Our determination to deal with this imbalance in our public finances through firm and decisive action has engendered real confidence in our economy on the international stage. The world out there believes in us and in our ability to work our way through our difficulties and return to growth.
Jean-Claude Trichet said, ‘In the case of Ireland, very, very tough decisions have been taken by the government, and rightly so.’ More recently Mr Trichet’s colleague José Manuel González-Páramo on the ECB said, ‘The Irish measures are very courageous. They are going in the right direction.’ The French Finance Minister, Christine Lagarde, said, ‘Ireland has set the high standard the rest of us must follow.’ On a recent visit to Ireland the German Minister for European Affairs, Dr Werner Hoyer, said, ‘I think there is a deeply rooted trust and confidence in this country’s ability to sort out its problems … There is a fundamental belief that the Irish are going to solve it.’
It was a bravura performance. While accepting the praise of European leaders, Lenihan made no reference to their culpability for Ireland’s economic woes. It was the French and German banks that had lent so recklessly to Ireland’s rogue institutions, such as Irish Nationwide. But they were taking no pain for their mistakes as a small country on the edge of Europe suddenly became saddled with the debts of a few hundred crazed developers. Instead Lenihan praised the Europeans, before dropping a series of domestic bombshells.
The state, he said, would have to put another €8.3 billion into Anglo Irish Bank immediately and a possible €10 billion more in the future. AIB needed to find €7.4 billion, but some of this money might be raised by selling off its good businesses in Poland and North America. The state, he said, would have to take majority control of AIB from its existing position of 25 per cent. Bank of Ireland would need €2.66 billion, but he hoped the bank would be able to raise some of this money privately. The state, he said, would remain a minority shareholder in the bank.
Then came Irish Nationwide’s turn.
Irish Nationwide, Lenihan said, was about to transfer €670 million of assets to NAMA, at an average discount of 58 per cent. This was the worst haircut in Irish banking by a considerable degree, reflecting decades of unchecked mismanagement and bad decision-making. Anglo Irish, by comparison, came in at 50 per cent, while Bank of Ireland stood at 35 per cent.
Taking account of this and his broader assessment of the building society, the regulator has determined that INBS will need an injection of €2.6 billion to remain compliant with its current regulatory capital requirements. This is a very large bill for the taxpayer, but, as in the case of Anglo, it is the least costly solution. It is important to highlight that this level of capital support is required to maintain the institution’s financial position in light of the large losses incurred on its loan portfolio. Without this capital injection the taxpayer would have to shoulder the significant and immediate costs in meeting the deposits, bond-holders, and the liabilities due to the ECB.
The detailed information that had emerged from the banks in the course of the NAMA process, the minister said, was ‘truly shocking. At every hand’s turn our worst fears have been surpassed. Some institutions were worse than others. But the fact is that our banking system, to a greater or lesser extent, engaged in reckless property development lending. In too many cases there were also shoddy banking practices. The banks played fast and loose with the economic interests of this country.’
NAMA, in a briefing later that day, said it planned to take over €81 billion of toxic assets, made up of between 14,000 and 15,000 individual loans. The first tranche of these loans would relate to the country’s biggest developers, who had loans of €16 billion. NAMA would buy these loans for €8½ billion, or a discount of 47 per cent.
The public were shocked. AIB announced in the middle of everything that it planned to increase its interest rates by 0.5 per cent, in a clear signal that it badly needed to get more cash in to stay afloat. For customers already under pressure this added €65 to the monthly payments on an average mortgage of €250,000.
In an editorial the following day the Irish Independent concluded: ‘If there is one thing you can bank on, it is that 2010 will go down as the year of the great bank robbery.’
Fine Gael’s spokesperson on finance, Richard Bruton, said:
With the stroke of a pen today Brian Lenihan will double our national debt. That’s quite an achievement. You see, they are going to pump over €70 billion into NAMA and our existing banks, including the zombie bank, Anglo Irish. This money is effectively going to pay off the bad debts run up by these banks and their speculator friends. We have crossed the Rubicon. There can be no turning back from this decision.
The state was now going to own Irish Nationwide outright by putting €100 million into it in ‘special investment shares.’ In such circumstances, Lenihan said, ‘the institution does not have a future as an independent stand-alone entity. The government’s priority will be to secure a swift sale of INBS or its integration with another entity.’
During a lengthy briefing for journalists, Lenihan said he planned to shake up the society’s board, and once this was done the issue of Fingleton’s €1 million bonus ‘would be raised.’
Joan Burton wasn’t convinced. ‘How did their managing director walk away with a retirement bonus of €1 million, which, when the heat was on, there were promises it would be given back, but it has never been returned? That is what ordinary people cannot understand. Can someone please stand up and explain how this can be?’
In a short statement that night Gerry McGinn warned the public that worse was to come when the society revealed its annual results in May.
We are grateful to the Government for its financial commitment to the Society. The Society will post significant losses for 2009 due to the high level of provisions required on our commercial loan book. This injection of capital will cover both the losses for 2009 and the uncertainty we will have over the extent of discount emanating from the transfer of impaired assets to NAMA.
The following day the Star published an inflammatory front-page article featuring photographs of Seán FitzPatrick and Michael Fingleton with the comment that they had cost the taxpayer €25 billion. The next day, 31 March, Anglo Irish Bank posted a loss of €12.7 billion, the biggest in Irish corporate history, for the fifteen months to the end of December 2009. The bank wrote off an incredible €15.1 billion on bad loans—with €10.1 billion of this relating to loans going into NAMA. In total, the bank had now sucked up €12.3 billion in taxpayers’ money.
On 1 April the state paid €100 million to take over the toxic mess that was Irish Nationwide Building Society. The same day Stan Purcell, a director of Irish Nationwide since 1994, resigned. A society insider said: ‘He was one of the very people who knew the place inside and out. He helped to the extent that he had to. He knew where the baggage was buried but he did not volunteer anything for us to look at for attention.’ Purcell had attended board meetings after Fingleton’s departure, but he didn’t say much. Every day he had gone into his office on the fifth floor and worked away at what he was asked to.
As the society’s new management, aided by Ernst and Young, dug deeper into its lending files, Purcell was regularly confronted by McGinn and McGloughlin, who were demanding explanations. ‘They confronted him about it from the summer of 2009 on,’ a society source said. ‘He’d take it all in and not say very much. Eventually Danny Kitchen told him: This is simply unsustainable, you have got to go.’
Purcell was paid €385,000 in his final year, at a time when the average salary in the society was €33,000. After twenty-four years at Fingleton’s side, he left quietly, a wealthy man with a multi-million pension fund earned while the society operated like a rogue hedge-fund, piling risk upon risk, which now had to be paid by the taxpayer.
That night Lenihan insisted that Ireland wouldn’t buckle under the cost of bailing out its bust banks. He told the Irish Times:
We are in danger of viewing
Ireland as having a problem we cannot surmount, but that is not the case. Those advocating default would put us in the position of Iceland or Argentina, and that would leave us with insurmountable problems. People are perfectly entitled to be angry at the reckless lending of the bankers. I understand that; but Ireland is not Argentina, and we can’t go around repudiating our debts.
In Lenihan’s mind, Ireland could still come through this, even though the evidence was mounting that his policies, under the direction of the European Union, would bankrupt the country. In all, it was a horrific week.
That weekend, in an editorial on 4 April, the Sunday Independent concluded: ‘The taxpayer has been taken for a mug for long enough. It’s high time that the Government spread some of the Anglo and Irish Nationwide pain to the bondholders. Unlike many of the depositors, these were savvy professional investors. Big boys’ games, big boys’ rules.’
In the same edition Lenihan tried to put a brighter gloss on the disastrous decision to bail out the banks and their bond-holders. ‘One of the good things about the steep discount, averaging 47 per cent, is that the residential property market will now be stabilised at a realistic level. You can now buy in confidence that the price is realistic.’ Yet again he was both hopelessly optimistic and plain wrong.
——
Ernst and Young continued to trawl through Irish Nationwide’s lending sewer. They were finding incredible things hidden away in its files. While their findings remained secret, the business editor of the Irish Times, John McManus, wrote an insightful opinion column on 19 April, the morning the society was to reveal record losses.
The truly baffling thing about what happened at Irish Nationwide was that it pretty much happened in plain sight.
Fingleton blatantly paid little more than lip service to the rules governing mutual societies and nobody shouted stop.
Instead of being held to account, he was lauded as some sort of mischievous, but brilliant, rogue basking in that most dangerous of Irish sentiments, sneaking regard.
In truth he was someone who was allowed hijack a friendly society through adroit use of its rules and, in particular, the omnipotence of a board that does not answer to institutional shareholders but instead to a disparate collection of members (or in truth customers) who were made feel profoundly grateful to have got a mortgage.
That day Irish Nationwide announced that its losses for 2009 had gone up tenfold, to €2.49 billion. McGinn told a news conference on the first floor of the building society: ‘When you arrive at the scene of a car crash, you try to keep the patient alive and deal with the issues. What has happened here is an outrage. Let’s not beat about the bush about that. I was very surprised and taken aback by how I found things here. There’s little point in trying to disguise it.’
He said the reason NAMA had given the society such a big haircut was its high-risk lending, poor paperwork and security, and use of profit shares, which meant the society sometimes acted more in the client’s interests than its own. ‘There were gaps of some pretty basic information in the paper trail. Up until 2007 the rate of increase and values in the property market—fuelled by the banks themselves—meant there was always an “out”, and they booked a profit. Everyone seemed to be content with that, until the music stops.’
He found it particularly shocking, he said, that the society’s board had received reports about its failings that had been forwarded in turn to the Financial Regulator, and yet nothing had been done.
Merger with the EBS was on hold while the society submitted plans for its future restructuring to the European Union by the end of June. ‘We have conducted a detailed analysis of the assets of the society and have created a fundamental change in the way the Irish Nationwide Building Society is managed, ensuring that robust corporate governance is in place and is effective.’
Danny Kitchen added:
The losses reflect unprecedented levels of impairment on our loan book, which gave rise to losses on a massive scale in the context of the society. The collapse of property markets both in Ireland and abroad gave rise to the impairments, but this was exacerbated by the nature of the operation of the business, which was clearly a flawed model. The scale of the losses reflects the failure of the society’s commercial lending strategy, which was over-reliant on asset value.
Afterwards McGinn did some television interviews before sitting down in a corner with Tom Lyons. He said the society had completed a review of its so-called ‘celebrity loans,’ to politicians, sports stars, socialites and well-known business people. He admitted that it had given favourable loans to many of these people, but he insisted there was ‘nothing untoward’ in this, as ‘the board gave Michael Fingleton extraordinary powers.’
He was able to make decisions on all sorts of matters without referral. Invariably the loans were within the powers granted to him by the board. These loans had a variety of characteristics: they could be interest-only, or with capital repayment holidays. The celebrity category was various well-known people. Even if it was interest-only for a period, the loans would still have to be paid back in full.
McGinn declined to comment on individual politician borrowers but said: ‘I have not come across a loan made to a public representative where there were special favours done [beyond Fingleton’s remit]. There was nothing untoward in loans being given on slightly generous terms.’
Later that day it emerged that Michael Fingleton junior had resigned. A society source said: ‘It’s not easy to sack people these days. Michael Fingleton junior was not very bright—he was very average. Yet he was one of two guys managing €5 billion. There was a lot of friction with him. Eventually he agreed to go. We all agreed it was better that way.’
——
The clear-out of most of the people who had destroyed the society and saddled the taxpayer with an ever-growing bill was now complete.
In the Dáil the following day, during leaders’ questions, Éamon Gilmore demanded to know whether Brian Cowen had ever been made aware during his time as Minister for Finance of the bad lending practices in Irish Nationwide. ‘I don’t think it was ever brought to my attention that that sort of practice existed,’ Cowen insisted. ‘Certainly not. The idea that such losses were imminent or people were suggesting that that was going to take place when I was Minister for Finance during that time was not the case.’
This was an extraordinary admission of how far out of the loop he was as Minister for Finance, given the constant discussions between the Financial Regulator and the society during those years.
That night Brian Lenihan brought in draft legislation to merge the Financial Regulator’s office with the Central Bank. This was to prevent the buck-passing of the boom happening again, when each had left it up to the other to monitor the banks. During the debate Richard Bruton brought up Irish Nationwide.
It reminds us of everything that was rotten, the way institutions were run as personal fiefdoms, and even still those who ran them have not in any way suffered any consequence for what has happened. And the consequences for taxpayers, for mortgage-holders, for people looking for jobs are extraordinary. Ordinary people have been brought to their knees, and they want accountability.
In the letters page of the Irish Times, Shane Hogan, who had campaigned for years with Brendan Burgess against Fingleton, addressed John McManus’s opinion column of a few days earlier. He recalled the society’s 2003 AGM, where the rebels had tried to have Fingleton sacked.
Over 80 per cent of members voted confidence in Mr Fingleton. Most members were mesmerised by claims such as ‘strong leadership of our managing director,’ ‘our business model has clearly proven itself’ and ‘we will continue to build on our success for the benefit of all our members and staff’ (direct quotations from the Directors Report for 2002).
Most members failed to see beyond the dollar signs flashing in front of their eyes to recognise the fundamental flaws in the leadership provided by Mr Fingleton and Mr Walsh.
I shouted stop, but few me
mbers listened. Now the taxpayer is left to pay the bill.
Hogan was right. The society’s members had allowed Fingleton’s absolute rule.
That summer, Ernst and Young completed their analysis of Irish Nationwide’s lending. Their findings were a devastating indictment of the society.
Chapter 12
THE FORENSIC ACCOUNTANTS MOVE IN: THE ERNST AND YOUNG REPORT
‘Corporate governance’ is a broad term that reflects the way an organisation conducts its business in relation to probity, honesty, checks and balances, transparency, accountability and legality. It can also be used as a formula for going on what might be called a ‘fishing expedition’, with broad terms of reference.
Fingleton was gone. Irish Nationwide was essentially collapsing, and the state had taken it over. Gerry McGinn’s job was to manage the meltdown, tidy up the balance sheet as best he could and manage the society in line with government policy.
The rationale for the Ernst and Young investigation was obvious. The society had lost hundreds of millions and would go on to lose a total of more than €5.4 billion. This was on foot of loans sanctioned by Michael Fingleton.
Basic questions had to be answered. How did this happen? Was the board weak? Were there adequate structures for ensuring that Fingleton did not have undue influence and control? Where did all the money go?
Fingers Page 31
