By the end of the 1990s Fingleton was, in banking terms, in first, or perhaps second to Anglo Irish, with a whole raft of developers who were in a hurry to get rich. His commercial property lending was growing. Just as selling mortgages was a growing but low-margin business, Fingleton was dealing with those further up the food chain, where the big money was being made.
And, given that he was always interested in property anyway, he was loving it.
Chapter 4
SEEING OFF THE REGULATORS AND THE REBELS
On Tuesday 21 March 2000 Con Power entered the boardroom on the seventh floor of Nationwide House. Below, the water of the Grand Canal moved sedately as Power took his seat and waited with his fellow-members for the main event.
It was exactly 11 a.m. when he arrived: Michael Fingleton; the man. The sharply dressed banker slipped through his personal door that linked his paper-strewn office with the more refined boardroom. The two rooms were the only ones used by the society for meeting its biggest customers, who already included Ireland’s newest class of multimillionaire: the property developer.
Fingleton’s successor, Gerry McGinn, would later remark on the close proximity of the two rooms. ‘What does that tell you? One guy made the decisions here—the layout of the building reflects that.’
Nodding and greeting everybody that Tuesday morning, Fingleton had the air of a busy and successful man granting his board a short amount of his precious time between deal-making.
Peter Donal O’Connor, the long-standing 69-year-old chairman of the society who had taken over the position from his father, smiled broadly at the man who had put it on the banking map. He put his two elbows on the table and tucked both his thumbs under his chin. ‘Well, Michael, what have you got for us today?’ he asked.
Con Power, a chartered secretary, chartered certified accountant, economist and specialist in ethics for professionals was taken aback. Attending his first board meeting of one of the fastest-growing lenders in Ireland as a non-executive director, he had expected that the meeting would at least have had an agenda. Instead there were not even minutes available to record what had happened at the society’s last meeting, let alone what it intended to discuss at this one.
It was all very casual while O’Connor and the rest of the board listened in awe as Fingleton recounted tales of big lending and rapid growth.
The only hiccup in the adulation was when mention of the Central Bank came up. Watchdogs in the bank were very concerned about how fast the society was growing and whether the appropriate checks and balances were in place. But the issue was only discussed briefly and light-heartedly. A meeting was set up afterwards for the three-person audit committee of the board to discuss it in more detail with the society’s auditors, KPMG, so little time was wasted on the matter.
As O’Connor ran through the meeting, barely questioning Fingleton, Power thought to himself, ‘This is even worse than I expected.’ When the meeting ended, he faced Fingleton privately, in the first of many such encounters. ‘We can’t have board meetings without an agenda and supporting documents being circulated in advance. Never again, Michael.’
Fingleton smiled. ‘Ah, Connie, sure we’re all friends here,’ he said. Power was not amused. From then on the company secretary, Stan Purcell, circulated both agenda and minutes to directors in advance, and it must be admitted that the quality of documents and records improved somewhat over time.
Power then, in his other new role on the audit committee, went straight into a meeting with KPMG.
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Chris Cullen and Darina Barrett, two senior accountants with KPMG, didn’t pull their punches. The Central Bank was worried about the speed with which Irish Nationwide was growing. In 1999 alone its loan book had grown by 34 per cent, or £462 million, to £1,806 million. The Central Bank was pushing hard for the society to review its ‘credit function’, or how it was lending to make sure things were not expanding out of control.
On 4 January 1999 the euro had been launched in financial and investment markets. A momentous event, much of Europe united under one currency for the first time since Charlemagne’s reign in the ninth century. This suddenly opened up a whole new set of opportunities for even a small building society on the edge of Europe. In this climate, Ireland’s small banking industry experienced a mini-wave of consolidation as banks sought to become bigger so as to tap into a wall of money in Europe that suddenly became available.
On 25 January 1999 Anglo Irish Bank bought Smurfit Paribas Bank for €38 million, bringing to its client list for the first time the industrialist Seán Quinn, while a few months later Irish Life Assurance merged with Irish Permanent to form Irish Life and Permanent in a £2.8 billion mega-merger, creating a third force in Irish banking behind AIB and Bank of Ireland.
More consolidation was seen as inevitable. Irish Nationwide, once it could get the necessary demutualisation legislation passed, was seen as unlikely to remain independent for longer than a few years. In the meantime Fingleton was determined to expand and take on the big boys of banking. He knew, however, that getting the legislation required to demutualise the society would be a complicated process. Inviting Con Power onto its small board was part of his strategy for achieving this. The two men barely knew each other beforehand.
Fingleton realised that he needed someone with Power’s legislative expertise and experience. Power was director of economic policy at the Confederation of Irish Industry (now IBEC). He had previously been seconded to work for the state in both the Department of the Environment and Local Government and the Department of the Taoiseach; he knew how the civil service worked and what was required to change legislation.
Power was not at first convinced. He rang a friend in the Department of Finance to ask him if it was ‘safe’ to join Irish Nationwide’s board. His friend said he would make enquiries and come back to him. ‘He came back and said Michael Fingleton will push it to the limit but he is too cute to go beyond the limit. That’s what came back from the Department of Finance.’ Power agreed to join the board, with the principal objective of paving the way for the society to be sold.
This sense that the society’s independence would be short-lived was exploited by Fingleton. Publicly he began to dangle the prospect of a windfall from demutualisation to lure in more deposits. Behind the scenes he kept an iron grip on the controls.
Just as Fingleton wanted to fatten the society for sale, the emergence of the euro provided the steroids of the European money markets to allow it to do so. It was an intoxicating cocktail for a man as egotistical as Fingleton, who felt that his small society could compete with anybody.
Europe was awash with cash, and careless French and German money managers were happy to back the little society that believed it could.
Fingleton, not the most diligent man for paperwork, was cutting corners, and the Central Bank suspected it. Perhaps he felt that, once the society was sold, any unpaid loans would ultimately be someone else’s problem. Yet right up to the end he acted like someone who genuinely believed the boom would continue, or at least there would be a soft landing. He was far from alone in that view. This combination of more deposits from greedy carpetbaggers and access to the overseas money markets allowed Irish Nationwide to expand rapidly.
The beginnings of Ireland’s property bubble were becoming evident as house prices rose by 17 per cent and commercial property shot up by 31 per cent. It was against this background that the Central Bank was concerned that Irish Nationwide might be over-stretching itself. It wanted Fingleton reined in; but at the same time it seemed to admire the building society boss’s ability to always have the inside track on any deal.
The day before the meeting of its audit committee, Irish Nationwide had agreed to pay its auditors to conduct a review, for a fee of £25,000 plus VAT. Nobody on the society’s board raised any concerns about its auditors having a potential conflict of interest in carrying out such a sensitive review. Con Power, for one, was impressed by KPMG, who seemed up
to speed on what needed to be done. They seemed more anxious, he felt, than either Fingleton or O’Connor to bring the society into the new millennium.
Afterwards he was surprised that the directors and senior executives did not go for a meal or even for a sandwich together, as would be usual on other boards on which he had served. ‘I thought it odd, as a lunch was a good way to discuss things away from the formality of the boardroom,’ he recalled. ‘But in Irish Nationwide there was never any socialising between board members that I was aware of.’
On 9 May 2000 there was another board meeting. This time Power was absent. Purcell now updated his board with the information that KPMG had met the Central Bank. It had told KPMG it wanted a review of the society that would take a hard look under its bonnet. Things were inching further on the regulatory front even as Fingleton continued to lend tens of millions every week relatively unchecked.
On 23 May 2000 KPMG wrote to Irish Nationwide outlining the terms of reference for its review, which had now been agreed with the Central Bank. At first it had four objectives, according to its letter. It was asked to look at ‘the appropriateness of the society’s lending policies and approval procedures,’ the ‘appropriateness of arrangements for management of non-performing loans,’ the adequacy of the society’s provisions, and the adequacy of supervision of the credit function by its board.
As the review was going on, its terms of reference were expanded. This happened in September after more discussions with the Central Bank. Now it also planned to look at the society’s arrears and reporting of non-performing assets to both the Central Bank and the society’s board, both of which were woefully inadequate.
KPMG had to push the society hard to get all the information required, which kept delaying the completion of its review. On 10 October, Con Power was so frustrated that he rang Purcell to find out if the report would ever be finished. Purcell coolly assured him that it was all going well. The report, he said, would find nothing much out of the ordinary and was just part and parcel of the ‘normal course of the bank’s supervisory function.’
Finally, on 12 October 2000, KPMG completed its 44-page report plus eleven appendixes. It was far from normal.
Even after months of preparation, KPMG was careful to heavily qualify its conclusion in a section entitled ‘Information sources.’ This stated that ‘no detailed substantive audit work was performed to independently verify either the accuracy or the completeness of the explanations or information obtained from senior management.’ In other words, in something that was a constant theme with the society, there was a reliance on the senior management—namely Fingleton—to take the accountants into the bowels of the society. (Within five years this reliance on managements for information would become a source of regret for all Ireland’s banking auditors, who failed to warn shareholders or the public of the catastrophic risk of allowing banks to get out of control. But none of them offered to return their fees, nor were they asked to by the state.)
Digging down into the society, KPMG found that Fingleton funnelled customers into the society in four different ways.
Firstly, the society offered loans indirectly through between twenty and twenty-five mortgage brokers. Then it had eighty-five so-called agents, who could be anybody from estate agents to local GAA luminaries, who drummed up yet more business in towns and villages around the country. The society dealt directly too through its fifty-one branches, including offices in Belfast, London, and the Isle of Man. The final route was by way of head office. This meant in effect dealing directly with Fingleton and his tiny team of lieutenants. A staff of thirty oversaw the granting of home loans, which gradually ran to billions under its department head, John Byrne, while another thirty-five reported to Kiera Mansfield, who managed administration.
Meanwhile the society’s already rapidly expanding multi-billion commercial loan book was managed by an even smaller team. A mere nine people looked after commercial lending at head office, headed by a senior underwriter, Mick Leonard.
John Byrne reported to Fiona Couse, the society’s operations manager. Unusually, he reported to her only on administrative matters; when it came to the important stuff—making the decision to lend, for instance—he bypassed her. Instead everything had to be routed through Fingleton, ensuring that only a very tight team really understood how and on what terms the society was lending to developers.
This report of 2000 is illuminating in the way it describes how the board on occasion generated business for the society. It states that ‘an element of new business, particularly commercial is referrals from the board.’ According to sources in the society, this note explains why some of the society’s directors at least became involved with the society despite its many shortfalls. Of course board members were paid, but membership of the board also gave access to Fingleton, who at the stroke of a pen could lend tens of millions within hours.
He was a powerful man to have the ear of just as the economy began to take off. Sitting around the boardroom table gave directors access too to the inside track of Irish business. The benefits of being a director could easily extend to doing better in their other businesses.
The report states clearly that the directors approved all loans greater than £500,000 as well as looking at monthly reports on arrears, an arrears trend report, and ‘any significant recoverability issues.’ Both the internal audit and Fingleton, the report said, always brought ‘any significant items’ to its board.
At least on paper, and according to Fingleton and his cronies, the board was fully in touch with what was going on. The reality was that board meetings were largely rubberstamping exercises, where numerous deals were run through in a couple of hours in meetings that never ran beyond lunchtime. Con Power would later recall that at his first loan approvals meeting dozens of loans went before the board in the space of a morning. ‘At every step along the way we were always assured by Michael Fingleton that Irish Nationwide not only obeyed the letter of the law but also its spirit,’ he said.
The KPMG report entitled ‘Irish Nationwide Building Society: Review of the Credit Function,’ described an array of serious problems. KPMG said these went from the boardroom down. It found that the level of information available to directors simply was not good enough. Irish Nationwide claimed that ‘any significant issues’ about problem loans went to its board, which then made their recommendations. The reality, KPMG found, was that ‘the Board minutes do not document the conclusions arising from this review.’
During its fortnightly meetings, the Board, as well as reviewing all new proposed credit facilities also discuss any significant loans in the pipeline, market developments which may have an impact on the societies credit strategy and recoverability issues, including their potential impact on provisioning levels. The board minutes do not document these discussions.
The board’s oversight of the risks inherent in the credit portfolio would be aided by an improved level of portfolio summary reports, e.g. as at 31 December 1999 there was no analysis of the Society’s credit portfolio by product, by maturity, by vintage, by size, by loan to value, by interest rate, by geographical concentration or by number of customers was available. In addition no exception reports, e.g. loans in excess of a certain maturity or loan to value etc., were available.
There is no formal documentation to support the key assumptions and components of the underlying credit strategy formulated by the board.
In short, Irish Nationwide’s board was operating somewhat in the dark, just as Fingleton was ramping up its lending to ever greater levels.
At the same time, at the executive level the society was operating in an ad hoc way. It was simply making things up as it went along, rather than adopting the correct procedures and processes for a financial institution of its size. Irish Nationwide, KPMG said, had not even a documented policy for working out its provisions for bad loans. Instead it relied on the instinct of its senior management.
Residential lending policy, the report conclu
ded, was very poor. ‘There are no specific concentration limits imposed in respect of the composition of the residential portfolio, eg geographical, by product etc.’ The society did not create ‘exception reports,’ making it hard to ‘identify any peculiarities or trends within the existing residential portfolio.’ This meant it could not easily find out how many of its mortgages had ‘unusual interest rates,’ or were highly leveraged.
Commercial lending to developers, which Fingleton prided himself on, was even worse. The society was lending hundreds of millions to property speculators without the proper checks. Among KPMG’s findings were:
There are no concentration limits applied to the components of the commercial portfolio in its entirety, e.g. sectoral limits, risk categorisation limits.
The level of reports analysing key aspects of the commercial lending portfolio, at either a detailed or summary level, does not facilitate an oversight of this portfolio.
The society’s policy is that all commercial loans should be reviewed on an annual basis. There was no documentation to support that this review had been performed during 1999. Management have indicated that an informal review was conducted and that a more formalised review will be performed for the year ended 31 December 2000.
The ongoing monitoring process of commercial loan facilities is not formalised and not documented … There are no formal checks to ensure that regular information e.g. monthly management accounts and any other key documentation, is received from all commercial customers on a timely basis, or that on site visits are made of larger commercial customers on a regular basis. The society does not have a credit watchlist mechanism, ie to record all commercial loans which although still performing are considered to have potential recoverability issues in the future.
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