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Bank bosses 'insisted no more capital was needed'

Guardian Economics 28th January 2009

Legal & General hit back yesterday at MPs who accused the investment industry of failing to prevent reckless bankers bringing the financial markets to their knees.

The company, which manages £275bn of investor funds, said it was the banks that were in the wrong after insisting throughout most of last year they were well capitalised and financially healthy.

Peter Chambers, chief executive of Legal & General Investment Management, said he met the chairmen and chief executives of Britain's major banks several times last year and was assured they were well capitalised only to find that months - or in one instance only weeks - later that they needed extra funds.

Treasury select committee chairman John McFall questioned whether the industry had done enough to monitor the activities of banks and other finance companies. He said "something had gone wrong" in the supervision of directors and the banks.

Chambers said L&G mainly operated tracker funds that invest in the FTSE 100. "We must track the index, so we are not in a position to show our disapproval by selling shares in a particular company.

"Last year we had 26 engagements with the senior executives of all the major UK banks spread throughout the year. At the beginning of the year we asked about the capital positions of the banks and all said there was no problem. They said there was no need for more capital."

Chambers said he made representations to Royal Bank of Scotland, which announced a £12bn rights issue only six weeks after meeting L&G executives. He said L&G called for the resignation of chairman Sir Tom McKillop and chief executive Sir Fred Goodwin.

"We spoke to RBS afterwards," he said. "We were told we would hear something we would like in August. When the time came it appointed three new non-executive directors." Nothing changed until the government made their departures necessary as part of the bail-out, he added.

Alan Grisay, chief executive of F&C Investments, who also appeared before the committee, said his team had five meetings with RBS executives before the government bail-out last year and received the same assurances.

The accusation that Goodwin and McKillop potentially misled shareholders at the time of the rights issue follows complaints from a Scottish MP and a police investigation into the claims.

Earlier MPs criticised hedge funds for fuelling the collapse of the banking industry with persistent short-selling.Stephen Zimmerman, chairman of NewSmith Capital Partners, said there was no evidence that short-selling had made the situation worse and pointed to sharp falls in share prices after the practice was suspended.

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