Such was the madness forming around property that taking measures to cool the market seemed unthinkable. Instead government think-tanks were coming up with ways to increase the borrowings, risk and state exposure to ever-rising prices.
In 2004 only 3 per cent of residential mortgages were 100 per cent loan-to-value, in other words the loan for the house was 100 per cent of its value. In 2005 First Active became the first bank to really push 100 per cent mortgages. The former building society was then owned by Ulster Bank. Within weeks the others all piled in. One of the first banks to announce 100 per cent mortgages held a press conference in Dublin in 2005. Executives fielded questions from journalists about the wisdom or otherwise of lending all the money to buy a house.
One of those present was Brendan Keenan, group business editor of the Irish Independent at the time. Executives batted back the questions by saying these 100 per cent mortgages would only be available to, and marketed towards, high-earners. They would be controlled and marketed in a targeted way for those most capable of paying the money back.
On his way back to the office Keenan was handed a leaflet on O’Connell Bridge advertising the new 100 per cent mortgages from the lender. He phoned the regulator and the bank and was told the leaflet was a mistake, caused by an over-enthusiastic branch manager.
Within a few months nobody even cared. Banks were handing out 100 per cent mortgages all over the place, and it was no longer even questioned. By 2007 they accounted for nearly one in eight mortgages. But first-time buyers were the ones really queuing up to get these loans. In 2004 only 3 per cent of first-time mortgages were 100 per cent; by 2007 the figure had reached 25 per cent.
The apparently booming economy, with full employment, was going so strongly that several hundred thousand eastern Europeans arrived in Ireland and found work. The Ahern government felt it could do whatever it wanted in regard to exchequer spending, because the tax revenue, although it was from boom-time sources, kept flowing in. With Charlie McCreevy as Minister for Finance, the government really let things rip.
By the end of 2003 Ireland was already some way down the road to failure. On Wednesday 3 December, McCreevy stood up in the Dáil to present his budget. ‘It is easy to forget the progress we have achieved—the defeat of unemployment as an economic scourge, the doubling of real income in the economy, the massive investment in infrastructure, and the substantial enhancement of social benefits for the welfare of all our people.’ He went on to list the plaudits Ireland had received from outside agencies, such as the International Monetary Fund. ‘The IMF also praised not only our prudent fiscal management and our tax reforms but it also commended our sensible incomes policies and our investment in education. All of these policies have laid the foundation for a virtuous circle, reinforcing growth and strengthening the resilience of our economy.’
He then announced one of the greatest wastes of public money in recent decades: decentralisation. Without any real logic, cost-benefit analysis or assessment of social benefit, McCreevy announced that more than ten thousand civil servants would move to fifty-three centres in twenty-five counties. The whole debacle cost hundreds of millions.
The government went on to announce the benchmarking of public-sector pay, which resulted in average increases of approximately 9 per cent. On the back of all this self-congratulatory recklessness it began to increase current spending by more than the increase in GDP. During the boom years of the late 1990s, increases in day-to-day government spending were always lower than the increases in GDP. That changed in 2001, and the pattern continued until the collapse in 2008.
But perhaps the most damaging thing the government did to encourage property speculation was tax relief. Banks were never going to rein in their property lending when government policy was to promote it and subsidise it. At the height of the boom, in 2004–6, we had tax relief schemes for urban renewal, multi-storey car parks, students’ accommodation, buildings used for third-level education, hotels and holiday camps, holiday cottages, rural and urban renewal, park-and-ride facilities, living over the shop, nursing homes, private hospitals and convalescent facilities, sports injury clinics and child-care facilities. Many of them were due to expire in 2003; McCreevy extended them to 2006. Brian Cowen then announced that he was closing them but allowed for a transition period, which in fact extended many of them until 2008.
The total gross tax cost to the exchequer of these reliefs from inception to mid-2007 was €3.2 billion. The net cost was about €2.2 billion. Without them, some projects would not have been built and those loans would not have defaulted, because they never would have been taken out. In his budget speech on 7 December 2005 the Minister for Finance, Brian Cowen, said: ‘We are living in the midst of the longest and strongest era of sustainable prosperity in all of Irish history. This didn’t happen by chance. This involved careful planning. As a nation we now enjoy a much enhanced quality of life. We are a prosperous country.’
Two-and-a-half years later his government announced its first round of spending cuts. The budget had to be brought forward to October 2008 as an emergency measure.
But back in 2004, 2005 and 2006, against a backdrop of wads of cheap money, of government policy subsidising property and construction, a voracious property boom and heaps of praise from reputable international think-tanks, the banks just went crazy.
Michael Fingleton could see that, while house prices continued to go through the roof, there was a lot more profit in lending to developers than in lending to people buying houses. This was because the mortgage market was highly competitive, whereas loans to property developers were all about relationships and not tying them up too much in paperwork. The virtuous circle seemed to apply to Fingleton’s property-developer clients, who could borrow more than 100 per cent of the cost of a site, then borrow all the money for developing it. Once they agreed to a profit share with Irish Nationwide they could then have non-recourse loans, enabling them to walk away if things went wrong.
But as the boom went on, Fingleton seemed to get everything right. His commercial property loans were often repaid when developments were successfully completed, encouraging both the lender and the borrower to go again but for even more money.
Developers lived like kings. One owner of a wine shop in the south Dublin suburbs recounted how it was not unusual for a developer to ring up at five o’clock on a Tuesday or Wednesday evening to say he was having a few people around for dinner and then order €5,000 worth of wine to be delivered to his house.
The Ahern government loved the developers, and the feeling was mutual. Bankers just sat back, handed out loans, did their lobbying in private, stood up to a weak regulator, and collected their ballooning salaries and bonuses. The property developer Seán Dunne invited both Charlie McCreevy and Bertie Ahern to his five-day fiftieth birthday party and wedding reception. Charity events became major social events, as these lines from Paul O’Kane in a Sunday Tribune article in April 2004 show:
The scene is the Four Seasons Hotel in Dublin on a balmy, early summer’s night. The event is a black tie ball for a third world charity that is run by a tireless Irish priest, who everyone agrees is a saint. The tables have been purchased at several hundred euro a plate and when the auction starts, the bidding is less than furious. A fifth century doubloon struggles to edge over its reserve, so too an original William Butler Yeats letter. Things really hot up, however, when a week-long stay at a glorious villa in Antibes and a similar package at the seven star hotel in Dubai come under the hammer. Bids move up in €5,000 notches and the whiff of cigar smoke fills the chandelier laden ballroom. This is Dublin’s new wealth at play. Gotta go there. Gotta have it.
The deception of wealth over borrowing, of asset prices over cash and of vanity over reality resulted in a remarkable speech by the German ambassador to Ireland, Christian Pauls, in September 2007, just on the eve of it all falling apart. He caused consternation when he told a gathering of mainly German business people in Dublin that in Ireland everyo
ne drives 2006 or 2007 cars, hospital consultants describe €200,000 per year as ‘Mickey Mouse money,’ junior ministers earn more than the German chancellor, and a house in Clontarf sold for €20 million—the price of a skyscraper in Frankfurt. He had captured the madness of it all, and inadvertently reminded Irish people of several very uncomfortable home truths.
Fingleton didn’t keep the promise he made in Irish Nationwide’s annual report in 2003. He increased lending massively. Commercial property loans shot up to a peak of about €9 billion. But during the period from the late 1990s onwards lots of loans were successfully repaid. In total the society lent out more than €17 billion in new loans. Its profit growth reflected this. But people outside probably didn’t fully appreciate how much of it was coming from developers and arrangement fees. In 2003 the society made a profit of €117 million. By 2005 this had grown to €176 million, and in 2007 it shot up to €390 million. Fingleton’s pay, like that of other bank chief executives, went up too.
In March 2006 things finally came to a head between Con Power and Irish Nationwide’s board. Power had many other interests besides his non-executive directorship of Irish Nationwide. In 2004 he had been made inaugural chairperson of the statutory Financial Services Ombudsman Council. This had been set up to deal with the complaints of customers of financial services companies. Power had become something of an expert in the area, thanks to Irish Nationwide.
Late on the evening of Wednesday 22 February 2006 he got a phone call from Brendan Burgess, telling him he had got a tip-off that Irish Nationwide had lodged papers in the High Court seeking a judicial review of a decision by the Financial Services Ombudsman. The society wanted to quash a €30,000 refund the Ombudsman had ordered it to repay to a mortgage customer.
Nobody in Irish Nationwide had bothered to tell Power that the society planned to take such an action. The following day he phoned Stan Purcell and told him he planned to resign from the board to avoid any perception that he might have a conflict of interest. He then discussed the matter with Michael Walsh, who urged him to stay on with Irish Nationwide and instead resign as chairperson of the Ombudsman Council. Power said no.
Late in the afternoon Michael Fingleton rang Power from London, where he was on a business trip. ‘I declined a request from Michael Fingleton to reflect on the matter and to discuss it with him at the weekend,’ Power said, ‘on the grounds that nothing he would say to me could alter what had been done by Irish Nationwide.’ Later that night he resigned from the society.
The following day Patrick Neary, who had been promoted to become Financial Regulator after Liam O’Reilly retired, rang him. Power’s contemporary note of what Neary said reads: ‘Great regret to see you go; it was a hard one to call; I appreciate why you did it, but we here are terribly sorry to see you go. You devil—you have put the cat among the pigeons, but you had no option.’
Just as Power moved on from the society, what he had originally joined the board to achieve was finally about to happen. Demutualisation always hung in the air but finally it was becoming real. In the summer of 2006 the bill introduced by Brian Cowen as Minister for Finance allowing for Irish Nationwide to be sold became law.
Power had earlier come close to achieving the same thing with the Housing (Miscellaneous Provisions) Act (2002). At the time the change was seen as a certainty, as in opposition in the 1990s Charlie McCreevy had been in favour of demutualisation. Power knew that the matter had been considered by the government in 2002 but had been shot down. It is not clear for whose benefit it was deferred, but not selling the society back then would prove a costly mistake in time.
The summer of 2006 saw the peak of the residential property market, but it was nearly twelve months before prices began to fall. In June that year MyHome.ie, owned by a group of estate agents including Sherry Fitzgerald, was put up for sale. The estate agents Hamilton Osborne King were sold. A percentage of Jackson Stops was sold. Gunne Residential was also sold.
Cowen had delivered Fingleton’s long-term wish. But had it come too late? There was no evidence of those feelings on the night the legislation was passed. Finally it was happening. The promised land. Demutualisation.
Michael Fingleton sent Stan Purcell, Olivia Greene and Brendan Beggan down to watch the historic vote from the public gallery of the Dáil. He already knew the result; he wanted to see who would oppose him, Olivia Greene recalled, so he could ‘deal with them.’ As they sat in the public gallery, Greene noted that Éamon Gilmore and Noel Ahern were among those opposing the vote.
Afterwards Beggan and Greene said they went for a drink with Purcell and Francie O’Brien, a Fianna Fáil senator, in the Leinster House bar. O’Brien introduced them around, studiously avoiding any representatives of the Labour Party but greeting members of his own party warmly. Brian Lenihan was among the politicians who shook their hands briefly. As the night wore on, the drinking moved to Doheny and Nesbitt’s, a popular pub in Baggot Street, famed for hosting a mix of politicians, businessmen, developers and civil servants, leading to the coining of the term ‘Doheny and Nesbitt School of Economics.’
‘Brian Cowen was there,’ Greene recalled, ‘and he had had a few drinks. He put his arm around us and said, “You’re working for a great man,” and so on.’ Seeking a more private corner in which to talk, the society’s group pushed their way towards the back of the bar.
Chapter 7
PORTRAIT OF A LENDER DESTINED FOR DISASTER
By 2004 Michael Fingleton had chosen his own road for Irish Nationwide. That road led to Britain and high-risk property-lending. The old business of residential mortgages in Ireland was being left behind.
Irish Nationwide was still giving out more mortgages at home but was losing market share and was making less money out of them. And Fingleton appeared to be losing interest. By 2006 a third of all the mortgages issued by Irish Nationwide had come through head office, as more and more of them were residential mortgages linked to developer clients who wanted to buy more and more houses.
The more money the society lent out, especially to a handful of developers, the greater the risk it was taking but also the greater the profit it was making. By the fact that his defined-benefit pension would be two-thirds of his salary (including bonus), Fingleton was singularly motivated to drive up profits before his planned retirement or the sale of the society. The greater the bonuses he made on higher profits, the greater his final pay would be, which would fix the value of his pension for the rest of his life. This ridiculous situation, accepted by the board, motivated the chief executive in completely the wrong way.
Irish Nationwide was no longer functioning like a building society. It was a sub-prime lender, a property bank, an investment bank, an equity house and a property developer rolled into one. The Financial Regulator had ample evidence and reports to get rid of the board or the chief executive but failed to carry out any meaningful action.
Eventually, after years of lobbying, in the summer of 2006 Brian Cowen introduced the legislation that allowed for Irish Nationwide to be demutualised and sold in one fell swoop. Shortly afterwards the society was put up for sale. KPMG, the society’s auditors, were hired in February 2007 to put together a highly confidential prospectus or sale document, known as a ‘vendor due diligence report’. It was entitled ‘Project Harmony’. It ran to several hundred pages and was presented to the society in June 2007. Its contents are revealed here for the first time.
The prospectus opens with a form of disclaimer. ‘In preparing our report, our primary source has been internal management information, and representations made to us by management of the society. We do not accept responsibility for such information which remains the responsibility of the management.’
It was a fairly standard statement, but given that house prices had begun falling the very month it was submitted to the board, some lines in the disclaimer were extraordinary. ‘We accept no responsibility for the realization of the prospective financial information. Actual results are likely to
be different from those shown in the prospective financial information because events and circumstances frequently do not only occur as expected, and the differences may be material.’ This was prophetic, and could have won first prize in the banking crisis Understatement of the Decade awards.
The report gave a snapshot of a business that was on the up, as long as the property market was on the up, but one that lacked the expertise, accountability, corporate governance, IT resources and restraint necessary to survive through a substantial change in the market.
According to the confidential KPMG report, the Financial Regulator’s office had been concerned about corporate governance arrangements at the society for years. But it did very little about it. In 2004 it noted significant gaps in controls and ‘a lack of knowledge in relation to obligations of the society under the Building Societies Act 1989.’ It had already broken the law on issuing proxy voting forms to members.
In the face of all this, instead of booting out the chief executive or taking real action, it wrote a letter to the society.
The Financial Regulator outlined his concerns, including the need to increase the size of the management team, succession planning for when Fingleton retired, the expertise and experience of the internal audit team, and procedures and controls for commercial property lending. In 2004 Irish Nationwide had €3½ billion out in commercial loans and clearly insufficient resources, knowledge and expertise to back that up.
Fingers Page 14
