Examination of Witnesses (Questions 720
TUESDAY 16 OCTOBER 2007
Q720 Mr Dunne: Were there any discussions
with someone from the Treasury or the Chancellors office?
Sir Ian Gibson: On the day that
the Board reached the decision not to pay the dividend there were
discussions on a broad range of issues, including the dividend,
with the Tripartite group. The Treasury was there, the FSA was
there and the Bank representative was there too.
Q721 Mr Dunne: So would it be fair
to characterise your decision that part of the contributory reasons
to changing your decision on the dividend was because you had
been leant on by the authorities that were providing the bank
Sir Ian Gibson: No, it would not
be fair to characterise it like that.
Q722 Mr Dunne: How would you characterise
the nature of those discussions with the Tripartite members on
Sir Ian Gibson: They wished to
understand in detail what the Board's thinking was at the point
at which we were having those discussions with them, where we
stood on dividend, where we believed shareholders' expectations
were, what we believed the view of rating agencies might be in
the case of pay or not pay, and what we saw as any potential risk
to our regulatory capital. We explained our thinking to them on
those fronts and explained the process that the Board was then
going through in terms of its review over whether or not to pay
Q723 Mr Dunne: So the Board changed
its view rather than was persuaded to change its view?
Sir Ian Gibson: I think the chairman
characterised it well, which is that we must as a Board or as
a sub-committee of the Board have discussed the dividend payment
almost dailyI do not have my notes with me but very frequently
during that period. I noticed the Chairman of this Committee's
comments during that period, for example. We looked at a whole
bunch of comments that were made. You said it was a matter of
public interest. There were lots of comments that the Board talked
about every day in saying "What should we take account of
Dr Ridley: On the point about
what proportion of our shares are held by employees, I do know
that we have a very large number of small shareholders in comparison
with the size of our staff and that is why we know that it is
a small number. The proportion of shares held by employees will
certainly be less than 10% and almost certainly less than 5%.
Q724 Mr Love: On a related issue,
I understand that the company continued to urge employees to buy
in the share-save scheme that you operate up till the end of August,
when clearly there were some difficulties. In retrospect, do you
think that was a sensible decision? As I understand it, it came
to an end at the end of August. For those that had signed up,
was it possible at that stage to cancel it on the basis that those
employees who had signed up might lose significantly from the
purchase of those shares?
Mr Applegarth: The Save As You
Earn scheme, the money that is invested they can withdraw back
as cash, so in terms of losing their money, no, that was not the
Q725 Mr Love: They can do that at
any time, or do they have to do it before the closure?
Mr Applegarth: They have to do
it at certain specified dates.
Q726 Mr Mudie: I think there is general
agreement that if we had a market solution it would have been
better all round. Andy asked questions of the Takeover Panel.
Did your advisors indicate any difficulty in the safe haven deal
being dealt with in a satisfactory timescale, in other words,
not reaching the Takeover Panel? We got the impression from certainly
the Bank of England that it was impossible because of the Takeover
Panel and the length of time and market disclosures, etc.
Mr Applegarth: You certainly would
not have been able under the current legislation to actually complete
a transaction within a weekend but we would have been able to
have an offer of a transaction, and it is my belief that the offer
of a transaction with a well-known bank would have been enough
to stop it.
Q727 Mr Mudie: You started discussions
in mid-August and they came to a head in September. The chairman
rang the Bank of England on 16 August. That was certainly a direct
line then. Where were the FSA in terms of liaising, speaking,
working with you throughout August into September?
Mr Applegarth: We formally had
two calls a day with the FSA but I have to say that the number
of informal contacts were greater than that. So we were in very
close and continuous contact with the FSA and, of course, they
are our lead contact for the Tripartite and they garner information
offers for others in the Tripartite and they pass communication
across. So the FSA were kept right up-to-date with everything
we were doing on corporate activity.
Q728 Mr Mudie: How up-to-date and
how supportive were they of this safe haven?
Mr Applegarth: I think it can
be generally characterised that everybody could see that it would
be a potential
Q729 Mr Mudie: When you say that,
can you confirm that "everybody"? It is certainly not
the evidence that the Bank of England could be included in that
Mr Applegarth: That is a fair
point. I am relying on feedback from the FSA, who are our key
contact of the Tripartite. It may be either the chairman or the
senior independent in their direct contacts with the Bank got
a different view.
Q730 Mr Mudie: So the FSA in effect
were the liaison point between you and the Tripartite, and the
FSA therefore worked closely, I presume, on the safe haven argument
with you and regarded it as serious enough to actually take to
the Tripartite to ask them to consider.
Mr Applegarth: Yes.
Q731 Mr Mudie: Did they give you
any stronger feeling than that? We failed to get Sir Callum, maybe
out of loyalty to the Tripartite, to say specifically that he
supported it. I am at a loss. If his organisation took it to the
Tripartite, they clearly would not have wasted their time or wasted
your time in a pretty fraught situation by taking something that
was lame at that point in the game to the Tripartite. Did you
get the impression they were supportive, that they thought it
was a serious idea?
Mr Applegarth: I think the hard
thing we have in answering that question is clearly that we were
not party to the Tripartite discussions. We only know the feedback
from the FSA and they were encouraging us to look at every opportunity
to avoid having to go to a lender of last resort.
Q732 Mr Mudie: Let me just ask you
this, as a layman. Certainly you, Dr Ridley. As an ordinary bloke
who hears disaster being faced, you work with the FSA and you
have another organisation willing to take you over and save all
the problems. The FSA take it off to the Tripartite and you get
a decision no. Did you just accept this with aplomb or did you
pick up the telephone and speak to anyone and say "What the
hell is going on?" I find it strange.
Dr Ridley: We were only going
to be in a position to take or not take a decision when we had
an offer. We were doing everything we could behind the scenes,
both with the authorities and through our advisers with other
corporate parties to encourage an offer to come forward in the
interests of our shareholders, creditors and other stakeholders.
Yes, we picked up the phone to anyone and everyone.
Q733 Mr Mudie: No, I am not making
myself clear. At the stage where the FSA took the deal to the
Dr Ridley: I am not clear that
is quite the right way of characterising it. It is for them to
answer about that but there was not a deal that was taken by the
FSA to the Tripartite group, as I understand it. There were continuous
negotiations going on between Northern Rock and the other party,
through advisers, and with the FSA talking to both Northern Rock
and the other party and the Bank of England likewise. The efforts
being made were to find a deal that was acceptable to the acquiring
party, that was likely to be acceptable to ourselves and required
various forms of support from the Tripartite authorities.
Q734 Mr Mudie: Yes, that is the specific
point, and the Tripartite support was whether the facility that
was eventually offered to you was going to be transferable. Was
that a condition of the deal from the safe haven? I dislike calling
Lloyds Bank a safe haven because they will use that as a slogan
for years: "Lloyds, the safe haven bank."
Dr Ridley: Because of the liquidity
problems in the market, in particular affecting us, we understand
that the other company needed to have their comfort and were negotiating
towards that. We were not part of that negotiation.
Q735 Mr Mudie: That was the thing
that broke the deal. Did you respond to the Bank of England in
terms of shock or anger or disappointment that the deal had foundered
because of their decision, or did you just accept it?
Dr Ridley: No. As I say, we continued
to speak to anyone and everyone.
Q736 Mr Mudie: No, no. I am just
asking. The normal point would have been to pick up the telephone
and speak to the Governor of the Bank of England and say, "What
the hell are you doing? We could avoid everything. This deal is
on the table. Why are you not taking this decision?" Moral
hazard, of course. Did you do that and if not, why not?
Sir Ian Gibson: Could I comment?
Q737 Mr Mudie: No, let the chairman.
I am just asking for a specific point of view from the chairman.
The whole thing is in your hands, what your company, your staff,
your depositors are facing. Did you pick up the telephone and
play hell with the Bank of England?
Dr Ridley: We spoke to the Bank
of England about all of this, yes, but
Q738 Mr Mudie: I know you did but
just answer the question. When the decision came back "Sorry,
they can't agree the facility," I am just as a layman thinking
anybody in this room would have said, "I'd better speak to
the guy. He doesn't understand how serious this is."
Dr Ridley: We were told that it
was impossible for them to provide the facility.
Q739 Mr Mudie: Okay, so you just
accepted it. This is not a judgemental comment. You just accepted
Dr Ridley: We did our best to
put the position.