Examination of Witnesses (Questions 600
TUESDAY 16 OCTOBER 2007
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
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
Dr Ridley: What is going to guide
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
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 sayyou 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 insured. 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
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 offernot a completed transaction but an
offerfrom 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
Q617 Mr Mudie: So specifically on
10 September the bankand I presume the Bank of Englandsaid
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
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.