Select Committee on Treasury Minutes of Evidence


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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