Examination of Witnesses (Questions 160-179)
MR MARK
HORSFIELD, MR
CHRIS ANTHONY
AND MR
DAVID WHELAN
26 JANUARY 2009
Q160 Mr Betts: So what you are saying
is you passed on information through credit rating agencies which
were warning signs authorities might have been looking at?
Mr Anthony: As professional investors,
they should be keeping a good watch on the information from the
rating agencies.
Q161 Mr Betts: Mr Whelan, the same?
Mr Whelan: We provide the rating
changes on a timely basis to the client as they come through to
us from the rating agencies.
Q162 Mr Betts: So at no point did
either of you think, "Well, the authorities aren't taking
any notice of this. Haven't we got some responsibility somewhere
as at least professional advisers to say, `At least have a look
at this credit rating. Have a look more carefully at it. Are you
aware of it'?" Do you not have conversations with your clients
of that sort of nature?
Mr Anthony: Yes, we do, and we
talk about ratings.
Q163 Mr Betts: So you talked about
the ratings?
Mr Anthony: Yes.
Q164 Mr Betts: And you talked about
the ratings of the Icelandic banks?
Mr Anthony: We did not ring them
up specifically to say -
Q165 Mr Betts: You talked about the
ratings of some banks?
Mr Anthony: Well, if the client
will ring us up and say, for example, "The rating on this
particular organisation has changed. What does this imply?"
Q166 Mr Betts: Did any clients ring
you up about Icelandic banks specifically?
Mr Anthony: Not me specifically.
Q167 Mr Betts: Your organisation?
Mr Anthony: I am not aware of
anybody having specific conversations with anybody—
Q168 Mr Betts: And you never phoned
them to anybody either? Nobody in your organisation picked the
phone up to any of your clients and said, "Have you seen
this? Didn't you ought to at least be particularly aware of this?"
Mr Anthony: We believe the system
we run keeps clients well informed.
Q169 Mr Betts: The clients have clearly
got all this information but were not acting in any rational way.
They clearly were not reading it in a way which would have informed
them to take the right decisions. So was there a stage where anybody
in your organisation picked the phone up to clients, "You've
got investments in Icelandic banks. We're not advising you what
to do. We're not instructing you, we're not directing you, we're
not even guiding you, we're just asking you to have a look at
these ratings"?
Mr Anthony: No. We passed the
information through and hopefully—
Q170 Mr Betts: And that is it? You
sat back and watched the disaster happening?
Mr Anthony: Well, I think up until
right at the very end most people did not think it was a disaster.
Q171 Mr Betts: But one of the credit
rating people, Fitch—I don't know whether you used Fitch—in
March 2006 started advising about the problems of investing in
Icelandic banks and there was a whole series then of worsening
ratings for Icelandic banks?
Mr Anthony: I am surprised that
they did not make a change in the ratings then at that particular
point in time if they were advising about the status of the Icelandic
banks. The rating changes really started in early 2008 and bear
in mind that a lot of local authorities had made long-term investments,
maybe three, four, five years at attractive rates of interest
with Icelandic banks when they were well-rated. In actual fact,
in 2006 Moody's rating agency raised the credit rating of the
Icelandic banks to AAA, the top rating.
Mr Horsfield: If I could just
comment on that. That move by that rating agency to give almost
a blanket highest rating possible across Iceland was met with
nothing short of widespread derision in the financial markets.
In fact, they had to remove that rating, the basis of assessing
that rating, two months later and the share price of that company,
Moody's, fell because of the market's response to that. It was
just derided. From our perspective, that influenced our decision
on the reliance on ratings because it seemed to us to be so out
of kilter with what other indicators in the market on those institutions
in Iceland were telling us. You could not reconcile the two.
Q172 Anne Main: It just actually
said it was triple rated as if that was some sort of reassurance.
It might be reassurance to me, knowing nothing about finances
and just sitting reading that, but if I am paying somebody to
advise me I would hope that if you meet something with derision
that they are doing it as well and are actually saying, "I
know it might say this on paper, but actually the reality would
be that it would be almost impossible to achieve this," and
you are saying you made that conclusion. Mr Anthony, did you not
make the same conclusion at a similar time then? Did you not have
the derision which Mr Horsfield has mentioned?
Mr Anthony: We did find Moody's
conclusions somewhat strange and in fact it did lead us to change
our counterparty system, which if you like I will go into—
Q173 Chair: You do not need to go
into the detail, but in that context then what was the point of
telling us, as a kind of fig leaf, that Moody's was giving an
AAA rating? You have just admitted that you thought it was a stupid
decision on their part anyway.
Mr Anthony: When Moody's reassessed
the ratings they knocked the ratings down by, I think, one or
two notches, so it was not as if they were taking them off the
investment grade. Can I say a couple of words about the rating
agencies and one of the reasons why we use them and why the ODPM
in investment guidance back in 2004 did place quite a bit of emphasis
on these rating agencies?
Q174 Anne Main: Before you do that,
Mr Anthony, I am just really interested to hear Mr Horsfield's
view that whatever the rating agency said, he made an informed
professional view that actually it was not believable and probably
acted accordingly, and yet you are saying now you thought it was
a little strange but did you alter your behaviour in any way,
shape or form?
Mr Anthony: We did, yes. We changed
our way of assessing counterparty creditworthiness.
Q175 Anne Main: And you passed all
that on? Before you go into the bit you want to go into, I do
not want to lose the thought in my head because I keep hearing
people saying they don't give positive advice on where to invest.
Mr Whelan and Mr Anthony, do you give negative advice, because
Mr Horsfield says he does? He says, "We were saying, `Whoa,
don't do that," at a particular point in time and I think
that is as good advice as you can pay for. Doing nothing sometimes
can be quite a good idea, or doing something different. Do you
ever give negative advice to get out of something, or do you just
leave them to make that decision as well? Mr Anthony, carry on
with your thought for a minute but I would like to have an answer
to that question.
Mr Anthony: I think we need to
clarify one thing here to see the difference between the services
we provide and the services provided by Arlingclose. With regard
to investment, Arlingclose do offer and supply an advisery service,
fund management advisery service, so they are advising their clients
on a whole lot of aspects there. As I mentioned a little bit earlier,
we made it abundantly clear that we provide an information service
on credit counterparties. That does not mean to say we do not
provide advice on investment. We advise clients with regard to
interest rate outlooks, which area of the yield curve they might
want to invest with. We will provide them with advice as to whether
they should be perhaps employing the services of external fund
managers, large fund management companies, and I think a number
of local authorities still used those. So I think there is a fundamental
difference in the types of services that are supplied.
Q176 Mr Betts: Mr Whelan, we have
had a discussion with Mr Anthony whether any information he provided—information,
not advice—would have drawn the attention of his clients
to the problems of the Icelandic banks. Did you offer any information
of that kind?
Mr Whelan: We provided information
through from the rating agencies. As the downgrades came through,
they were sent straightaway to the local authorities.
Q177 Mr Betts: And Fitch's warnings?
Mr Whelan: They all went through
to the local authorities.
Q178 Mr Betts: So were you not slightly
surprised then, sat there in your City office, that you have got
these local authorities putting all this hard-earned council tax
payers' money into these risky investments?
Mr Whelan: I think one thing you
need to appreciate is that if you were to look at the investment
strategy for each local authority they will be different, because
not only will the circumstances be different but their risk appetite
will be very different as well. Therefore, when they come to look
at their approach they are looking at their own specific risk
tolerance and what they want to do in terms of their approach
to investments. So our input in terms of the information from
the credit rating agencies is just one part of the process they
go through internally to arrive at what they want to do with their
funds, and ultimately they go to the market through the money
broking market or direct to the banks people want to place their
funds with.
Q179 Mr Betts: I can understand why
local authorities certainly do have slightly different approaches.
That is why we have local government and people look at their
own individual circumstances, but with your expertise in these
areas you must surely have scratched your head at some point and
thought, "No local authority really wants to be investing
in investments as risky as these"? It is not just that they
were a little bit extra risky, they were very risky by the time
we got to September.
Mr Whelan: As the rating downgrades
came through, any warnings, any positive signs, we passed them
along as they came—
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