Examination of Witnesses (Questions 1760
THURSDAY 10 JANUARY 2008
MP, MR JOHN
Q1760 Mr Brady: Moving on to the
question of the guarantee for depositors, Sir John Gieve said
to us at our last meeting before Christmas that it became clear
on Friday 14 September that the lender of last resort facility
had not reassured retail depositors. Why did it then take you
until shortly before 6.00pm on the following Monday to announce
the guarantee that was the only way to halt the run?
Mr Darling: Well, for reasons
that again, I think, I set out last October, I do not think on
the Friday the extent of the guarantee that was then available
to Northern Rock depositors was a primary thing in people's minds.
Remember, what had happened was that there were rumours in the
market on the afternoon of the Thursday, the day before the 13th,
and it then appeared on the BBC News in the evening and it was
fairly dramatic news that a fairly well-known bank had gone to
the Bank of England for help. Then the queues started to form
on Thursday evening and dramatically so on the Friday. I think
it was probably at some point late on Saturday that it was becoming
clear that something would have to be done. As the Governor made
clear in his evidence in the same session you are referring to,
we discussed this on Sunday and agreed that it was likely we would
have to do something and I became convinced that it was. Guarantees
are quite complicated and, as you know, we have changed the terms
since it was originally announced and then it was thought best
to announce it at the end of Monday because we were not in a position
to do it at the start of business on Monday, and that is when
we announced it and suddenly the queues went and it certainly
slowed down the rate of withdrawals.
Q1761 Mr Brady: So you would have
announced it before the markets opened on Monday, if it had been
possible to do so?
Mr Darling: We were not in a position
to have done it then and I was pretty clear that, given the gravity
of the position that we faced, when I announced the guarantee,
I wanted to be pretty clear what exactly I was announcing because
people would want to know beyond doubt what the position was.
Q1762 Mr Brady: And it was announced
as soon as it was possible to announce it?
Mr Darling: Yes, and basically
you have a choice over these things. I think you either have to
do this at the start of business or at the end of business and
I think announcements during the course of business can be problematic.
As for the timing of the guarantee, that was my judgment and that
was my decision for which I am solely responsible.
Q1763 Mr Brady: When we saw you in
October, you told us that you did not think a guarantee or the
extent of cover under the depositors' scheme was an issue on the
Friday, whereas Sir John Gieve implied that it was the main issue
on the Friday. It seems to us that this was clearly a key topic
of conversation at the deputy level on the Friday. Should that
have been brought to you at the principal level sooner than it
Mr Darling: I am not aware that
it was, but I listened to what John Gieve said on 18 December
and I also listened to what the Governor said who, I suppose,
is John Gieve's boss, and he was very clear that we sat down to
discuss this on the Sunday and we had not discussed that before.
As I said to you last October and I remain of the view, things
were such on the Friday that I suspect that, no matter what I
stood up and said in relation to a guarantee, you would still
have had the queueing problem because what you had was a dramatic
announcement, and this is something that has changed in the last
20 years with 24-hour news, and the queues started to form and
the situation just got worse and worse and worse, and I think
it was not actually until the Saturday that people started talking
about guarantees. We discussed the thing on the Sunday and I announced
it on the Monday, but certainly, as I know from my own record
of what happened and also in relation to what Mervyn King said
to you at the same session that you are referring to, Sunday was
the first time that the Tripartite Committee discussed this.
Q1764 Mr Brady: If this had been
brought to you on the Friday though, presumably then you would
have been in the position to announce the guarantee before the
markets opened on the Monday?
Mr Darling: If I had believed,
on advice, that a guarantee was necessary and that it would have
resolved the situation, then of course I would have taken action
at the earliest opportunity, but I actually do not think, given
what was going on at that time and hindsight is a wonderful thing,
that the guarantee was the issue on the Friday. I think that people
were so surprised that this had happened and they were seeing
people queueing up, and it remains the case that the money was
there and people could have got it out if they wanted and that
has never been a problem as far as Northern Rock is concerned,
but, as I say, as Mervyn King has said, as Callum McCarthy said,
as I have said, this was discussed on the Sunday for the first
time and we took action on the Monday.
Q1765 John Thurso: Chancellor, I
would like to go back to the Market Abuse Directive and particularly
the question of the legal advice, but, before I do so, can I just
clarify what I think I heard you say which was that the authorities'
judgment during that critical week was that it "was not a
showstopper", I think is what you said.
Mr Darling: No, I said that, all
things being considered, the Market Abuse Directive did not really
figure in it because the two things that were in my mind were,
firstly, the company itself believed it would have to say something,
it would have to reassure
Q1766 John Thurso: Presumably it
would have had that advice from Freshfields?
Mr Darling: It is from their own
legal advisers. The second thing is that my belief was that there
was every chance that this was going to leak and I was dead right.
Q1767 John Thurso: There is a great
difference between advice ex ante and leaking ex post.
Mr Darling: Well, there may be,
but my belief, given that I thought it would leak and in any event
Northern Rock felt that they were under pressure to say something,
was that it was better to make a statement on our terms rather
than be in a position where it gets out and you then have to make
a statement perhaps at a time which might have made the situation
even worse and I just think that would have been wrong.
Q1768 John Thurso: Mervyn King, when
he came before us, gave evidence when he said in the most unequivocal
terms that his first preference was for a covert operation and
I think the exact quote was, "as we used to do in the 1990s".
Is it the case then that the other members of the Tripartite arrangement
did not share that view?
Mr Darling: Yes, Mervyn King was
of the view that his preference would be to do it covertly. I
am bound to say that, if I had thought that you could do this
particular exercise covertly, I would have been quite happy to
do that, but my fear was that it was going to come out and, if
it was going to come out in a disorderly manner, then I think
that would have been even more damaging.
Q1769 John Thurso: So, even if it
had been, in your view, legal, you would have still not supported
Mr Darling: There were two considerations,
and the first one actually was the fact that Northern Rock believed
they had to say something and they had their own legal advisers
as far as that is concerned. They certainly had to issue a profits
warning because it was the first time they had to draw to the
markets' attention that things were not all well. You may remember
at that time that another large bank had, for wholly technical
reasons, borrowed money from the Bank of England overnight simply
because the settlement system had not cleared everything, and
there was no end of speculation. Remember, there was a lot of
feverish speculation at that time and people were phoning up banks
on a daily basis, saying, "Have you been to the Bank of England?",
so we are not talking about the comparative calmness we have got
now, but we were talking about a very feverish time.
Q1770 John Thurso: The reason I want
to try and nail this, and the Chairman has given us a relatively
brief time to do it, is because a great deal has been made, and
much evidence has been given, that the preferred option was a
covert option and the reason why it could not be done was entirely
legal advice. Did each member of the Tripartite arrangement get
separate legal advice or was there one set of legal advice given
to the Tripartite arrangement?
Mr Darling: I do not think we
all went off to our lawyers and discussed all these things. The
Market Abuse Directive is there, we are aware of it, but, as I
said to Mr Brady, it was not the primary consideration. Now, I
think if it were possible for us to be able, beyond peradventure
as far as the law is concerned, to conduct covert operations for
certainly a decent period, that would be hugely beneficial. On
one view, there is sufficient flexibility in the Market Abuse
Directive to do that, provided, I think I am right in saying,
that you can be assured it is kept confidential, but again that
is difficult, and also that you are not actually misleading people.
Q1771 John Thurso: Was that specific
legal advice to any of the Tripartite members on the subject of
whether or not it was covert and possible?
Mr Darling: No.
Q1772 John Thurso: So there was no
legal advice specifically given?
Mr Darling: As I said to Mr Brady
and I think I said it last October, we were not sitting there,
saying, "What does the law say in relation to this?"
We were driven by the fact that Northern Rock itself were pretty
clear that they had to make something public and I was pretty
clear that this was going to come out in any event. Now, we discussed
these things, but the Market Abuse Directive was not actually
central to our minds. Of course we are aware of its existence.
Q1773 John Thurso: I am sorry to
press you, but I think it is terribly important, particularly
given our discussions in Brussels. There was actually no legal
advice given to any member of the Tripartite arrangement on this
Mr Darling: There was no advice
coming from Brussels that said, "You've got to make this
Q1774 John Thurso: Was there any
advice given by legal authorities, whether government officers
or outside firms, to any of those three bodies in this country
at that time on whether or not it was a covert operation that
was possible or not?
Mr Darling: I cannot speak for
the Bank of England and the FSA, but we did not seek legal advice
on whether or not this should be a covert operation. This was
a judgment that we had to reach based on the fact that Northern
Rock, who, I think, did seek legal advice, I think I am right
Mr Maxwell: Yes.
Mr Darling:and their directors
were under pressure to make a statement and on my judgment, and
it was right, that this was going to leak and somebody went to
tell the BBC and maybe others that this was the case.
Q1775 John Thurso: The Governor said
to us, "I had still hoped, and indeed I pressed strongly,
for the ability to conduct a covert operation, but in the end
the strong legal advice among the Tripartite Authorities was that
it could not be done", so the only way to square your statement
with his statement is to say that you were, within the authorities,
discussing the legal advice, but nobody actually went and got
Mr Darling: I cannot tell you
offhand whether the Bank of England or the FSA went to the lawyers
in the week in question. All I can do is tell you what considerations
were in front of the Tripartite Committee, which I chair, during
the course of the week that we took that decision.
Q1776 John Thurso: When we were in
Brussels, the Commission officials we met conveyed to us the strong
view that the Market Abuse Directive was never intended to prevent
a covert operation
Mr Darling: I know that.
Q1777 John Thurso:and also
that, in their view, it did not prevent a covert operation. We
have got strong evidence from the Governor that that was his preferred
option. It seems clear that it was not pursued because of the
risk that you assessed, or whoever assessed it, of a leak. Is
that actually where we are?
Mr Darling: I have never argued
that the Market Abuse Directive was the thing that governed the
decision that this operation was going to be made public. In October
and on every occasion I have been asked about it, I have said
that the decision was driven by two things, Northern Rock's position,
and the FSA is the listing authority for these things who will
undoubtedly have looked at the position, but the Market Abuse
Directive was not actually the stumbling block, but it was actually
Q1778 John Thurso: With regards to
the legal advice, what we have got down to is the sum total of
the legal advice in the whole affair was the partner responsible
at Freshfields and that was it.
Mr Darling: Sorry, what partner?
Q1779 John Thurso: Well, whoever
gave the advice to the Northern Rock Board.
Mr Darling: I do not know that
the advice was given to Northern Rock. What I do know is that
the Authorities' decision to make a public statement on the Friday
morning was taken as a result of the considerations that I have
set out. I do not believe that the Market Abuse Directive was
the stumbling block. I am well aware of the advice that you have
been given in Brussels in relation to that, but I do not think
it was the issue. Of all the things we had to consider, this was
not the issue.