UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 300-ix

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Treasury Committee

Project Verde

Tuesday 21 January 2014

Lord Levene of Portsoken KBE and Gary Hoffman

Evidence heard in Public Questions 1445 - 1747

USE OF THE TRANSCRIPT

1.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.

3.

Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.

4.

Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.

Oral Evidence

Taken before the Treasury Committee

on Tuesday 21 January 2014

Members present:

Mr Andrew Tyrie (Chair)

Mark Garnier

Stewart Hosie

Andrea Leadsom

Mr Andrew Love

John Mann

Mr George Mudie

Mr Brooks Newmark

Jesse Norman

Mr David Ruffley

John Thurso

________________

Examination of Witnesses

Witnesses: Lord Levene of Portsoken KBE, former Chairman, NBNK Investments, and Gary Hoffman, former Chief Executive Officer, NBNK Investments, gave evidence.

Q1445 Chair: Lord Levene and Gary Hoffman, thank you both very much for coming to give evidence to us this morning. Lord Levene, what have been the consequences for you personally arising from the failure to acquire Verde’s branches?

Lord Levene of Portsoken: Chairman, first of all, thank you for your welcome. We are both very pleased to have the opportunity to speak to your Committee this morning. For me personally, the NBNK project-if I can put it like that-was a proposal that was put to me some time ago. It was a proposal put together by some of the largest investing institutions in the country, long before I had anything to do with it. I think they had rightly concluded that pure retail banking in the UK was a good business, that to a large extent a number of the largest retail banks had lost their way and if there could be a retail bank again, which was just that, pure retail, this would be a good thing for them to invest in.

They invited Sir Brian Pitman, who I think was regarded as one of the best retail bankers of his time, to become the chairman of it and he agreed. Sadly, he died and so they approached me to take over. I thought this was a good idea. I still do, and it is a matter of great regret to me that this did not happen. For me personally, I got the usual flak; although I think perhaps when some people have seen what has happened subsequent to that they may have changed their view somewhat. I have other responsibilities that I follow, and so personally for me it is a matter of carry on with life.

It is still a matter of regret to me that something that I think would have been a good idea, which was being supported by all political parties and, if we read the statements just at the end of last week by the leader of the Opposition, it seems to be déjà vu all over again, "Why don’t we create some challenger banks?" So I think it was a good idea, but life goes on and so you have to get on with it.

Q1446 Chair: You have made a number of very serious allegations or inferences of allegations in your evidence. Overall, do you think that the bidding process for the Verde branches was fair?

Lord Levene of Portsoken: No.

Q1447 Chair: Are you alleging bad faith on Lloyds’ part?

Lord Levene of Portsoken: Looking at the whole situation in the round, Chairman, and, of course, as time goes on things start to become clearer, I was told at one stage, quite late on in the process, that I should look at the references to financial services in the Coalition Agreement. One of those references said that it was one of the goals of the Coalition to promote the interests of mutuals. I think that there were two particular champions as Ministers in the Coalition, the Financial Services Secretary-

Q1448 Chair: Sorry, could you just tell us when it was that your attention was drawn to a section of the Coalition Agreement?

Lord Levene of Portsoken: I would say about halfway through the process, certainly before the decision had been taken.

Q1449 Chair: This is after the first bid or between the bids?

Lord Levene of Portsoken: From memory, it was after the first bid.

Chair: After the first bid, okay. Sorry, do carry on.

Lord Levene of Portsoken: Yes. Clearly the Business Secretary had said for a long time that he was a big supporter of mutuals. He told me that himself when I saw him, and I had not understood the full inference of that. I have subsequently learned that the Financial Services Secretary is thought to have been a very significant supporter of mutuals. With the benefit of hindsight-which of course one always likes to have-there seems to have been a view that, if the creation of a new challenger bank would be created by a mutual, this would be another tick in the box for the goals that had been set out. I have no difficulty with that, provided it was done by fair means rather than foul.

Your clerk has provided us with some of the later evidence that was put in by Lloyds Bank to say, "How would one know? How were NBNK so perceptive that the Co-op were going to fail in such a spectacular manner?" We were not so perceptive.

Q1450 Chair: We will come on to that in a moment. The question was whether you are alleging bad faith on Lloyds’ part and you have just suggested that foul means were in play. If foul means were in play, it sounds as if you are alleging bad faith. Is that correct?

Lord Levene of Portsoken: Well, "Foul means" is one terminology. What I would say is that, in our view, they chose to concentrate on all the positive aspects of the Co-op and none of the positive aspects of our bid.

Q1451 Chair: Okay, but can I come back to the question: are you alleging bad faith on Lloyds’ part?

Lord Levene of Portsoken: I believe that Lloyds were swayed by political considerations, which I-

Q1452 Chair: We will come on to that in a moment, but are you alleging bad faith?

Lord Levene of Portsoken: I would say that their assessment of our bid, to the extent that that was explained to their board-and we have no idea whether that was done-was not done fairly.

Q1453 Chair: Do you think that that unfairness constitutes bad faith?

Lord Levene of Portsoken: Yes.

Q1454 Chair: So you are alleging bad faith?

Lord Levene of Portsoken: Yes.

Q1455 Chair: Bearing in mind-and I have known you a little bit for a very long time, and you are one of the shrewdest and most thoughtful operators around-that that must have been one of the key question that you would be asked today, why did you spend five goes before coming to the conclusion that you were alleging bad faith?

Lord Levene of Portsoken: Could I just ask Mr Hoffman to talk about the five goes, because I do not think that we had five goes. Do you want to just address that point?

Q1456 Chair: No. I just want to ask you, Lord Levene, why you did not say, "Yes, I am alleging bad faith"?

Lord Levene of Portsoken: Because at that stage we believed that we were bidding reasonably fairly, and the reason that there were five goes, which was-

Q1457 Chair: My question is about the evidence that you have given me this morning. I am trying to clarify why you have not come and just said, "I am alleging bad faith".

Lord Levene of Portsoken: If you ask me do I think it was bad faith, yes I do.

Q1458 Chair: Before I leave that area, I would like to ask you whether, in the light of that, you are planning any legal action.

Lord Levene of Portsoken: No, Chairman.

Q1459 Chair: As far as we can tell, you made that clear in a conversation with Mervyn King on 5 July 2012, didn’t you?

Lord Levene of Portsoken: Yes.

Q1460 Chair: We have seen the minutes of that conversation. If you are alleging bad faith-which is a very serious allegation-why are you not contemplating legal redress?

Lord Levene of Portsoken: Because, as of today, neither I nor Mr Hoffman have any particular standing in this. We are no longer directors of the company. We are no longer shareholders. I think that if one looks at the bigger picture today-

Q1461 Chair: The shareholders have £25 million they might like to recoup, haven’t they?

Lord Levene of Portsoken: That is up to them, Chairman.

Q1462 Chair: Right at the beginning you pointed out that initially there was a reputational hit for you as well. There is a lot at stake, so why are you not suing?

Lord Levene of Portsoken: Because I would like to believe, Chairman, from what I have heard from people that I know in the City and from what I have read in the press, that the belief now is no longer-as we were very unfairly tarred with-that we were a bunch of incompetents who did not know what we were doing. Even in the last few days many senior people have said, "Now we understand what was happening. Now we can believe what you said".

Q1463 Chair: It is the allegation of incompetence that has triggered the vigour of your response?

Lord Levene of Portsoken: In part, yes.

Q1464 Chair: But you are not going to seek redress, even though in your view it was action taken in bad faith. Did you take legal advice on whether you could take action?

Lord Levene of Portsoken: Only informally.

Q1465 Chair: Is that a "Yes" or a "No"? Either you go to seek legal advice or you do not on a matter of that gravity.

Lord Levene of Portsoken: One of the few remaining members of the board is a distinguished lawyer, and I talked to him about it. I decided-and I think Mr Hoffman decided-that life goes on at the end of the day. I believe that my reputation-

Q1466 Chair: Do you think you would win a case for bad faith?

Lord Levene of Portsoken: It would be a very complex case and it would cost a lot of money, and I am not sure that we would win too many friends from pursuing it.

Q1467 Chair: So the answer to that is, "We might win. We might lose. But it would cost a lot of money", and you do not want to lose friends.

Lord Levene of Portsoken: Yes, that is a fair summation.

Q1468 Chair: We might come back to that in a moment. Just to be clear about the Coalition Agreement, you said that the Coalition Agreement was brought to your attention after the first bid.

Lord Levene of Portsoken: Yes.

Q1469 Chair: Were you not already aware of the Coalition Agreement?

Lord Levene of Portsoken: I was generally aware of it from memory. The Coalition Agreement is a very long document.

Q1470 Chair: But this is on page 1 of the Coalition Agreement. It is on page 9 technically, but the first eight pages are of foreword. It is in the middle of page 1 and page 1 starts with "Banking". It is right at the top. I must ask you whether you were aware already of the commitment in the Coalition Agreement-

Lord Levene of Portsoken: To promote the interests of mutuals?

Chair: Yes.

Lord Levene of Portsoken: Only parenthetically and it was not at the front of my mind.

Q1471 Chair: When you say, "My attention was drawn", it does sound a bit curious that you were not already aware of it.

Lord Levene of Portsoken: Let me put it into context. When it was suggested to us that there had been considerable political interest in this I said, "Why?" They said, "Well, perhaps you would like to have a look at the terms of the Coalition Agreement", which I then did. When we were in the middle of making a bid for a large number of retail banks like this, we thought that we were dealing with a normal commercial situation. Perhaps we should have looked more at the Coalition Agreement, but certainly it was not the first thing that came to mind.

Q1472 Chair: Lord Levene, you have been in Government for years and years and years. You were right at the heart of the most difficult negotiations of the lot. That is with the Defence industry. You knew you were not in-as you have described it-a normal commercial situation. This is offloading a major holding of a part state-owned institution. You knew jolly well that politicians would be thinking about this decision and have an interest in the outcome. You will agree with that, surely.

Lord Levene of Portsoken: Of course, because before this was well under way I consulted widely with a number of politicians. If I recall rightly, I even came to see you because obviously, as Chairman of this Committee, you had an interest. We were given considerable encouragement by everybody we saw, from all political parties, to press ahead with this. If I recall rightly, at the time there was no suggestion that a mutual-in this case the Co-op-was going to be one of the bidders.

Q1473 Chair: Did you say a moment ago that you came to see me to ask whether you should go ahead with this bid?

Lord Levene of Portsoken: No, I did not ask whether we should go ahead with the bid.

Q1474 Chair: I do not remember any such conversation about that. I would like to clarify the point that you did make there, parenthetically.

Lord Levene of Portsoken: Let me make clear what I meant. I came to see you to say that we were interested in bidding for this and that I wanted to let you know. I did not ask you whether we should do it. I just wanted to let you know, and you said words to the effect of, "Thank you for letting me know".

Q1475 Chair: I think that that is accurate. Can I just come back to this Coalition Agreement before we move on? Knowing your extremely distinguished record in Whitehall over many years, I have to say that it strikes me as extraordinary that you were not aware of the terms of the Coalition Agreement before you set off on this path, and that you only discovered the import of it after your attention had been drawn to it in between the two bids.

Lord Levene of Portsoken: I think the import of it is correct, Chairman. Of course we knew the Coalition Agreement existed. That is a very lengthy document. We knew that it was the wish not only of the Coalition but, as far as I was aware, of all political parties to encourage the start of a new challenger bank, which is what we were doing. We certainly informed as many relevant politicians as we could talk to of our wish. They all thought this was a good idea and, as I said at the time, we did not focus on the particular issue of mutuals because the Co-op at that time certainly was not a bidder. They came in later on. Should we have looked further? Perhaps we should, but we had a lot of other things to look at. We believed and we had been told by the politicians involved-and you will have seen the correspondence-that they were keeping strictly out of this.

Q1476 Chair: But you feel perhaps that you should have looked further?

Lord Levene of Portsoken: Perhaps we should have done, but we believed-

Q1477 Chair: Would you go as far as saying that was incompetence or not?

Lord Levene of Portsoken: No. I think it was one issue and perhaps we should have paid more attention to it. We had a lot of other things to look at.

Chair: Yes, I understand that.

Gary Hoffman: If I could add, Chairman-

Chair: I would like to clarify one more point and then there will be an opportunity for you to come in, in just a moment.

Gary Hoffman: No problem.

Q1478 Chair: I want to clarify that the allegations you are making, in a nutshell, are: first, that there was political interference to public detriment and that you feel this constitutes bad faith.

Lord Levene of Portsoken: Yes.

Q1479 Chair: Secondly, that Lloyds moved the goalposts of the auction to help ensure the Co-op won and that that constitutes bad faith.

Lord Levene of Portsoken: I would say that constitutes unattractive commercial practice.

Q1480 Chair: Okay. Just to be clear, is this also part of the bad faith allegation or not?

Lord Levene of Portsoken: Yes.

Q1481 Chair: That also constitutes bad faith. There are numerous subsidiary elements to each of these. Thirdly, Lloyds’ evidence to this Committee has-and these are the words you have used-"been at best disingenuous".

Lord Levene of Portsoken: That is a very good description, Chairman.

Q1482 Chair: We will come on to all three of those in more detail in questions from other colleagues.

Mr Hoffman, before I pass the questioning on to Jesse Norman, I realise that you have not been given an opportunity to have a go. So do respond or add to any of the thoughts or exchanges.

Gary Hoffman: Chairman, the only thing I was going to add is that, of course, we were aware of the political backdrop. In some ways we were encouraged in this process because of the political backdrop, because that was about creating challenger banks, creating something different, creating something that was purely retail-focused, and that is what we were about.

Notwithstanding the Coalition Agreement’s mention of mutuals, the overriding point was that we needed new challenger banks, and there was Vickers, the Banking Commission on Parliamentary Standards, as well, and we were encouraged by some of the conclusions there. Therefore, we entered into this process believing, and with assurances, that the process would treat the different bidders on the merits by which they bid. It is only once we thought that the process was not necessarily coming out in our favour, for all sorts of reasons, that we chose to take a step back and say, "Why is this happening?"

Q1483 Chair: On that specific point, Lord Levene, if I can come back to you for one point of clarification? When you said, "Why isn’t this happening?" presumably that coincided with the point at which your attention was drawn to the Coalition Agreement?

Lord Levene of Portsoken: It did.

Q1484 Chair: Is that correct? That is the point at which-

Gary Hoffman: That is what I am trying to add.

Q1485 Chair: Who was it who drew your attention to the Coalition Agreement?

Lord Levene of Portsoken: I actually do not remember, Chairman. But once somebody mentioned this to me-and I actually cannot remember who it was-then it was like the penny dropped and we suddenly started to realise where this was coming from.

Q1486 Chair: This is a set of thought processes that-as you said a moment ago-perhaps you should have had earlier but which, nonetheless, you feel is short of incompetence?

Lord Levene of Portsoken: Yes. We were looking much more at the commercial and financial issues that were involved. Should we have spent more time on this? Perhaps, but we did not.

Q1487 Jesse Norman: Lord Levene, I want to clear up a couple of points of fact arising from the Chairman’s questions. First of all, have you sustained or have your investors sustained any financial loss from this failed bid?

Lord Levene of Portsoken: Have I sustained? Yes.

Q1488 Jesse Norman: How much?

Lord Levene of Portsoken: I invested £100,000. I received back something like £40,000, so I lost £60,000.

Q1489 Jesse Norman: You lost £60,000?

Lord Levene of Portsoken: Yes.

Q1490 Jesse Norman: How much have your investors lost as a result of the failed bid?

Lord Levene of Portsoken: If they have realised their investment-

Q1491 Jesse Norman: No, how much have they lost so far from the bid having failed as a result of the process that you say is the result of bad faith?

Lord Levene of Portsoken: If they have not realised their investment they have not actually lost anything yet.

Q1492 Jesse Norman: Sorry, it is a paper loss, yes.

Lord Levene of Portsoken: A paper loss of 60%.

Jesse Norman: Of 60%?

Lord Levene of Portsoken: Yes.

Q1493 Jesse Norman: On the investment of £50 million?

Lord Levene of Portsoken: Correct.

Gary Hoffman: That is right. The amount that was spent was just under £30 million.

Q1494 Jesse Norman: The amount that is in play is about £30 million?

Lord Levene of Portsoken: Yes.

Q1495 Jesse Norman: You said you do not intend to seek legal redress yourself on this matter. Have you had any indication from any of the investors whether they may seek legal redress?

Lord Levene of Portsoken: I have heard tell that some of them may be waiting to see what happens as a result of this hearing, Mr Norman, to see whether they will do so or not, but I have nothing definite about that.

Q1496 Jesse Norman: Thank you. Potentially there is a lawsuit for £30 million on the table and consequential costs?

Lord Levene of Portsoken: Yes.

Q1497 Jesse Norman: I am grateful for that, thank you. I want to focus on the details of the bid for the moment. Lloyds has told us that the final bid from the Co-op for the Verde branches was superior to the one that your NBNK consortium offered, both financially and in terms of its execution risk. What I want to ask is, whether or not you agree with that assessment, and we know that you do not agree with it, was that not a reasonable conclusion for it to reach?

Lord Levene of Portsoken: If I may, I am going to ask Mr Hoffman to answer that in detail because he was more involved with the numbers. But from my understanding of it, and from what I have seen now-and, again, with the benefit of hindsight-I do not think anybody would come to that conclusion. But may I ask-

Q1498 Jesse Norman: Just to be clear, you do not think anyone could come to the conclusion that it was reasonable for Lloyds to take the Co-op bid over your bid?

Lord Levene of Portsoken: We did not come to that conclusion. If you say "anyone", anyone can take any-

Q1499 Jesse Norman: But it was a reasonable conclusion. They were not committing an egregious mistake.

Lord Levene of Portsoken: For what it is worth, my view is that it was not a reasonable conclusion.

Q1500 Jesse Norman: Okay. Thank you. Mr Hoffman?

Gary Hoffman: I think it is important to say that when Lloyds communicated the decision to us, on 27 June 2012-and, as an aside, I had met with them at 7 am that morning because late the night before they had requested me to come down to talk about a number of issues, so I went to speak to Antonio Lorenzo and Toby Rougier-they were very clear, during that meeting on the day on which the decision was made, that the key determinant was not price. They understood where we were on price. I said, "Is there anything more we need to do on price?" They said, "No, we understand where you are. We understand your price adjustment mechanisms". In communication of the decision, that is after the event of the decision, they said to me at 4.55 pm that day that it was not about price; it was about a number of factors, principally about execution risk, and that is what they have said to me, Lord Levene and others since that date.

In terms of the specific numbers, clearly I am not privy and should not be privy to all the detail of the Co-op. However, from what I have seen publicly given, theirs was a £350 million offer upfront with a further £400 million over 15 years, dependent upon performance of the business. Our offer was a range of £630 million to £730 million and an additional £120 million invested upfront to get to completion. Our monies were going to be paid-let us use the £730 million number-upon signing of the sale and purchase agreement, that is well in advance of completion, whereas the Co-op monies would be paid at completion. Hence, I conclude from those figures that our offer was financially superior.

Q1501 Jesse Norman: But it was not unreasonable for them to prefer the other offer. You have said they preferred it on execution grounds, but you are not suggesting that it was unreasonable for them to reject it on financial grounds. You think yours was better.

Gary Hoffman: I think it perfectly reasonable to say, "Price is important but not the only thing". They may be there or thereabouts both on price. I happen to think ours was superior, but I have not seen all the detail of the Co-op bid. You should of course take into account other factors, such as: how this fits with state aid rules-I could talk about that-what is the risk of execution for our customers and for employees, and what is the risk of execution for funding? I think it is perfectly acceptable to take all those things into account and make a decision either in favour of the Co-op or NBNK or neither. It is difficult to be objective when you are one of the bidders but, having been around financial services for a long time, it was crystal clear to me that the execution risk for the Co-op was extremely high. I said at the time I thought it would unravel over a short period of time, which is what it did.

Q1502 Jesse Norman: Just to be clear, it was not unreasonable for them to choose the other bid on financial terms and it was not unreasonable for them to choose the other bid on execution terms, although in fact the judgment turned out to be flawed, as we have seen by the performance of the Co-op subsequently. That is what you are telling us?

Gary Hoffman: It is perfectly within their rights and they can change the process. I can talk about the process more, but they can change the process at any time according to the letter of the process and they can make a decision based on what they regard as the criteria.

Q1503 Jesse Norman: Of course, you as a challenger institution, following what you believe is a Government remit to increase competition by providing new entrants into the market, have all the benefits of being the new entrant and hopefully-as you hoped for at the time-the support of that. Of course, they are an existing clearing bank and, therefore, the purchase of branches might be seen to be mitigated, in terms of execution risk, by giving it to an existing player even if it did not meet the remit of increasing competition by bringing in a new entrant. Is that right?

Gary Hoffman: It is possible you can conclude that. But for those that were very close to retail banking at the time, it was crystal clear that the execution risk with the Co-op was extremely high, given their integration issues with the Britannia, given the group structure and given the lack of management capability they had.

Q1504 Jesse Norman: How widely known were those issues in the market at the time?

Gary Hoffman: Very widely known. Clearly I am not going to talk about lots of informal conversations I had with senior bankers, but I had lots of informal conversations with senior bankers who would share that view. There would be people inside Lloyds that have that view. There would have been people inside the Co-op that would have that view. There would have been people inside the FSA that had that view.

Q1505 Jesse Norman: Thank you for that. Lord Levene, you have said you think that it was unreasonable for Lloyds to prefer the Co-op bid. Could you explain why?

Lord Levene of Portsoken: Mr Norman, as I said earlier, everyone can be very wise with the benefit of hindsight, but we were making it very clear that we believed that the Co-op could not perform. They did not believe us. I think if you look at what has happened with the Co-op overall since then-even yesterday-the number of problems that they faced were unfathomable. How would they do this?

There is one particular point that they made in their evidence that I would like to bring to your attention. They said that we did not have committed funds. In effect, that is not true. When I started my evidence today, I explained how the genesis of this programme was when some of the largest institutions in the United Kingdom decided-and I think quite rightly-that retail banking was a good sector in which they should invest. They decided to commit, certainly to us, up to £2 billion to pay for the acquisition, which is roughly what they then thought it was going to be worth, of these 632 branches of Lloyds Bank. They immediately wrote us out a cheque for £50 million just to get us going.

Throughout the evidence that we have seen that has been submitted to your Committee, Lloyds seem to be saying that we had no committed funds; we did not have the money there. It was absurd. They knew who our shareholders were. In fact, Mr Hoffman can tell you that he offered to take these very large institutions into Lloyds to say to them, "Look, we commit to make this money available. You do not need signed letters from us. You know who we are".

Jesse Norman: The equivalent of the old "highly confident" letter.

Lord Levene of Portsoken: Yes. You know when you have people of the nature of the backers that were backing us you do not need-

Q1506 Jesse Norman: Let me ask you a question about that. JP Morgan was acting as the financial adviser to Lloyds Banking Group. If you think that their assessment was unreasonable, JP Morgan must have been wrong in giving that advice. Is that right?

Lord Levene of Portsoken: Mr Norman, you are experienced in this as well. You will always have advisers and the advisers of Team A will say, "Black", and the advisers of Team B will say, "White". Are they all always right? No, I am sure they are not.

Q1507 Jesse Norman: Why would JP want to say that black was white, from your point of view? What would be the point, from JP, of having a well-respected international institutional come out in favour? They do not have any skin in the game, do they?

Lord Levene of Portsoken: Because they were acting on behalf of their client.

Q1508 Jesse Norman: Their client is instructing them to come out in favour of the Co-op, on your way of thinking of it?

Gary Hoffman: If I can just add here that, of course, in any acquisition process like this a bidder will be asked to increase the confidence of the funding during the process. In the early part of the process we gave comfort letters. We gave highly confident letters later in the process. It would not be usual at any stage in the process, until we get to a sale and purchase agreement, to provide committed funding and that would be true of NBNK. It would be true of the Co-op. It would certainly be true of an IPO where, of course, you would not get that committed funding until right towards the end of the process.

As Lord Levene says, we offered several times for there to be joint meetings between Lloyds and our investors to show what their commitment was, and our investors were very happy to have those meetings.

Q1509 Jesse Norman: They turned you down?

Gary Hoffman: Lloyds said they did not need those meetings because they understood the quality of our investors. I think the other thing to say is that-

Jesse Norman: So quality spoke for itself. They did not need to meet your investors to know that they were highly reputable institutions that would-

Gary Hoffman: Of course. They were mainly blue chip investors. They were not hedge funds there to make a quick buck. These were long-only blue chip institutional investors. Of course the other important thing to say on this is that funders will only provide underwritten funds when they have, in effect, prospectus-quality information. Lloyds was not able to provide that information to anyone, including themselves, in order for that committed funding to be provided because they were working to provide that prospectus-quality information in line with an IPO timetable, not in line with our timetable. That delayed us significantly-and, understandably, we did not moan-in the ability to provide the increase in confidence on funding.

Jesse Norman: The Chairman has an interjection and then I want to go on.

Q1510 Chair: Just to be clear, it was Lloyds’ fault that a higher level of confidence on funding was not provided? It was Lloyds fault that they did not-

Gary Hoffman: I would not have used those words. They asked for comfort letters. We gave them. They asked for a repeat of those letters at each stage of the process. We gave them. Towards the end of the final bid, on 11 June 2012, they gave us some additional financial information. We asked them if they would like further letters and whether they would like to meet. They said, "We do not need anything else".

Q1511 Chair: I heard that in previous evidence. I am asking you to summarise where the blame lies-if there is blame to be had or to be allocated- for the fact that there was not a higher level of confidence in this bid written out in a document at the time the decision was taken.

Gary Hoffman: What I am saying is that no party-whether it be the Co-op, NBNK or a prospective IPO-could provide that level of committed underwritten funding at that stage. It was Lloyds that turned down meetings with our investors where they would have stated their clear intent.

Q1512 Jesse Norman: Mr Hoffman, I do not understand that. Am I not right in saying that Lloyds wrote to you requesting more details around your funding plans?

Gary Hoffman: Yes.

Q1513 Jesse Norman: They would not have done that if they were comfortable with the quality of the funding that you were showing them.

Gary Hoffman: No, I do not think that is true. I think that is a normal thing to happen in these processes and we updated them each time they asked us for that. Clearly, I do not know what they were asking the Co-op. I think that the Co-op would have had more difficulty providing the sort of letters that we had because they had different-

Q1514 Jesse Norman: But the letters you had were all on an uncommitted basis. They had exactly this language, "This letter does not constitute and should not be construed as, a proposal, a commitment or an offer by or on behalf of us to provide any financing". Is that right?

Gary Hoffman: Yes. What I am saying is that-

Q1515 Jesse Norman: They are explicitly disavowing any commitment in those letters.

Gary Hoffman: Mr Norman, all I am trying to say is that is normal in this type of process and Lloyds understood that. They would not have expected to receive any letter without that legal caveat in the back.

Q1516 Chair: Are you attaching any blame to Lloyds’ conduct with respect to this issue?

Gary Hoffman: I think they should have met with our investors. If they had concerns about whether our investors were committed at this stage of the process that we were at, then I think they should have met with our investors as offered several times.

Q1517 Jesse Norman: The thrust of your point is, how could they be grumbling about execution risk if they were not even prepared to meet with your investors, whom you had offered to, and who were some of the biggest institutions in the country?

Gary Hoffman: Yes, exactly.

Q1518 Jesse Norman: The final point, just to come back to Lord Levene because you did not follow through. You said to us that it was unreasonable for Lloyds to prefer the Co-op Bank bid. You have acknowledged that they were so advised by JP Morgan and you have said that JP Morgan was instructed by their clients to give that advice. They were acting at the behest of their clients. Is that right?

Lord Levene of Portsoken: No, I did not say they were instructed by their clients to tell them that the bid was good. Of course, they were instructed by their clients to give them their advice, which is what they did.

Q1519 Jesse Norman: So JP Morgan were acting and exercising their judgment independently, in response to a request from their clients for their best advice?

Lord Levene of Portsoken: I would imagine so, yes.

Q1520 Jesse Norman: You are not suggesting that they were catering to a pre-understood idea in Lloyds that they wanted the Co-op?

Lord Levene of Portsoken: No.

Gary Hoffman: JP Morgan would have been advising on the financial aspects rather than the other execution aspects; even though, of course, they always stray into those, so they would ask me quite a lot about technology. Let us not forget that JP Morgan would know the Co-op well, having advised them on the Britannia acquisition.

Q1521 Chair: On the JP Morgan aspect of this, you are suggesting they sang the song that their clients told them to and that they were prepared to subordinate their independent professional judgment to that?

Gary Hoffman: Those are not my words, Chairman.

Q1522 Chair: No. That is the impression I got back when I heard the exchange that took place a moment ago about JP Morgan from you.

Gary Hoffman: No, I was saying that JP Morgan would have provided advice on the financial aspects of it. I have no idea what that financial advice said, so I cannot comment on that.

Q1523 Chair: Is it your view that JP Morgan acted professionally and as they should in every respect, as far as you know?

Lord Levene of Portsoken: I do not have enough information about their advice to be able to say that, Chairman.

Q1524 Chair: You said a moment ago that you had lost money.

Lord Levene of Portsoken: Yes.

Chair: £60,000 I think you said.

Lord Levene of Portsoken: Yes.

Q1525 Chair: How much were you paid in total as directors’ emoluments?

Lord Levene of Portsoken: I think I was paid about £300,000 a year.

Chair: So the total was about £600,000?

Lord Levene of Portsoken: Yes.

Q1526 Chair: Mr Hoffman, how much were you paid? You were in a full executive role. You were in a non-executive role for £600,000.

Gary Hoffman: Yes, my salary was £750,000 a year.

Chair: That is about £1.8 million.

Gary Hoffman: I cannot remember how long-I am sure your calculation is right.

Chair: I do have the figures in front of me.

Gary Hoffman: I am sure your calculation is right.

Q1527 Chair: Yes. Lord Levene, you were down £60,000 but you were up £600,000. That would have been a more accurate reply to the question.

Lord Levene of Portsoken: Not entirely, Chairman, because, of course, there is tax to be paid on that as well.

Q1528 Chair: You were down £60,000 gross and up £600,000 gross would have been a fully accurate reply.

Lord Levene of Portsoken: Chairman, I think a fully accurate reply is that I might say there was an opportunity cost because if I had not been doing that I might have been doing another job.

Could I make one other point?

Q1529 Chair: I just want to clarify on the money with Mr Hoffman. You were paid just under £1.8 million, but in addition to that there was a commencement fee, wasn’t there?

Gary Hoffman: Yes.

Q1530 Chair: I have from the accounts that the commencement fee was another £1.8 million, so we are talking about £3.6 million here.

Gary Hoffman: Yes. Clearly I was leaving another role in order to do this and there were monies due from that role and that was part of me joining. It was-

Q1531 Chair: I am not passing any comment on whether these were the right sums of money for this type of work. I am passing a comment on the allusion that was made earlier, that either or both of you might have lost money.

Gary Hoffman: Your numbers are clearly factually correct. Lord Levene has told you why he got involved. I got involved in order to create something different in UK retail banking. My great shame and regret is the fact that we were not given that opportunity.

Q1532 Chair: No, I have that point. I am just trying to clarify these numbers. You said a moment ago that the total amount at risk was about £30 million. I make it about £25 million on the basis of what is in the public domain. In any case, we are talking roughly the same numbers. I have taken a look at the breakdown of that. If we strip out salaries, the commencement fee, social security costs, depreciation and operating leases, which are the main other heads, I still only get this number down to £20 million and that is described, in what was put in the public domain by you, as "other, not disclosed". Is there any of that you feel able to disclose now? That sum is £20 million. What was that spent on?

Gary Hoffman: In order to put a comprehensive, well-thought-through, very structured bid for a serious set of assets we had to engage a number of advisers. We had to do lots of detailed due diligence. Most of that would have been in due diligence, legal advice, banking advice fees and IT, brand and marketing preparation.

We did not come at this, as some would say, as a shell with no assets and plans. We had a comprehensive, robust plan to address the totality of what we were trying to buy. As a consequence, yes, we committed serious amounts of our investors’ money in order to do that. They were happy for us to do so. We had to do it in a serious way to convince Lloyds-obviously not as well as we could have done-and to convince the FSA. I think we did a very good job with the FSA, and we can talk about that. We had to convince a lot of other stakeholders as well.

I suppose I would put it into perspective. At our peak, when we were working very hard on this-and it was a very intense transaction, we had about 50 people working on it-we were spending about £2 million a month, whereas Lloyds were spending over £2 million a day.

Q1533 Chair: That is a very helpful clarification. It might also be useful if you could give a breakdown of the "other" element there.

Gary Hoffman: Could we revert on that? I do not have those numbers.

Chair: Later, yes. Anybody looking at this, as I have done, would have their eye immediately drawn to the elephant in the room on that sheet, which is of course the £20 million.

Gary Hoffman: Yes.

Q1534 Mr Love: Can I refer the Committee to my designation as a Labour and Co-operative MP? Can I come back to this issue of your investors and the commitments they gave? Is it unreasonable for Lloyds Bank to interpret the following comment in the letter, "This letter does not constitute and should not be construed as, a proposal, a commitment or an offer by or on behalf of us to provide any financing to NBNK". Is it unreasonable for them to interpret it that way?

Gary Hoffman: The only way in which that paragraph could and should be interpreted is in a transaction process such as this. That would be exactly the paragraph that anyone would put in at this stage, and Lloyds and their advisers would expect that.

Q1535 Mr Love: That is not what Lloyds have said to us. The letter then goes on to say, "The letter may not be used without our prior written consent save that a copy may be provided to Lloyds Banking Group who may place no reliance on it." How would you interpret that? Would it be unreasonable for Lloyds Bank to interpret that as not being committing any funds to this proposal?

Gary Hoffman: No, it would be unreasonable for them to do that. This is, unfortunately-and advisers and legal advisers play a role in these processes-exactly what you would expect to be put in such letters at this stage of the process. That is why we wanted to ensure there was more flavour around the legalese in the letters provided to LBG by, for example, their meeting directly with the investors to hear their level of commitment. It is exactly because those sorts of legal caveats are always put into these letters. It was because of the compliance departments in those investment organisations that we wanted to provide more flavour to LBG. LBG would have understood exactly why those letters say that. It would be extraordinary for them to say anything else.

Q1536 Mr Love: That is not what they are saying in their memorandums to us and when they gave evidence. They also raised the backdrop to this, being that public equity markets were effectively closed at that particular time and, therefore, it was a very difficult investment climate. Do you take that into account in recognising the reasonableness of the way in which Lloyds responded to your offer?

Gary Hoffman: Clearly, as Lord Levene has already said, our blue chip investors had already provided £50 million without any financial information being provided. Therefore, it would be wrong to say that equity markets were completely closed for this type of potential investment because they had already provided £50 million in order to fund the transaction and they had provided comfort letters. Clearly, the investment proposition has to be sufficiently compelling for them to then put the money in in due course, but-even during that very difficult period-transactions were being done if the investment proposition was right.

Q1537 Mr Love: But if I can put the opposite case, very many good investment prospects were not being done because of the climate. You were asking Lloyds to take a very large risk at that particular time, plus the letters that they received-now, it may well have been that they could have met with your investors-they suggest that the information from you was quite clear and their interpretation is entirely different from yours.

Gary Hoffman: Mr Love, they understand how these processes work extremely well and they would not have expected any different from those letters. Indeed, they said that to us at the time. The other thing I would say is let us not forget the context here. This is a forced sale. This is not a choice for Lloyds to sell something in the markets. It was a forced sale into the markets, which was mandated by the European Commission and a legally binding agreement, I assume, between the Treasury lawyers and the European Commission to sell this asset in the market by November 2013 and, if that did not happen by that time, then it should be sold at no minimum price.

This is not a normal type of equity transaction where the seller has a choice, which it does. The timing of the transaction needs to be taken into account in what we are saying here. If those equity markets are difficult-and indeed they were-then that would be true for us, for an IPO, and presumably for the Co-op in raising their funding, too. We happened to have a number of very strong, very large, very long-only, not in it to make a quick buck, institutional investors that were prepared to back us and to provide letters, with the normal caveats in a transaction process, and they said they were happy to show their commitment.

Q1538 Mr Love: I would like to come back because, of course, there was the IPO as a backdrop and there was still competitive tension with the Co-op Bank at that particular time. Let me ask you, Lord Levene, did it not send alarm signals when Lloyds clearly did not wish to meet your investors? Did that not send a signal to NBNK that perhaps your bid was not being viewed in quite the positive light that you had expected?

Lord Levene of Portsoken: No, Mr Love, it sent a completely different signal. The chairman of Lloyds Banking Group is a very experienced investment banker, more so than a commercial banker. He will have understood the import of those letters better than anybody and would have known that this was totally standard practice.

For the benefit of you and the Committee, perhaps I can just tell you who some of those investors were: Aviva, Invesco, Foreign & Colonial and Baillie Gifford. As Mr Hoffman said, these are not fly-by-night operators. This was not my idea to start NBNK. This was their idea. They had put up money. They had stood behind us throughout. At no time throughout the process did any of those investors come to us and say, "Hey, look, it looks like Lloyds do not treat you seriously. Do we still want to go ahead with this?" Quite the opposite; they were astonished as well. We were very surprised at what happened and we do not believe that, looking at this, any experienced investment banker would have regarded the caveats that were put in the letters by those investors as being anything other than entirely standard procedure.

Q1539 Mr Love: It is clearly coming across, in the evidence that both of you are giving, that the terms of the forced sale that the European Union was imposing upon Lloyds led you to believe that the very competitiveness of your bid may not need to be as good as it would be in normal circumstances. I am rather hacking at it at the moment, but the point I am trying to make is that, between your first bid in 2011 and the second bid in 2012, there was not a significant improvement. In fact, some would say you lowered your bid. Was that against the backdrop of the forced sale?

Gary Hoffman: No, not at all. We were crystal clear that there were a number of competitive bidders and, therefore, we needed to be on the mark, on our game, with a competitive bid in financial terms. Of course, we knew in a forced sale, in an environment where the Banking Commission and politicians wanted a challenger bank, that there were other factors to be taken into account and, frankly, we thought we ticked all the boxes on those.

The only reason for the reduction between December 2011 and our final bid on 27 June 2012 was the fact that on 12 June, I think it was-or it might have been 11 June-2012, 18 months into the process Lloyds gave us updated information that showed a reduction in profits of several hundred million pounds for the Verde transaction. That is the only reason our bid was reduced, because their projections had reduced by several hundred million pounds. For example, up until that point, they were assuming base rates would be in the high 300 basis points by the end of 2014; clearly it was never going to happen.

Q1540 Mr Love: Could I come to execution risk? Lord Levene, is the characterisation of NBNK as having no bank, no treasury, no clients and no infrastructure, a fair characterisation?

Lord Levene of Portsoken: No, I do not think it is a fair characterisation. We were set up as a new venture. Of course we did not have any branches. Of course we did not have any clients. We were encouraged to start a new venture, which is what we did. By its very definition, a new venture does not have clients. But what we did have-as I have been at pains to explain-was basic investors who were there from the outset, who were ready to do this because they believed that the creation of a new challenger retail bank was a very good investment. To be fair to them, I think they also felt this was a good thing to do for the greater society where clearly a number of people have been failed by retail banks. We did not.

I understand entirely your question, which I think is a fair one: were we trying to see if we could squeeze the last penny out of it because there was so very little competition? That was not where we were, and I will tell you why. We had set this up precisely to buy these banks. There was no other motive there. When it was coming to what was now clearly the crunch, our interest was to put in the best possible bid that we could, and that is what we did. We certainly did not say, "Let’s see if we can shave a few pounds off this". That was not the way we operated, otherwise we would have failed.

Q1541 Mr Love: Let me ask you a final question. In the circumstances, just looking at NBNK, was it reasonable for Lloyds Bank to consider execution risk so considerable in relation to NBNK as to discount it from the bidding process?

Lord Levene of Portsoken: All I can say is that I do not agree with them. I understand what they did. I think they are wrong. I understand why they said that, but I just think they were wrong.

Gary Hoffman: I would add that if they had concluded that having no branch infrastructure, no legacy systems infrastructure and no banking licence was a non-starter in this process, then they should have said that at the beginning of the process. They did not say that because they did not believe that to be true, nor did the FSA. Clearly, we had many sessions with Lloyds on all of those issues where we believed we satisfied them on all of those issues and, indeed, they said that we had satisfied them on most. Let me give an example on IT.

Q1542 Chair: I do not think we need the example, unless it is absolutely essential, on grounds of time. Why do we not just accept that point?

Gary Hoffman: I will just make the one sentence. In Lloyds’ evidence they say that we did not have a platform. All I would say is we were introducing a partner that runs platforms for hundreds of millions of customers; probably better to do it without the legacy platform, a clean platform doing different simple things for customers.

Q1543 Chair: We are already at 11.10 am and we have lots of colleagues who want to come in. On the basis of what I am seeing so far, we might take a very brief interval at 11.30 am to give everybody a breather for five minutes or so, and then we will resume at 11.35 am or thereabouts and run until lunchtime.

Just following up Andy Love’s questioning on execution risk, let us set aside execution risk for one moment and go back to the JP Morgan assessment that you were cross-examined on earlier. You were sent the supplementary evidence that has been put to us, which we are publishing today, the short supplementary evidence last week. You have seen that, haven’t you?

Lord Levene of Portsoken: Yes.

Q1544 Chair: I will ask Lord Levene these questions. Lord Levene, you say that the December 2011 rejection of the first bid showed that the deck was stacked against you. That is correct, is it not?

Lord Levene of Portsoken: Yes.

Q1545 Chair: You had your nose ahead as far as the financial assessment is concerned, setting aside the execution risk. Is this correct?

Lord Levene of Portsoken: Yes.

Chair: I have it completely correct? I have not missed any key point out?

Lord Levene of Portsoken: Yes.

Gary Hoffman: I think that that JP Morgan note concludes that as at December 2011.

Chair: That is correct and that was this supplementary evidence shows.

Gary Hoffman: Yes.

Q1546 Chair: With respect to the second bid, they concluded that the Co-op bid was ahead on financial grounds alone but-in evidence to us a moment ago-you were saying that was because they were just peddling whatever line their clients wanted.

Lord Levene of Portsoken: No, Chairman. Mr Hoffman can give you more evidence on this, and I think I pointed this out in a note previously. They had done their sums incorrectly and, in fact, if you had done the sums properly, you would find that our bid was higher and not lower.

Q1547 Chair: You are saying that, with respect to this issue, just the financial aspect of the analysis, JP Morgan was incompetent?

Lord Levene of Portsoken: No, I am saying that when Lloyds-and I do not know who told them to say this-said that the other bid was higher-that is right, isn’t it?

Gary Hoffman: I just go back to the very perceptive-

Chair: No, hang on, I just want to clarify. Are you saying that they were incompetent with respect to this?

Lord Levene of Portsoken: All I am saying is that they said that our bid was lower and we believe they miscalculated it.

Q1548 Chair: They miscalculated it. Was that a piece of incompetence? What led to this miscalculation?

Lord Levene of Portsoken: I cannot tell you that, Chairman. I do not know why they got the calculation wrong.

Chair: Just a momentary rush of blood to the head.

Lord Levene of Portsoken: I do not think so.

Q1549 Chair: I am just trying to get to why it is that JP Morgan came out with a view based on a calculation that you yourself said was erroneously put together.

Lord Levene of Portsoken: Perhaps we are not privy to everything they saw on the Co-op and, as I said before-

Chair: There may be further undisclosed information?

Gary Hoffman: There may be. In very simple terms, for me it would be difficult to conclude that a £350 million upfront payment from the Co-op followed by £400 million dependent on business performance over 15 years compared with £730 million upfront would be a better deal. There must be other things in there that made that because JP Morgan is full of clever people that would not normally get that type of calculation wrong.

Q1550 Chair: There is more that we should be asking of JP Morgan in evidence to explain this gap?

Gary Hoffman: I think I would go back to-

Chair: Although you are not passing judgment at the point that you are saying JP Morgan are incompetent, you are saying that there is information, not yet in the public domain, which is required in order to explain why such a group of clever people-as you described it-took such an extraordinary decision. Do I have that right?

Gary Hoffman: I would agree with that if the decision was made principally on price. We were told-

Q1551 Chair: This may be the further piece of information.

Gary Hoffman: Yes, but we were told it was not.

Q1552 Chair: I am trying to summarise what you appear to be saying to us, because there is a great deal of inference and I am trying to translate it into evidence. Perhaps you could summarise that point for us. Lord Levene, am I right in thinking-in the absence of that further piece of information, that further explanation that may be of a non-financial nature-that JP Morgan’s judgment with respect to this would be incompetent?

Lord Levene of Portsoken: Chair, I am not passing any judgment on JP Morgan. I am only commenting on what Lloyds Bank said to you in the evidence that we have seen, where they said that they believed that our bid was lower. We believe they are wrong. We do not understand why they were wrong. If they had advice from JP Morgan that we are not privy to, then we cannot comment on that.

Q1553 Chair: In December 2011, when you concluded that the deck was stacked against you, you must have sat around the table and thought, "We are up against deep, dark forces here. What on earth are they?" Did you?

Lord Levene of Portsoken: Yes.

Q1554 Chair: In which case, why did you sally forth with another bid?

Lord Levene of Portsoken: Because we believed that we would be treated fairly, certainly by-

Q1555 Chair: Even though you felt there were deep, dark forces at work?

Gary Hoffman: I think much more-

Chair: I am just asking Lord Levene, but by all means come in in a minute.

Lord Levene of Portsoken: Whenever we inquired about this, either formally or informally, we were told, "Do not worry. This is a commercial decision and that is the only basis-"

Q1556 Chair: But you already had the evidence that the deck was stacked against you, Lord Levene, staring you in the face, and you decided to go ahead and-as I put it-sally forth with a second bid. Why did you do that? Why did you put your shareholders’ money at risk?

Gary Hoffman: Can I come in here with a comment?

Chair: In a moment. I just want Lord Levene to comment, since he was leading this project.

Lord Levene of Portsoken: Because we were being given signals from those involved that this was very fair, and if we believed there were dark forces at risk, we should not believe them, and this was-

Q1557 Chair: Hang on, just to clarify what you are saying there, each piece of your evidence has a high degree of inference in it and I think it is important that we draw it out. What you are saying here is, yes, you considered that the deck was stacked against you; yes, you considered that there were dark forces at work, but that you sought reassurance before going ahead, before sallying forth with that second bid. Have I summarised your position correctly?

Lord Levene of Portsoken: Yes, and I think-

Q1558 Chair: Okay, I just wanted to clarify that. If that is the case, I would be grateful if you could tell us from whom you sought that assurance and what evidence you can provide of it, of the exchanges, of your concern that there were these dark forces at work and wanting reassurance before going ahead with the second bid.

Lord Levene of Portsoken: Certainly. I asked the Chairman of Lloyds Bank if there were any outside influences and he assured me there were not. I asked the-

Q1559 Chair: But you pointed to the stacked deck, did you not, at that point and said, "But come on, old chap. It is obvious that there is something amiss here. There are these deep, dark forces at work".

Lord Levene of Portsoken: He assured me that I was wrong. He made-

Q1560 Chair: You believed him?

Lord Levene of Portsoken: I listened to what he said. We also made inquiries-

Q1561 Chair: But if you disbelieved him, if you were not believing him, you would have been mad to go ahead with the second bid, wouldn’t you?

Lord Levene of Portsoken: I mean, short of categorising everybody we spoke to as lying to us, which I was not and did not-

Q1562 Chair: But you are now. You are now saying this was in bad faith, are you not?

Lord Levene of Portsoken: Chairman, if you look at the history of this, which we set out here, this has taken place over a long period and it is like doing a jigsaw puzzle, and as you continue, more and more of the pieces fall into place.

Q1563 Chair: But a pretty big piece fell into place in December 2011, did it not, something that led you to conclude that the deck was stacked against you? That was your evidence to us.

Lord Levene of Portsoken: This is what we had been led to believe and I thought it was quite possible. But when I made inquiries of the Chairman of Lloyds Bank and in the Treasury, I was told I was wrong. It was only, Chairman-and you will have seen this-when I was called in directly for a one on one meeting with the Governor of the Bank of England, who told me that our fears were well-founded. That is when I finally realised that we had not been told the truth.

Q1564 Chair: Mr Hoffman, you want to comment.

Gary Hoffman: Chairman, one more point, yes. Of course we believed that we had not had a fair hearing at that point in December 2011. The other people we consulted were our investors because clearly we were spending their money, so it was important to get their view. The announcement from Lloyds was that they would reach heads of terms with the Co-op by the end of March. That is what their 17 December-I think it was, or perhaps 14 December-announcement said. We were of the clear view that the Co-op would not meet that date, indeed would not be able to get anywhere near heads of terms by that date and hence, if they were going to miss that date, we should stay in the game. That is what we believed, that the Co-op would not deliver on what they said they would deliver in December through to March. That is why, during March and April, when that became clear that they were not going to meet that, we reacted.

Chair: Unless you want to chip in, Andrea?

Q1565 Andrea Leadsom: Yes, just on that. Was it the decision of your investors that you should continue or was it your executive decision that you should continue?

Gary Hoffman: It was our recommendation to our investors, but, given that they had started this venture in the first place, clearly we always consulted with them very closely and we would not want to go ahead without their full support. But our recommendation was based on the fact that we thought the Co-op deal would fall apart.

Q1566 Stewart Hosie: Lord Levene, you note that, over the Verde bidding process, Lloyds made repeated changes to the process and the package on offer. How many times was the package changed significantly and what were the most significant changes that were made?

Lord Levene of Portsoken: Perhaps I can ask Mr Hoffman to answer that, because he is more in the detail.

Gary Hoffman: Five, substantially. The initial package was a large package of £70 billion of assets and I think £40 billion of liabilities, with a funding gap therefore of £30 billion. That would have been very difficult for any bidder to close, although we did have some discussions about the way in which that could be done. It was changed when we did the second round bid in September, and it is important to make the point that every single date we were asked to meet, we met. I do not think that is true of any others bidders. After September and before December, the package was reduced substantially in order to remove that funding gap to make it more of a balanced book.

Then after December, when they had tried to reach heads of terms through to the end of March, had failed to reach heads of terms with the Co-op and had allowed us back into the process in April, there were then further changes made to the package, including taking out some price-promised mortgages, which would have been difficult to manage in this, and the IP portfolio, for example. In the end, what we were bidding for was about a £22 billion balance book of assets and liabilities, so you can see a change from something over here to something quite changed.

Q1567 Stewart Hosie: But presumably you would agree that Lloyds were entitled to change the terms of this offer and the timetable of the auction process at any time during that period.

Gary Hoffman: Yes.

Q1568 Stewart Hosie: There was nothing untoward necessarily in the nature of the changes?

Gary Hoffman: I think that they would say that the reason they were doing it was to protect their shareholders and to make sure they had more people in it. It was clear to me that-I am not saying they were not doing that-what they were also doing was making this a more attractive package to the Co-op.

Q1569 Stewart Hosie: We will come back to that, but they will maintain that this flexibility that they were putting in was to protect the shareholders, to protect shareholder value.

Gary Hoffman: Of course.

Q1570 Stewart Hosie: Again, that is not an unreasonable thing. Explain to me then, why were these changes being made more attractive to the Co-op?

Gary Hoffman: First of all, let us remember that we were the only ones to bid on a second round bid in September 2011 and Lloyds could have progressed with that bid. If they had stuck to the letter of their process, they could have said, "Right, we have the bid. We have an IPO in the background. No one else has been able to bid. We will go forward with the person that has bid, if that is acceptable in terms of finances". My guess is it was, but instead they chose to repackage it to enable the Co-op back into the process.

Q1571 Stewart Hosie: Lord Levene, is that what you meant by suggesting that Lloyds moved the goalposts in order to induce a bid from Co-op Bank?

Lord Levene of Portsoken: That was one of the elements of it, yes.

Gary Hoffman: To be crystal clear, of course their advisers would undoubtedly have been saying, "You want more than one horse in the race alongside the IPO to keep commercial traction".

Q1572 Stewart Hosie: Then can you explain a specific change-either to the package or the bidding timeline-that specifically benefited Co-op at any time in this process?

Gary Hoffman: The fact that the Co-op did not meet any date that was given to them in the process, and they were given more time each time, suggests to me absolutely the process was changed in order to accommodate the Co-op.

Lord Levene of Portsoken: Mr Hosie, can I just underline there that the Chairman mentioned that I have spent a lot of my career effectively working on your side of the table, working with Government, and in particularly large transactions-as the Chairman said-with the Ministry of Defence. When you have a large bid like this and you have a closing date, then that is it. That is the closing date. In my experience, it is very unusual to say, "Right, you have to submit your bid by noon on 24 May. That is it", come 24 May or whatever the date was, we go and say, "How have we done?" and they said, "You are the only bidder". I said, "Fine, then we have won". "Oh no, we are going to start bidding again." I found that very unattractive and I thought that was very wrong. Legally, are they able to do that in a commercial transaction? Yes. Morally, I think it is very wrong.

Q1573 Stewart Hosie: Of course, what Lloyds have said is that, in addition to your bid, they had other letters of interest.

Lord Levene of Portsoken: But they did not amount to anything.

Q1574 Stewart Hosie: Given that is what they are telling us and we have no reason to doubt that, and this is a complex, big transaction, hundreds of branches, the creation of a challenger bank, it is not unreasonable-and also forced in part by the European Commission-surely to allow as much time as possible to get as many bids in as possible rather than simply working to a date?

Gary Hoffman: I absolutely agree with that. In terms of other letters of interest, that would not be true after September 2011. Clearly I am not privy to the fact, but, in terms of the process that I knew of, there was Sun Capital, us and Co-op. After September it was just us and the Co-op, and I doubt there was other interest after that.

Q1575 Stewart Hosie: I want to just probe further on this moving of the goalposts in order to benefit the Co-op. The Co-op was named the preferred bidder in December 2011, it was granted exclusivity, but NBNK was readmitted to the process in April. Is that not an argument to suggest that the goalposts were being changed to facilitate NBNK at that point?

Lord Levene of Portsoken: Mr Hosie, I think it was an argument to suggest that they could not get anywhere with the Co-op and so they had to start again, which is what they did, and they were not able to reach any kind of deal with the Co-op. Had they been able to, they certainly would not have come back to us.

Gary Hoffman: My interpretation is that they were having considerable difficulties getting comprehensive executable plans from the Co-op, so they allowed us back into the process. I think that is an understandable thing to do.

Q1576 Stewart Hosie: Have you any evidence of that?

Gary Hoffman: Have I any evidence of that?

Stewart Hosie: Other than the absence of a firm bid, have you any evidence to suggest that is the case?

Gary Hoffman: Apart from the fact they did not put a bid in, apart from the fact that they did not meet the date they had set for the heads of terms, apart from the fact that a number of people that had worked for me in NBNK were working in Co-op and said there was no way that they were going to meet their plans, no.

Q1577 Stewart Hosie: If that was known to you, presumably that was known to Lloyds as well, and presumably also to Government and the other backers of the bid.

Gary Hoffman: My complete mystery in all of this, and the reason for the frustration, is I think it was pretty obvious to nearly everyone involved in this, and observers and advisers, and yet they progressed. That is what I do not understand.

Q1578 Stewart Hosie: Let me just ask a final question then. There is a lot of supposition, there is a lot of reading between the lines and there is a lot of nuance. Why was NBNK’s bid rejected in favour of Co-op?

Lord Levene of Portsoken: May I venture my own view, which is that there was considerable pressure on Lloyds to accept a bid from the mutual. That is what I believe.

Chair: We are going to come on to that later on, but I can assure you there will be a good deal of examination on that question. I think we should take a five-minute interval, because we have been going 90 minutes. We will resume, because I think there is half a dozen more colleagues, or certainly five more colleagues, to come in. We will resume at 11.35 am.

Sitting suspended.

On resuming-

Chair: We shall recommence and I will hand over the questions to Andrea Leadsom.

Q1579 Andrea Leadsom: Thank you, Chairman. Good morning still. I want to talk to you about the missing risks document. Lord Levene, you have said in the evidence to the Committee that it is inconceivable that the Treasury Committee could accept that, having been required by NBNK’s board to submit this document to Sir Win, you would then fail to do.

Lord Levene of Portsoken: Correct.

Q1580 Andrea Leadsom: How could that possibly have happened? How can it be that you handed over the risk document that NBNK thought highlighted the problems with the Co-op bid, yet Lloyds claim to have absolutely no recollection or evidence that they ever received it?

Lord Levene of Portsoken: As I think you have seen, I was instructed at a board meeting to take this document to the Chairman of Lloyds. Both Mr Hoffman and I attended that meeting and we can both confirm to you today-if you would like it, on oath, but I am sure you do not-that I gave him that document.

Q1581 Andrea Leadsom: That was on 27 January 2012?

Lord Levene of Portsoken: Correct, in his office. I can remember very clearly doing so.

Q1582 Andrea Leadsom: That document was about NBNK’s perspective on what the risks were of the Co-op bid?

Lord Levene of Portsoken: You have a copy of the document.

Andrea Leadsom: Yes. Just to be clear that it is that document?

Lord Levene of Portsoken: Yes, it was that document. People have said, "With the benefit of hindsight, that was a pretty perceptive document". That document was not produced with the benefit of hindsight, that document was produced, together with our advisers, of what we believed to be the case at the time. Unfortunately, we were proved only too right, because if anybody looked today-

Q1583 Andrea Leadsom: Yes, we will come on to that. But on this point about the fact that there is a dispute over whether Lloyds ever received it, is Sir Win lying, do you think, that he did not receive that document?

Lord Levene of Portsoken: I gave the document to Sir Win like that. Mr Hoffman can confirm.

Q1584 Andrea Leadsom: So he is lying-that he never received it?

Lord Levene of Portsoken: Perhaps he had a senior moment.

Q1585 Andrea Leadsom: Okay, so a senior moment or lying?

Lord Levene of Portsoken: Perhaps it dropped down the side of a sofa, but if he says I did not give it to him, that is untrue.

Q1586 Andrea Leadsom: Did you give it to him and tell him what was in it or did you just hand him a piece of paper that he could have put down and-

Lord Levene of Portsoken: We were talking about our bid and I said, "We have been considering our bid, and we have had prepared for us a detailed assessment of the strengths and weaknesses of the other bid", which you would expect us to do. He and I were certainly good friends at the time. I said, "Win, I really think you should read this, because if you read it and if you check it, I think you will think very carefully about whether to accept the Co-op bid or not", and he said, "Thank you very much".

Q1587 Andrea Leadsom: Bearing in mind all the circumstances and the conditions under which you handed it to him and so on, is it conceivable that he might have handed it to an aide and just not thought any more of it?

Lord Levene of Portsoken: Anything is conceivable. I gave him the document. Now, people have said, or may have said, "Why wasn’t it emailed?" I think if you read that document and you consider the circumstances of the time I gave it to him, it was a very, very sensitive piece of paper and we took the deliberate decision not to email it because, as I am sure members of your Committee know, emailing bits of paper can be quite risky. I said, "I will not take that risk. I will give it to him in person". I gave it to him in person and he took it. What he-

Q1588 Andrea Leadsom: Can anyone back up the decision that you took to only hand it over in person? Is that minuted anywhere, that a decision was taken not to email it?

Lord Levene of Portsoken: Yes, Mr Hoffman can, and other members of our board who were at the meeting.

Gary Hoffman: Yes. I think there is important context in the background here. Clearly we were a rival bidder, so it is always difficult for a rival bidder to be commenting on someone else because it can be seen as sour grapes. We were not about that. We were trying to do an objective assessment of what we thought, given what our objectives were. You will see at the top of that piece of paper it says, "To the board of Lloyds Bank" and I think Sir Win questions the provenance of it because of that.

I will get to your specific question. We discussed whether we should send it to the Lloyds board electronically. We thought for three reasons we should not: first, because we were a rival bidder; secondly, because we thought that would undermine Sir Win’s position as Chairman. If he was Chairman he would be annoyed if we did that, and we did not want to annoy him; and thirdly, that we thought it would be best if we talked it through with him and that Lord Levene left it with him. That was the reason that it was done.

Q1589 Andrea Leadsom: Is that decision minuted anywhere?

Gary Hoffman: Yes, it is.

Q1590 Andrea Leadsom: So we could see in the minutes where you had decided?

Gary Hoffman: Yes.

Lord Levene of Portsoken: You have had a copy of the board minute. If I could draw your attention to another document, which I think-

Gary Hoffman: I think it is minuted in the board meeting of 26 January, the day before, that Lord Levene should hand it to him.

Q1591 Andrea Leadsom: That would be helpful to see.

Lord Levene of Portsoken: I thought that had been circulated to the Committee.

Could I just draw your attention to another document that concerns this directly that I circulated, which is a file note of a conversation that took place on-I will just try to check the date-26 June 2013, when I had a phone call from the Times telling me that the Lloyds’ press office were developing a story that this whole document was a fabrication by me. Fortunately for them, before that went to press, they decided to pull that story. I was very angry. I telephoned another director on the board, Norman Blackwell, who by coincidence is the Chairman designate of Lloyds, and I said, "If you dare state that, I will throw the book at you". That to me says a great deal about Lloyds’ thinking on this, because that document clearly did exist. I was not lying, Mr Hoffman was not lying, our board was not making this up and the only defence was to say that I had fabricated the whole thing. That to me says a great deal about it. Although they may pooh-pooh it and say, "Well, anybody could have said that" they were obviously worried that they had been given this advice and had ignored it, or he had been given it and certainly had not shown it his board.

Q1592 Andrea Leadsom: Thank you. In fact, the Treasury Clerk’s team have just shown me the extract of the minutes of your board meeting that says, "The board considered a tabled paper entitled, ‘Key risks to the Co-op and Verde transaction’ and agreed that subject to a final review for sensitivity, it would be appropriate for the paper to be left with LBG’s chairman at the forthcoming meeting". It does not explain that it was not being electronically sent, but it does clearly show the intent.

Lord Levene of Portsoken: It said "left with" because we deliberately decided not to send it electronically for the reasons I say.

Q1593 Andrea Leadsom: Mr Hoffman, can you confirm that you saw Lord Levene hand the document to Sir Win?

Gary Hoffman: Yes. We talked about a number of topics in that paper and then it was handed over just as we were leaving.

Q1594 Andrea Leadsom: Who else was at that meeting?

Lord Levene of Portsoken: Nobody. The three of us.

Q1595 Andrea Leadsom: Just the three of you, okay. You were scheduled to meet António Horta-Osório the following week. Did that meeting take place and did you discuss the document with him then?

Gary Hoffman: I cannot recall a meeting the week after. To be fair, I saw Lloyds lots of times during this process. The number of times we saw them between January and March was very few and far between, because Co-op were in exclusive talks, so I do not recall a meeting after that.

Q1596 Andrea Leadsom: For the record, can you confirm why did you decide to write that memo and what the purpose was of writing it? To help your bid?

Lord Levene of Portsoken: The memo was written to our board to inform them on our internal adviser’s assessment of the Co-op bid, which, as you read that memo today, you may say it was pretty perceptive, which it was. We were asked earlier why we carried on with this bid: because we thought that we had the best bid.

Q1597 Andrea Leadsom: Sorry, I understand that you are claiming that it is prescient in hindsight, but at the time, was the purpose of writing it to encourage your own shareholders that you were still in with a chance? Was it to improve your bidding possibilities? What was the purpose of it?

Lord Levene of Portsoken: It was to our board. In a large transaction like this, obviously as it moves ahead, you get reports on what is happening. This was a report on what we believed to be the status of the Co-op in their bid. We saw it. It was seen by our board and, as you will have noted from the extract from the minutes, it was agreed by the board that I should hand a copy of that to the Chairman of Lloyds Bank, which I did.

Gary Hoffman: There were two reasons. First, yes, we had to convince ourselves that it was right to continue to keep NBNK open, spend some money-less money than we were spending-pending perhaps the Co-op bid falling apart, so we had to convince ourselves there was a strong argument for us to do that, otherwise it would have been a waste of our investors’ money. We thought that the Lloyds’ board should be informed what we thought about it.

I suppose secondly, and probably less easy to believe from your perspective as to why we were doing some of this, as someone who had been involved in financial services for a long time, I truly believed that a challenger bank that was very different was needed. I could not see that that was going to happen, given all that was happening with the Co-op.

Q1598 Andrea Leadsom: Again, thank you to the clerks, they have pointed out in that same board minute that, "Meetings have been arranged with the LBG Chairman on 27 January and the Chief Executive during the week commencing 6 February, so that the company can hear in more detail what aspects of its bid LBG had liked or disliked and to enable the company, NBNK, to express its concerns about the Co-op’s ability to complete the transaction". That would have been the week of 6 February that you are meeting with António Horta-Osório. Can you tell us, did you raise the memo with him at that meeting? Did you give it to him?

Gary Hoffman: I cannot remember what I did at that meeting.

Q1599 Andrea Leadsom: Okay, but it would have been normal, would it not-

Gary Hoffman: Absolutely. There were a number of conversations I was having at the time, whether it be with LBG, indeed with their advisers, indeed with the FSA and of the stakeholders where I would have highlighted what was in that paper, including with the group Chief Executive of the Co-op.

Q1600 Andrea Leadsom: Are you saying that that memo was shown to different stakeholders, including regulators and other advisers? You have said on the one hand that you felt this was exceedingly confidential, so that you were not going to email it, but now you are saying you cannot remember who you talked to about it, because you were talking to lots of people about it.

Gary Hoffman: What I am saying is that we did not hand that paper to other people, but the contents in it, what we thought, we would have explained to other people.

Q1601 Andrea Leadsom: Within a week, surely you would have talked to António Horta-Osório about the contents of that paper-

Gary Hoffman: Yes.

Andrea Leadsom: -which Sir Win says that António Horta-Osório completely denies you ever having raised it with him. Is he lying?

Gary Hoffman: On many occasions I discussed with Antonio Lorenzo, who my main conversations were with, rather than António Horta-Osório, who remember was absent for three months during this critical period. My main conversations were with Antonio Lorenzo and with Toby Rougier, the Head of Corporate Development. I am sure they would be fully aware of mine and the board’s opinions on what the Co-op’s weaknesses were through various conversations.

Q1602 Andrea Leadsom: In Sir Win’s letter to the Chairman, he says, "We certainly have no record of it, nor of it being referenced by Lord Levene again in any of a number of subsequent discussions with me, Antonio" who I presume he means Horta-Osório, "or our advisers".

Gary Hoffman: I think there may be a semantic piece here and we need to be careful. Whether he is saying, "I do not remember you referring specifically to that paper yet again"-

Q1603 Andrea Leadsom: No, this has surely become much more important than that. This is much more important, isn’t it? This is effectively Lloyds Banking Group saying that you have not raised with them-

Gary Hoffman: Concerns about the Co-op.

Andrea Leadsom: -some very real concerns about the Co-op bid.

Gary Hoffman: That is nonsense.

Q1604 Andrea Leadsom: They are lying then? In your opinion, they must be lying, must they not?

Lord Levene of Portsoken: It is untrue.

Gary Hoffman: It is inconceivable that they would not know we had serious concerns about whether the Co-op would be able to execute. We said it many times to them, to their advisers and the FSA. It would be inconceivable that they would not think we had raised that.

Q1605 Andrea Leadsom: Finally on that point, then I just want to move on very quickly to something else: what turns on this letter, other than your reputations? Is it significant in this issue?

Gary Hoffman: I do not care about my reputation at all in this, so nothing turns so far as my reputation is concerned. What turns on this is the fact that there could have been a challenger bank set up by now and a deal done and it was not, because people were not cognisant of the execution issues associated with the Co-op. That is what turns on it.

Lord Levene of Portsoken: For me, it is slightly different. This is personal, insofar as I have stated to this Committee-I have put it in writing-that I handed this piece of paper to the Chairman of Lloyds Bank on 27 January in his office. I stand by that and I know that Mr-

Chair: I think we have that firmly on board.

Andrea Leadsom: Yes.

Lord Levene of Portsoken: Okay. If you want to know what turns on it for me, it is me being accused of lying and I will not accept that.

Q1606 Andrea Leadsom: Yes, I understand. Just one point on the letter, of course the risks memo does not identify the one thing that sort of took the Co-op bid down, which was the £1.5 billion black hole in the balance sheet. In that sense, while it may have highlighted a lot of the risks of the Co-op bid, it did not highlight the one thing that-

Lord Levene of Portsoken: It was not just that.

Gary Hoffman: It did not specifically say, "The commercial loan book on the Britannia" and all of those other things that created the so-called black hole of £1.5 billion. It did not say that, but what it certainly said was that, for all sorts of reasons in the Co-op group, including its structure, including issues elsewhere in the group, including problems with its IT systems, where it might have to write off money-

Chair: I think we have that.

Gary Hoffman: Sorry, Chairman, I am addressing the particular point. It explicitly says, "We think that the Co-op will struggle to raise the finance for this".

Q1607 Andrea Leadsom: Mr Hoffman, one final question. After the decision was taken to go exclusively with Co-op, but before NBNK came back into the bidding process, did you go and have discussions with the Co-op Bank about becoming their new Chief Executive?

Gary Hoffman: I was invited to have a discussion with the Co-op to see whether I would be interested in that position via some head-hunters. I said I would only be prepared to go and have that discussion on the basis that the principal reason for me going would be to explain to the Chief Executive, Peter Marks, that I did not think they were capable of executing on the deal. That is the discussion I principally had with him. Yes, we had some tentative discussions about whether I could become the Chief Executive of the Co-op Bank. I said it would be inappropriate for me to have any discussion like that when I do not think this game is over.

It was also a strange conversation in some ways, in that I remember when Mr Marks gave evidence here, he said he did not have clear control and oversight of the bank, but was a non-executive director of it and an approved person. In that meeting, he made it crystal clear to me that he was the driving force behind the Verde deal and that the Co-op Bank Chief Executive reported to him and was accountable to him. He also said, given the background as to why I went to see him, in effect, "Please, Sonny Jim, do not come and tell me how to run a bank".

Q1608 Andrea Leadsom: Did you take it any further? Did they offer you a job? Did they want to see you again?

Gary Hoffman: No. They did say, "We would like to set up meetings with the Chairman, Mr Flowers". I said-and I think they agreed, by the way-that it would be inappropriate for me to have any further discussions, despite the fact that the Co-op was in exclusive talks; if the game was not over, it would be inappropriate for me to have those meetings.

Q1609 Andrea Leadsom: Had the game been over, would you have considered it favourably?

Gary Hoffman: No.

Q1610 Chair: Just to be clear, if we ask him, Mr Marks will confirm, will he, that you had a conversation on the basis that they would not get the deal?

Gary Hoffman: Sorry?

Chair: That your conversation with him about your future there was wholly on the basis of them not getting Verde. That is the point you made earlier.

Gary Hoffman: No. I mis-spoke, if that is what you heard. What I said was the only reason I would have a conversation was to explain what I thought about their bid and that they were incapable of executing on it. It was not that I would consider the role of Co-op if they won the bid. I did not say that.

Q1611 Chair: Just to be clear, we are agreed you feel this document that went missing was very sensitive and very important, but are you asking us to accept today that, although you had numerous follow-up meetings with Lloyds, you cannot explicitly recall a conversation about that document with any of the participants?

Lord Levene of Portsoken: I did not have numerous follow-up meetings with the bank.

Q1612 Chair: No, but you did, Mr Hoffman.

Gary Hoffman: Yes.

Q1613 Chair: Just to be clear, that is what you are asking us to accept, isn’t it, that you had these numerous meeting with Mr Lorenzo-

Gary Hoffman: Mr Rougier.

Chair: -and other parties, very senior parties. You had just handed over a very sensitive and very important document, so sensitive that it could not be emailed, but you did not raise that document at all at any time in any of those subsequent meetings, the contents or the substance of it.

Gary Hoffman: I raised the contents.

Chair: But not the fact of that document?

Gary Hoffman: I did not.

Q1614 Chair: That is your evidence?

Gary Hoffman: Yes, absolutely.

Q1615 Mr Ruffley: Lord Levene, on the question of bad faith, where earlier today you have alleged bad faith, I just want to explore the legal position because it seems to me that we have heard that £30 million has probably been lost by various parties. In most of the commercial experience I have had, if a deal goes bad and one of the parties collectively is down £30 million, they go to law, they seek damages. We have had legal advice to the effect that there could be three courses of action in law. One would be insofar as the tender process is a contractual arrangement, it could be for breach of contract because, as you know, in British law there is an implied term that parties act in good faith, that the process is fair. You are suggesting it was not fair. So, first point, there could be a common law action for breach of contract; secondly, under the law of equity there could be restitution because from your evidence you were misled, you were not treated fairly, there was a misrepresentation, you incurred costs and you could get restitution of the costs incurred; thirdly, perhaps more difficult, there is action for deceit, for fraud.

That is just the general advice this Committee has received and it seems to me that, if £30 million is what we are talking about, you would have taken fairly serious legal advice as to whether or not to launch legal proceedings and I wonder why that is not the case.

Lord Levene of Portsoken: First, we are not talking about one party losing £30 million.

Mr Ruffley: No, I said collectively.

Lord Levene of Portsoken: Yes. Collectively, it is with a number of very large investors. £30 million to you and to me is a considerable sum of money. For them individually, if they had £2 million or £3 million each in multi-billion pound fund, it is not a huge amount of money, and they are not out of it yet. Another element you have to consider is that a lot of those investors were also investors in Lloyds Bank. Not because of this, but in fact because the world has moved on, their investment in Lloyds Bank will now be worth a lot more than it was before and I would imagine that they are looking at this and saying, "Yes, this was not good, but in the fullness of things, do we have time to bother with something like this, which for our institution is £2 million or £3 million? It is too much trouble". I think that is what happened.

Q1616 Mr Ruffley: I think that is helpful, because the mystery has been that, because there seems to be an allegation of bad faith and injustice and impropriety, you have explained why there might not be legal proceedings.

You just said in your last answer words to the effect, "They are not out of it yet". I just want to probe very quickly: on 10 December last, there was a report on "Sky News" that some remaining shareholders in NBNK-no names were mentioned-are considering legal action. I appreciate you are not one of their number, but is there anything either you or Gary Hoffman could do to illuminate that point? Are there letters before action being served?

Lord Levene of Portsoken: I was told this, and it was the usual sort of rumours, stories, whatever you want to call them, that go around the City. It may still be there, it may happen, it may not happen. I am not part of it. I was also told that they may be waiting to see what happens as a result of the inquiry from this Committee, but I do not have anything specific to say on that.

Q1617 Chair: Just to clarify one point you made there in response to David Ruffley, Lord Levene, you seem to be suggesting that these sums, £2 million or £3 million, are very small beer for the investors.

Lord Levene of Portsoken: For those investors.

Q1618 Chair: That does not in any way set aside their fiduciary duty to look after their clients’ money, does it?

Lord Levene of Portsoken: No, but they may say that they have not sold their shares; they have not lost the money yet. They might get it back. They may say, "Look, by not making a fuss we will do better, because if we do make a fuss-" I mean, there is always the case if any action were taken against Lloyds Bank, it might slow down the flotation that inevitably is going to happen. I do not know; I am not speaking for them. These are just suppositions.

Q1619 Chair: But you consulted them and they were not keen, or you did not consult them?

Lord Levene of Portsoken: No, I have not consulted them, because I have no standing in the matter anymore.

Q1620 Chair: You have not even taken formal advice on it, even though you think there was bad faith?

Lord Levene of Portsoken: I have spoken to one or two people and the advice is equivocal. I spent two and a half years on this process and it went nowhere. I think-

Chair: You have already made those points earlier. I do not want to take up more time on them.

Q1621 John Mann: Just before I start my questions, is the concept of yourself, Lord Levene, and a challenger bank dead for all time?

Lord Levene of Portsoken: I would never say anything is dead for all time, but I believe that it was a very good idea. Just at the weekend when Mr Miliband said he was in favour of challenger banks, I was asked-this was on the radio-what did I think about that. I said, "Well, this is where I came in. I have heard this before". But I think in view of my experience to date, it would not be something I would rush to do. I still think it is a good idea.

Q1622 John Mann: Looking at the evidence that we have received, it is unequivocal that Mr Horta-Osório told us that Government Ministers saw favourably the mutual model and therefore the Co-op as a destination for Lloyds’ branches. He was unequivocal. Indeed, he went further. He outlined that there had been briefings and conversations with Government Ministers and Lloyds in which Government Ministers-in the plural-expressed that they liked the mutual model and they agreed and saw the Co-op as a good destination for Lloyds’ branches. We know from the Co-op, the Reverend Flowers, who told us that Mr Mark Hoban had had many, many telephone conversations to see what Treasury could do to assist the process. We know from the Reverend Flowers that the regulator, Andrew Bailey, had told the Co-op that the regulator was under no doubt at all that there was considerable political support for this deal from members of the Government and he wanted to make Reverend Flowers aware that that was the case. Throughout, we are very clear from the evidence that Government has had its hands all over this.

Lord Levene, your attention was drawn to this possibility in the summer of 2011, so that would have been July or August 2011. Was that the first time you were aware?

Lord Levene of Portsoken: There had been inferences for some time.

Q1623 John Mann: For some time? What does "some time" mean?

Lord Levene of Portsoken: I would imagine a few months. Mr Mann, in transactions like this, rumour abounds, stories abound, and you learn after a while that you hear them, you believe some; you do not believe others. I had no basis to complain in detail to Government Ministers until I had something absolutely specific from a source that I am sure this Committee would regard as unimpeachable, which was when I was called to go to see the Governor of the Bank of England, when he told me this quite specifically.

Chair: We are going to come on to that shortly.

Q1624 John Mann: Yes. I am interested in the earlier period, because you have said that your attention was drawn. It cannot have been many months earlier.

Lord Levene of Portsoken: We had discussions with officials; I spoke to the Permanent Secretary for the Treasury; I spoke to other officials in the Treasury and was assured that this was being treated very fairly.

Q1625 John Mann: But we are talking about the period up to September 2011. You tell us your attention had been drawn to the Coalition Agreement. Is that the first time that you had an indication that there was a political viewpoint in Government on what should happen?

Lord Levene of Portsoken: On that specific point of mutuals?

John Mann: Yes.

Lord Levene of Portsoken: Yes.

Q1626 John Mann: But that is what this is about, so that was the first time. That must have come as quite a bombshell to you?

Lord Levene of Portsoken: No, I regarded it as one more piece in the jigsaw of what was happening. I knew a lot of these officials. I knew the Ministers involved and whenever I spoke to them formally or informally, they said, "That is not a problem". Of course it was always there. Of course in any transaction like this there are pros and cons of all sorts of things. At the end of the day, one would hope that in a transaction of this kind, and particularly with a very large public interest involved, that the financial considerations would be paramount.

Q1627 John Mann: But which Ministers did you speak to?

Lord Levene of Portsoken: I certainly spoke to Mark Hoban and I certainly spoke to the Permanent Secretary to the Treasury, and they assured me that this was being treated fairly. They did not deny that there was a clause obviously in the Coalition Agreement about favouring mutuals, but perhaps naively-and I like to think normally I am not naive-I thought that this, because it was a high-profile transaction, would be treated very fairly on its own merits.

Q1628 John Mann: When was the first time you raised that concern, either with the Permanent Secretary or Mark Hoban?

Lord Levene of Portsoken: I cannot tell you precisely. I cannot tell you precisely.

Q1629 John Mann: But approximately. You have given us a detailed timescale, so approximately.

Lord Levene of Portsoken: Some time after it had been raised with us, and as time went on, after it had been-

Q1630 John Mann: So it was raised with you in July or August 2011 and then you raise it, because it will have come as a bombshell, it is a big issue-

Lord Levene of Portsoken: I would not say it is a bombshell. It is another piece of the jigsaw.

Q1631 John Mann: Somebody has told you to look at the Coalition Agreement.

Lord Levene of Portsoken: Correct.

John Mann: If you are about to embark on the creation of a challenger bank potentially-

Lord Levene of Portsoken: We were not about to embark, we were halfway through the process.

Q1632 John Mann: The process has begun, you are in the game. Someone has dropped this huge bit of information, the implication of which is there is the possibility of an undue bias. We find now from the Co-op and from Lloyds that they say that that is the case. They admit it. Both the Co-op and Lloyds have told us that, so that is the case. You find out. You presumably raise it immediately?

Gary Hoffman: No, I do not think we did. If I could come in on this, in some ways you make a better case for the bias than we have, because you are able to recount a number of things that have been given in evidence here that we have seen, and of course we were not privy to those things at the time. Clearly raised with Lord Levene was the Coalition Agreement, and we were fully aware of the political-

Q1633 John Mann: Raised by who?

Gary Hoffman: I think we talked about it at the board and with advisers.

John Mann: At the board and with advisers?

Gary Hoffman: Yes.

John Mann: In the summer of 2011?

Gary Hoffman: That is right. On the other hand-

Q1634 John Mann: But who raised it with you?

Gary Hoffman: I think it was one of our advisers, but I cannot be sure. Now, the more important point-can I just carry on?

Q1635 John Mann: Sorry, no, this is important. You think that one of your advisers raised this, and it is important enough to discuss it at the board?

Gary Hoffman: Yes. But let me round it out because this is important, that, notwithstanding that political backdrop-which is important-we were being given assurances that this bid would be treated on its merits, so it was only until after September, when we were the only ones to put in a bid on time. But then the package was changed and then only in December, when Co-op were given exclusivity, despite the fact that we thought our bid was more compelling and much further advanced than theirs was, that we thought this was something that should be a real concern to us.

Q1636 John Mann: So in July to September? We are not clear yet, Chair, on the timescales-

Chair: I am not sure about that, but anyway, you can have another go, John.

John Mann: No, we are not, and it is important that we do. July to September you are raising these concerns and getting assurances from the Permanent Secretary, Mr Mark Hoban-anyone else in Government at a senior level?

Lord Levene of Portsoken: I also raised it with a number of politicians, and I think, if I may, the Chairman may remember that I raised it with him.

Q1637 Chair: You did not give me any intimation that there was anything untoward at any stage.

Lord Levene of Portsoken: No, no, but I had mentioned it.

Q1638 Chair: What was it that you raised with me?

Lord Levene of Portsoken: I mentioned to you that we had heard that there might be some political impetus behind this. More specifically, I raised it with the Chairman of the Public Accounts Committee, wrote to the Chairman of the Public Accounts Committee. She wrote to the Comptroller and Auditor General who wrote back afterwards and said that he did not think it was a matter in which he could become involved.

I hope you will forgive me for saying, Mr Mann, the sensitivity here is quite significant. If I believe-and I have been around in Government circles for some time-there is something that is not quite right that is taking part within the Government, it would be quite normal that I would go and raise this with a member of the Opposition. I am not sure if he was Shadow Chancellor at the time, probably not, but Ed Balls, whom I knew well, of course I then find-as Mr Love explained as well this morning-he is a Labour and Co-op MP. There has been further commentary on that. The same applies to the Chairman of the Public Accounts Committee, so I did not feel that I was able to find too many people who wanted to dig into this, so we had to sit there and wait to see what happened. It was only-and forgive me, Chairman, I know you said I have mentioned it a bit too early-when the rumour and scuttlebutt was going around it crystallised in my being summoned by the Governor of the Bank of England to tell me this quite specifically.

Q1639 John Mann: No, that is not what Mr Hoffman has just told us. Mr Hoffman has just told us that in September and then in December this is seen by yourselves as being-

Lord Levene of Portsoken: Yes.

Q1640 John Mann: Lord Levene, you are not very convincing at the moment. You are trying to jump to-and no doubt we will come to it-an important issue with the Governor of the Bank of England, but that is the following summer.

Lord Levene of Portsoken: Yes, it is an ongoing process.

Q1641 John Mann: No, you have been in the heart of Government as a political operator. You know your way around.

Lord Levene of Portsoken: Yes.

John Mann: I put it to you that you have a discussion at your board, which we have now found out for the first time that there could be a Government impetus behind the opposing bid, for whatever reason, and the Government favours that. We have had that then confirmed both by Lloyds and the Co-op; that was clearly the message that they received. I put it to you that you then go around and you do talk to lots of people to ensure that that does not happen. I am trying to clarify who you spoke to, not in July 2012 but at the key time in 2011. Did you speak to the Chancellor? Did you speak to 10 Downing Street?

Lord Levene of Portsoken: You have to understand that when these issues were raised at the time they were rumour. I do not like running on rumour. You must not forget, we had two other politicians on our board and we talked to them about it and this was clearly-

Q1642 Chair: Just to tell the Committee who they were; I know who they were, but just for the public record.

Lord Levene of Portsoken: Lord Forsyth and Lord McFall. We took advice from them as well. It was clearly becoming a very, very difficult issue and so we hoped that we could believe in fairness at the end of the day, despite the rumour.

Q1643 Chair: Just to be clear, "It was becoming a serious problem". When was that, because John Mann is particularly concerned about the chronology, so let us just be clear what date that was.

Lord Levene of Portsoken: It was a problem after we had lost the bid. All this happened afterwards.

Q1644 Chair: So this is after December 2011 and before-

Lord Levene of Portsoken: Clearly, we could have dropped the whole thing at that time and said, "We are out of it" and we did finally do that. But this is a very, very sensitive issue. I have been schooled in doing these things according to the book and we were trying to do them according to the book and some people may say we were fobbed off. Other people may say we had explanations given to us that we should adhere to. That is why I say-and I am sorry to keep harking back to this-it was only when I had final indisputable advice as to what had happened that we raised this further, by which time, as far as our bid was concerned, it was too late.

Chair: We are going to come on to that in a moment. John has one final question and then we must move on.

Q1645 John Mann: One final question. Obviously Mr Hoban has been sacked since, so there is no need to be the fall guy and resign from Government, but is it your view that there has been impropriety in Government in relation to the public interest with this case?

Lord Levene of Portsoken: What has happened, as your Committee has been clear to point out, is that it was stated quite clearly in the Coalition Agreement that the Coalition would do what they could to favour the interests of mutuals. I cannot say to what extent, in the particular case of the sale of the Lloyds’ branches, the political impetus in doing that overrode what would have been a better commercial decision.

Q1646 Chair: But just to be clear, are you saying that there was impropriety or not? We asked this question of numerous people in various ways. I have a list of half a dozen of them in front of me who have been involved in this deal in various ways and they have all given us one clear answer. We would like your clear answer. Was there impropriety?

Lord Levene of Portsoken: I believe that the people who took this decision could provide justification for so doing. One man’s view of that as to whether it is improper and another one as to whether it is politically expedient, you have to take their own view.

Q1647 Chair: So you are not alleging impropriety?

Lord Levene of Portsoken: I think it was-

Chair: You can say "Yes" or "No" to some of these questions. That is always an option.

Lord Levene of Portsoken: I think it was very unfair.

Q1648 Chair: Unfair on you or unfair to ask you to decide whether it was or not?

Lord Levene of Portsoken: No, I think it was unfair. I think it was certainly unfair on the shareholders.

Chair: I see. You are making a different point.

Gary Hoffman: The great tragedy out of all of this of course is, if there were political influence-which Mr Mann says the evidence suggests there was-then that has been to the detriment ultimately of the mutual sector and not to the championing of it. That is a great tragedy. The other great tragedy is we do not have a challenger bank.

Q1649 Chair: But to be clear, you are saying "if there was". This came from all sides. You have cited the Labour Chairman of the PAC, the Shadow Chancellor, as well as meetings with Conservative politicians and also with senior officials. Everyone is in on this.

I am going to move on now. I think we have-

John Mann: No, you have thrown in something that was not said.

Chair: Order, John. Order.

John Mann: No, you have thrown in something that was not said and I want to clarify it.

Chair: Order. Thank you, John.

John Mann: No, you are out of order. You are totally out order. You have been named in this. You are out of order in your questioning and you are out of order in your chairing of it. Issues have been raised here and they should be properly heard. You are out of order yourself.

Chair: David Ruffley.

John Mann: You are running away from this.

Chair: If you have further points that you want to raise later on, John, in a calm manner, we will consider returning to them. Pass me a note on what they are.

We have four more colleagues who want to get in. That is my main problem, John.

Q1650 Mr Ruffley: You have said, Lord Levene-now and also in your written evidence, and I am quoting-that you, "Received a number of messages indicating there had been significant political involvement leading up to the original decision on Verde". I want to explore what that political involvement entailed and who the individuals were who were getting politically involved, which politicians, because you have used in your testimony a few minutes ago the words, "It was at the level of rumour". I wrote it down. No doubt there is a lot of well-informed rumour. You are a very sophisticated businessman and a very sophisticated political operator, so you are hearing this rumour. What I want to try to understand is who was applying this political pressure and what form did that political pressure take, because so far I am certainly not clear-and I do not think colleagues are clear-about the answer to those two questions, who and what?

Lord Levene of Portsoken: As you say, I can only guess as an informed observer here. But as it was the expressed preference of the Coalition to promote the interests of mutuals, and as the Financial Secretary was particularly responsible for this area and he has made no secret of the fact that he is a great believer in mutuals, I would imagine that it is quite likely. I do not know whether it is true or not, but you have heard Reverend Flowers say he had something like 30 conversations-I believe that is the case-with the Financial Secretary. One forms their own conclusion.

Q1651 Mr Ruffley: So the answer to the first question, "Who?" you have indicated that you do not know.

Lord Levene of Portsoken: I do not know.

Q1652 Mr Ruffley: But we are talking a Treasury Minister. We are not talking about senior mandarins. In all probability, we are talking about an elected-

Lord Levene of Portsoken: I am saying it seems likely that it could have been a Treasury Minister, yes.

Q1653 Mr Ruffley: The second question is if one accepts that it was an elected politician-let us just assume that-I wonder what you thought the method of exercising political influence or pressure was because, again, we have to be specific. Just to say "political pressure" does not cut the mustard for me. Does it involve this politician ringing up the Chairman and/or Chief Executive of Lloyds? Is it getting involved in moving goalposts? "Political pressure" to me is a meaningless description. What is the activity that you think took place that was improper?

Lord Levene of Portsoken: Mr Ruffley, if I had to guess from what we have heard-and you know as much about this as I do-I would say that a Treasury Minister would have spoken to either the Chairman or Chief Executive of Lloyds Bank and said, "Look, you should be aware that if you end up with the Co-op as the bidder, we think that would be helpful". But I asked the Chairman of Lloyds Bank if that had been the case and he said, "Absolutely totally untrue, none whatsoever".

Q1654 Mr Ruffley: He has given that testimony to this Committee.

Lord Levene of Portsoken: There you are. He said the same thing.

Q1655 Mr Ruffley: But if that be the case, does that get us anywhere? I am a former solicitor of the Supreme Court and I have a rusty legal brain, but I would say there is not much hard evidence here on the testimony we have received, and you are not able to demonstrate any hard evidence as to who did the influencing or, secondly, what that influencing was. Therefore, it seems to me that while no doubt your informed briefings from important people-and we will hear more about this in a minute-were to be taken seriously, I do not dispute that, if one is a black-letter lawyer, one thinks this is a bit thin. What would you say to that observation?

Lord Levene of Portsoken: I would say you are absolutely right, and Mr Mann asked why we did not pursue further. Because we were getting nowhere. We were hitting a brick wall. We had no hard evidence until I was told quite specifically about this political influence by someone whose word I would say in this Committee is unquestionable. That is where we get to.

Mr Ruffley: I think we are going to get that in the next question from my colleague, George Mudie, so I think that point will be taken.

Gary Hoffman: On that point, Mr Ruffley, I absolutely concur with Lord Levene. It is very difficult for us, because we were not the ones being influenced. We were the ones-if there was some influence-that were disadvantaged, but we did not have the conversations, if there were any, of influence.

Q1656 Mr Ruffley: Just a final observation. You are looking at the moving of the goalposts. You are looking at the way they calculated the valuations, and you are seeking a logical explanation as why these things were going on, and there is no other-

Gary Hoffman: Yes. There is no logical explanation why the Co-op would be chosen, given what people knew about the Co-op.

Mr Ruffley: Understood, fine.

Gary Hoffman: That is all I can say.

Mr Ruffley: I think this is going to be continued by my colleague, Mr Mudie.

Chair: Sorry, I was just going to bring John back with a quick rejoinder, because he has a particular concern that he is very concerned about, so let us hear what it is.

Q1657 John Mann: I merely wish to clarify-on the Chairman’s summation-whether or not in this period in 2011 you discussed your concerns with Mr Balls.

Lord Levene of Portsoken: No, and I do not think I suggested that I had. I said I thought about it and decided not to.

Q1658 Chair: What was your reference to all these other characters that you made then, to the Shadow Chancellor and to the Chairman of the PAC and me, for example?

Lord Levene of Portsoken: Why did I-

Chair: What involvement did we have in this political-

Lord Levene of Portsoken: Because I knew, Chairman, that you had an interest in this area. As a former accounting officer and Permanent Secretary, I had quite a lot to do with the Public Accounts Committee and I believed there was a public interest in the huge investment in Lloyds Bank. But I am afraid that nobody wanted to pursue it. I addressed it to the Comptroller and Auditor General. He did not want to pursue it either, so we-

Q1659 Chair: This was in? This is Amyas Morse we are talking about now?

Lord Levene of Portsoken: Yes, Amyas Morse, absolutely.

Q1660 Chair: You spoke to Amyas Morse about it when?

Lord Levene of Portsoken: I wrote to him. I also had correspondence on this with another member of the Public Accounts Committee, Austin Mitchell. I only chose him because I knew him well personally. He had, as you will probably know, quite forthright views on things like this.

Chair: I think we have clarified that.

Q1661 Mr Mudie: Just to confirm, you said until you spoke to the Governor of the Bank of England you had no hard evidence?

Lord Levene of Portsoken: Yes.

Q1662 Mr Mudie: As we are sitting now, do you have any hard evidence?

Lord Levene of Portsoken: None that I have not told you about. All of this was-

Mr Mudie: You answered the question-

Lord Levene of Portsoken: Okay, the answer is no.

Q1663 Mr Mudie: No, good. If your fears have any substance, it is as a result of the meeting with the Governor of the Bank of England?

Lord Levene of Portsoken: Correct.

Q1664 Mr Mudie: Right. He invited you in?

Lord Levene of Portsoken: Yes.

Q1665 Mr Mudie: He invited you; he did not summon you? He gave you what some people in the banking industry would enjoy, a private meeting with the Governor of the Bank of England?

Lord Levene of Portsoken: Yes.

Q1666 Mr Mudie: So he did not summon?

Lord Levene of Portsoken: He called my office and said could I please go round to see him and I said, "Yes, with pleasure".

Q1667 Mr Mudie: You fixed your diary a couple of weeks later and went to see him?

Lord Levene of Portsoken: No, I think it was a lot quicker than that.

Mr Mudie: No, it was not. It was the 28th and he telephoned your office on the 12th.

Lord Levene of Portsoken: That was probably the first appointment we could get.

Q1668 Mr Mudie: That was two weeks, yes. Was there just the two of you in the room?

Lord Levene of Portsoken: Yes. He probably had a private secretary there.

Q1669 Mr Mudie: Did someone take notes?

Lord Levene of Portsoken: I cannot recall.

Q1670 Mr Mudie: Was the person sitting in the room, the third person, taking notes?

Lord Levene of Portsoken: I do not remember.

Q1671 Mr Mudie: That is a good start. Your indication is the Governor said you were not going to win it?

Lord Levene of Portsoken: Yes.

Q1672 Mr Mudie: You naturally said, "Why?"

Lord Levene of Portsoken: Correct.

Q1673 Mr Mudie: What did he say?

Lord Levene of Portsoken: He said, "Because this is going to be a political decision, and so your only way forward, if there is one, is to talk to the politicians".

Q1674 Mr Mudie: That is a fairly serious thing to say and to put into the public arena.

Lord Levene of Portsoken: Yes.

Q1675 Mr Mudie: Was the meeting held on a private basis? Was that your understanding? Was it a confidential chat to you, too?

Lord Levene of Portsoken: It was a confidential meeting, yes. If I may, I would add this. I have been around long enough to know that, if I am invited to a private meeting with the Governor of the Bank of England, who tells me something as sensitive as this, I do not reveal it. It was only as this inquiry progressed and after the Governor had retired that I called him and I said, "Look, I am going to be-and, indeed, is the case today-called by the Treasury Select Committee to give evidence on this. I said that I was given some information by a senior figure. Can I tell them what happened?" and he said, "Yes".

Q1676 Mr Mudie: You will be suggesting that, if we ask Lord King, he will confirm that he told you there was political involvement and the decision was taken on that basis?

Lord Levene of Portsoken: Yes.

Q1677 Mr Mudie: Where did Lord King get the information from?

Lord Levene of Portsoken: As the Governor of the Bank of England at that time, the owner of the various regulators, I should think it was the sort of information he got every day.

Q1678 Mr Mudie: So the regulators knew this?

Lord Levene of Portsoken: I am not saying that. I am saying that it had just happened then. Whether the regulator knew that or not I do not know, but the Governor of the Bank of England is a very important figure and usually keeps his ear to the ground and knows what is going on.

Q1679 Mr Mudie: Yes. He said, and this is what you told in evidence, that he could not intervene?

Lord Levene of Portsoken: Yes.

Q1680 Mr Mudie: Did he give you any explanation why he could not intervene?

Lord Levene of Portsoken: Yes, because he said it was a political decision.

Q1681 Mr Mudie: He is the Governor of the Bank of England and there is a line that you do not cross. Whether the Chancellor wants something or not, there are statutory powers for the Bank of England and the Governor of the Bank of England. He could intervene. We have asked Bailey this and he saw no reason to intervene.

Lord Levene of Portsoken: Well, that is his view.

Q1682 Mr Mudie: Did you just accept that the Governor of the Bank of England was washing his hands?

Lord Levene of Portsoken: I am not going to question. The Governor of the Bank of England called me to tell me what he thought and I accepted what he said.

Q1683 Mr Mudie: Right. One of the things he told you was to meet the politicians, which you duly did.

Lord Levene of Portsoken: He did not tell me to meet the politicians. I said, "What can I do?"

Mr Mudie: You said.

Lord Levene of Portsoken: I said, "What can I do?" and he said, "You can only discuss this with the politicians".

Q1684 Mr Mudie: Yes, he told you the only way you could go was the politicians, you should meet them?

Lord Levene of Portsoken: Correct.

Q1685 Mr Mudie: You met them?

Lord Levene of Portsoken: Yes.

Q1686 Mr Mudie: You met Mark Hoban and you met George Osborne. George Osborne came into the meeting later but came into the meeting?

Lord Levene of Portsoken: Correct, yes.

Q1687 Mr Mudie: Did you raise this specific claim by the Governor of the Bank of England with them face to face?

Lord Levene of Portsoken: I am not sure whether I told him that it came from the Governor, but I think there was no doubt at that time why I was talking to them. I told them that I had been told at the highest level, because I had not yet got clearance from the Governor to mention his name, that this was a political decision. Mr Hoban denied it and said he had had no contact with the bidders at all.

Mr Mudie: He told them he had no contact with?

Lord Levene of Portsoken: The bidders.

Q1688 Mr Mudie: No, that is not the same thing. The Bank of England Governor is suggesting that the Government have made it absolutely clear they want this bid to succeed and that he could not intervene. Do you agree with that?

Lord Levene of Portsoken: That is what he told me.

Q1689 Mr Mudie: Are you genuinely telling us that when you went to see the Chancellor you did not say, "The Governor told me"? You would be outraged at this time; I would be. There is a lot of money at stake, a lot of prestige, and just the general injustice of it if this was happening.

Lord Levene of Portsoken: No, I did not because I regarded that as a piece of information I had been given in confidence, and I respected that confidence until I was released from that confidence.

Q1690 Mr Mudie: You were released when?

Lord Levene of Portsoken: Very recently.

Mr Mudie: Three weeks?

Lord Levene of Portsoken: I think in the New Year, at the beginning of January, because, as you may know, the Governor went to New York.

Q1691 Mr Mudie: Why, in your view, would the Governor volunteer this information to you, which was very, very sensitive information and very dangerous information to confirm?

Lord Levene of Portsoken: Because the Governor-and I know this Committee knows him well-is a very upright and proper person. He was coming to the end of his term. He had encouraged us from the very beginning to act as a challenger bank. He had seen all the work that we had done to try to bid for this. Remember, by this time the whole Co-op edifice had already collapsed. He had seen that whereas there had been the opportunity to have a challenger bank, which would have done what everybody wanted to see, that had fallen apart. I think that at the very last moment he had said to me, "Look, I cannot do anything about this. The only thing you can do is talk to the politicians". I think that is why he told us.

Q1692 Mr Mudie: Do you accept that if the Governor was so worried about this unfairness or wrong he had the powers to stop it?

Lord Levene of Portsoken: You could only ask him that.

Mr Mudie: Sorry?

Lord Levene of Portsoken: I think you could only ask him that question.

Q1693 Mr Mudie: You are the one with the banking experience. You know the power of the Bank of England. You know the power of the regulators. You were speaking to the regulators all the way along. You were not speaking to them for fun. You were speaking because they were crucial to the agreement of the deal. If Lord King was so upset about it, why did you not ask him and why did he not take the appropriate action to intervene?

Lord Levene of Portsoken: I said to him, "Is there nothing you can do about this?" and he said, "Your only source of complaint now is to the politicians". I was not going to question him why he made that statement.

Q1694 Chair: Again I want to be absolutely sure. I am sure John Mann will also want to be absolutely sure that we have all the facts absolutely straight here. First of all, was there one meeting or two?

Lord Levene of Portsoken: Two.

Q1695 Chair: Okay. Let us go to the first meeting. That was in May on the 28th?

Lord Levene of Portsoken: Are you talking about the meeting with the Governor?

Chair: With the Governor.

Lord Levene of Portsoken: Yes.

Q1696 Chair: That was on 28 May, so that is before the final decision of the second bid?

Lord Levene of Portsoken: No.

Chair: Which was in June?

Mr Mudie: Yes, it was, 28th.

Lord Levene of Portsoken: Yes, 28 May 2012, correct.

Q1697 Chair: Right, okay. Who called for that meeting?

Lord Levene of Portsoken: The Governor.

Q1698 Chair: Okay. You do not recall whether anybody else was in the room?

Lord Levene of Portsoken: I think it is quite possible-almost certain-there was a private secretary there.

Q1699 Chair: Did he say at that first meeting that a bid from NBNK would not be accepted?

Lord Levene of Portsoken: He said that the decision had been made to give the contract to the Co-op.

Chair: So he told you that it would not be accepted?

Lord Levene of Portsoken: Not that it would not be accepted. That it would not be the winning bid.

Chair: It would be refused. If not accepted it is refused. I do not know why you are challenging the language.

Lord Levene of Portsoken: Because "not be accepted" means that it is not an acceptable bid. It could be an acceptable bid without being the winning bid.

Q1700 Chair: He told you that the bid would lose?

Lord Levene of Portsoken: Correct.

Q1701 Chair: Just to clarify on the second meeting, this now took place at the beginning of July. Is this 5 July?

Mr Mudie: No, it was a day before the-

Chair: I think it was on 5 July but we will just see whether we are agreed on when this meeting was.

Mr Mudie: It was the day before the deal was announced.

Lord Levene of Portsoken: Yes, with Sir David Walker, that is right.

Q1702 Chair: There were more people present at that meeting, weren’t there? David Walker was there as well.

Lord Levene of Portsoken: Yes.

Q1703 Chair: At that meeting, did the Governor say that a bid would not be accepted because a political decision had already been made?

Lord Levene of Portsoken: I have to refer to the note. Yes, there is a minute, Chairman, which you may have, which is my minute.

Chair: I have seen it. I just want to put it on the record. We are clear that at that meeting he made this remark as well?

Lord Levene of Portsoken: Yes, it is the same thing.

Q1704 Chair: He made it in the first meeting and he repeated the remark that he had made in the first meeting in the second meeting?

Lord Levene of Portsoken: Yes.

Q1705 Chair: Did the Governor say that the bid had been altered to favour the Co-op?

Lord Levene of Portsoken: Mr Hoffman will correct me if I am wrong, but I think, Chairman, the decision had already been announced by 5 July.

Gary Hoffman: That is correct, yes, 27 June.

Lord Levene of Portsoken: The first meeting was before the event; the second meeting was after the event.

Q1706 Chair: Let us ask the question for both meetings, but it was in the second meeting I was referring that question to. Just on this first meeting, did the Governor say that the bid had been altered in some way to favour the Co-op?

Lord Levene of Portsoken: No, he did not say it was altered. He said the decision would be made in favour of the Co-op.

Q1707 Chair: Did he say that the bid in any way had been adjusted to disfavour you for the benefit of the Co-op?

Lord Levene of Portsoken: No.

Q1708 Chair: In the July meeting, did he make any reference of that type?

Lord Levene of Portsoken: No. The second meeting, the July meeting, was called at our request because I wanted to go with Sir David Walker to speak to the Governor. Effectively, he confirmed to us what was already the case. If you look in my minute, Chairman, you will see that one of the reasons I was doing this was because I was concerned that our shareholders might ask us what we had done about it.

Q1709 Chair: No, I understand that, but I am just trying to clarify a very straightforward factual point. Did the Governor say in 5 July meeting that the bid had been in any way adjusted to favour the Co-op at your expense?

Lord Levene of Portsoken: No.

Chair: He did not. Excellent. Thank you very much.

Q1710 Andrea Leadsom: Just a quick question. Lord Levene, is it your opinion that, if he considers a political intervention has been made, it is for the Governor of the Bank of England to stand by and allow that to take place where he is clearly accountable for the integrity of the British financial system? It seems to me utterly astonishing that he would have accepted and advised you to go and talk to the politicians. In his job as Governor of the Bank of England, with the systemic responsibility that he has just received that the best decision needs to be taken with all of the available information as opposed to a political decision, did it strike you as odd at the time? Did you say anything to him about, "Surely it is your job to ensure that it is free and fair"? We live in a free market economy, not in one where politicians decide who is going to own what, other than in extremis, which this was not. Did that strike you as odd? Does it strike you as odd now?

Lord Levene of Portsoken: Ms Leadsom, you know the then Governor as well as I do. I do not think it would have been very wise for me to go and tell the Governor of the Bank of England how to do his job.

Q1711 Andrea Leadsom: But why? Surely that is a copout.

Lord Levene of Portsoken: Well, that was my view.

Chair: That is your view. If I may, Andrea, I am going to bring in Mark Garnier because we have two more colleagues who want to come in and some of us-I think you, too, probably-would like some lunch.

Q1712 Mark Garnier: Lord Levene, I would like to test a bit more this accusation of political interference. I am very interested in your latest discussion about this conversation with the Governor of the Bank of England. You are suggesting in it that he told you that perhaps you might like to go and make contact with some politicians in order to discuss what was going on. Is it not possible that you could have misinterpreted what he was saying and, in fact, what he was suggesting was that there is, as yet, no political interference at all and that by you going and having a conversation with some politicians you could engender some political interference in your favour?

Lord Levene of Portsoken: No.

Q1713 Mark Garnier: You are absolutely convinced that that was not the case? You are utterly convinced that there was political interference working against you, that there was a conspiracy working against NBNK?

Lord Levene of Portsoken: I was told by the Governor of the Bank of England that the decision was being made for political reasons.

Q1714 Mark Garnier: Just remind us what those political reasons are that you think.

Lord Levene of Portsoken: I can only surmise that they were because there was a wish to further the interests of mutuals.

Q1715 Mark Garnier: You refer on a number of occasions to the Coalition Agreement, which I now have in front of me, which is a 35-page document of which the banking bit is not quite one side of A4. I will refer you to the particular bits you look at. It says here, "We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry". Of course part of that is the mutuals, but a competitive banking industry, more people coming into the sector. I might also add there are two other paragraphs.

Lord Levene of Portsoken: Could I just interject there?

Mark Garnier: Please do.

Lord Levene of Portsoken: You answered the question that the Chairman posed to me: why didn’t I immediately say, "Aha, in the Coalition Agreement it says on the first page they are going to promote the interests of mutuals. Why on earth are you doing this?" I won’t say it was a throwaway remark but it was a small comment in a long document.

Q1716 Mark Garnier: You are absolutely right. It is a small comment in a long document and there are a number of bullet points. This is one of the bullet points. There are two other bullet points, which interestingly start with the same sentence. The first bullet point is, "We will reform the banking system to avoid a repeat of the financial crisis, to promote a competitive economy, to sustain the recovery and to protect and sustain jobs". Later on, there is another bullet point that says, "We will reform the regulatory system to avoid a repeat of the financial crisis". In your written evidence that you submitted to us, towards the end of it-bullet point 5 under the political interference question marks-you make this statement, "Respected journalists are thwarted in their Freedom of Information attempts to obtain papers and periodic articles appear that indicate there is a ‘smoking gun’ somewhere". This is the important bit, "Frankly, given everything that has come to light about the Co-op, it is incredible to suggest that nobody in Lloyds Banking Group, in Government or in Regulation could have known about or predicted what was to happen"-or, if you do not mind me using slightly clearer English, "It is absolutely clear to everybody that it was about to blow up"-"unless, of course, there was a collective will to push through the Co-op bid come what may". Does it not strike you as being absolutely incredible that there will be political will to push through a bid from Co-op, come what may, which would result in this organisation blowing up? I think the important point is that, even if you are not privy to the inside information about what is going on within the Co-op in terms of its impaired loan book and all the rest of it, the reality is that you have a financial bank, a small bank, which is trying to increase its size tenfold in the space of three years, at a time of a highly stressed banking environment with dubious overall control in terms of the Co-op. It simply does not make sense that there would be the political will to put an institution at such colossal risk when two bullet points-using this agreement-refer to the fact they do not want to have a repeat of the financial crisis. Yet what you are suggesting is that the political will was to create a financial crisis.

Lord Levene of Portsoken: That is not what I am suggesting at all.

Mark Garnier: It is in your evidence.

Lord Levene of Portsoken: It is what I was told. With the benefit of hindsight and when history comes to look at this, they will say, "How can it be?" With everything that had happened-and with everything, of course, that it is good to know afterwards that happened about the Co-op, the situation it was in and the management and the way it happened-it is inconceivable. It is inconceivable. If you saw this and it had taken place in Latvia you would say, "How on earth could anybody have been so stupid?" This is the point. People have accused me, us, of being bad losers. You are a bad loser if you bid and someone else wins. Here, we were not bad losers. It was an appalling winner.

Q1717 Mark Garnier: There are various other elements that I think come into this, which have not really been discussed. For example, we have the John Vickers Independent Commission on Banking, which was published in September 2011. Sir John Vickers suggests that a challenger bank should have a 6% share of the current account market. The Verde branches have a 4.8% share of the current account market. However, if you add that to the Co-op then you are looking at a 6% challenger bank, whereas with NBNK you are looking at a 4.8% challenger bank.

Lord Levene of Portsoken: Yes.

Mark Garnier: If you take that one element in terms of the political mix that is going into this, then clearly there is a strong argument why, in fact, NBNK’s bid fails on that Vickers proposal.

Lord Levene of Portsoken: I do not think so because they were looking for a new challenger bank. If one of the requirements was that you could only become a new challenger bank if you already had about 5% of the banking market, if that had been made clear we would never have bid. It was not.

Q1718 Mark Garnier: Yes, but you are selecting a paragraph out of the Coalition Agreement but not a paragraph out of the Vickers proposals. That is selective.

Gary Hoffman: You are absolutely right on the narrow point of the Vickers report that said ideally you would have 6%, and we would not have qualified for that. We thought there were all sorts of other things that we brought to the party that would make us a much more meaningful challenger bank, including-by the way-that that Vickers statement said that you could grow to that 6% over time, which we would qualify for.

Q1719 Mark Garnier: Sure, assuming things go well and bearing in mind that, of course, we are still in a stressed banking market.

Lord Levene of Portsoken: As with everything, one can always debate these things. What I think you cannot debate with the benefit of hindsight is that to go ahead with this for the Co-op along with everything else they have done was a terrible decision. Now, perhaps people should have known more at the time but-

Q1720 Mark Garnier: I want to challenge your assertion that there was political interference on this. Look, I do not think that anybody particularly disagrees with your overall point, but it is your direct challenge that there was political interference. Again, picking another bit of anecdotal evidence, you have made much of the investors in NBNK: Aviva, Foreign & Colonial, Bailey Gifford, Invesco, to name but a few of these absolutely blue chip, high quality investors. You also make a point: would you necessarily want to engage them, in terms of their relationship, with variance in the market and everything, in a legal battle, and that is absolutely right. Let us turn the telescope round a bit. If you are the Government sitting on two state-owned banks that at some point you want to privatise, the last thing you are going to want to do is to interfere in such a way that it is going to compromise your relationship with the market, who you are presumably at some point wanting to sell £40 billion worth of RBS to. It does not make sense.

Lord Levene of Portsoken: When the Government came into office they wanted to have two challenger banks. They were going to use the decisions of the EU to force Lloyds and RBS to sell off their branches to set out these two new challenger banks. What are we left with today, in January 2014? Nothing.

Mark Garnier: That is not strictly true.

Lord Levene of Portsoken: We have the wish that they are going to happen, but that is an awfully long time afterwards. The truth is that it did not happen. Perhaps now, happily, I hope, second time round, they will get it right. I think if you had said to anybody in Government then, "Look, you are going to hive off part of Lloyds, part of RBS, because they have been ordered to and I can tell you now that both of these bids are going to fail totally", nobody would have believed you, but that is what happened.

Q1721 Mark Garnier: I am still struggling. Again, you have said on a number of occasions that the equity markets have been particularly troubled. Again, we all agree that we are still in a period of stress for the banking industry and it is only gently coming off the high stress levels. It was always going to be difficult to try to push out two new challenger banks into this market irrespective of which way you wanted to do it. We have seen some of these other branches have not been sold off in other deals, which have also failed. You also assert that Lloyds Banking Group was using NBNK as a stalking horse for the IPO option. What is the difference between the IPO option and the NBNK deal? At the end of the day, there is no difference between the TSB-

Gary Hoffman: A couple of things to say on the comment. First of all, I do not think either of the deals to create the challenger bank has failed because of the equity markets. They have failed because of the inability to be able to execute particularly on systems. If you take the Santander Rainbow deal for RBS-which coincidentally was the Lloyds management now in Santander doing that deal-that failed as a result of execution issues and arguments about price adjustments, not about the markets. I think that is true of this, too.

Q1722 Mark Garnier: If the markets were good, they would have made it work. I think you would agree with that. Indeed, you are trying to make it work. You were trying to make your deal work and you are angry that it did not.

Gary Hoffman: The most difficult thing is execution, not raising the money, as long as you have the right price. I do not accept that the market stopped these things doing -

Mark Garnier: The market is part of it.

Gary Hoffman: Of course. The backdrop is not helpful, but execution is-

Mark Garnier: When you are assessing risk of any persuasion, you have to take into account-

Gary Hoffman: Agreed.

Lord Levene of Portsoken: If I may say so, the difference with our bid was we did not dream this up and say, "Let us go and find some investors". This was the investors’ wish. They stood by us all the way through. When things got difficult they knew about all this. We said to them, "Are you still with us?" "Yes, absolutely". Nobody can prove this with hindsight, but I can tell you now if the NBNK deal had gone ahead and been accepted, that bank would now be up and running. It would be in very good shape and we would have delivered what we said we were going to deliver. We had the investors behind us.

Gary Hoffman: The difference between us and an IPO-because you are right, there are some similar characteristics, but on the specific question raised-is, of course, on an IPO all the money is raised at the end, whereas we were saying that we would raise all the money at SPA and that would give, therefore, much more certainty. There is a much more important point as well. What is happening now is a bank is being created through an IPO, which has a Lloyds’ brand that they do not want. It has a lot of branches, most of which they do not want. It has Lloyds’ systems. It has Lloyds’ management. It has Lloyds’ products-

Mark Garnier: Which they do not want.

Gary Hoffman: It has Lloyds’ processes.

Mark Garnier: Which they do not want.

Gary Hoffman: The tie together of Lloyds and that IPO organisation will be for many years. They will be joined at the hip, and the commercial argument about how much Lloyds will charge that entity will be the pressure point for the investors for those transitional services agreements, which will not be transitional because they will remain there for about 10 years, I would say.

Q1723 Mark Garnier: I think that is a very, very important argument. I completely agree with you that the financing model is in reverse with you guys, because you have the money upfront rather than running the risk of it with the market. Nonetheless, whichever way you address this point, it still meets the target in the Coalition Agreement that you are diversifying the banking market and that is ultimately-

Gary Hoffman: Well, I do not think it does. I think it creates a mini Lloyds. It is like putting lipstick on a pig because all you are doing is putting a brand above it; same products, same systems, same processes, same people.

Q1724 Mark Garnier: Yours would have been different how?

Gary Hoffman: Absolutely it would have been very different: very new brand; very new systems without the problems of the legacy; introducing some new products that we had started to talk to Lloyds about; a very different attitude to service. There were lots of things that we-

Q1725 Mark Garnier: Have you looked at doing a block deal to buy TSB?

Gary Hoffman: No.

Q1726 Mark Garnier: Why not?

Gary Hoffman: Having tried this, we are not going to try that.

Mark Garnier: It is an easy one.

Q1727 John Thurso: I am tempted to say "Good evening", but I am the last, you will be delighted to know. A couple of quick questions. First, regarding UKFI, did you have discussions with UKFI during the process?

Lord Levene of Portsoken: Oh, yes.

Q1728 John Thurso: Could you very quickly characterise those discussions for us?

Lord Levene of Portsoken: They were not interested to talk to us.

Q1729 John Thurso: Right, so they were non-discussions?

Lord Levene of Portsoken: They were non-discussions. I said I believed that their role was to safeguard the public interest in these financial institutions. I told them what was happening and they said they relied on the advice that they were given by Lloyds Bank. I said I thought they were supposed to be an independent assessor of what was going on. They did not agree and we had quite an acrimonious discussion.

Q1730 John Thurso: Did you have any discussions with any other substantial shareholders of Lloyds?

Lord Levene of Portsoken: Only insofar as one or two of them were shareholders of ours as well.

Q1731 John Thurso: Those discussions you would characterise as?

Lord Levene of Portsoken: We were not talking to them as shareholders of Lloyds; we were talking to them as our shareholders.

Q1732 John Thurso: Your view of UKFI is as summed up in your conclusion, "The UKFI, as a watchdog for the public interest in state ownership of financial service industries, has failed in its duty"?

Lord Levene of Portsoken: Absolutely.

Q1733 John Thurso: Can I come to the FSA? What discussions did you have with the FSA during the course of the bid? I will skip over this. I am aware at the outset Adamson said you do not need a licence, you are all good people, and so on. That is not the point of the question. Did you have discussions going further on?

Lord Levene of Portsoken: I will let Mr Hoffman answer that because he had virtually all the discussions with them. What I would say is, as far as I could see and as far as I observed, the FSA behaved impeccably throughout.

Gary Hoffman: Yes, I think that is important to emphasise that the FSA were very even-handed. Clearly, there were some hurdles that we had to get over as well as hurdles that the Co-op had to get over. I think they were very different hurdles. We had exceedingly close and regular dialogue with the FSA about our business plan, about our capital liquidity plans, about our management structure, all of them things you would expect us to want to put in place in advance of a change of control. Of course, they were also intensely interested in our funding and what due diligence we had done.

By the time we got to the end of May 2012, in fact 29 May 2012, the FSA wrote to me to say that, of course, there were still some things to do but, to quote, "The process of engagement is satisfactory from our point of view at this stage in the process". That is as good as it gets from the FSA during that type of transaction. We had done lots of work and planning and shared with them all of our plans for, as I say, capital liquidity, customer conduct, the fact that we would have no bonuses in the bank; all sorts of things that were appealing to the FSA we had been through. I just do not know whether the Co-op had been through a similar engagement. I doubt it.

Q1734 John Thurso: At any point during your discussions with the FSA, did you have the similar kind of discussions that were in the key risk document that you put forward to Lloyds? Did you share those concerns at all or discuss them with the FSA?

Gary Hoffman: Yes.

Q1735 John Thurso: What was the FSA’s reaction to what you said?

Gary Hoffman: "Thank you for sharing them with us." It is difficult for the FSA. They were grateful for our views, and I suppose they were grateful for my personal views, given I have been around a long time and I had just completed a similar separation and restructuring of Northern Rock to what needed to be done at Lloyds in terms of separating systems. They understood that there are not many people that had done the execution that was similar to Verde, so I think they appreciated our views. They appreciated our views on the Co-op but, to be fair to them, they were even-handed and they were not going to comment on those views, they just received them.

John Thurso: Can I just check with the clerk this evidence has been published?

Chair: Yes, it has.

Q1736 John Thurso: I do not know if you had a chance to see the evidence because I think it is quite recently published. There is a letter from Andrew Bailey together with-slightly redacted for names-copies of the notes of the FSA’s meetings with the Co-op.

Gary Hoffman: I have not seen those.

Q1737 John Thurso: It is pretty damning stuff. It makes clear, to my mind at least, that whenever Project Mars I think they called it-

Gary Hoffman: Yes, they did.

John Thurso: -or Verde comes up as a heading there were very severe concerns as to the ability of the Co-op to fund it-I will not quote them but you can see it for yourself-going through to a point at which Andrew Bailey attended a strategy day that caused some concern. In my world they would call it "a hell of a bollocking" but he talked to them robustly I think is probably the right word.

Gary Hoffman: Yes, if you want my view on how these things work, having been involved in lots of conversations with the FSA over time, I think the FSA puts lots of conditions and hurdles against people doing things, sometimes believing that they will never get to meet those conditions or hurdles; therefore, it will ultimately fall apart. I think that is what has happened here. My personal view is they should be much clearer upfront and say no.

Q1738 John Thurso: Absolutely. When you get a chance to read this, for example, there is one dated 31st July 2011, "AB"-who I assume obviously is Andrew Bailey-"then set out his view that Britannia would have failed had it not been for the Co-op and Richardson had been lucky to survive, not least as CEO of the merged entity. He said that FSA continued to have issues with the effectiveness of the Group’s risk management and controls, and he was not persuaded that Richardson had ever grasped those issues. Consequently, AB was unconvinced that Richardson would ever fix them". There are lots more about the internal problems within the Co-op.

Gary Hoffman: I think it just goes to emphasise the concerns we had were shared by lots of stakeholders.

Q1739 John Thurso: I think you would agree that that sort of concern would be shared between Andrew Bailey, the Governor and senior people; possibly even senior people at the Treasury might be aware of these concerns?

Gary Hoffman: Yes. I would also say as a matter of principle that the FSA would share them with Lloyds. Let me say why I would say that. In the interests of transparency, we were always clear throughout the process that anything that the FSA or Lloyds sent to us we were happy to be shared with the FSA and with Lloyds.

Q1740 John Thurso: To be absolutely fair and not to take things out of context, this was, of course, before the £1.5 billion black hole was discovered and the FSA were voicing extreme concern-

Gary Hoffman: Even then.

John Thurso: -as to the ability to raise the necessary funding and what that would do to tier 1 capital ratios and so forth.

Gary Hoffman: That was my point earlier on to Ms Leadsom in that although we did not explicitly in the risk paper refer to the 1.5 black hole because no one knew about it, we did point out that it would be extremely difficult; given their structure and given what was happening in the group that they would not be able to raise that money.

Q1741 John Thurso: I think we are broadly agreed that there was very considerable concern around and the probability is-it is almost a certainty-that the Bank of England would know of this. It is a pretty reasonable supposition that senior officials in the Treasury would know about this. Lord Levene, I come back to the central point that you have put before us in your memorandum, which is effectively that it was the pressure by the Government that caused the outcome that we now see. You have used a number of terms to describe this: from your meeting with the Governor that "for political reasons"-and I am quoting you, obviously-and earlier on a quote, "This is going to be a political decision". I want to try to get to what supports that. It seems to me that a number of other words have been used. We have had interference, interest, support, but the core point that you are making to us is that the pressure was of a sufficient kind from people in Government as to amount to interference, such that it caused Lloyds to make a decision that it might not otherwise have made. Is that a fair summation of the charge sheet?

Lord Levene of Portsoken: I can only surmise that. I do not know that, but it seems a pretty reasonable supposition.

Gary Hoffman: We would just say, given all the evidence you have there, it would be strange because I would have thought Lloyds would have seen some of that at the time. As I say, people would share that correspondence and their concerns. How could you make that decision if there was not something else going on?

Q1742 John Thurso: That is a very interesting question and there may well be something else going on, but whether it is the particular something that you have put forward is what I am really-

Gary Hoffman: Yes, and we do not know.

Q1743 John Thurso: The reason I want to put this to you is, for example, what Reverend Flowers said when he was asked by Mr McFadden, "NBNK has alleged there was a Treasury favouritism or political favouritism towards the Co-op as being a preferred bidder in this deal. Is that what you felt?" Reverend Flowers says, "Not at all, sir. I am sure that the esteemed former chair of this Committee, who was a director of NBNK, and his colleagues believe that. Nonetheless, if you look at the rigour that is within the Vickers report in terms of the scale of a challenger bank that would be able to take on the others, and which would be encouraged in the Vickers report, we were looking at a challenger bank that would have somewhere between 6% and 7%". He starts off by making it clear that is not his view. Earlier on, when we had the chairman of Lloyds before us, our Chairman began by asking, "Is it true, as has been alleged, that the decision to award Verde to Co-op was made on political rather than commercial grounds?" Of course you will say, "He would say that, wouldn’t he?" but Win Bischoff says, "No, it is not. What the board looked at was financial and the ability to execute". You construct the argument for the political pressure, first, by being directed to the Coalition Agreement, which-as my colleague has pointed out-is one paragraph. Having had a very small part to play in that, the mutuals part of it to my understanding was building societies. I think there is at least room for interpretation as between whether it was Co-op or building societies or what. Even if that was something that is favoured, it is perfectly possible for Mark Hoban or Ed Balls or Vince Cable or whoever might be involved to say, "Gosh, that would be a great solution" without doing anything about it, but your allegation is they acted, one or all, to a point at which the outcome was changed. As a very experienced person in the corridors of power, Lord Levene, can I ask you whether that kind of conspiracy is credible?

Lord Levene of Portsoken: I can only comment on that from what I am told by politicians and, to my great relief, I have never been or pretended to be a politician. Politicians have said to me that Mark Hoban’s main raison d’être in life was to promote the interests of mutuals, and there is nothing wrong with that. All of a sudden he becomes the Minister who is responsible for this deal, in which he is looking at the interests of mutuals and he can suddenly see there is a great prize in store. Unfortunately-and I know Mark well, he is a nice guy-I think he got this wrong.

If I could also draw your attention to this famous document that the Chairman of Lloyds said he cannot recall ever getting, there is one sentence in it that I think sums up the whole thing. It says, "Co-op’s finances look to be overstretched, and it is unclear as to how they would raise more funds for Verde". Perhaps if more people had thought about that we would not be in the mess we are in now.

Q1744 John Thurso: Can I put to you an alternative, which is that Lloyds always wanted to do an IPO-

Lord Levene of Portsoken: That is a different story.

John Thurso: -and that there was political encouragement coming in bucket loads, and the easiest way to see that off was to encourage you along and then drop you and then drop the Co-op? It is an equally compelling conspiracy.

Lord Levene of Portsoken: I agree with you. That is phase 2. That is what Mr Hoffman was saying to me all the way through. He said, "Look, they want to do an IPO. This is it". This is all supposition, of course. What better way to ensure there is an IPO with-as we have said-Lloyds’ processes, Lloyds’ branches, Lloyds’ everything else, than to ensure that you get two bids, one of which is not really credible, the other one is pretty credible; take the other one; you get some political assistance with that as well and bingo, oh dear, NBNK has dropped out, the Co-op has collapsed, so I suppose there is nothing else for it, we will just have to do an IPO. That is probably the real answer.

Q1745 John Thurso: In that circumstance, the political interference is no more than the kind of pressure you get politically in many deals and it does not become the determining factor, and perhaps the politicians end up being used by those frightfully cunning bankers again.

Lord Levene of Portsoken: I do not know. As I say, I am not a politician, but I think that at the end of the day the bottom line is the Treasury-with whom I have had quite a lot of experience-says, "What really happened at the end of the day? We are going to sell off Lloyds now. We are going to get a lot of money for it, far more than it was ever worth because fortunately the economy is getting better, the banking sector has come up, so do not worry about all this niff-naff because we are going to get all our money back and more and, irrespective of whether UKFI did a good job or a bad job, we are quids in and everybody is happy", and you can understand that.

John Thurso: I think you ascribe more confidence to Government Ministers than I do.

Q1746 Chair: You see what many of us feel, Lord Levene, is that perhaps we still do not have the full explanation of how we got to where we are. But that we do not necessarily need to go down the road of what you have pretty much described as a conspiracy in order to find a reasonable explanation, and you have just heard one, which is why we have spent so much time today exploring the murky deal, the dark forces, the summons to see the Governor, which it seems may not be needed in order to explain events.

Lord Levene of Portsoken: It depends at what point you decide that the music stops.

Q1747 Chair: At which point did you decide the music stopped?

Lord Levene of Portsoken: We decided the music stopped when we could not go on with it any further, and because we had seen that the politicians had decided to go their way whatever happens.

Chair: Okay. We have been round the chronology at some depth today, and there is still more to do to get to the bottom of this. There are now no less than six inquiries running. I think ours will shortly be brought to a close, although we have a few more people we need to call. Thank you very much for giving extended evidence today. I am glad we did take that intermission, in retrospect. It was extremely interesting evidence. Thank you.

Prepared 27th January 2014