Examination of Witnesses (Questions 660
- 679)
TUESDAY 16 OCTOBER 2007
DR MATT
RIDLEY, MR
ADAM APPLEGARTH,
SIR IAN
GIBSON AND
SIR DEREK
WANLESS
Q660 Chairman: You were not diversified
the enough. That is the point I am making to you.
Sir Derek Wanless: The company
strategy has been very clearly articulated and it is to concentrate
on mortgage and—
Q661 Chairman: Exactly, so you were
not diversified enough in the case of a crisis.
Sir Derek Wanless: No, that strategy
has been a very successful strategy.
Q662 Chairman: You only had one well
to go to where other companies had a number of other wells, HBOS
and others, and that is the situation, and that is what you did
not see as a company or you ignored as a company. You only had
one well from which to drink.
Sir Derek Wanless: That is simply
not true, and those who comment on the shares, the analysts, talk
about our well-diversified funding stream. Retail, wholesale,
covered bonds, securitisation gave us channels which opened up
markets around the world and nobody has foreseen that all of those
markets would close at the same time.
Q663 Chairman: Sir Derek, again,
this is unreal. You depended for 75-80% of your business on mortgages.
Other reputable companies were diversifying and, as I say, in
the case of HBOS, they only depended on it for 20% of their profits.
If you had diversified, if you had sat with an ambitious chief
executive and said, "Look, Adam, don't put all your apples
in the one basket because we are going to end up in a car crash
here" and things could have helped.
Sir Derek Wanless: That is simply
not the way that we saw it or any—
Q664 Chairman: It is the way everybody
else in the way UK sees it.
Sir Derek Wanless: No commentators
saw that. The model that we described for the business, which
was a concentration on mortgage business, was a very clear, transparent
model—
Chairman: Sir Derek, I have spoken to
chief executives of major banks—
Jim Cousins: Which ones, Chair?
Chairman: I am not saying which ones.
Jim Cousins: We have had 20 minutes grandstanding
from you. Do you not think that is quite sufficient? What other
banks have you talked to, Chairman?
Chairman: I am saying diversification
is important.
Jim Cousins: You are telling this Committee
you have talked to other banks who are cleverer. Please tell this
Committee what other banks they were.
Q665 Chairman: I am not saying. The
point is, Sir Derek, they are saying that diversification is important.
Sir Derek Wanless: We had a model
which was simple and well understood. It was sold to the market
as a model which concentrated on mortgages. A few years ago we
sold our credit card business because it was a risky business.
We have this year sold our commercial finance business. There
is a concentration on mortgage assets. That concentration was
well known to all of those people with whom we do business.
Q666 Mr Breed: Mr Applegarth, when
did you qualify as a banker?
Mr Applegarth: I am not a qualified
banker.
Q667 Mr Breed: The period that I
am most interested in is the period between March and August,
during which time you had certain changes of policy, you sold
off the commercial book, and you issued a profits warning. The
Risk Committee seemed to carry on as normal; it did not have any
increased meetings. Everything was going along as if you thought
it was normal. There was the so-called close control of the FSA,
which seemed to me anyway to be non-existent, and in the end you
contacted the FSA on 13 August. During the whole of this period
of time what discussions or meetings took place with your external
auditors?
Mr Applegarth: Our external auditors'
first point of contact is the finance director and they have a
series of regular meetings with the external auditors, so there
would be at least monthly formally, but the contact was much more
frequent than that.
Q668 Mr Breed: So the external auditors
were well aware of the situation on at least a monthly basis between
March and August, yet it appears to me that they sent a letter
expressing their concern about the liquidity and everything else,
I think, on 11 September, which seems to be somewhat late.
Sir Derek Wanless: If I may, as
the chairman of the Audit Committee, answer that—
Q669 Mr Breed: So you are Chairman
of the Audit Committee as well as the Risk Committee?
Sir Derek Wanless: Yes, I am.
The auditors did the normal job in the interim results signing
off. There were no liquidity issues which the auditors needed
to pay special attention to at the time of the interim results
in July.
Q670 Mr Breed: So the auditors felt
no need at any time to alert the FSA or the Bank of England as
such about any concerns they might have had in the figures that
they were seeing from Northern Rock?
Sir Derek Wanless: You would have
to ask the auditors but I would be astonished if they did because
they did not alert us to any issues at that stage.
Q671 Mr Breed: Do you think their
letter of 11 September was timely?
Sir Derek Wanless: I am not quite
sure exactly which letter you are referring to.
Q672 Mr Breed: Bearing in mind you
had a liquidity crisis on 9 August, it seems about a month later
they decided to send a letter.
Sir Derek Wanless: The auditors
were in contact with the company and knew well that the company
were keeping the Tripartite informed, as we mentioned earlier.
Q673 Mr Breed: So they felt no need
whatsoever to express an opinion.
Sir Derek Wanless: You would have
to direct that to them.
Q674 Mr Breed: Who are your auditors?
Sir Derek Wanless: PWC.
Q675 Mr Love: I am going to make
a very big assumption, which is that you, as the operators of
Northern Rock, understand Northern Rock depositors better than
anyone else. What I am trying to get to the bottom of is the psychology
of what happened on that Monday morning. I am going to make the
assumption again that there is some evidence, that you have got
your employees to talk to these depositors about why they were
withdrawing their money. I want to be clear first of all, because
there seems to be a difference of view between the chairman and
the chief executive about whether or not the BBC leak was instrumental
in what happened. I think you were saying Mr Applegarth that you
thought that the difficulties you would have had would have probably
led to that although it might have been exacerbated by the BBC.
Dr Ridley, you said that you thought if you could have handled
it, it would have been okay. Can we get clarity? Are we moving
towards Mr Applegarth's view of things?
Dr Ridley: Just be clear, I never
said that if there had been no leak everything would have been
okay. I simply said, which was exactly what Mr Applegarth said,
that the management of the communication on the Monday morning
would have enabled the shock to depositors to be slightly less.
Q676 Mr Love: You mentioned, Mr Applegarth,
a number of things that you thought could have helped. Let me
ask you about one of the ones that was raised by us with the Governor
of the Bank of England and subsequently now by the Chancellor,
deposit insurance, both in terms of time and in terms of the coverage.
Would that have made the difference?
Mr Applegarth: I think it must
be true that if the depositors' scheme guaranteed 100% at a higher
level, that would have reduced the probability of withdrawals.
That must be true.
Q677 Mr Love: How about the time?
Were people coming to you? This is anecdotally what we have been
told through the media. The rational view was "There is a
run started on the bank—better get your money out early
otherwise it's going to be tied up for months on end." Is
that what your employees were being told by depositors who came
for their money?
Mr Applegarth: I can understand
readily the logic of somebody who has their life savings invested
in an institution and who sees pictures of people queuing outside
the door and they go and join that queue. That is quite a logical
reaction. One of the problems with the depositors' scheme was
it is not simple to explain, in that the existing scheme was until
recently guaranteed up to £2,000 and then a certain percentage
up to another. It does not lend to sound bites when you are trying
to deal with customers either on the telephone or queuing outside
your branch.
Q678 Mr Love: Was that an issue that
was raised consistently by those depositors who were queuing?
I am just asking. I do not know whether you gathered any evidence
from this process. It might help with the psychology of all of
this.
Mr Applegarth: The first set of
evidence we tried to collect was what issues they were having
actually getting the money out. It was not just queuing outside
the branches, because that was actually the least money going
out, although it was the most visible sign of a retail run. It
was what was happening with internet withdrawals, what was happening
with postal and telephone withdrawals. The logic was at the time,
and I perfectly understand it, "We have seen pictures. You
have got our life savings. I want it back. I do not really want
to withdraw it and I'll bring it back." In fact, that is
what we have seen. We have actually seen depositors returning
cheques but I perfectly understand the reaction they took. I would
have probably done the same thing if I was in their shoes.
Q679 Mr Love: You talked about a
safe haven. The Governor of the Bank of England said to us that
the Takeover Code made it impossible to do what traditionally
the Bank of England has done. Do you think it was an institutional
arrangement like the Takeover Code or were there failures in the
way that the bank interacted with Northern Rock and the possible
high street bank that you mentioned that could have taken over
Northern Rock?
Mr Applegarth: I think the Bank
of England acted remarkably smoothly within the constraints it
had. Clearly, it would have been impossible to get a completed
transaction over a weekend but it is my view that, had you had
an announceable offer over the weekend with a major high street
brand, that would have provided sufficient confidence so a run
did not happen.
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