Local authority investments - Communities and Local Government Committee Contents


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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