Examination of Witnesses (Questions 384
TUESDAY 16 OCTOBER 2007
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,
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
Q396 Mr Fallon: You are playing with
words here; I thought you were a journalist. You have a sub-prime
Dr Ridley: I said in my letter
that we have no sub-prime loans; it is truewe 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.