Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 540 - 559)



  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—

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