Examination of Witnesses (Questions 1260
TUESDAY 4 DECEMBER 2007
MR E GERALD
Q1260 Mr Mudie: You are saying that
in those three or four years you did not make enough profits to
cover the exposure you now have?
Mr Mills: In our case it's actually
quite simple and the arithmetic is fairly straightforward. We
were not involved in terms of the origination of the product and
we were not involved, in the early years, in the structure and
distribution of the product. We put together a team 18 to 24 months
ago and got involved.
Q1261 Mr Mudie: You got in too late?
Mr Mills: With the benefit of
Mr Palmer: I have not done the
math, but the huge growth of subprime lending in the US is a relatively
Q1262 Mr Mudie: We have had it for
three or four years, so how long have you been in?
Mr Palmer: Over that period of
time, but I think the huge growth came about in 2005 and 2006.
Q1263 Mr Mudie: Why have you not
made money if you were in at the beginning and you have had three
good years? Have the good years not compensated for you being
caught with late exposure?
Mr Palmer: It is pretty clear
that different decisions were made in different firms at different
times and they have led to different outcomes.
Q1264 Mr Mudie: Lord Aldington, I
have left you out. What about your position?
Lord Aldington: I do not know
whether anybody has even done that piece of math. It is an interesting
Q1265 Mr Mudie: Why would you not
do it if you were running a firm? If you have a product and are
suddenly caught with this exposure the one defence of anybody
dealing with it is to say that the company has made brass out
of it over the years. Why have you not got that figure?
Lord Aldington: I did not say
that we had not done it; I said I did not know whether anybody
had done it. We certainly have not made it public. My guess, just
based on the provisions we have taken, is that we would be more
in the Goldman department than in the other, but I honestly cannot
Q1266 Chairman: Mr Corrigan, you
stand out from the pack here by making money. Is it not the case
that you have done that because you bet the other way from these
guys and you saw this could end in tears?
Mr Corrigan: Approximately in
the timeframe of our second quarter which ends in May we sensed
that deterioration particularly in the subprime space was mounting.
In that timeframe we began to hedge our exposures in ways that
turned out reasonably well from a financial point of view.
Q1267 Chairman: In summary, is it
fair that collectively you say you provided all the information
needed to enable an institution to buy a complex product from
you and analyse such risks that might ensue from that purchase?
Mr Corrigan: You use the word
"all" and that always makes me nervous. I do not think
I would want to be wed to that word, but certainly a systematic
aggressive effort was made to provide adequate disclosure to help
investors make informed decisions.
Q1268 Chairman: What about you, Mr
Mr Mills: I think we made adequate
disclosures and I think we have tried to assist.
Q1269 Chairman: So that people knew
Mr Corrigan: Real effort was made
to provide adequate disclosure.
Q1270 Chairman: Lord Aldington, what
do you say?
Lord Aldington: I support what
Mr Corrigan has said. The key to all of this is making the information
Q1271 Chairman: Mr Palmer?
Mr Palmer: Information was provided,
but I do not think anyone can pretend that the types of market
conditions were foreseen.
Q1272 Chairman: I come back to the
question asked by my colleague Mr Ainger about the mortgage in
Chicago. If there are information problems early on about, say,
the sale of a mortgage in Chicago is it not the case of garbage
in, garbage out?
Mr Corrigan: There is obviously
a truism in what you say, but I do not want to leave you with
the impression that I defend every single thing that was done.
There is no question that mistakes were made, but it is also true
that the conditions that have materialised especially in the subprime
mortgage market by any standard are quite extraordinary. There
were obvious breakdowns in the credit origination process.
Q1273 Chairman: I understand, but
I go back to the point about garbage in, garbage out.
Mr Corrigan: I would not characterise
it in that way. Who would have anticipated that in key segments
of the residential mortgage markets in the United States house
prices, which have not declined in absolute terms in over 30 years,
would do so by 5% or 6%? You can characterise that as "garbage"
if you will. Freely admitting that mistakes were made, I would
not go as far as to characterise it as "garbage in, garbage
out". There are opportunities and situations in which people
Q1274 Chairman: In your opinion,
were investors sophisticated enough to understand what you were
telling or selling them?
Mr Palmer: There are two things
happening here: first, the complexity of the instruments and the
decisions to invest in them; second, the unforeseen marketplace
conditions. You have to remember that both of those things are
happening at the same time.
Q1275 Chairman: Lord Aldington, were
they sophisticated enough to understand what you were telling
or selling them?
Lord Aldington: We have always
treated our investors in this as if they are professionals and
we take steps to satisfy ourselves that that is the case. One
must say that in certain isolated casesI can think of a
couple in Germany which have been in the pressit is not
clear that the investors fully understood what they were buying
or that they took advantage of the possibility to do their homework.
Mr Mills: Mr Chairman, I think
that there are different classes of investorsthose who
participated directly in the purchase of CDOs, I think, were given
all the information and all the analytic tools to make a decision.
I think some of the investors, particularly investors in commercial
paper that were buying commercial paper that was rated A1 and
P1, and not necessarily understanding some of the underlying assets
probably did not have sufficient information.
Q1276 Chairman: As a result of this
crisis do you agree that you have suffered reputational damage?
Mr Mills: I believe that we have
suffered reputational damage, yes.
Lord Aldington: I do not think
Mr Corrigan: Sure we have.
Mr Palmer: We have.
Chairman: The UK stands alone. Thank
you very much for your evidence this morning.
3 Note by witness: The comments and the cases
to which I referred were observations based solely on press reports,
and I have had no personal involvement with the relevant matters,
I have no have personal knowledge that any investors that purchased
products from Deutsche Bank failed to understand them. Back