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Royal Bank of Scotland, Northern Rock and Lloyds Banking Group - Treasury Contents

Examination of Witness (Question Numbers 140-159)


12 JANUARY 2010

  Q140  Jim Cousins: The National Audit Office has investigated the whole history of these affairs. Their Report tells us that on 16 September 2008 the Treasury considered informing HBOS that it would be closed to new business unless a rescue could be arranged. Did the Treasury share that judgement with you?

  Mr Daniels: It was very clear that HBOS was a very troubled company and that in fact the troubles were getting worse and worse. I believe that the stock on that same day took a fall of in excess of 20%. So it was abundantly clear that HBOS was having difficulties not only in terms of their capital but, more importantly and pressingly, their liquidity.

  Q141  Jim Cousins: I am sorry. I must press you for a specific reply. The Treasury considered informing HBOS on 16 September 2008 that it might require HBOS to be closed to new business. Did the Treasury share with you that they were considering doing that?

  Mr Daniels: Certainly in our conversations with the tripartite it was very clear that—

  Q142  Jim Cousins: I am very sorry. I will come on to the tripartite. I am asking you this. We now know the Treasury on 16 September were considering instructing HBOS to stop taking new business. Did the Treasury inform you that they were considering doing that? You were in the middle of negotiating with the Treasury.

  Mr Daniels: I certainly was—

  Q143  Jim Cousins: Did the Treasury tell you what we now know they were considering doing?

  Mr Daniels: I certainly was in the middle of those negotiations. If I could finish my previous sentence, certainly the tripartite made it very clear to us that they were highly concerned about the future of HBOS, and it was also very clear that were we not to move forward, they would consider other actions.

  Q144  Jim Cousins: Did they tell you that they were considering, on the day on which you were negotiating with the Treasury, that same day, instructing HBOS not to take new business?

  Mr Daniels: I do not have a specific recollection of that but—

  Q145  Jim Cousins: I would be very grateful if you would look into that. It is an important part of the record.

  Mr Daniels: I would be very happy to, if I may finish. I do not have a specific recollection of the closure to new business but I think it was abundantly clear that the Treasury and the tripartite were incredibly concerned about the future of HBOS and they very clearly transmitted that concern to us.

  Q146  Jim Cousins: On what basis did you think that your shareholders should offer to pay HBOS's shareholders £2.32 per share for a business which was effectively bust on 16 September?

  Mr Daniels: What we did was we valued the business, and what we did as we looked at each component of it, so the branches very clearly had a worth, the brand has a worth, the customer base, the systems, and so on, all have a value and what we did is we looked at the value of all the assets, we took into account all of the liabilities and the future losses, and we arrived at a price that we thought was a fair price.

  Q147  Jim Cousins: The tripartite authority, according to the same NAO Report, had formed the view that temporary public ownership of HBOS was a possible last resort solution. Had the tripartite authority shared that conclusion with you when you were negotiating on behalf of your shareholders to acquire the bank?

  Mr Daniels: It was very clear that the tripartite and the Treasury were very concerned about HBOS. It was also very clear that, were we not to go forward, they would take other steps because of the concern for the financial system. So we were left in no doubt that the tripartite would intervene. We did not know the specific form of intervention.

  Q148  Jim Cousins: You were not told that they were considering a last resort solution of temporary public ownership for HBOS?

  Mr Daniels: We certainly believed that that was an alternative. We did not know specifically that that would be what they would do. They did not share that with us, but the gravity of the situation was very clear.

  Q149  Jim Cousins: Mr Daniels, did the Government and the tripartite authority hoodwink you on 16 September or did you hoodwink your shareholders? Which is it?

  Mr Daniels: I find that a difficult question to answer but what I would tell you is I do not believe that anyone was hoodwinked. What we believe is this is a very good deal for our shareholders and will prove to be in the medium term—our shareholders including the taxpayer. We believed this was good for not only the Lloyds shareholders and other stakeholders but we also believe it was a good thing for the wider banking system. It would have been, I think, had HBOS gone down much more serious consequences than the current crisis that we are experiencing.

  Q150  Jim Cousins: This Committee has launched an inquiry into banks that are too big to fail. On 16 September 2008 you acquired another bank, making banks very much bigger, and that bank had already failed. All of this was done between you and the Government and the tripartite authorities. Does it not make this issue of "too big to fail" a rather spurious one?

  Mr Daniels: If I may, let me try and take that in pieces. The "too big to fail" I think is a very handy catch-phrase but if we can examine what is behind that, there is a view that bigness means definitely more risk and higher probability of failure. I do not believe that the evidence is at all clear that there is a link between bigness and failure. I think we have seen issues across the board in terms of the spectrum of size, where some very small institutions have failed and some large institutions have had their troubles. I think it has much more to do with the attitude toward risk and the management's ability to manage risk successfully. So I am not sure that the "too big to fail" doctrine is necessarily elucidating.

  Q151  Mr Fallon: Why did the merger prospectus conceal from shareholders the actual amount of the £25 billion loan from the Bank of England that was guaranteed by the taxpayer?

  Mr Daniels: I beg your pardon. I do not believe there was any concealment. I believe that our disclosures were absolutely thorough and appropriate.

  Q152  Mr Fallon: But the disclosures did not include the actual amount.

  Mr Daniels: The disclosures were, again, thorough and appropriate. What we disclosed was that there was emergency funding from the central bank, that it was substantial, that HBOS would not be able to function without it, so we believed that the investor could be left with no doubt as to the seriousness of the emergency lending. It was also, I think, very clear that the UK listing authority under the FSA approved the thoroughness and the accuracy of the disclosures, that their responsibility, our responsibility, is to ensure that investors have as much information as they need to be able to make a decision.

  Q153  Mr Fallon: But you and your fellow directors had the legal responsibility for the prospectus. Why should shareholders not have been given the actual figure of £25 billion?

  Mr Daniels: Again, we believe that we gave very full disclosure.

  Q154  Mr Fallon: But you did not disclose the £25 billion.

  Mr Daniels: Correct.

  Q155  Mr Fallon: Why was that?

  Mr Daniels: It was not felt to be necessary because the fact that the amount of funding was substantial, the fact that HBOS was completely dependent on it and the fact that HBOS would not be able to operate without it was viewed as more than sufficient.

  Q156  Mr Fallon: Did the Treasury advise you to leave out that particular figure?

  Mr Daniels: No, there was no advice from Treasury on that. What we believed was that the disclosure was more than adequate for any investor to be able to make an intelligent decision.

  Q157  Mr Fallon: Do you now regret not disclosing the £25 billion?

  Mr Daniels: I believe the disclosure was absolutely thorough.

  Q158  Mr Fallon: Thorough?

  Mr Daniels: Thorough.

  Q159  Mr Fallon: It did not have the amount.

  Mr Daniels: I believe the disclosure was absolutely thorough.

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