The top seven customers alone owed the society €2.1 billion, or 22 per cent of its commercial loan book, Price-Waterhouse Coopers said. These seven—Seán Mulryan, Michael O’Flynn, Gary and Alan Landesberg, David and Eliot Rosenberg, Stephen Conway’s Galliard Homes, David Conway, and David Burke’s Roadnumber—owed the society more than €250 million each. With the exceptions of Mulryan and O’Flynn, none of these big exposures had any profile in Ireland.
Looking slightly deeper, Price-Waterhouse Coopers found that the society’s top twenty-five customers owed it €5.1 billion on 30 September 2008, or 54 per cent of its commercial loan book. These twenty-five people would later cost the state more than €2 billion of the total €5.4 billion spent to prop up Irish Nationwide.
The accountants said that a number of Irish Nationwide’s large customers were running out of cash and were either sacking staff or selling non-core assets to keep themselves going. They didn’t spell out the fact that sacking a few employees and selling a few shares or other liquid assets was hardly going to make a dent in their borrowings.
Niall Mellon, the house-builder and philanthropist, Larry O’Mahony, who jointly built with the former IRA man Tom McFeely, and Alastair Jackson, the Northern developer, were all under pressure, the report said. (Oddly, even though McFeely was the driving force in the O’Mahony-McFeely partnership, his name is left out of the Price-Waterhouse Coopers report.) ‘In the event that these customers default, the quality of the society’s security and the value it will realise will dictate the level of impairment, if any, the society will incur,’ they said, rather obviously. Loan-to-values were already reaching dangerous levels for all three, with Mellon at 89 per cent, Jackson at 85 per cent and O’Mahony at 82 per cent. In other words, the society had very little wriggle room for recovering its money if any of the three toppled. They were borrowed up to their necks.
Incredibly, despite it being clear that the property market had begun to crash, Price-Waterhouse Coopers said Irish Nationwide rated only 6.6 per cent of its €9.5 billion commercial loan book as grade 5, ‘unacceptable risk,’ or 6, standing for ‘provision required.’
Despite huge sums ploughed into development land that was yielding no income, and huge bills for interest roll-up, the society (unchallenged by Price-Waterhouse Coopers) was insisting that 93 per cent of its loan book was in good shape. ‘There are a number of high risk customers,’ the accountants reported. ‘The society deems Alastair Jackson, Seán Dunne, Larry O’Mahony, Hugh O’Regan, Niall Mellon, Northern Way Properties and Devondale to be the most likely to raise potential concerns should the current market environment persist over the next 18–24 months.’
All these clients were on the society’s ‘watch list,’ those who might default or go bust. However, they were not written off—despite being heavily underwater and with little prospect of recovery. Price-Waterhouse Coopers noted that the society was giving some of them ‘equity release facilities’: in other words, it was lending more to them even as they fell off the cliff. The society’s business model ‘has been successful over the past number of years, however changing economic circumstances highlight a number of underlying risks.’ The society, they said, had very late in the day slowed its lending in late 2007, when it decided to concentrate on new lending to its old developer clients rather than chasing new ones.
It was only in August and September 2007, as the property bubble reached its limit, that Irish Nationwide finally stopped allowing its developers to buy sites without planning permission. By then, of course, the damage had long been done.
Irish Nationwide’s business model was to ‘lend against property assets with collateral.’ However, Price-Waterhouse Coopers noted that ‘in some instances’ the society asked only for ‘limited equity’ from borrowers when they were guiding sites through the initial stages of getting planning permission for development land, and after this it might finance construction too.
They did not spell out the fact that ‘some instances’ did not mean rarely or on occasion but commonly. Irish Nationwide was habitually giving 100 per cent loans to developers to finance the most risky type of project in the event of a property crash: fields and sites that produced no income and that nobody would want in a downturn, let alone a global crash. They also said the society’s model was that ‘loans are normally given for periods of two to three years, which allows INBS to renegotiate more favourable terms as the project collapses.’
Even worse, huge sums were being lent to the society’s biggest clients on an interest roll-up basis—where the society, rather than the developers, was paying the interest cost of loans until the projects were completed. At the end of 2007 the society had rolled up interest of €514 million, with €309 million of this owed by its top twenty-five clients.
The accountants did not spell out what this type of lending meant in the event of an extended downturn: the devastation of Irish Nationwide’s balance sheet. Instead they spent ages poring over Fingleton’s fantasy numbers, which assumed that the property market would pick up again.
Fingleton told Price-Waterhouse Coopers that he believed the society’s various joint ventures with developers would make €903 million in profit for the society in the best case, or €616 million if things worsened. ‘Market conditions will determine the ultimate outcome,’ the accountants concluded.
In total, Irish Nationwide expected to make a ‘core business profit of €248.5m before loan provisions in 2008.’ The society said it expected to make the same amount in the future, even though it accepted that it would take some losses on its loans. In 2008 it predicted that loan impairments would cost it a mere €142 million. Fingleton’s delusions were being presented in all seriousness to the government.
The truth, however—that the building society was a toxic time-bomb—was there in the report. Price-Waterhouse Coopers noted that the society’s jumbo borrowers also had ‘significant exposures’ to other domestic and overseas banks. At this stage of the crisis Irish Nationwide and the government simply had no idea how developers had stacked one loan on top of another until the top ten developers in the country each owed between €1 and €3 billion personally, through their companies and in joint ventures with others. They said there was a ‘risk’ that if other banks called in their loans Irish Nationwide’s customers wouldn’t have the money to repay the society, and that those banks that could be relied on in the past to sell on overvalued property among each other might simply refuse to do so.
Not to worry, however, Irish Nationwide assured the accountants: ‘INBS has identified these exposures and is satisfied with its overall security package.’ When the society’s loans entered NAMA two years later these claims would be shown to be very far off the mark and bordering on the fantastical, as Irish Nationwide’s sloppiness and recklessness saw it top the league of rubbish lending. This was quite an achievement, given the fierce competition.
A cliff could be seen looming for the society’s developers if the market did not unlock itself. ‘Given the current economic environment,’ the accountants said in their understated style, ‘borrowers may find it difficult to refinance these loans.’ This was ‘exacerbated’, they said, by how many of the society’s sites needed more money pumped into them to ensure that something was built that might eventually be capable of generating income, or of being sold.
In total the society said it needed to lend €502 million more in the next twelve months just to dig out its existing clients. Once it had done this it would slam on the brakes and reduce commercial lending to €10 million a month.
To finance itself, the society had a number of short-term obstacles to surmount. These included raising €500 million by securitising its mortgage book by February 2009 and raising €1 billion by securitising its commercial book. On top of this it needed to tap the European markets for £500 million that December and in 2009 to roll another £689 million of European money that was due to be repaid in May 2009. It was a colossal amount to raise just to keep goin
g; but there was optimism at the top.
In a speech on 23 October, Brian Lenihan said the guarantee was ‘a necessary first step’ and the cheapest bail-out in the world so far compared with other countries, where ‘billions and billions of taxpayers’ money are being poured into financial institutions.’ Ireland was being run by geniuses, was the message. He said that after the guarantee the government would ‘move on and examine other questions which may have to be addressed to ensure that the banks are put on a sound footing.’
In the weeks after the guarantee, Lenihan briefly looked right. The Financial Regulator, Patrick Neary, told politicians in confidential meetings on 11 November 2008 that €65 billion had flowed into Irish banks in the six weeks following the guarantee. The most any bank would lose, he assured them, was €3 billion. Everything was coming back great from Price-Waterhouse Coopers. ‘All institutions appear at this stage to be resilient under this “aggressive” stress test,’ Neary said. There were ‘no plans for recapitalisation’ of any Irish bank, although this could change if the economy worsened.
Michael Walsh was not convinced that Irish Nationwide would pull through. In the final weeks of October he engaged in secret talks with the chief executive of Irish Life and Permanent, Denis Casey, about a possible tie-up. While it had a profitable life business, Irish Life was greatly exposed to the international money markets through its Permanent TSB mortgage business. It was interested in getting access to Irish Nationwide’s large deposit book and residential mortgage book, which could be used to get money from the European Central Bank.
The minutes of a meeting on 30 October show that Casey met the top brass at the Central Bank and the Financial Regulator to discuss taking over Irish Nationwide, or merging with the French bank BNP Paribas. Casey circulated his notes of this meeting to the board of Irish Life and Permanent. ‘I said we were working with MW [Michael Walsh] and things were progressing in a workmanlike way,’ he recorded.
Not everybody was as realistic about the society’s lack of a future as Walsh. Fingleton still had the attitude of hope-for-the-best, and he tapped into his contacts within the government and politics to assure them that the society’s future was sound. He cleverly positioned himself as the only person capable of pulling the society through these difficult times, even though his own chairman was by now convinced that Irish Nationwide was finished.
For Fingleton, only he and his close-knit band of cronies knew how to pull the levers in the society’s lending files to keep it going. In his own head—and for the moment in some parts of the state—he was still in charge, and he continued to spend the society’s money lavishly.
At Christmas 2008 Irish Nationwide spent €11,000 on gifts from 4giftsdirect.com, including ten Supreme Christmas Feast Hampers at €840 each, which it sent to its developer clients. It also donated €25,000 to All Hallows’ College, Dublin, where Fingleton had trained as a priest, to sponsor a gala Christmas concert in the Vicar Street theatre featuring the singer Rebecca Storm and the Derry musician and composer Phil Coulter. It was incredible that even after the bank guarantee the society kept spending in this way.
A later analysis of Irish Nationwide’s spending on presents to developers and others would show that at Christmas 2005 it spent €14,700 on twenty-four bottles of wine (or €612.50 per bottle) from the Dublin branch of Berry Brothers and Rudd. The same year it spent €25,000 in Terry’s, a high-end wine retailer, to cover the cost of seventy-two bottles of Cristal champagne and other drinks. The society also gave a cheque for €5,000 to the Fianna Fáil senator Des Hanafin (whose daughter Mary was a government minister) to support a national anti-drug campaign. Hanafin was a social buddy of Fingleton, and the two were often seen chatting in the Shelbourne Hotel.
Fingleton used such gifts to charity—paid for with the building society’s funds—to develop a reputation for generosity. In 2006 the society spent €5,000 on a table at a charity auction for the Jack and Jill Children’s Foundation, set up to help seriously ill children and their families. Over dinner Fingleton gleefully bid €6,000 for a Gucci watch, which he then magnanimously returned to be auctioned again. Afterwards the bill for the watch was paid by Irish Nationwide.
At Christmas 2006 nine Supreme Christmas Feast Hampers were bought for €840 each, €8,300 altogether, also using the on-line retailer 4giftsdirect.com. A further €20,000 was spent with Watercourse Gift Deliveries on the most exclusive bottles of Irish whiskey in the world: six bottles of Midleton 20th Anniversary and six bottles of Midleton 1973, at more than €1,400 a bottle.
Christmas 2007 saw the society spend €12,000 with 4giftsdirect.com for eleven hampers priced €840 each as well as €5,500 on forty-eight bottles of wine (or €114.58 each) from Berry Brothers and Rudd.
It was all very different from the harsh treatment doled out by Fingleton to his smaller borrowers when they fell into arrears. Sure didn’t the developers deserve to be indulged …
Chapter 9
FINGERS WAVES GOODBYE
The year 2009 would prove to be an extraordinary one in the implosion of Irish Nationwide Building Society. After benefiting from Brian Lenihan’s bank guarantee in September 2008, the society simply accelerated towards the cliff.
It became obvious within a relatively short time after the guarantee that the banks had much deeper problems than simply getting liquidity or access to cash because of a perceived lack of confidence in the banking industry. It was becoming apparent that banks, including Irish Nationwide, had huge losses pending on their commercial property loan books.
International banks hadn’t just stopped lending money to Irish banks because of rumours or unfair perceptions: it was because they were right and the reality behind the banks’ balance sheets was even worse than the perception. Irish banks in general, but Anglo Irish Bank and Irish Nationwide in particular, had lent too much money to property developers. The façade that the banks simply had a liquidity problem crumbled very quickly; so too did any lingering naïveté about the behaviour of those running them.
Even hours after the bank guarantee was announced there were those who said that, whatever about the main retail banks (such as AIB and Bank of Ireland), Anglo Irish and Irish Nationwide should not have been saved. The premise of the guarantee was that it would save the banks without actually costing anything. If they merely had a liquidity problem, the guarantee would never be called upon. But if the government got it wrong and property developers could not repay their loans, the result would be a multi-billion calamity.
By December 2008 the sceptics who questioned whether a neat little arrangement had been reached with Lenihan and Cowen for Anglo Irish and Irish Nationwide began to feel vindicated.
Behind the scenes, Fingleton took the curious decision to write to the Irish Rugby Football Union. Back in July 2005 Irish Nationwide had bought six ten-year tickets for the West Stand in Lansdowne Road at €6,600 each per year. This allowed Fingleton to entertain both his inner circle of cronies in the society and his developer pals. On 2 December 2008 he quietly asked the IRFU to send the tickets from then on to his home address in Shankill, and not to the society. This would allow him to continue to enjoy their use in the future, come what may. Perhaps he sensed that a storm was brewing.
On 18 December, fifteen days after announcing its full-year results, and a provision of a paltry €500 million for bad debts, it emerged that the chairman of Anglo Irish Bank, Seán FitzPatrick, had moved his own personal borrowings out of Anglo Irish, just before the end-of-year accounts, by refinancing his loans with Irish Nationwide. It emerged that the amount involved was an enormous €87 million, and that FitzPatrick had done this every year since 2000. At its peak his loans from Anglo Irish had reached €129 million.
It was inconceivable that Irish Nationwide would refinance or temporarily ‘warehouse’ FitzPatrick’s loans without Fingleton sanctioning it. The public outcry was enormous, and Fingleton would inevitably face scrutiny. The idea that the most influential figure at Anglo Irish
Bank had warehoused his personal borrowings with Irish Nationwide for seven years, without the investment community being told, dealt a severe blow to the sinking credibility of Irish banking. Investigations began into the Anglo Irish situation that would have included any role Irish Nationwide had in warehousing loans. But there was no clear evidence that Irish Nationwide or Fingleton had broken any rules by facilitating this eight-year process.
FitzPatrick said in The FitzPatrick Tapes that he never discussed this transfer with Fingleton. He acknowledged, however, that it was impossible that Fingleton did not know about his loans. Documents relating to the transfer are signed by more junior officials in the society and not by Fingleton.
FitzPatrick resigned after his loans emerged, and the day afterwards his chief executive, David Drumm, followed him.
On 15 January 2009 Anglo Irish Bank was nationalised. At first the reasons put forward were failings of corporate governance. The reality, however, was that the bank would have collapsed if the government had not intervened.
It was chaos. A guessing-game began about which of the banks would be next as share prices continued to tank. A stunned public was infuriated as scandal after scandal emerged from the Anglo Irish woodwork.
On 4 February the Taoiseach, Brian Cowen, announced in the Dáil that he planned to take a tougher stance on bankers’ pay. The taxpayer was being asked to pump €8 billion into the country’s two biggest banks, AIB and Bank of Ireland, and Cowen, not surprisingly, wanted cuts in return.
If there were to be recapitalisation, I would expect the directors’ fees to be cut by 25 per cent, and I would expect that when they appoint their top executives, there would be an upper limit on remuneration. I would expect that whatever it is at the moment would be cut by at least another 25 per cent as well.
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