TUESDAY 4 DECEMBER 2007

MR E GERALD CORRIGAN, LORD CHARLES ALDINGTON, MR JEREMY PALMER AND MR WILLIAM MILLS

  Q1260  Mr Mudie: You are saying that in those three or four years you did not make enough profits to cover the exposure you now have?

  Mr Mills: In our case it's actually quite simple and the arithmetic is fairly straightforward. We were not involved in terms of the origination of the product and we were not involved, in the early years, in the structure and distribution of the product. We put together a team 18 to 24 months ago and got involved.

  Q1261  Mr Mudie: You got in too late?

  Mr Mills: With the benefit of hindsight, yes.

  Mr Palmer: I have not done the math, but the huge growth of subprime lending in the US is a relatively recent phenomenon.

  Q1262  Mr Mudie: We have had it for three or four years, so how long have you been in?

  Mr Palmer: Over that period of time, but I think the huge growth came about in 2005 and 2006.

  Q1263  Mr Mudie: Why have you not made money if you were in at the beginning and you have had three good years? Have the good years not compensated for you being caught with late exposure?

  Mr Palmer: It is pretty clear that different decisions were made in different firms at different times and they have led to different outcomes.

  Q1264  Mr Mudie: Lord Aldington, I have left you out. What about your position?

  Lord Aldington: I do not know whether anybody has even done that piece of math. It is an interesting question.

  Q1265  Mr Mudie: Why would you not do it if you were running a firm? If you have a product and are suddenly caught with this exposure the one defence of anybody dealing with it is to say that the company has made brass out of it over the years. Why have you not got that figure?

  Lord Aldington: I did not say that we had not done it; I said I did not know whether anybody had done it. We certainly have not made it public. My guess, just based on the provisions we have taken, is that we would be more in the Goldman department than in the other, but I honestly cannot tell you.

  Q1266  Chairman: Mr Corrigan, you stand out from the pack here by making money. Is it not the case that you have done that because you bet the other way from these guys and you saw this could end in tears?

  Mr Corrigan: Approximately in the timeframe of our second quarter which ends in May we sensed that deterioration particularly in the subprime space was mounting. In that timeframe we began to hedge our exposures in ways that turned out reasonably well from a financial point of view.

  Q1267  Chairman: In summary, is it fair that collectively you say you provided all the information needed to enable an institution to buy a complex product from you and analyse such risks that might ensue from that purchase?

  Mr Corrigan: You use the word "all" and that always makes me nervous. I do not think I would want to be wed to that word, but certainly a systematic aggressive effort was made to provide adequate disclosure to help investors make informed decisions.

  Q1268  Chairman: What about you, Mr Mills?

  Mr Mills: I think we made adequate disclosures and I think we have tried to assist.

  Q1269  Chairman: So that people knew the risks?

  Mr Corrigan: Real effort was made to provide adequate disclosure.

  Q1270  Chairman: Lord Aldington, what do you say?

  Lord Aldington: I support what Mr Corrigan has said. The key to all of this is making the information available.

  Q1271  Chairman: Mr Palmer?

  Mr Palmer: Information was provided, but I do not think anyone can pretend that the types of market conditions were foreseen.

  Q1272  Chairman: I come back to the question asked by my colleague Mr Ainger about the mortgage in Chicago. If there are information problems early on about, say, the sale of a mortgage in Chicago is it not the case of garbage in, garbage out?

  Mr Corrigan: There is obviously a truism in what you say, but I do not want to leave you with the impression that I defend every single thing that was done. There is no question that mistakes were made, but it is also true that the conditions that have materialised especially in the subprime mortgage market by any standard are quite extraordinary. There were obvious breakdowns in the credit origination process.

  Q1273  Chairman: I understand, but I go back to the point about garbage in, garbage out.

  Mr Corrigan: I would not characterise it in that way. Who would have anticipated that in key segments of the residential mortgage markets in the United States house prices, which have not declined in absolute terms in over 30 years, would do so by 5% or 6%? You can characterise that as "garbage" if you will. Freely admitting that mistakes were made, I would not go as far as to characterise it as "garbage in, garbage out". There are opportunities and situations in which people make mistakes.

  Q1274  Chairman: In your opinion, were investors sophisticated enough to understand what you were telling or selling them?

  Mr Palmer: There are two things happening here: first, the complexity of the instruments and the decisions to invest in them; second, the unforeseen marketplace conditions. You have to remember that both of those things are happening at the same time.

  Q1275  Chairman: Lord Aldington, were they sophisticated enough to understand what you were telling or selling them?

  Lord Aldington: We have always treated our investors in this as if they are professionals and we take steps to satisfy ourselves that that is the case. One must say that in certain isolated cases—I can think of a couple in Germany which have been in the press—it is not clear that the investors fully understood what they were buying or that they took advantage of the possibility to do their homework.[3]

  Mr Mills: Mr Chairman, I think that there are different classes of investors—those who participated directly in the purchase of CDOs, I think, were given all the information and all the analytic tools to make a decision. I think some of the investors, particularly investors in commercial paper that were buying commercial paper that was rated A1 and P1, and not necessarily understanding some of the underlying assets probably did not have sufficient information.

  Q1276  Chairman: As a result of this crisis do you agree that you have suffered reputational damage?

  Mr Mills: I believe that we have suffered reputational damage, yes.

  Lord Aldington: I do not think so.

  Mr Corrigan: Sure we have.

  Mr Palmer: We have.

  Chairman: The UK stands alone. Thank you very much for your evidence this morning.