Fingers

by Richard Curran

  Now Fingleton realised that his dreams of an easier life seemed unlikely. It was going to be some time yet before he was able to retire.

  At the same time he was worried about his personal fortune. He had investments in land banks with Gerry Gannon, the developer, and Francie O’Brien, the former Fianna Fáil senator. These were now looking rocky. He had other investments too in various corners that he was worried about. Worst of all, though, was his €27 million pension from the society. He had ploughed most of into Irish and British banking shares. These too were tumbling, but Fingleton felt sure they would recover in time once the market saw sense. As far as he was concerned, Fingleton was still rich.

  ——

  As the summer ended Fingleton was back firmly in his creased green leather chair on the top floor of the society’s head office. At all times he could see through his window the Central Bank as he schemed and plotted how the society and his favourite customers might escape.

  The situation was dire, and while Fingleton didn’t fully recognise it, Walsh did. Late in the day he finally began to use his expertise as best he could. The society faced a series of big cash calls that needed to be repaid, and Walsh feared it might not be able to meet every one of them with the credit market in complete lock-down as investors worried that one of Wall Street’s big investment banks might fail. The writing was on the wall for the society, and each week made things harder, but Fingleton remained in denial. Then things really got bad.

  On 4 September, Moody’s credit rating agency sharply downgraded Irish Nationwide’s long-term bank deposit grading, from AAA to BAAA1. Essentially this meant that one of the world’s top three rating agencies no longer considered the society a safe haven with a high investment grade.

  The main reason given by Moody’s for saying the society was now riskier was that 80 per cent of its loan book was in commercial property and development in Ireland and Britain, where there was a ‘rapid deterioration’ in land and property values. The society, Moody’s concluded, was ‘weakly placed’ and ‘on review for further downgrades.’ In fact it hinted that it might have downgraded the society more only it believed that the ‘probability of systemic support for INBS in the event of a financial crisis is moderate.’

  The downgrade caused a minor shock wave for the government, already hugely concerned as Ireland’s listed banks daily hit new lows. Michael Manley, a senior official of the Department of Finance, prepared a memo on the situation for his minister, Brian Lenihan, which was stamped ‘top secret.’ He said that the downgrade would make it more expensive for the society to fund itself and would cause corporate deposits to be withdrawn from it, especially in its Isle of Man subsidiary. Irish Nationwide, Manley said, expected that €200 million at least would be taken out. (This would turn out to a very optimistic expectation.)

  In a handwritten note on the secret memo, William Beausang, an assistant secretary of the department who worked tirelessly during the crisis, addressed Lenihan directly. ‘Minister this is not good news for INBS and while INBS is currently financially stable with high levels of liquid assets, there is clear potential for future difficulties if further downgrades materialise.’

  In the fevered climate of the time, Irish Nationwide was facing a run against its deposits. That Friday, 5 September, at 6:15 p.m. things got dramatically worse. Reuters, one of the world’s most credible news agencies, reported that Irish Nationwide was in serious trouble. The society, it said, was ‘in talks with its lenders to avoid insolvency.’ The story was published without a comment from the society, which first heard about it when an eagle-eyed journalist from the Irish edition of the Sunday Times rang its spokesperson, James Morrissey.

  The Financial Regulator was also caught on the hop; but within an hour its press office was ringing around to tell journalists that the story was without foundation.

  At 8:31 p.m. the story reappeared updated on the wires. This time it included a strong denial from Irish Nationwide. At 10:45 p.m. the story was removed from the Reuters system and replaced with a retraction, and an admission that there would be no substitute story.

  Irish Nationwide had forced Reuters into an embarrassing climb-down. Michael Fingleton had managed to gag the biggest news organisation in the world

  The same night Ronald Quinlan, a reporter with the Sunday Independent, confronted the Taoiseach, Brian Cowen, immediately after his broadcast on the Late Late Show, which was taking place in the new Wexford Opera House. Cowen had just told the presenter, Pat Kenny, his reasoning for hastily bringing forward the government’s budget to 14 October. The budget, he said, would be ‘about sending a signal to the country that we are in a new set of circumstances. There is no doubt about that. The deceleration is happening much faster than anyone ever expected. We must take whatever steps are necessary now so that we can get back to the good times as soon as possible.’

  Cowen also resisted pressure from developers, the banks and some quarters of the media to cut stamp duty on house sales in the mad expectation that this would get the property market moving again. ‘We are not going to tinker around with the market. There is a correction taking place in the residential housing market. The problem is that with houses becoming more affordable people can’t get access to credit. That is the issue. It is really a question of trying to tackle that issue.’

  It was too little too late for Cowen. Despite the Irish Nationwide story sending business news desks into a tizzy, Cowen wasn’t questioned by Kenny on the matter. Ronald Quinlan was determined to as he approached the Taoiseach.

  Cowen reacted angrily to his line of questioning. To even ask whether an Irish bank could be in trouble seemed an affront. He said he was unaware of the story that was causing so much trouble for the society.

  As I said to you now, I don’t know anything about it, so there’s no point in pursuing it when I don’t know anything about it, and I’ve said that the company says there is no basis to it, so I really don’t think that it’s helpful for me to talk off the top of my head when I don’t know anything about it. That’s only fair, isn’t it?

  Pressed further, he added:

  Rumours and unfounded rumours are not good at all. They shouldn’t happen. So, I think it’s important for me not to speculate on the basis that what you say appears to be a rumour. I don’t want to add to it whatever because I don’t think it’d be very sensible.

  The Irish banking system is well capitalised. There has been no indication whatever that there is any difficulty there. The financial soundness of the banks is not in question. There is always dialogue there to make sure that we know exactly what the position is.

  I think the point has been made by the regulator and the Central Bank in their various reports, that the Irish banking system is well capitalised.

  The following day Lenihan also defended the society. He told ‘Saturday View’ on RTE radio that he believed Irish Nationwide was fine. He dismissed the claim by David McWilliams that the banks had pursued ‘explicit and delinquent policies’ by lending money to ‘people who couldn’t afford the houses they bought.’ Lenihan replied:

  I don’t accept this, and I think this is very dangerous. The Central Bank chairman gave evidence to a parliamentary committee this summer and clearly indicated that stress-testing had been done on all the Irish banks and there was no danger at all.

  Irish banks are not exposed to the sub-prime problem which US banks are exposed to. There is exposure in the Irish banks, but they made it clear they can accommodate it. The analysts of the different firms that look at bank shares and bank performances have said the Irish banks can weather this crisis.

  While Lenihan was on air, Quinlan wrote his story, kicking off with Cowen’s angry reaction. He submitted the article to his editor, Aengus Fanning, who was in phone contact with Fingleton, who assured his friend that he had been the victim of unprofessional conduct by Reuters. Fingleton was incandescent.

  Fanning burst out of his office after talking to Fingleton, convinced that th
e failure of Reuters was the real story and not Cowen’s angry reaction. The following day the Sunday Independent led with Fingleton’s reaction, complete with a smiling picture of him posing in a yellow jumper. Cowen’s telling response was relegated to half way down the article.

  ‘This was the most irresponsible piece of financial journalism that I have experienced in my 35 years at the Irish Nationwide,’ Fingleton told the Sunday Independent. He lashed out at the ‘perpetrators’ of the ‘totally malicious’ Reuters story, describing their actions as an ‘attempt to sabotage’ the building society.

  The story was irresponsible, false and untrue, and Reuters have accepted that. They have admitted to their subscribers around the world that ‘material elements are incorrect’ in the story and that it ‘contained false information.’

  In the present highly sensitive economic, financial and commercial climate, the putting out of such statements is tantamount to commercial sabotage by people who are trying to undermine Irish Nationwide Building Society.

  We emphasise that the Irish Nationwide was, is, and continues to be a strong, profitable financial institution with record levels of capital and liquidity, both of which are essential in the present climate. We are rock solid.

  The deputy leader of Fine Gael, Richard Bruton, had a more insightful response.

  Confidence is the core of banking, and that has to be protected. We have to make sure that the confidence that is expressed in our banking system by the Central Bank is firmly based.

  I think it would behove the minister to look hard at these stress-testing models to see if they are robust enough to pick up any difficulties in a timely way so that we can anticipate them.

  The Reuters story, while inaccurate, was not entirely untrue. At the highest levels of the state there were real fears about Irish Nationwide’s future if it continued to be downgraded by the rating agencies. The question of how to respond if it failed was being looked at. While Cowen, Lenihan and Fingleton reassured the nation, behind the scenes the Financial Regulator’s office was looking at its options. That weekend the heads of the country’s main banks were contacted about Irish Nationwide. The regulator feared a big run on Irish Nationwide’s deposits when it opened that Monday morning, which might spread to other banks, already under pressure. The remedies discussed included preparing a contingency plan for AIB and Bank of Ireland to pump in several billion in deposits to bolster the society. This was rejected by the two banks: they had no appetite for being dragged into Irish Nationwide’s morass. The talks ended inconclusively, with no contingency plan adopted.

  Events internationally, however, moved in the society’s favour. That same momentous weekend the US Treasury was forced to step in to rescue the Federal National Mortgage Association (FNMA, or ‘Fannie Mae’) and the Federal Home Loan Mortgage Corporation (FHLMC, or ‘Freddie Mac’).

  While all this was going on that Sunday morning, an article by David McWilliams in the Sunday Business Post raised the possibility of the state guaranteeing Ireland’s banks. Though McWilliams says the article was entirely his own idea, it was not inconsistent with views expressed by a number of banking and wealthy business insiders about how to get the country to rescue the bust banks. Whether there was an orchestrated campaign from bankers and business people remains unclear; what is certain is that a number of prominent business people, who were also supporters or clients of either Anglo Irish or Irish Nationwide, reached the same conclusion at the same time: the state would have to put its weight behind all Ireland’s banks. McWilliams’s article would act as a rallying-cry in the days ahead as Ireland’s banking system approached the brink of collapse.

  America’s show of strength in bailing out its two biggest sub-prime mortgage lenders ensured that, when Monday morning came, stock markets rallied. A big run on Irish Nationwide failed to materialise, and the society limped on.

  The Financial Regulator, however, was still very concerned about the society. Anglo Irish Bank was under even more pressure and was its great priority, as it had a balance sheet of €101 billion, as against Irish Nationwide’s €16 billion. Unknown to Fingleton, the Financial Regulator, Patrick Neary, rang David Drumm, chief executive of Anglo Irish, asking to meet him to discuss the building society. ‘What Neary said was, Would we look at Irish Nationwide,’ Seán FitzPatrick, chairman of Anglo Irish, said in interviews for a book about his life and Anglo Irish, The FitzPatrick Tapes, by Tom Lyons and Brian Carey, published in 2011.

  He said, We asked AIB and Bank of Ireland to do something but [they] wouldn’t. David said, Yeah, maybe, and he came back and he talked to me about it. I sort of said maybe what we should do here is, this could be a great chance for us here of actually getting the government to back us.

  So what we should say is, Lookit, we will do it. We will take over the loan management of the loans. We are in a much better position.

  And Michael Walsh wanted us to do it as well. Michael Walsh saw us as the obvious people to do it because we had a better knowledge of their loan book than anybody else and we wouldn’t be as scared of it and therefore wouldn’t write off as much and more importantly we would be able to handle it.

  On the other hand the negative about that was that you were going to actually get a concentration of loan borrowers—not all borrowers but for instance Seán Mulryan, a big one of ours, was a big one of his.

  Michael Walsh was quite keen. He spoke to David on a few occasions.

  Michael Fingleton wasn’t part of the discussions. There was tension between Michael and Michael Walsh. Michael controlled the whole thing and Michael Walsh was trying to [come up with a solution].

  This was done behind Fingleton’s back.

  As these talks went back and forth, the credit market continued its vice-like tightening. Drumm told FitzPatrick to meet Lenihan to discuss the possibility of Irish Nationwide merging with Anglo Irish. They met in Lenihan’s private office in Merrion Street. It was the first time the two men had met. Kevin Cardiff, the civil servant in charge of banking, was also in attendance.

  ‘Basically what they were talking about was Anglo,’ FitzPatrick said. ‘It was a lead on the whole issue of Irish Nationwide. I spoke to him about that but I didn’t really speak to him.’

  Lenihan was preoccupied and kept getting up to take phone calls. FitzPatrick thought he would have encouraged a merger, as it was Neary’s idea, but no dice. ‘He wasn’t really interested,’ FitzPatrick said.

  Lenihan seemed to know that bolting two wrecks together wouldn’t solve anything. He had more to think about than the views of Seán FitzPatrick. Irish banking was falling apart, and he knew that it was almost inevitable that Irish Nationwide would continue to be downgraded. He became anxious to get his own eyes and ears at the society’s boardroom table, someone he could trust to tell him what was going on.

  On 10 September the society announced that it had beefed up its flimsy board with the appointment of Seán Carey, a former assistant city manager of Dublin, as a non-executive director. Carey was hardly a banking heavy-hitter but he knew something about finance from his days with Dublin City Council, and was uncompromised, unlike others who had been on the board for too long. This happened the same day that Fitch, another rating agency, followed Moody’s and downgraded Irish Nationwide, moving it from A– to BBB+ or seven levels below its former AAA rating, the highest level. Fitch welcomed the appointment of Carey as a step towards strengthening the society’s corporate governance but also fretted about its huge exposure to commercial and residential property.

  Irish Nationwide knew better, of course, than either Fitch or Moody’s. Responding to its downgrading, it said it ‘fundamentally disagrees’ with both and that their views did ‘not reflect the underlying financial strength of the society. It is important to emphasise that the society is and continues to be a strong, profitable financial institution and that profit budgeting projections are on target for the first half of 2008.’

  The society said it had made a profit of €391 m
illion in 2007 and expected to have earnings in 2008 that would again be greater than the EBS, First Active, ACC and National Irish Bank combined.

  Fitch wasn’t as convinced of the society’s brilliance. It noted that it had billions to refinance over the coming fifteen months. ‘The increasing cost of funding, together with reduced revenue from lower volumes of business, has begun to impact profitability,’ it said, ‘although, currently, performance ratios remain strong.’

  Within days, Irish Nationwide’s views of its own prospects would be shown to be woefully out of touch with the emerging harsh reality for banks around the world.

  On 15 September the crisis reached a new apex: Lehman Brothers fell. It was the biggest bankruptcy in American history, as the investment bank had assets of $600 billion. Suddenly it was clear that nobody was too big to fail—not least a small building society on an island on the edge of Europe. Anglo Irish was in even worse straits as depositors withdrew billions from their accounts. While other banks were not that far behind, Anglo Irish knew it could topple in days. Its treasury department was besieged with phone calls as investors tried to get their money out.

  Anglo Irish now urgently needed to take over Irish Nationwide, but with some form of state support, which would show the market that not only was Anglo Irish able to do deals but that Ireland was in some way behind it. It wanted the state to give them a guarantee that it would pick up future losses related to the building society. It also knew that getting access to the society’s billions in deposits and residential mortgages (which could be used to obtain liquidity from the European Central Bank) would put it in a position to survive longer. As FitzPatrick explained,