THURSDAY 10 JANUARY 2008

RT HON ALISTAIR DARLING MP, MR JOHN KINGMAN AND MR CLIVE MAXWELL

  Q1760  Mr Brady: Moving on to the question of the guarantee for depositors, Sir John Gieve said to us at our last meeting before Christmas that it became clear on Friday 14 September that the lender of last resort facility had not reassured retail depositors. Why did it then take you until shortly before 6.00pm on the following Monday to announce the guarantee that was the only way to halt the run?

  Mr Darling: Well, for reasons that again, I think, I set out last October, I do not think on the Friday the extent of the guarantee that was then available to Northern Rock depositors was a primary thing in people's minds. Remember, what had happened was that there were rumours in the market on the afternoon of the Thursday, the day before the 13th, and it then appeared on the BBC News in the evening and it was fairly dramatic news that a fairly well-known bank had gone to the Bank of England for help. Then the queues started to form on Thursday evening and dramatically so on the Friday. I think it was probably at some point late on Saturday that it was becoming clear that something would have to be done. As the Governor made clear in his evidence in the same session you are referring to, we discussed this on Sunday and agreed that it was likely we would have to do something and I became convinced that it was. Guarantees are quite complicated and, as you know, we have changed the terms since it was originally announced and then it was thought best to announce it at the end of Monday because we were not in a position to do it at the start of business on Monday, and that is when we announced it and suddenly the queues went and it certainly slowed down the rate of withdrawals.

  Q1761  Mr Brady: So you would have announced it before the markets opened on Monday, if it had been possible to do so?

  Mr Darling: We were not in a position to have done it then and I was pretty clear that, given the gravity of the position that we faced, when I announced the guarantee, I wanted to be pretty clear what exactly I was announcing because people would want to know beyond doubt what the position was.

  Q1762  Mr Brady: And it was announced as soon as it was possible to announce it?

  Mr Darling: Yes, and basically you have a choice over these things. I think you either have to do this at the start of business or at the end of business and I think announcements during the course of business can be problematic. As for the timing of the guarantee, that was my judgment and that was my decision for which I am solely responsible.

  Q1763  Mr Brady: When we saw you in October, you told us that you did not think a guarantee or the extent of cover under the depositors' scheme was an issue on the Friday, whereas Sir John Gieve implied that it was the main issue on the Friday. It seems to us that this was clearly a key topic of conversation at the deputy level on the Friday. Should that have been brought to you at the principal level sooner than it was?

  Mr Darling: I am not aware that it was, but I listened to what John Gieve said on 18 December and I also listened to what the Governor said who, I suppose, is John Gieve's boss, and he was very clear that we sat down to discuss this on the Sunday and we had not discussed that before. As I said to you last October and I remain of the view, things were such on the Friday that I suspect that, no matter what I stood up and said in relation to a guarantee, you would still have had the queueing problem because what you had was a dramatic announcement, and this is something that has changed in the last 20 years with 24-hour news, and the queues started to form and the situation just got worse and worse and worse, and I think it was not actually until the Saturday that people started talking about guarantees. We discussed the thing on the Sunday and I announced it on the Monday, but certainly, as I know from my own record of what happened and also in relation to what Mervyn King said to you at the same session that you are referring to, Sunday was the first time that the Tripartite Committee discussed this.

  Q1764  Mr Brady: If this had been brought to you on the Friday though, presumably then you would have been in the position to announce the guarantee before the markets opened on the Monday?

  Mr Darling: If I had believed, on advice, that a guarantee was necessary and that it would have resolved the situation, then of course I would have taken action at the earliest opportunity, but I actually do not think, given what was going on at that time and hindsight is a wonderful thing, that the guarantee was the issue on the Friday. I think that people were so surprised that this had happened and they were seeing people queueing up, and it remains the case that the money was there and people could have got it out if they wanted and that has never been a problem as far as Northern Rock is concerned, but, as I say, as Mervyn King has said, as Callum McCarthy said, as I have said, this was discussed on the Sunday for the first time and we took action on the Monday.

  Q1765  John Thurso: Chancellor, I would like to go back to the Market Abuse Directive and particularly the question of the legal advice, but, before I do so, can I just clarify what I think I heard you say which was that the authorities' judgment during that critical week was that it "was not a showstopper", I think is what you said.

  Mr Darling: No, I said that, all things being considered, the Market Abuse Directive did not really figure in it because the two things that were in my mind were, firstly, the company itself believed it would have to say something, it would have to reassure—

  Q1766  John Thurso: Presumably it would have had that advice from Freshfields?

  Mr Darling: It is from their own legal advisers. The second thing is that my belief was that there was every chance that this was going to leak and I was dead right.

  Q1767  John Thurso: There is a great difference between advice ex ante and leaking ex post.

  Mr Darling: Well, there may be, but my belief, given that I thought it would leak and in any event Northern Rock felt that they were under pressure to say something, was that it was better to make a statement on our terms rather than be in a position where it gets out and you then have to make a statement perhaps at a time which might have made the situation even worse and I just think that would have been wrong.

  Q1768  John Thurso: Mervyn King, when he came before us, gave evidence when he said in the most unequivocal terms that his first preference was for a covert operation and I think the exact quote was, "as we used to do in the 1990s". Is it the case then that the other members of the Tripartite arrangement did not share that view?

  Mr Darling: Yes, Mervyn King was of the view that his preference would be to do it covertly. I am bound to say that, if I had thought that you could do this particular exercise covertly, I would have been quite happy to do that, but my fear was that it was going to come out and, if it was going to come out in a disorderly manner, then I think that would have been even more damaging.

  Q1769  John Thurso: So, even if it had been, in your view, legal, you would have still not supported a covert—

  Mr Darling: There were two considerations, and the first one actually was the fact that Northern Rock believed they had to say something and they had their own legal advisers as far as that is concerned. They certainly had to issue a profits warning because it was the first time they had to draw to the markets' attention that things were not all well. You may remember at that time that another large bank had, for wholly technical reasons, borrowed money from the Bank of England overnight simply because the settlement system had not cleared everything, and there was no end of speculation. Remember, there was a lot of feverish speculation at that time and people were phoning up banks on a daily basis, saying, "Have you been to the Bank of England?", so we are not talking about the comparative calmness we have got now, but we were talking about a very feverish time.

  Q1770  John Thurso: The reason I want to try and nail this, and the Chairman has given us a relatively brief time to do it, is because a great deal has been made, and much evidence has been given, that the preferred option was a covert option and the reason why it could not be done was entirely legal advice. Did each member of the Tripartite arrangement get separate legal advice or was there one set of legal advice given to the Tripartite arrangement?

  Mr Darling: I do not think we all went off to our lawyers and discussed all these things. The Market Abuse Directive is there, we are aware of it, but, as I said to Mr Brady, it was not the primary consideration. Now, I think if it were possible for us to be able, beyond peradventure as far as the law is concerned, to conduct covert operations for certainly a decent period, that would be hugely beneficial. On one view, there is sufficient flexibility in the Market Abuse Directive to do that, provided, I think I am right in saying, that you can be assured it is kept confidential, but again that is difficult, and also that you are not actually misleading people.

  Q1771  John Thurso: Was that specific legal advice to any of the Tripartite members on the subject of whether or not it was covert and possible?

  Mr Darling: No.

  Q1772  John Thurso: So there was no legal advice specifically given?

  Mr Darling: As I said to Mr Brady and I think I said it last October, we were not sitting there, saying, "What does the law say in relation to this?" We were driven by the fact that Northern Rock itself were pretty clear that they had to make something public and I was pretty clear that this was going to come out in any event. Now, we discussed these things, but the Market Abuse Directive was not actually central to our minds. Of course we are aware of its existence.

  Q1773  John Thurso: I am sorry to press you, but I think it is terribly important, particularly given our discussions in Brussels. There was actually no legal advice given to any member of the Tripartite arrangement on this particular subject?

  Mr Darling: There was no advice coming from Brussels that said, "You've got to make this public".

  Q1774  John Thurso: Was there any advice given by legal authorities, whether government officers or outside firms, to any of those three bodies in this country at that time on whether or not it was a covert operation that was possible or not?

  Mr Darling: I cannot speak for the Bank of England and the FSA, but we did not seek legal advice on whether or not this should be a covert operation. This was a judgment that we had to reach based on the fact that Northern Rock, who, I think, did seek legal advice, I think I am right on that—

  Mr Maxwell: Yes.

  Mr Darling:—and their directors were under pressure to make a statement and on my judgment, and it was right, that this was going to leak and somebody went to tell the BBC and maybe others that this was the case.

  Q1775  John Thurso: The Governor said to us, "I had still hoped, and indeed I pressed strongly, for the ability to conduct a covert operation, but in the end the strong legal advice among the Tripartite Authorities was that it could not be done", so the only way to square your statement with his statement is to say that you were, within the authorities, discussing the legal advice, but nobody actually went and got legal advice.

  Mr Darling: I cannot tell you offhand whether the Bank of England or the FSA went to the lawyers in the week in question. All I can do is tell you what considerations were in front of the Tripartite Committee, which I chair, during the course of the week that we took that decision.

  Q1776  John Thurso: When we were in Brussels, the Commission officials we met conveyed to us the strong view that the Market Abuse Directive was never intended to prevent a covert operation—

  Mr Darling: I know that.

  Q1777  John Thurso:—and also that, in their view, it did not prevent a covert operation. We have got strong evidence from the Governor that that was his preferred option. It seems clear that it was not pursued because of the risk that you assessed, or whoever assessed it, of a leak. Is that actually where we are?

  Mr Darling: I have never argued that the Market Abuse Directive was the thing that governed the decision that this operation was going to be made public. In October and on every occasion I have been asked about it, I have said that the decision was driven by two things, Northern Rock's position, and the FSA is the listing authority for these things who will undoubtedly have looked at the position, but the Market Abuse Directive was not actually the stumbling block, but it was actually—

  Q1778  John Thurso: With regards to the legal advice, what we have got down to is the sum total of the legal advice in the whole affair was the partner responsible at Freshfields and that was it.

  Mr Darling: Sorry, what partner?

  Q1779  John Thurso: Well, whoever gave the advice to the Northern Rock Board.

  Mr Darling: I do not know that the advice was given to Northern Rock. What I do know is that the Authorities' decision to make a public statement on the Friday morning was taken as a result of the considerations that I have set out. I do not believe that the Market Abuse Directive was the stumbling block. I am well aware of the advice that you have been given in Brussels in relation to that, but I do not think it was the issue. Of all the things we had to consider, this was not the issue.