Examination of Witnesses(Questions 700-719)|
TUESDAY 29 OCTOBER
700. They got greedy. The cost of bank borrowing
had come down and assets were going up at a greater rate so they
borrowed more and more. They were literally thinking they could
print money but then asset prices went down and they were stuck
because they had borrowed to buy and they were finished because
the banks called them in. It is the extenteven their Association
accept itand you missed it?
(Mr Thomas) I will give you an example,
sir, of something which other people did quite easily. One of
the failed ones had only bank borrowings and yes, if they had
had zeros underneath those bank borrowings they would not have
been in such trouble, that is a good example of it.
701. I want to clarify what I think we have
discovered here. We have discovered two crucial things, and Brewin
Dolphin are at the heart of both. The first is that you did not
understand the product that you had created and were marketing.
You thought you did but you did not. Your only defence on that,
as far as I can tell, is you are saying other people did not understand
(Mr Thomas) Our stress testing was very,
very extensive; I did understand it.
702. The second point I think we have uncovered,
and I do not seem to be getting any correction or even qualification
on this point, is that there was no communication going on in
this firm at all and that you created a fundamentally new product
which was being sold as if it were a traditional product to several
thousands of private investors, many of whom have now lost their
(Mr Hall) It is absolutely correct that
Mr Thomas did not
703. It is an appalling state of affairs, is
(Mr Hall) He did not feel that he had
created anything that was any riskier than earlier. Is that correct?
(Mr Thomas) That is right.
704. Your answers have been direct, more so
than the obfuscation from previous witnesses on that, so that
is very helpful. But in the article on yourself, Mr Thomas, on
Sunday it said that senior industry figures said ". . . greed
is the bottom line of this. The brokers have made huge amounts
of money." This is the merry-go-round. This is what it is
all about and people who were sold zeros were not told about the
effect that gearing would have. They were not told, unlike in
the promotion when they thought they were first in the queue,
that as soon as you get a bank they were second in the queue and
the bank was safe but the ordinary investor was not, he was washed
up, and that is the issue we are looking at and we want honest
answers to that.
(Mr Thomas) I can throw some more light
on it, if you like, sir. I can remember only one case of one potential
placee saying, "You have created a zero with a gearing of
its own and we do not want to take the placing." That was
another large stockbroker who specialised in private clients who
bought zeros. He differentiated between that kind of geared zero
and the earlier kinds.
Mr Tyrie: When was that, Mr Thomas?
705. Who was he and when?
(Mr Thomas) In about 1998-99.
706. So in 1999 somebody came to you and said,"Hey,
you may not understand your product but I do"; it is a lethal
product, it is a nasty cocktail with double gearing on the zero.
(Mr Thomas) Only one man of all the others
I was talking to.
Mr Tyrie: But somebody was coming to
you and saying, "You may not fully understand your product
but I do"?
Chairman: Who was this honest man?
707. Who was against this gearing? "This
gearing is doubled geared" is what he was saying to you.
(Mr Thomas) It was one case, one opinion,
one telephone call.
708. This man drew to your attention what could
happen within the structure. He showed you what could happen and
what was happening and you dismissed it because it was only one
(Mr Thomas) We did not talk in great
detail. Nobody had reconstructed what might happen. All he said
was, "I do not like geared zeros", and I did not place
anything with him.
709. He said he did not like it for a specific
reason, a correct reason, which was that it was gearing on gearing
and you took no notice of it. It did not cross your mind that
your product that you thought was okay might have some flaw, that
the guy might have a point?
(Mr Thomas) No, I did not.
710. Who was the gentleman?
(Mr Thomas) I do not think I am giving
away any information which would hurt him in any way, sir. There
was a father and son relationship I had known in Henderson Crossthwaite
for years and years and years. The father is called Pickford and
so is the son. That is the only criticism I have ever had of any
of my designs.
711. Could I ask Mr Hall when exactly were the
first signs evident to you of a zero being unlikely to pay its
full value on maturity?
(Mr Hall) September 2001.
712. September 2001. Not before then? Bells
were not ringing before then at all?
(Mr Hall) No.
713. Is that a straight no or "to the best
of your knowledge and belief" that nothing before September
2001 at all occurred to you or any of those who worked for you?
We are talking about the private client side.
(Mr Hall) Absolutely. To the best of
my knowledge and belief, 2001, September thereof.
714. Right. So far as you are aware, were other
brokers' financial advisers in relation to their private clients
changing their advice in relation to zeros before September 2001?
(Mr Hall) So far as I am aware, there
715. There was one?
(Mr Hall) I may have got it in retrospect.
716. So it was out there in the market that
this was a bit dodgy?
(Mr Hall) No, I do not think it was that
far and I am not sure of what period I personally would have been
aware of the fact that there was one who had thought that there
might be a problem earlier.
717. When you discovered there was a problemin
relation to private clients I am talking about herehow
did your advice change?
(Mr Hall) Our advice changed particularly
insofar as the risk assessment was concerned. Very sadly, one
of the things that became apparent at once was the fact that the
marketability of the stocks in this sector dried up, as did confidence.
With no confidence it went out like a light, so one became unable
to sell any quantity of stock and the prices fell rather rapidly
and the best advice I was getting was that although the sector
was under pressure, there were problems, certainly if one had
bought a zero and advised a client to buy a zero for a particular
purpose, it was highly likely that they were looking over the
whole of the period when it was likely to be repaid and around
September 2001 it became apparent that there were pressures and
that it was possible that they were going not to be repaid in
amounts that had been expected. It was not suggested to me at
that stage that what has happened would happen, in other words,
they went bust.
718. Could I turn to Collins Stewart. In the
memorandum they sentin good time unlike Aberdeenyou
specifically refer to the difficulties caused for splits in the
recession of the early 1990s. What I do not quite get here is
given that that history was very much on the record and should
have been at the forefront of your minds, why the levels of gearing
were allowed to get to the levels they got to, ending quite disastrously
for investors. Why, with all that history, was it ignored?
(Mr Crawford) I do not think it was ignored.
I think just to go back
719. Sorry, we are talking and we have been
talking for about half an hour or longer about the critical importance
of very, very high gearing which has ended in disaster for investors,
many of them people who cannot afford to lose any money. You followed
the arguments, it is not a new point. This very high level of
gearing should have been very much to the fore of the minds of
Collins Stewart and others. You admit to that in your memorandum.
These were high levels of gearing; why did they get so high?
(Mr Crawford) As I was about to say,
I think the lessons of the 1990s were not ignored. If you look
back at the 1990s, some of the split structures which came out
of there were very simple structures inasmuch as they had maybe
half of their capital in ordinary shares and half of them in zeros,
so with regard to the ordinary shares, the cost of the ordinary
shares was quite high because the zeros were compounding at quite
a large number and they represented a large proportion of the
structure. It is also fair to say at that time the first zero
which nearly did not work was the zero in Olim Convertible, and
that was in the early 1990s, so the experience of zeros almost
not working had been realised in the early 1990s as well. However,
when bank debt did come to the fore, as we said in the late 1990s,
bank debt was considerably cheaper and people saw the benefits
that would accrue to the ordinary shareholders as well. What you
ended up with were structures where typically the gearing was
not necessarily the same level as the zeros were in the previous
years, so the bank debt was seldom as high as 50 per cent and
normally ranged between 25 and 40 per cent, so the gearing was
lower in terms of the bank debt but clearly it was a different
structure altogether from the early 1990s.