Examination of Witnesses (Questions 540
TUESDAY 16 OCTOBER 2007
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
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 Statesand I know that that is not always
appositeif 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
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
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
arrangementsyou 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