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  In 2006 the office of the Financial Regulator conducted another inspection. Once again it expressed its concerns but did little else. Commercial lending had by then rocketed to €8 billion.

  The KPMG report reveals that by 2007 the society had breached rules on concentration of risk in too few clients and too few sectors for three years in a row. It had made fundamental mistakes in its reports to the Central Bank. It had been shown to have poor record-keeping and files on lenders.

  The report also sums up findings made by the society’s own internal audit committee. It had found that in 2006 there was no formal credit risk policy governing special arrangement fees that the society organised with developers as a way of splitting future profits from various ventures. These fees were not recorded on the society’s loan administration system but were recorded and identified in accordance with entries made directly to the general ledger. This meant essentially that they were handwritten in a book.

  Incredibly, the internal audit report also said: ‘In 2006 it was identified that commercial files were situated in both the commercial administration and lending departments and the location of some commercial files were unknown.’

  ‘Light-touch’ regulation clearly failed throughout the banking system; but at Irish Nationwide there were multiple examples of things being done badly, or not being done at all. There were examples of failings in corporate governance and of breaches of Central Bank rules and guidelines. Yet they were not forcefully acted upon.

  Ironically, the regulators had more power to remove a director of a building society than it had over executives in banks. Under the Building Societies Act (1989) the Financial Regulator had the power to remove a director for not being a fit and proper person if it considered that action to be appropriate. There was no similar explicit power in relation to other banks. This set things up for the regulator to insist that everything it felt needed to be done was done. If it wasn’t, it could have moved towards deeming any director to be unfit.

  A former board member of the Central Bank, however, says he could never recall any major push to tackle Fingleton during his years attending its meetings.

  The Central Bank’s view was the opposite of gung ho. We knew there were problems in Irish Nationwide but the Central Bank always felt we didn’t have the powers to take him on. I don’t believe this was true. We did have enough power to make life very difficult for Michael Fingleton … The attitude was very much … sure this will go away when the society is sold, and good riddance! It was going to be sold and that was that.

  Part of the background of Ireland’s regulatory failure was certainly the fact that Irish Nationwide was going to be sold. Rather than take the proper steps to force change, the regulator—like the thousands of carpetbaggers who opened up accounts—was depending on Brian Cowen to change the legislation so that it could be sold off. This would make everything go away. It would be an easier solution than getting into the difficult work of actually regulating.

  Brian Cowen, as Minister for Finance, was under pressure to change the law and allow the society to be sold off. Once Fingleton got the nod that this was happening he launched a new savings product to grab more badly needed deposits. The ‘Advantage 30’ scheme gave a good savings rate but also entitled the saver to a share of the cash pay-out from the sale of the society. Carpetbaggers flocked to it in their thousands.

  By law, Irish Nationwide had to have a minimum of 30 per cent of its funds coming from members’ savings accounts. The confidential report discloses that Advantage 30 took in more than €1.2 billion between May and December 2006. This was a quarter of all members’ savings accounts.

  Fingleton knew he needed these deposits. He was lending out so much money to property developers that he was almost in breach of the Building Societies Act on the 30 per cent rule. Even when he took in €1.2 billion on his new product, by the end of 2006 the crucial ratio was down to a wafer-thin 30.3 per cent. However, he had already approved and committed himself to a further €1.1 billion in loans that had not yet been drawn down. If Cowen had not changed the legislation, the society was heading for a clear breach of the law. It was on a collision course.

  There were only two ways of dealing with this crisis: get the Central Bank to reduce the limit to 25 per cent, or make sure the society was sold off. By early 2007 Irish Nationwide had asked the Financial Regulator to cut the 30 per cent rule to 25 per cent, but it had not happened.

  It was becoming more and more obvious to the government and the regulator that this thing had to be sold, and soon.

  Courting the property developers and throwing ever larger amounts of money at them was paying dividends for Irish Nationwide and Fingleton’s wallet as his bonuses went higher and higher. The problem with excessive lending for British projects was that there weren’t that many customers. The society had built up a core group of large clients with a big appetite for borrowing. Thanks to Fingleton it was largely a one-way bet.

  All British borrowers and all loans for developments in continental Europe were handled by the Belfast office. A mysterious low-key place, this oversaw €6 billion of British and European lending but only did one small property loan in Northern Ireland. The office was run by Gary McCollum, who had previously worked with a small building society before joining Irish Nationwide. Together with Michael Fingleton’s son, Michael junior, and a small staff of five they doled out the cash, rarely with personal guarantees, through joint ventures and on a non-recourse basis, so that if things didn’t work out, the client could just walk away from the project.

  In 2004 Irish Nationwide had €1.9 billion of commercial loans in Britain; within two years this had exploded to €4.8 billion. It was almost double the amount of commercial property loans it had given out in Ireland.

  The KPMG report discloses that when it came to lending to property developers the society’s rules were incredibly loose. It found that up-to-date valuations were not sought as each property development continued over the life of the loan. About 30 per cent of the commercial loans, or €2.4 billion, had a loan-to-value ratio of more than 100 per cent. Once the property market turned sour this meant there was no financial cushion to soften the blow.

  When it came to handing out loans of tens and hundreds of millions for property speculation to a handful of clients, Irish Nationwide had its own unique approach. The KPMG report boasts that the society based the success of its commercial lending on its business relationships, its ability to make decisions quickly and its low salaries for employees. ‘Management believe that they operate in a niche market and the key differentiator is their ability to provide quick and efficient lending decisions while maintaining high security and low risk.’

  The average salary for mortgage administrators was €25,000 per year, at a time when the average industrial wage was about €34,000. The report makes it clear that Fingleton knew he was paying below-average wages, but it emphasises that in the management’s opinion the senior staff were paid appropriately.

  The report reveals the society’s formal loan approval process for commercial customers. It clearly states that loans must go to the credit committee, and in the absence of a formal credit committee meeting, where a loan was greater than €1 million it must be approved by Michael Fingleton and two members of the committee. Yet elsewhere in the report it talks about commercial loans being approved by Michael Fingleton or the credit committee (or both). The extraordinary powers and influence of Fingleton come across strongly.

  KPMG found that when it came to property developers the special arrangement fees charged by the society on foot of profits made by clients’ projects were not recorded on the society’s loan administration computer system; instead they were just recorded by hand in a general ledger. It also found that the terms and conditions of loan facilities on developer loans were often changed later. As far back as 2004 it had emerged that for some of these amendments to the original loan no new signed facility letter had been issued or approved within the normal
procedures, and approvals had not been updated. So nobody, other than a couple of senior executives, knew what the new terms of some developer loans were, or why they had been changed.

  KPMG concluded that the compliance structure was adequate, given the size of the institution, but that it could be improved. It also recommended that the Belfast office be included in any new supervisory arrangement.

  KPMG found that Irish Nationwide expected to rake in about €750 million over the following five years from developer fees. But perhaps the most shocking revelation of all is how it treated its high-flying developer clients when it came to finding out how much profit the property ventures had actually made.

  Irish Nationwide would agree arrangement fees when the loan was given. These were based on how much profit the borrower estimated the venture would make. According to the report, the society

  depends primarily on the borrower for information in respect of the development project. A percentage of profit and an estimated profit figure are set out prior to the loan being advanced in respect of supplemental arrangement fees. The group places trust in the customer in respect of the information being provided. Once the profit handed to the society in respect of such fees is similar to the original amount stated at the outset, management do not dispute actual profit generated on the development. This is to ensure that the group does not breach its relationship of trust with the customer and increase the likelihood of repeat business going forward.

  This extraordinary and highly irregular arrangement defies belief. The picture that emerges of how the society lent to developers where extra fees based on profits were paid is truly shocking. Irish Nationwide did not even check what the profits of the venture were. It didn’t take personal guarantees. The agreed fees were not recorded on the computer system but by hand in a ledger. Developers frequently obtained loans above 100 per cent of the value of the property. The terms of the loan were often changed without proper recording and back-up information. Files were often incomplete and sometimes just missing.

  This level of complacency, blind trust and largesse in lending to a golden circle of borrowers is in stark contrast to how Fingleton pursued some residential borrowers who fell behind and tried desperately to hold on to their homes.

  THE GREY GOOSE: SEÁN MULRYAN

  It is hard to say exactly when Michael Fingleton and Seán Mulryan first met. Their business relationship goes back quite a long way. But it seemed quite fitting that the son of the garda from Tobercurry would end up getting on extremely well with the property developer who grew up in a thatched cottage in Co. Roscommon.

  Friends say that after meeting Mulryan and identifying him as a potentially significant client, Fingleton worked hard at developing that relationship. They also say that Mulryan cultivated the relationship too, and both saw a mutual benefit.

  Part of the toxic lending mix at Irish Nationwide was Fingleton’s love of doing commercial property development joint ventures. It was great when the market was going up but disastrous when things collapsed. The first joint venture on a development was done with Mulryan’s company Ballymore Properties in Lucan, Co. Dublin, in the early 1990s. Together they built more than five hundred houses and a shopping centre.

  The Fingleton-Mulryan business relationship took off from there. Both men saw themselves as self-made country lads who had conquered Dublin and made a lot of money. They loved big corporate days out at Croke Park, where they were regular visitors at each other’s corporate boxes.

  The inextricable links that were to grow between Fingleton’s Irish Nationwide and Mulryan’s Ballymore Properties developed over several years. It ended up with Mulryan’s companies collectively having the biggest loans from Irish Nationwide and one of his senior executives, David Brophy, sitting around the board table of Irish Nationwide as a non-executive director.

  ‘From the age of 18 I always wanted to start my own business,’ Mulryan told the Sunday Telegraph in 2006. He started Ballymore Properties when he was twenty-six. It wasn’t easy, and he worked extremely hard to make it happen. It was the early 1980s and not a particularly good time to go into any kind of business.

  It is said that Mulryan sold his house to help finance his first development. He moved into rented accommodation and traded in his car for a cheaper model. He became a developer and plugged away throughout the 1980s and early 90s. Like so many others who hit the big time with the property boom of the late 1990s, he didn’t really make headlines in the business pages until the end of the 1990s. More newspaper articles were appearing on specific deals Mulryan was doing. But it was only when he began doing big deals in London and buying up development land in places like Bratislava and Budapest that he really came to national attention.

  He had developed political friendships, such as with Charlie McCreevy of Fianna Fáil. His companies made improper payments to Liam Lawlor TD totalling £50,000 over a period of four years in the mid-1990s.

  One of his most prominent deals in Ireland was the development of the Whitewater Shopping Centre in Newbridge, Co. Kildare. He developed this in partnership with the developer Seán Dunne. The idea was conceived around 2000 as a mass-market fashion retail centre with 32,000 square metres of retail space, though it didn’t open until 2006.

  Other big deals Mulryan did in Ireland included the purchase of a large site at the former Baldoyle racecourse in Co. Dublin. He bought an option to acquire the lands from a company called Pennine Holdings, in which Frank Dunlop had an interest. Mulryan bought the land for £30 million in the mid-1990s, got it rezoned for housing, and sold half of it to Séamus Ross’s Menolly Homes for €95 million.

  Mulryan was very similar to other developers in that a stint in England in his youth had stuck with him, and he saw the London property market as the ultimate big prize. In 2004 he developed the 29-storey Ontario Tower at New Providence Wharf in the London docklands. It was the city’s tallest residential building. Then came the Pan Peninsula, two towers with more than seven hundred apartments in total. He was selling apartments in the Pan Peninsula in November 2005 for up to £1.6 million each.

  Mulryan became personally involved in the campaign to bring the Olympic Games to London for 2012. He donated nearly £1 million to the organisers and another £250,000 towards the celebrations in Trafalgar Square when London was chosen as the venue. He was described as the second-largest landowner in the London docklands. All this placed him in very powerful circles in the City of London. He was invited to 10 Downing Street, where he met the Prime Minister, Gordon Brown.

  At his peak it is difficult to say just how wealthy Seán Mulryan was. Some estimates suggest that he had a net worth of €350 million; others have said it was much higher.

  As we now know, when it comes to property developers it doesn’t really matter what the number was: it depends on the extent of their borrowings and the optimism that can be shown in placing a value on their assets at a particular moment. Mulryan was certainly a very wealthy man. He had two helicopters, which he used almost like a bus service. He would regularly use them to fly from his 250-acre Ardenode Stud in Ballymore Eustace, Co. Wicklow, which was packed with works of art and thoroughbred horses, to his offices in the eighteenth-century Fonthill House in Lucan. He also had a €20 million jet, which he took delivery of in 2008, known as the Grey Goose. He reportedly leased it to Hollywood actors, including Johnny Depp, and a number of wealthy Middle East business families. Mulryan told the Daily Telegraph in 2006 that he owned between fifty and a hundred racehorses. But as the credit crunch began to bite and the property crash deepened, Mulryan was forced to sell his horses, his jet, and his helicopters.

  Again like many property developers, Mulryan decided to place the parent company at the top of his property empire in unlimited-liability status. He did this in 2005. Other developers did the same thing around that time. It was a mechanism that meant they did not have to submit full group accounts to the Companies Registration Office and that only snatches of the success of his business empi
re could be gleaned from subsidiary accounts, never a full financial picture.

  Mulryan’s group of companies is listed as the biggest exposure of Irish Nationwide Building Society. An analysis in 2007 showed that the society had a net exposure to Ballymore Properties of €265 million. However, the Irish Nationwide approach of doing joint ventures through special-purpose vehicles, sometimes with different shareholders, meant that the actual indirect exposure may have been higher.

  One joint venture in particular illustrates the relationship between Irish Nationwide and Mulryan. The company was called Clearstorm and it was a fifty-fifty joint venture between Ballymore and Irish Nationwide. As was normal with these deals, the society took an equity stake but also lent the money for the project, though on a non-recourse basis; this meant that if anything went wrong the assets of the project were the only real security.

  Clearstorm was a joint venture to develop sites in London in the Tower Hamlets district. The entire project was lent around €163 million by Irish Nationwide. In 2007 the society sold its stake in the venture to Ballymore, making it a full subsidiary of the Ballymore group. Media reports at the time suggested that Irish Nationwide made a profit of about €40 million on the sale of the stake. However, by 2010 it had made a provision against the €163 million in loans of €108 million.

  The total group debt of the Ballymore companies cannot be obtained, because it did not have to submit group accounts since 2004. But it was estimated at its peak to be approximately €2 billion, spread over forty projects. This was owed to a large number of banks, including Irish Nationwide.

  Ballymore’s British operations do submit accounts. The latest figures show that in the year to March 2011 it made a pre-tax loss of £93 million, having lost £225 million the previous year. It had total assets of £619 million but owed its creditors £839 million, which had to be paid within one year. It had a net shareholder deficit on its balance sheet of nearly a quarter of a billion pounds.