happening with postal and telephone withdrawals. The logic was at the time, and I perfectly understand it, "We have seen pictures. You have got our life savings. I want it back. I do not really want to withdraw it and I'll bring it back." In fact, that is what we have seen. We have actually seen depositors returning cheques but I perfectly understand the reaction they took. I would have probably done the same thing if I was in their shoes.
Q679 Mr Love: You talked about a safe haven. The Governor of the Bank of England said to us that the Takeover Code made it impossible to do what traditionally the Bank of England has done. Do you think it was an institutional arrangement like the Takeover Code or were there failures in the way that the bank interacted with Northern Rock and the possible high street bank that you mentioned that could have taken over Northern Rock?
Mr Applegarth: I think the Bank of England acted remarkably smoothly within the constraints it had. Clearly, it would have been impossible to get a completed transaction over a weekend but it is my view that, had you had an announceable offer over the weekend with a major high street brand, that would have provided sufficient confidence so a run did not happen.
Q680 Mr Love: That did not happen. Was that because of something that the Bank did or was it the Takeover Panel rules that precluded that from happening?
Mr Applegarth: I understand in the first instance it was because a facility similar to the one we got was not available to the main high street bank at the time. It was subsequently made available in the first weekend of the run but, unsurprisingly, in the middle of a retail run it is difficult to find a safe haven.
Q681 Mr Love: The final thing I want to ask you is about whether it should be overt or covert. The Governor told us it is a Directive from the European Union on market abuse. There are many reasons why we would want to make overt lots of things that would be covered by a Market Abuse Directive. Would you be suggesting, from your experience, that we should be thinking seriously about changing that and making it covert in the very specific circumstances that you were facing?
Mr Applegarth: I think a general rule that transparency is good I would sign up to, but there are occasions where discretion of being able to make something covert might have helped. The problem the bank would have faced even if it could have made it covert is in practical terms because, as proved by the leak to the BBC, in practical terms, there will be so many people involved in terms of advisers, etc, that it would have got out and that in itself would have been damaging. If you think it is going to go out, you might as well try to manage the communications well, and this is where I am in agreement with the chairman: the probability of a run would have been lessened had we been able to do the full communication over the Monday morning as intended as opposed to having to rush the communication on the Thursday morning.
Q682 Chairman: Sir Derek, when you were chief executive of NatWest the Bank of England supervised you. What was the difference in approach between the Bank of England supervision and the FSA's now?
Sir Derek Wanless: The supervision in the 1990s was a good deal more informal. The procedures which exist under the FSA tended not to be there at that time and there was a good deal more personal discussion.
Q683 Chairman: Would you say they monitored liquidity and funding more in the Nineties?
Sir Derek Wanless: No.
Q684 Ms Keeble: I have a couple of questions. What percentage of your mortgages were taken out in the last couple of years, during your big expansion programme?
Mr Applegarth: We have been growing our assets by 20% plus or minus 5% for the last 17 years.
Q685 Ms Keeble: If you could just say the percentage by value, not by number, because presumably they are a bit larger now.
Mr Applegarth: Yes. I would imagine over the last two years - and I will provide the exact number for you in writing - it probably accounts for around a third of our current lending.
Q686 Ms Keeble: Earlier you said that the average mortgage life on your books was three years.
Mr Applegarth: Three years one month, yes.
Q687 Ms Keeble: If you say a third of them are very new, what is the profile for the rest of them? The point is really the length of time that people hold a mortgage before they either pay it off or remortgage rather than the average lifetime of the mortgage as you have got them now. They are obviously two different things.
Mr Applegarth: Yes, of course they are. The average life of a mortgage product is three years one month. The length of time a customer stays with us, however, is back up to seven years. Because, as the chairman said, we are very good at retaining our mortgage customers, the average life a customer is with us is extended but his mortgage product is short. So what you are finding is mortgage customers are increasingly having two or three or four products with us during their life before they leave us. The mortgage product - and it is the mortgage product that you are funding - has an average life of three years one month.
Q688 Ms Keeble: Perhaps we can have that profile when we get the figures. The other thing is that you said much earlier on in the questions - and I might not have got the wording exactly right - that you had some more risky investments that you moved off-balance sheet.
Mr Applegarth: Yes.
Q689 Ms Keeble: Can you just explain what that was? It was just a throw-away phrase.
Mr Applegarth: Of course I can. Under Basle II, when you get your Basle II approval, the relative risk weighting of certain assets in your balance sheet changes. So what we had, because of the quality of the loan book, was you saw our risk weighting for residential mortgages come down from 50% to 15%. That clearly required less capital behind it, so that links to why we were able to increase the dividend. We had some assets whose risk weighting did not change. Commercial lending is a good example. It remained 100% risk weighted. Relative to the mortgages, which had gone down to 15%, they were therefore less capital efficient and therefore it made sense to remove that type of asset off the balance sheet. It also tied in well---
Q690 Ms Keeble: Can you just say again what they were? I did not catch it when you went through it.
Mr Applegarth: Commercial lending, unsecured lending, commercial buy-to-let. Those were the three prime areas.
Q691 Ms Keeble: Those you moved off-balance sheet?
Mr Applegarth: Those we announced publicly that we were going to. We had only completed the three parts of the commercial sale.
Sir Derek Wanless: We sold them.
Q692 Ms Keeble: I see. You sold them. All of them, or you got through part of them?
Mr Applegarth: We sold all the commercial, and it was in three stages, but clearly the market dislocation has meant we have not been able to sell the unsecured or the commercial buy-to-let. As markets return towards normal, so we should be able to do that but that will take some time.
Q693 Ms Keeble: Can I just ask because you said "the unsecured". Does that mean your new package is included in the riskier portfolio? Can you just describe a bit about the buy-to-let and why that is perceived to be riskier?
Mr Applegarth: Absolutely. There are two types of unsecured lending. There is about £7.8 billion of it. There is the unsecured lending that is bundled with it to get the first-time buyer product and there is stand-alone unsecured lending. Our aim was to sell the stand-alone unsecured because the unsecured would together perform so well. Its three months plus arrears are actually less than the industry average for secured lending. So we looked to move off the balance sheet, sell, the stand-alone unsecured and that accounts for 60% of that £7.8 billion. The risk weighting under Basle II did not go up. It was just the relative risk weighting versus mortgages which came down. The same applies to the commercial buy-to-let. The commercial buy-to-let did not change its risk weighting, just relatively compared to mortgages, which came down, made it look therefore less capital efficient. So it is good-quality lending but it did not fit in a high-quality asset balance sheet because we believed that high-quality assets and transparency was the way to maintain liquidity. Wrong!
Q694 Chairman: You mentioned special-purpose vehicles. You have the Granite special purpose vehicle. What is the purpose of that?
Mr Applegarth: Granite is our securitisation vehicle and accounts for roughly 50% of our funding. The way securitisation works is you borrow against a pool of mortgages. The bond holders, the people who are lending the money against it, they carry the risk and therefore there can be no risk from those loans to the PLC's balance sheet, so even though it is shown in our balance sheet, it has to be a separate legal entity. The separate legal entity is a master trust.
Q695 Chairman: Just one point there. In the agreement with Northern Rock the Law Debenture Corporation names a particular charity, Down's Syndrome North East, but this charity has come out with a statement saying that they were not consulted.
Mr Applegarth: Indeed, and I regret that. We have spoken to them and I have written to apologise. The master trust---
Q696 Chairman: They say they had no knowledge of Northern Rock at all. That is what they said. It seems an extraordinary step that you took.
Mr Applegarth: That is not true. They had no knowledge that they had been named a beneficiary or potential beneficiary if there was a windfall from the master trust at some time in the future. Clearly they knew about us because the reason they were picked is that in 2001 they were one of our three corporate charities.
Q697 Chairman: You gave them £40,000.
Mr Applegarth: Yes, the staff raised £40,000.
Q698 Chairman: What they are saying is they were not consulted about this.
Mr Applegarth: It is not usual to consult them but I have to say we have spoken to them and I have written to apologise.
Q699 Chairman: Some would say it is identity fraud if you use a name and they do not know about it.
Mr Applegarth: I would not go so far as identity fraud but I have written and apologised and they have accepted my apology.
Q700 Peter Viggers: One of the aspects of this affair which has caused so much damage is the lack of a clear, informed market for quite a long period, from 9 August, when you first knew of the liquidity problems, through to 14 September, when you made your announcement. Obviously, the FSA and the Takeover Panel have some responsibility for ensuring that there is no false market, that there is an informed market, but the prime responsibility is yours, and there must have been many times during this turbulent period when you considered what public announcements you should make. Can you please talk us through the narrative of that?
Dr Ridley: Certainly. You must remember that on 9 August it was not as if there was a sudden change in our profit forecast. This was the beginning of a squeeze that, if it lasted only a short number of days, would have no effect at all. As it went on and it became clear that there would be an impact on the profit forecast, we were keeping in very close contact with both the authorities that you mentioned and also our own legal and other advisers, broking advisers, about whether we needed to make an announcement. The other thing we had to take into account was that we were by then in talks with the potential safe havens that have been mentioned. So we simply took the best advice we could on when and where we needed to make announcements and we made exactly as many announcements as we were advised we had to make.
Q701 Peter Viggers: Just for the record, can you remind us of the share price performance during this period?
Dr Ridley: There was a sharp decline in the markets generally in the middle of August and some recovery after that.
Q702 Peter Viggers: You took advice and made announcements when you were advised to make announcements?
Dr Ridley: We were absolutely clear that we made every announcement that we needed to make when either we needed to announce a change of profits or we needed to announce discussions with other parties, and while the discussion of the facility with the Bank of England was going on, that was also a relevant factor that we were told we had to take into account.
Q703 Peter Viggers: You maintained contact with the relevant authorities throughout?
Dr Ridley: We maintained contact with the relevant authorities throughout.
Q704 Chairman: Dr Ridley, did you think it was appropriate to offer a 14.2 pence dividend to shareholders, almost £60 million in total, whilst the bank was under Treasury protection?
Dr Ridley: We kept the position of the interim dividend under continuous review from the time that we announced it at the end of July until we took the decision to not pay it. That was a decision that had to be a careful balance of judgement between on the one hand---
Q705 Chairman: Your announcement was Tuesday 25 September but a couple of days before it you were still saying you were going to pay it out. There was a bit of a brouhaha in the press that day. What changed your mind about paying it out then?
Dr Ridley: We were taking continuous advice and listening to all parties, including the FSA and others, and we were having to balance the judgement between, on the one hand, paying cash out of the business and, on the other hand, our obligations to shareholders.
Q706 Chairman: Do you think it was appropriate to pay out £40 million to preference shareholders, even though you had cancelled the payment to ordinary shareholders?
Dr Ridley: That is simply a mistake that was made in the press. It was not a dividend to preference shareholders; it was interest on a debt.
Q707 Mr Dunne: Following up on that, what proportion of the shares of Northern Rock are held by the Board?
Dr Ridley: I do not know the answer to that question.
Q708 Mr Dunne: Approximately?
Dr Ridley: Can we write to you on that?
Q709 Mr Dunne: Is it a significant proportion or it is an insignificant proportion?
Dr Ridley: I should imagine it is a pretty insignificant portion.
Q710 Mr Dunne: What proportion of the shares are held by employees?
Dr Ridley: Seventy-five per cent. Sorry. It is the other way round.
Sir Ian Gibson: We do not know.
Q711 Mr Dunne: You do not know what proportion of your shares are held by your employees?
Sir Ian Gibson: No. We know that 75% of employees hold shares. We will find out for you from the small share register---
Q712 Mr Dunne: I am astonished to hear that no member of the Board knows the proportion of shares held by its staff, given the importance that you place on employee ownership in the company. You know 75% of your employees hold shares but you do not know how many shares they hold. Do you know how many shares are held by the foundation?
Dr Ridley: The foundation does not own ordinary voting shares. What it owns is a stake that converts into 15% of the company on takeover.
Q713 Mr Dunne: Does the foundation receive dividends on those interests?
Dr Ridley: The foundation receives in lieu of a dividend a covenant of 5% of pre-tax profits.
Q714 Mr Dunne: So the foundation had no interest in a dividend decision as such?
Dr Ridley: That is correct. The foundation has had £175 million from us over 10 years.
Q715 Mr Dunne: Indeed, which is very impressive and distressing to the foundation that that is now going to seemingly come to an end. Are any members of the Board directors of the foundation?
Dr Ridley: No, currently no members of the Board are directors of the foundation.
Q716 Mr Dunne: Will the foundation, given its contingent ownership position, have an ability on a transaction with a third party to act as a blocking shareholder in the event that a transaction materialises?
Dr Ridley: My understanding is that its stake converts automatically.
Q717 Mr Dunne: Into 15%?
Dr Ridley: Yes.
Q718 Mr Dunne: Therefore it could have a blocking shareholding if the acquirer acquires 100%.
Dr Ridley: No, it converts once the acquirer has, whatever the expression is, full control.
Mr Applegarth: It is not blocking. It is a dilution.
Q719 Mr Dunne: Picking up the Chairman's comment about the decision to reverse the dividend, did you have any discussions with the Bank of England which helped you change your mind?
Dr Ridley: No. The discussions about the dividend we had were with the FSA and with other advisers.
Q720 Mr Dunne: Were there any discussions with someone from the Treasury or the Chancellors office?
Sir Ian Gibson: On the day that the Board reached the decision not to pay the dividend there were discussions on a broad range of issues, including the dividend, with the tripartite group. The Treasury was there, the FSA was there and the Bank representative was there too.
Q721 Mr Dunne: So would it be fair to characterise your decision that part of the contributory reasons to changing your decision on the dividend was because you had been leant on by the authorities that were providing the bank facility?
Sir Ian Gibson: No, it would not be fair to characterise it like that.
Q722 Mr Dunne: How would you characterise the nature of those discussions with the tripartite members on the dividend?
Sir Ian Gibson: They wished to understand in detail what the Board's thinking was at the point at which we were having those discussions with them, where we stood on dividend, where we believed shareholders' expectations were, what we believed the view of rating agencies might be in the case of pay or not pay, and what we saw as any potential risk to our regulatory capital. We explained our thinking to them on those fronts and explained the process that the Board was then going through in terms of its review over whether or not to pay the dividend.
Q723 Mr Dunne: So the Board changed its view rather than was persuaded to change its view?
Sir Ian Gibson: I think the chairman characterised its well, which is that we must as a Board or as a sub-committee of the Board have discussed the dividend payment almost daily - I do not have my notes with me but very frequently during that period. I noticed the Chairman of this Committee's comments doing that period, for example. We looked at a whole bunch of comments that were made. You said it was a matter of public interest. There were lots of comments that the Board talked about every day in saying "What should we take account of here?"
Dr Ridley: On the point about what proportion of our shares are held by employees, I do know that we have a very large number of small shareholders in comparison with the size of our staff and that is why we know that it is a small number. The proportion of shares held by employees will certainly be less than 10% and almost certainly less than 5%.
Q724 Mr Love: On a related issue, I understand that the company continued to urge employees to buy in the share-save scheme that you operate up till the end of August, when clearly there were some difficulties. In retrospect, do you think that was a sensible decision? As I understand it, it came to an end at the end of August. For those that had signed up, was it possible at that stage to cancel it on the basis that those employees who had signed up might lose significantly from the purchase of those shares?
Mr Applegarth: The Save As You Earn scheme, the money that is invested they can withdraw back as cash, so in terms of losing their money, no, that was not the case.
Q725 Mr Love: They can do that at any time, or do they have to do it before the closure?
Mr Applegarth: They have to do it at certain specified dates.
Q726 Mr Mudie: I think there is general agreement that if we had a market solution it would have been better all round. Andy asked questions of the Takeover Panel. Did your advisors indicate any difficulty in the safe haven deal being dealt with in a satisfactory timescale, in other words, not reaching the Takeover Panel? We got the impression from certainly the Bank of England that it was impossible because of the Takeover Panel and the length of time and market disclosures, etc.
Mr Applegarth: You certainly would not have been able under the current legislation to actually complete a transaction within a weekend but we would have been able to have an offer of a transaction, and it is my belief that the offer of a transaction with a well-known bank would have been enough to stop it.
Q727 Mr Mudie: You started discussions in mid-August and they came to a head in September. The chairman rang the Bank of England on 16 August. That was certainly a direct line then. Where were the FSA in terms of liaising, speaking, working with you throughout August into September?
Mr Applegarth: We formally had two calls a day with the FSA but I have to say that the number of informal contacts were greater than that. So we were in very close and continuous contact with the FSA and, of course, they are our lead contact for the tripartite and they garner information offers for others in the tripartite and they pass communication across. So the FSA were kept right up-to-date with everything we were doing on corporate activity.
Q728 Mr Mudie: How up-to-date and how supportive were they of this safe haven?
Mr Applegarth: I think it can be generally characterised that everybody could see that it would be a potential---
Q729 Mr Mudie: When you say that, can you confirm that "everybody"? It is certainly not the evidence that the Bank of England could be included in that "everyone".
Mr Applegarth: That is a fair point. I am relying on feedback from the FSA, who are our key contact of the tripartite. It may be either the chairman or the senior independent in their direct contacts with the Bank got a different view.
Q730 Mr Mudie: So the FSA in effect were the liaison point between you and the tripartite, and the FSA therefore worked closely, I presume, on the safe haven argument with you and regarded it as serious enough to actually take to the tripartite to ask them to consider.
Mr Applegarth: Yes.
Q731 Mr Mudie: Did they give you any stronger feeling than that? We failed to get Sir Callum, maybe out of loyalty to the tripartite, to say specifically that he supported it. I am at a loss. If his organisation took it to the tripartite, they clearly would not have wasted their time or wasted your time in a pretty fraught situation by taking something that was lame at that point in the game to the tripartite. Did you get the impression they were supportive, that they thought it was a serious idea?
Mr Applegarth: I think the hard thing we have in answering that question is clearly that we were not party to the tripartite discussions. We only know the feedback from the FSA and they were encouraging us to look at every opportunity to avoid having to go to a lender of last resort.
Q732 Mr Mudie: Let me just ask you this, as a layman. Certainly you, Dr Ridley. As an ordinary bloke who hears disaster being faced, you work with the FSA and you have another organisation willing to take you over and save all the problems. The FSA take it off to the tripartite and you get a decision no. Did you just accept this with aplomb or did you pick up the telephone and speak to anyone and say "What the hell is going on?" I find it strange.
Dr Ridley: We were only going to be in a position to take or not take a decision when we had an offer. We were doing everything we could behind the scenes, both with the authorities and through our advisers with other corporate parties to encourage an offer to come forward in the interests of our shareholders, creditors and other stakeholders. Yes, we picked up the phone to anyone and everyone.
Q733 Mr Mudie: No, I am not making myself clear. At the stage where the FSA took the deal to the tripartite group---
Dr Ridley: I am not clear that is quite the right way of characterising it. It is for them to answer about that but there was not a deal that was taken by the FSA to the tripartite group, as I understand it. There were continuous negotiations going on between Northern Rock and the other party, through advisers, and with the FSA talking to both Northern Rock and the other party and the Bank of England likewise. The efforts being made were to find a deal that was acceptable to the acquiring party, that was likely to be acceptable to ourselves and required various forms of support from the tripartite authorities.
Q734 Mr Mudie: Yes, that is the specific point, and the tripartite support was whether the facility that was eventually offered to you was going to be transferable. Was that a condition of the deal from the safe haven? I dislike calling Lloyds Bank a safe haven because they will use that as a slogan for years: "Lloyds, the safe haven bank."
Dr Ridley: Because of the liquidity problems in the market, in particular affecting us, we understand that the other company needed to have their comfort and were negotiating towards that. We were not part of that negotiation.
Q735 Mr Mudie: That was the thing that broke the deal. Did you respond to the Bank of England in terms of shock or anger or disappointment that the deal had foundered because of their decision, or did you just accept it?
Dr Ridley: No. As I say, we continued to speak to anyone and everyone.
Q736 Mr Mudie: No, no. I am just asking. The normal point would have been to pick up the telephone and speak to the Governor of the Bank of England and say, "What the hell are you doing? We could avoid everything. This deal is on the table. Why are you not taking this decision?" Moral hazard, of course. Did you do that and if not, why not?
Sir Ian Gibson: Could I comment?
Q737 Mr Mudie: No, let the chairman. I am just asking for a specific point of view as the chairman. The whole thing is in your hands, what your company, your staff, your depositors are facing. Did you pick up the telephone and play hell with the Bank of England?
Dr Ridley: We spoke to the Bank of England about all of this, yes, but---
Q738 Mr Mudie: I know you did but just answer the question. When the decision came back "Sorry, they can't agree the facility," I am just as a layman thinking anybody in this room would have said, "I'd better speak to the guy. He doesn't understand how serious this is."
Dr Ridley: We were told that it was impossible for them to provide the facility.
Q739 Mr Mudie: Okay, so you just accepted it. This is not a judgemental comment. You just accepted it.
Dr Ridley: We did our best to put the position.
Q740 Mr Mudie: Sir Callum said, "I think it is incorrect to regard the private sector solution as being a firm, cut and dried offer. It was still at an exploratory stage." It sounds to me that it was well past an exploratory stage, and it would have to be to give comfort to the depositors.
Dr Ridley: A degree of exploration had obviously taken place, yes, but no, there was no firm offer. We never had an offer on the table.
Q741 Mr Mudie: No, but you would have got an offer, you are strongly confident, if you had had that guarantee.
Dr Ridley: We cannot be sure of that.
Q742 Mr Mudie: Your chief executive seemed to indicate earlier that he would be content with that and that would have saved the problem.
Dr Ridley: Had an offer come forward within a day or two on that basis then yes, we would have been in a better position but of course, you cannot be absolutely sure that an offer is going to come forward.
Q743 Chairman: Sir Ian, finally, do you think relations between the Board and the shareholders of Northern Rock were sufficiently transparent?
Sir Ian Gibson: I think they were, yes. In fact, to pick up a series of questions asked earlier, over the years Northern Rock's overall approach has been to be extremely transparent about the simplicity and straightforwardness of its model because that has enabled it to disclose the quality of its book and therefore attract reasonably priced credit. That has continued too with its shareholders.
Q744 Chairman: The reason I am asking that is that lawyers for the UK Shareholders Association are now examining whether there is a potential class action suit against Northern Rock for withholding crucial information that could have prevented shareholders from losing millions of pounds. That is a press comment. Do you feel that Northern Rock should have disclosed details of the risks to its business model sooner? Why did the Board wait a whole month before announcing crucial information to shareholders?
Sir Ian Gibson: On the first point, the risk information about its model was very clearly in the market and has been for a very long time. It is a very clear presentation of the company that is given in our annual report. It is a very straightforward business. It is essentially a UK mortgage-only business, which some would see as a weakness, others would see as a strength. It depends on your point of view. The data surrounding that has been transparent to all for a considerable period, not just this year but year on year. As for a secondary position, I think colleagues of yours, Chairman, explored in great detail with the chairman and the chief executive just now the whole process that took place from, I guess, 14 August onwards, where we consulted legal advisers, the UK Listing Authority, the FSA, later the tripartite, in terms of what was appropriate to disclose at what point, either about other party discussions or about discussions with the Bank of England or about the trading circumstances of the company, and we are fully satisfied that we did follow the best advice and follow it to the letter.
Q745 Chairman: I am mindful that the Governor of the Bank told the Treasury Select Committee that he was alerted to an impending crisis on 14 August. The shareholder group is saying they wanted to know why an announcement was delayed until the rescue package was finalised on September 14, exactly a month later. What answer is there to that, Sir Ian?
Sir Ian Gibson: You have heard the answer, that first of all, we were in a series of discussions with not just the one party that has been focused on right now but a number of potential acquisition partners, and through that period, with the advice of the UKLA and the FSA, as well as our lawyers, it was not suitable to put information into the market. We were, by the way, continuing to fund, as has been pointed out, varying amounts different days, but we were always continuing to fund; we were always liquid. The profits that we are now forecasting for '07 are in the market and profit warnings were issued at the appropriate times in all cases. Once we were in discussions with the Bank of England, our guidance from all involved, including clearance with the UKLA, was that those discussions be not made public because there are circumstances, and we have certainly seen the results of those circumstances, that mean it is not appropriate in the view of the listing authority or the FSA that certain of those discussions are taken to the market, and they might be for a different business.
Q746 Chairman: Finally, can I ask you to give us a message in terms of the future of Northern Rock over the next six, nine months to reassure people.
Sir Ian Gibson: First of all, it is a bank that remains in business, that is solvent, that is serving its customers, that is paying its debts, that is paying its employees, and it continues to wish to do that and will strive in every degree to do that. Secondly, we know we have the period essentially between now and the end of this year in which to work out the most appropriate strategy for the bank, for the company, for its shareholders, for its creditors, for its stakeholders and for its employees - we have all those groups to consider, and we will - and to bring that to the tripartite group and obtain what consents and appropriate support are necessary for whichever of the range of solutions that we end up choosing, and to do that in such a fashion that people will say post that event... From my viewpoint, I hope they say "They did the best that anybody could," because that is what I want them to say and I hope that committees like this are able to say, "In the light of quite unpredictable, unforeseen circumstances, they made a decent fist of it in the end."
Chairman: We have a long way to go there because we are looking at the tripartite agreement and to date not many people have taken responsibility, so that is a conundrum for us which we want to examine over the next few months. Can I thank you for your attendance this morning.
 Note by John Thurso: The information provided by the FSA in fact related to the dates of the meetings of the FSA's own Risk Committee.