Rock chiefs twice offered to resign

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Adam Applegarth, chief executive, and Matt Ridley, chairman of Northern Rock, twice indicated they were prepared to resign since the banking crisis broke, it emerged on Tuesday.

The two men spent three hours on Tuesday morning being grilled by MPs about why Northern Rock had found itself on the brink of collapse and had been forced to go to the Bank of England for £13bn of emergency funding.

The crisis prompted the first run on a British bank for almost 140 years as retail depositors attempted to get their money back, forcing the government to step in and guarantee all savings.

John McFall, chairman of the committee, on Tuesday accused the board of not properly stress-testing a shutdown of the wholesale markets which led to Northern Rock being unable to access funding and seeking Bank of England support.

“Why are you alone in the United Kingdom in this embarrassing situation?” he asked. “You went cap in hand to Bank of England and are in a position where your bank is effectively nationalised . . . it’s the taxpayer that’s supporting your bank at the moment.”

Mr Ridley said there was nothing that could have been done to prevent the crisis given that no one expected all wholesale markets to seize up at once.

He said: “The idea that all markets would close simultaneously was unforeseen by any major authority . . . We review liquidity regularly; we were hit by an unexpected and unpredictable concatenation of events.”

Mr Applegarth told the House of Commons Treasury select committee that nobody had anticipated turmoil in the credit markets that would make it impossible for the bank to finance itself.

He also pointed the finger at the Bank of England, which refused to follow the US Federal Reserve and the European Central Bank in providing cheap liquidity directly to the banking system.

“The fundamental cause was the speed and duration, and the global nature of the liquidity freeze – heightened for us by the fact we didn’t have access to the same type of borrowing facilities available to banks in the US and from the ECB,” he said.

He said no action could have been taken by the bank to prevent this.

He also said that Northern Rock had taken out some liquidity insurance to protect itself against such events but this had not proved enough.

Mr Applegarth said that Northern Rock had been in talks with a high street bank in September but these talks broke down on September 10 – four days before Northern Rock went to the Bank of England for emergency funding.

The talks – believed to have been with Lloyds TSB – broke down because the Bank of England facility offered to Northern Rock was not able to be transferred to the new buyer.

Mr Applegarth suggested a run on Northern Rock could have been avoided if the offer had been agreed. “It would not have taken place [a run] if we had been able to announce an offer by a big retail brand,” he said.

Mr Applegarth said that the bank had also looked at whether it could access liquidity from the European Central Bank through its small Irish savings business as part of the options it looked at after the global credit squeeze on August 9.

“Had we had more time we would might have been able to put in place the legal documentation and gone through the Irish branch. . . the trouble is that would have taken two to three months.”

He said that if the bank had been able to access the ECB funding, which is not made public, then a retail run on the bank would have been avoided.

“If we had been able to borrow using mortgage assets as collateral which is what they do at ECB . . . the ECB has had 150 institutions and because it is not public they have not had the shocking retail run we have had.”

Mr McFall accused Sir Derek Wanless, chairman of the Northern Rock risk committee, of not doing his job properly in not stress-testing a complete shutdown in the wholesale markets.

He pointed out that the Bank of England had already warned in April of a “sharp reduction” in market liquidity.

“Your voice should have been a cautious voice.” he told Sir Derek who was chief executive of NatWest, a retail bank which ran into difficulty in the US before it was taken over by Royal Bank of Scotland.

Sir Derek said that Northern Rock had stress-tested 20 different scenarios of which 15 had involved some sort of liquidity issues but it had not tested a complete shutdown.

Michael Fallon, senior opposition Conservative party member on the committee, also questioned why Mr Ridley and Mr Applegarth were still in post.

“You caused the first run on a bank for 150 years, you have borrowed billions of public money and damaged the good name of British banking. Why are you still clinging to office?”

Sir Ian Gibson, Northern Rock’s senior non-executive director, told MPs that executives including Mr Applegarth and Mr Ridley had offered to resign, but that the board had rejected the resignations

He said on August 30 he had asked board members whether they were willing to resign and later when the run on the bank started in September, the chairman and chief executive had also indicated they were willing to resign.

Sir Ian added: “Following the run, having consulted brokers, shareholders and the board – the overwhelming feedback was we can worry about that [resignations] later . . . what we need to do is direct the bank through a crisis .”

The pair were also accused of a lack of humility by MPs. However Sir Ian said: “There is absolutely no arrogance on behalf from the board and there is shock and distress.”

Mr Applegarth said the announcement of the facility on September 14 and the subsequent panic created by phrases like “lender of last resort” had panicked savers even though the backstop facility at that point had not been drawn upon.

He said: “It was a sensible and prudential thing to do to put the backstop in place, it was the leaking of the backstop that caused the retail run.”

Andy Love MP said: “I was in New York and Washington and they don’t know about British banks but they know about Northern Rock, they know about the queues outside the bank – do you fully the reputational damage you have done to the banking system in the UK?”

Mr Ridley said he agreed the name of Northern Rock had suffered “some damage” .

“It is a matter of enormous distress to me and colleagues,” he said.

Mr Applegarth pointed out that Northern Rock had started to slow its loan growth from March onwards.

“You saw the slowing down of asset growth which we had done from the third month this year and we were selling various asset books,” he said. “We picked up warnings signs coming from US subprime and we slowed the rate of growth and gave new guidance on our profits for the year.”

Northern Rock has received takeover approaches from several potential bidders including JC Flowers, the US private equity group, and a consortium led by Sir Richard Branson’s Virgin Group. It said on Monday that those discussions were still at an early stage.

The bank has in recent weeks been heavily criticised for rapidly expanding its share of the mortgage market in the first half of 2007, potentially adding to its funding problems.

Tuesday’s hearing was the third by the Treasury select committee since Northern Rock was bailed out last month. In previous sessions Mervyn King, governor of the Bank of England, blamed the crisis on a series of factors including European insider trading laws and the UK’s inadequate system of guaranteeing bank deposits.

Last week Hector Sants, the Financial Services Authority’s chief executive, acknowledged inadequacies in the regulator’s supervision of the lender.

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