Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 600 - 619)



  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 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 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.

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