House of commons
Oral evidence, 21 January 2014.
Witnesses
Lord Levene of Portsoken KBE, former Chairman, NBNK Investments, and Gary Hoffman, former Chief Executive Officer, NBNK Investments, gave evidence.
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.
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.
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—
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.
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.
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.
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—
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.
Chair
Do you think that that unfairness constitutes bad faith?
Lord Levene of Portsoken
Yes.
Chair
So you are alleging bad faith?
Lord Levene of Portsoken
Yes.
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?
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—
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.
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.
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.
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—
Chair
The shareholders have £25 million they might like to recoup, haven’t they?
Lord Levene of Portsoken
That is up to them, Chairman.
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”.
Chair
It is the allegation of incompetence that has triggered the vigour of your response?
Lord Levene of Portsoken
In part, yes.
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.
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—
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.
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.
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.
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.
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.
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.
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.
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.
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”.
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.
Chair
But you feel perhaps that you should have looked further?
Lord Levene of Portsoken
Perhaps we should have done, but we believed—
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.
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.
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.
Chair
Okay. Just to be clear, is this also part of the bad faith allegation or not?
Lord Levene of Portsoken
Yes.
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.
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?”
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.
Chair
Is that correct? That is the point at which—
Gary Hoffman
That is what I am trying to add.
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.
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.
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.
Jesse Norman
How much?
Lord Levene of Portsoken
I invested £100,000. I received back something like £40,000, so I lost £60,000.
Jesse Norman
You lost £60,000?
Lord Levene of Portsoken
Yes.
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—
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.
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.
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.
Jesse Norman
The amount that is in play is about £30 million?
Lord Levene of Portsoken
Yes.
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.
Jesse Norman
Thank you. Potentially there is a lawsuit for £30 million on the table and consequential costs?
Lord Levene of Portsoken
Yes.
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—
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—
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.
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.
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.
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.
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.
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.
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—
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.
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.
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.
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.
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”.
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.
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.
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—
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—
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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—
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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—
Chair
This may be the further piece of information.
Gary Hoffman
Yes, but we were told it was not.
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.
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.
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—
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—”
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—
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—
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—
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—
Chair
You believed him?
Lord Levene of Portsoken
I listened to what he said. We also made inquiries—
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—
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.
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.
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?
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.
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.
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.
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.
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.
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?