In 1989 such a rule would not have appeared too restrictive to Michael Fingleton. After all, he didn’t even begin talking publicly about the possibility of demutualising until about 1995, and he never fully committed himself publicly to the idea until well into the 2000s.
By 1990 Fingleton was a well-known figure in financial and media circles. He would not have been a household name by any means but he had attracted the attention, and respect, of many executives in rival building societies. Fingleton was by now enjoying running Irish Nationwide. He told the Irish Times in 1991: ‘Stress means nothing to me. I never get over excited and I don’t take myself too seriously and I have never believed in the cult of my own personality. I am very practical and down to earth in my approach to running my business.’
When you are handling other people’s money you have to be conservative. But that doesn’t mean you have to stand still. For me the most important thing is to have a flexible approach to business and an awareness of what’s going on at all levels. From what I can see large organisations, weighed down with theory, often lose their way.
For a business not ‘weighed down with theory,’ by 1991 the society was pretty big. It had opened fifty branches, had 160 agents and a staff of two hundred, operated on a cost base that was a small fraction of that of its competitors. ‘No organisation should be overstaffed. It is counterproductive. Our staff are not overworked, but they are stretched and challenged a little. I tend to reach decisions swiftly and it helps if one is in touch with things.’
Fingleton was a leading figure in the Irish Building Societies Association. His stint as chairman of the association during the currency crisis of late 1992 and early 1993 brought him in close proximity to Bertie Ahern, then Minister for Finance.
As the value of the Irish pound continued to rise on the back of wider European currency speculation in 1992, Irish building societies found that the cost of securing inter-bank finance to lend to customers was rising rapidly. By the end of 1992, only weeks before Ahern’s government devalued the Irish pound by 10 per cent, inter-bank borrowing rates had hit 17 per cent. This in turn was putting enormous pressure on building societies to push up their mortgage rates to well above that.
The Department of Finance had a series of meetings with representatives of the building societies, largely through the association chaired by Fingleton. The government was close to agreeing a £650 million financing package for the societies when the decision was made to devalue the currency.
The crisis placed Fingleton at the centre of his sector’s negotiations, and the public eye, as anxious mortgage-holders watched to see what would happen their borrowing rates. Fingleton had become the public face of mortgage lending, even though Irish Nationwide was only the fifth-largest society by value of assets.
1992 was a landmark year in the creation of the single market in Europe and the loosening up in European money markets. In time it would lead to French and German banks recklessly pumping tens of billions into Irish banking, which in turn would lend this money on for property. It would prove an addictive and dangerous concoction for Irish bankers.
Just as the currency crisis came to an end in 1993, the small world of Irish building societies was about to be turned upside-down.
There was something about building societies back then. They tended to be run by individuals with strong personalities for very long periods. They could sometimes be dominated by colourful, larger-than-life characters, who were heavily associated with the society. It might have been the virtually non-existent regulation under the Registrar of Friendly Societies that contributed to this phenomenon; it may equally have been their tendency to attract lots of deposits made up of ‘hot money’ that made them seem a bit like mavericks. But they tended to get drawn into scandals, and when one hit it hit hard.
Two of the biggest building societies were Irish Permanent and First National. Just as Fingleton dominated Irish Nationwide, the Irish Permanent was controlled by Edmund Farrell. For years First National had been run by members of the Skehan family, but in 1993 its boss was Joe Treacy.
Following the introduction of the Building Societies Act (1989), Irish Permanent had begun to consider demutualising. It would be possible for the society to become a private company and then be floated on the stock exchange. Edmund Farrell, its long-time chief executive, felt he was the man to lead the move. But floating a company on the stock exchange brings its own challenges. One of them is transparency.
When investors are considering buying shares in a company that is about to be listed on the stock exchange they have to be given a prospectus. This is a very detailed document describing every financial aspect of the company. Its financial performance, its potential conflicts of interest, its directors’ salaries and all other financial dealings that might be relevant are laid bare.
In the preparation of the Irish Permanent’s prospectus it emerged that Edmund Farrell had sold his house in Foxrock, Co. Dublin, to the society in 1987. The society spent £440,000 in renovating the house and then sold it back to Farrell in 1991 for £275,000. In addition, when Farrell became executive chairman in 1991 he was paid approximately £300,000 for agreeing not to work for any other financial institution as part of a restrictive clause in his employment contract.
The controversy led to a massive row within the society, and Farrell was removed. The society later sought the return of the £440,000 through the courts. Farrell denied any wrongdoing and counter-sued Irish Permanent for unfair dismissal. Eventually the actions were settled out of court.
As it turned out, 1993 also saw another bombshell go off. The chief executive of First National, Joe Treacy, was accused by an employee of sexual harassment. Treacy denied the claim but was effectually removed from the job. He later sued the society and reached a settlement that resulted in his receiving a lump sum of £140,000 and his full pension.
It had been an extraordinary year for building societies and one that left much for Fingleton to ponder. It is not clear how he felt about early exits of the chief executives of two of his biggest rivals, but he certainly would not have wanted a repeat performance. He may have felt sorry for both of them, or perhaps he took a purely commercial view in which controversy and uncertainty in a competitor was good for Irish Nationwide. In two competitors it is even better. However, the nature of both departures would have left much for Fingleton to weigh up.
It was clear to him that floating a building society on the stock exchange would bring significant financial disclosures, and if there were any financial skeletons in the cupboard they would most certainly jump out, with potentially explosive repercussions. In Joe Treacy’s case the incident showed how even an allegation of impropriety in relation to an employee can lead to scandal and an early exit from the job.
Whatever his thoughts were, in his following sixteen years in charge he never once contemplated in a serious way floating the society on the stock exchange. And in fact many years later he was named in an employment appeals case taken by a senior executive who had had an affair with him.
And 1993 wasn’t over yet. The political correspondent of the Irish Times, Geraldine Kennedy, uncovered a story about the sale of a complex of 299 apartments near the Burlington Hotel in Ballsbridge, Dublin. Known as Mespil Flats, it was home to mainly retired tenants who had been living there for a long time.
The complex was sold by Irish Life, a company in which the state was still a major shareholder. The buyer was a group of approximately twenty investors put together by the businessmen Brendan Gilmore and Michael Holland. The investors included two daughters of the Taoiseach, Albert Reynolds, the attorney-general, Harry Whelehan, the former managing director of First National Building Society, Joe Treacy, the broadcaster Marian Finucane, the barristers Patrick MacEntee and Kevin Haugh, the well-known publican Dessie Hynes, and Michael Fingleton.
The tenants were not invited to buy their flats, despite the fact that many of them envisaged spending the rest of their days there. As long-term
property-fund investors, Irish Life would not have sought to remove any of the tenants, but a set of new owners might have a different approach.
The Mespil Flats controversy became an enormous national story. It played out badly for Irish Life, and news coverage also did not reflect well on the buyers. ‘People thought that if there were household names, politicians and private investors involved something must be wrong,’ Michael Holland told the Sunday Times in August 2004. He admitted that some tenants were entitled to feel aggrieved but argued that half way through the deal the currency crisis erupted. Some of the venture’s original backers pulled out, forcing Gilmore and Holland to broaden the net of potential investors to include anyone known personally to them who might have the money required to come into the deal. This is how so many well-known people ended up as investors, and part of the reason why public interest in the venture was so intense.
Eventually Irish Life set up a trust fund to compensate the tenants for any hardship or losses incurred as a result of the sale.
It was the kind of negative personal publicity that Fingleton hated. This was compounded when it emerged that he had taken out a mortgage loan from the society that had not been included in the Central Bank file, as required. The mortgage was for £100,000. Fingleton dismissed the oversight on the grounds that the auditors and the society’s compliance officer were of the view that because it was granted on normal commercial terms it was not required to report it under their reading of the relevant section of the 1989 act.
With hindsight, Fingleton’s involvement in the Mespil Flats controversy and the non-disclosure of this loan reflect two things: a keen eye for a good property deal, and a liberal approach to interpreting corporate governance rules.
However, neither story would have been too damaging to Fingleton’s general reputation. Many business people would have felt that the Mespil Flats deal was perfectly acceptable, and might have wished they could have been in on it themselves. But the non-disclosure of the loan should have been taken as a real warning by the Central Bank as regulator, though it would not have been regarded as a big deal by others, given the culture of the time.
Something that particularly irked Fingleton during the 1990s, and beyond, was the question of public disclosure of how much he earned. The salaries of directors of building societies were traditionally never disclosed. However, when the Central Bank took over regulation of the sector in 1989, total salaries for all directors were disclosed to it.
In the early 1990s journalists began to realise that they could go to the Central Bank and ask to see these returns. The first newspaper story about Fingleton’s salary appeared in April 1994 and disclosed how much he had earned in salary, pension and other benefits in 1993. It included a comparison for 1992. It showed that he had received salary, pension and other benefits totalling £249,000 in 1993, up from £201,000 in 1992. This was an enormous sum at the time. For example, the chief executive of ICS Building Society, Tony O’Connell, earned £103,000 that year.
Building societies did not have to provide a breakdown of the individual earnings of each director but only the total for executive directors. But Fingleton was caught out by the fact that he was the only executive director, as was O’Connell at ICS.
So it was not very surprising that, after the story of his salary appeared, one Irish Nationwide executive, Stan Purcell, was elevated to the board in time for the next year’s report. Every year after that a total figure was given for Fingleton and Purcell together, which meant that people could only guess at how much of it had gone to Fingleton and how much to Purcell.
Fingleton and Purcell shared total pay of £357,000 in 1995 and pension contributions of £322,000. When questioned about the figures at the annual general meeting that year, Fingleton refused to disclose individual pay packets, saying the society was not required to break down individual payments to its directors. ‘Financial institutions can’t be run like charities,’ he said. And anyway, their contracts were performance-related. The substantial pension contributions in 1995 were because in earlier years ‘we forgot about our own pensions,’ he said.
TAKING A PUNT
It’s extraordinary to think that a small mutual residential mortgage lender could end up losing more than €5.4 billion. It is even more incredible given that most of the losses came from commercial property loans to developers, builders and speculators. Relative to its size, the collapse and subsequent cost to the taxpayer of €5.4 billion is one of the most expensive in the world. Losses of over €5.4 billion on a loan book of just €12 billion are relatively greater than those at Anglo Irish Bank.
Why the society slid away from its raison d’être of providing small mortgages to members of the public to massive developer loans is a complex question. It is even more difficult to trace when Fingleton first turned down this road.
In the final few years before Irish Nationwide imploded it had become more and more apparent that it was lending large sums to commercial property investors. But throughout the 1990s there were barely any references to commercial property lending in any of the media coverage of the society. In fact Fingleton makes only a couple of public references to it at all.
Yet it is clear that he was lending money for commercial property deals as far back as the early 1990s. Many of these were never made public. Details emerge in the report compiled by KPMG in 2007 as a sales brochure and ‘vendor due diligence’ statement when Irish Nationwide was being sold. That document is disclosed here for the first time.
It shows that 1993 was the year Dermot Desmond’s company, IFSC South Block Ltd, did business with Irish Nationwide. The society bought three floors of IFSC House, Desmond’s big office block. The floors were already leased to tenants such as Barings and Danisco. Irish Nationwide bought a lease of 199 years and 362 days for £12.9 million. In March 1995 the society took up a leasehold interest of the same duration in part of the ground floor of IFSC House, which was subject to a lease agreement with Citibank. This cost £3.3 million.
There were tax benefits to the deals. A lease that was three days less than the leasehold held by Desmond’s company meant that this deal qualified for full capital allowances on tax, which was confirmed in writing by the Revenue Commissioners. The cost of these transactions was considered to be expenditure on a relevant interest in the building, which was an industrial building for tax purposes and therefore subject to accelerated allowance claims at a rate of 54 per cent of the qualifying expenditure in the year it was incurred. A further 4 per cent per year straight-line claim applied after that, until 97.4 per cent of the cost was claimed in full.
Two separate, specially established companies, known as special-purpose vehicles (SPVs), granted options to Irish Nationwide on the deals. This meant that the society could sell its interest in the building to the SPV for specified amounts. The price of exercising this option was secured by deposits placed with Irish Nationwide in Dublin on the first deal and Irish Nationwide in the Isle of Man on the second. These are reflected in charges and liens against IFSC South Block Ltd and in favour of the society, registered with the Companies Registration Office at the time. The options Desmond held to buy back its interest from Irish Nationwide at these set prices ran out in 2007 and 2008. They were designed like that to avoid a tax claw-back on the thirteen-year tax allowances that Irish Nationwide had enjoyed from the purchase. Both charges were fully satisfied by Desmond’s company in 1997.
Fingleton had an appetite for doing all kinds of unusual deals for a building society. In the late 1990s the society purchased plant and equipment with a view to leasing it to Intel, the transnational microchip manufacturer. The amounts involved are enormous, totalling €175 million. In the mid-2000s the company transferred these assets to special-purpose companies, which were then transferred to Intel. This was done for a nominal sum, described in one confidential document as ‘tax written down value.’ These are all perfectly legitimate tax-efficient types of business but certainly reflect how far Irish Nationwide w
as moving away from bread-and-butter lending to ordinary people for buying a house.
Even if little was known about these non-residential mortgage deals, there were some clues about the effect Fingleton’s love of commercial deals was having on the financial success of Irish Nationwide as early as the 1990s. An analysis of the accounts of the society shows that whenever Fingleton faced tough times in the residential mortgage market he was able to boost profits significantly by making what were referred to as ‘exceptional investment gains.’ This often related to the sale of financial instruments such as government bonds or other assets. Fingleton’s early success in boosting profits when he needed to from avenues other than mortgages showed he had an eye for a deal, and usually a good sense of timing, when deciding when to buy and when to sell.
As far back as 1984 Irish Nationwide reported an 88 per cent increase in profits, from £4.5 million to £8.4 million, on the back of a £3 million gain from the sale of investments. Then in 1993 profits shot up by 53 per cent, from £16 million to £24½ million, on the strength of a £10 million gain on the sale of gilts. Taking out the investment gain, profit rose by a more modest 11 per cent.
There were several years when exceptional investment gains seriously lifted the net profit. But there was virtually no mention of lending to property developers. ‘I always admired Fingleton in the way he ran his operation,’ said a senior executive in a rival building society. ‘He always seemed to be able to generate good profits from a fairly small business. We were baffled for a long time how he was doing it.’
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