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  ‘There was no animosity towards Fingleton among building societies,’ said a former senior executive in another society. ‘He seemed to run a good operation, and if anything there was some degree of envy as to how he was getting so much out of it.’

  But by the end of the 1990s and early 2000s rival building societies and mortgage lenders no longer saw Irish Nationwide as competition at all. ‘It was clear that Fingleton was going for the commercial property end of things,’ one former building society executive said. ‘He was just ticking over with mortgages, but by that stage they weren’t really what he was at. We no longer even saw him as a competitor. This was because we were selling mortgages and that was no longer the INBS [Irish Nationwide] focus.’

  ‘He had gone down the Anglo road,’ said another. ‘He wanted to be a mini-Anglo. We didn’t even see ourselves as competing against him any more.’

  Fingleton himself mentioned what he called ‘commercial lending’ in March 1994. When talking about the society’s financial results for 1993, he said that provision for bad debt amounted to £4 million, the same level as in 1992. This was ‘not indicative of any deterioration’ in the quality of the loan book, he said; ‘we are going into more commercial lending,’ and he felt he wanted to take a more prudent view of this activity.

  It is ironic that the first time he talks about getting into commercial lending it is in the context of being more prudent by allowing for bigger potential bad debt. It was as if he was aware even then of the risks, and his instincts were to be cautious. But all that had gone within seven or eight years.

  So too had the view of rival building societies that he was going down a different road. Eithne Tinney, a non-executive director of EBS Building Society for eight years, said that undoubtedly executives in EBS were envious of Fingleton’s salary, apparent financial success and contacts when it came to property developers in the 2000s. ‘There was a view by about 2005 that Irish Nationwide was leaving us behind. The view had become very much, if Irish Nationwide can do it, we should be able to do it.’ Ultimately it proved a massive mistake for EBS—not only to get into commercial property lending but to do it so late in the boom. ‘We were getting involved in the tail end of it all. I have no doubt that Michael Fingleton inadvertently led EBS astray. We should have stuck to the knitting.’

  EBS ended up losing its independence and requiring approximately €1 billion in capital injections from the state to cover losses primarily on commercial property deals.

  But just as Fingleton was deciding to increase his lending to developers in the 1990s, he also began to make bigger and more ambitious plans. He made a bid for TSB in 1994. This was a mutual mortgage and personal banking operation, formerly the Trustee Savings Bank. Its sale was being handled by the Minister for Finance, Bertie Ahern. Fingleton went up against National Irish Bank by making an offer of £102 million. It may have been as much about stating his ambition as seriously making an offer. He hadn’t bid as much as National Irish Bank but justified it by saying that Ahern suggested that price would not be the only factor. In the end the sale did not go ahead at that time, though TSB was sold a few years later.

  In 1995 Fingleton said he was interested in buying the Agricultural Credit Corporation or Industrial Credit Corporation from the state, both of which were due to be privatised. A successful acquisition here would have brought a banking licence and with ICC a business and commercial property loan book.

  Fingleton may simply have been thinking in PR terms by stating his interest, but equally he may have been half-serious. In any event both ICC and ACC were sold off to others a few years later, and Irish Nationwide didn’t buy either.

  THE FEELING IS MUTUAL

  One of the most influential factors in the apparent failure of regulation from outside Irish Nationwide, and the failure of corporate governance within it, was the fact that Fingleton toyed for years with the idea of demutualising the society. Without coming out and saying he wanted to sell the society, from the mid-1990s onwards he began talking about the restrictive and ‘unfair’ nature of the Building Societies Act (1989). This meant that if the society was demutualised it could not be taken over for at least five years.

  By the mid-1990s one building society, Irish Permanent, had already converted to a PLC and was listed on the stock exchange. In Britain building societies were being snapped up by large banks or were rushing head-first towards the stock exchange themselves. By 1996 there were only three large building societies in Britain still wedded to the mutual concept. It began with the flotation of Abbey in 1989. Later came the takeover of Cheltenham and Gloucester by Lloyds Bank, and the takeover by Halifax of Leeds Permanent before a fresh float. A year later Abbey National had taken over National and Provincial.

  At home, Fingleton watched Irish Permanent demutualise and float on the stock exchange in 1994. But he had also seen how the preparatory work for that process had cost Edmund Farrell his job. For the chief executive of Irish Permanent, Roy Douglas, and other executives the flotation had proved to be incredibly rewarding. Irish Permanent was floated in October 1994; within a year Douglas, who was being paid a fortune, had shares in the company worth close to £1 million. Irish Permanent had access to capital, growth potential and a very lucrative share option scheme. And it seemed inevitable that it would be taken over once the five years were up.

  This was a case study in how a flotation can be very enriching, as long as you don’t have too many skeletons in the cupboard. Publicly listed companies tend not to be prone to the development of personal fiefdoms. It is possible to run a PLC with a dominant chief executive, but it can go very wrong, as so many things have to be fully transparent and disclosed.

  In 1998 First National, having changed its name to First Active, was also floated. This was a somewhat different experience. Before the flotation, stock markets began to weaken. There was an expectation that the issue price of the shares would be no lower than £2.65 and could be as high as £3.80 per share. Former members were being given free shares as a sweetener for agreeing to the privatisation. This also suited carpetbaggers who had put money on deposit just to get some free shares.

  But as D-Day approached, the promoters were forced to cut the flotation price down to £2.25 as a result of market nerves and weak demand. Some commentators felt the board should have pulled the float altogether and tried again when the market recovered. But the board decided to press ahead with it at a knock-down price to ensure success.

  But, unlike the Irish Permanent flotation, the timing was not so good, and trading and operational issues dogged the early period of the float. The society, now a PLC, still had outstanding cost issues and felt compelled to sack 175 employees and close 25 of its 76 branches. ‘It simply wasn’t ready to compete for mortgages on the tighter profit margins that were now coming in,’ said one former building society executive. ‘The mortgage market had got very competitive. The only way to make money was to have lower running costs, drive up volumes by selling more and more mortgages, or by cutting your costs.’ Pressure mounted on the chief executive of First Active, John Smyth, and he stepped down in February 2000.

  Here was another lesson staring Michael Fingleton in the face. He was not carrying heavy costs, but it was clear that floating on the stock exchange could be an arduous and risky business.

  Fingleton’s real attitude to demutualising was not at all clear at first in the 1990s when he began to talk about it. The five-year rule obviously annoyed him, as did other restrictions on the commercial activities he could get up to as a mutual building society and not a bank.

  Speculation began to mount that Irish Nationwide would demutualise. The speculation prompted a flood of deposits from carpetbaggers, who wanted to collect whatever free shares might become available. But Fingleton made it clear that he did not want the five-year rule. This prompted a lot of media analysis at the time, suggesting that Fingleton felt he should be able to float the company and then have it taken over fairly quickly. The obvious interpr
etation was that Fingleton would be given free shares in the demutualisation and would not have to wait five years for his shares to be sold off in a takeover bid.

  But this was far too simplistic an interpretation, and it missed several crucial points. There was nothing wrong with the five-year rule in one sense. If Fingleton really wanted to float the company he could have done so, been well paid, and got free shares and share options. It shouldn’t have mattered whether the company was then taken over in one year, five years, or ten years. On the face of it there was nothing stopping Fingleton from floating the society and doing exactly what Irish Permanent and First Active had done. Yet there is no evidence that he seriously contemplated that course. Instead he spent years lobbying successive governments for a change in the law, which only one building society wanted, enabling him to demutualise and immediately sell the company in a private trade sale.

  Just because Irish Permanent had been floated once it demutualised did not mean that Fingleton wanted to float at all. Sources close to the society say that all he wanted to do was demutualise the society and at the same time sell it, without floating it on the stock exchange.

  This sequence of events would have placed him in the driving seat. A private buyer would mean there would be no public disclosure of pay, connected party transactions, corporate governance practices or due diligence; there wouldn’t be an Edmund Farrell moment for Fingleton in the event that there were aspects of how he ran the society that he wanted to keep private. He could do a private deal with a buyer behind closed doors.

  Members would get a large pay-day. A mechanism would have to be found by which Fingleton would get a large pay-day too. As a mutual he didn’t own any more of it than anyone else; but if a deal was done in private he could be granted a nice new job by the new owner and a large one-off payment in gratitude for all the work he had done in building up the society. An allocation of the proceeds of the sale would have been earmarked for the executives and staff. There were suggestions that it could have been as much as 10 per cent of the proceeds. If Irish Nationwide went for €1.3 billion, approximately €130 million would be divided up. The person with the biggest influence in deciding who would get what was Michael Fingleton.

  Another valid point was that Fingleton was running the society as though he were indispensable. In a way he was. He had the personal contacts for the growing loans to developers. He decided who got what. He knew about the structure of deals and how much the society charged in interest.

  The alternative, under the then rules, was running a gauntlet of due diligence that would result in a publicly issued prospectus. The society’s systems, board structure, pay structure, board committee structure and lots more would all come under public scrutiny.

  A PLC would require a new board, with independent directors and an independent chairman. Fingleton could even be ousted by a new PLC board. He could have been ousted in a hostile takeover after flotation.

  Attempts by Fingleton to have the legislation changed were misinterpreted in some quarters and linked to an unexplained desire to have the company floated and then taken over. It seems far more likely that Fingleton believed a quiet trade sale, immediately switching the society from a mutual to a subsidiary of something else, suited him, the board and the members a lot better.

  But he didn’t directly and openly talk about selling the society at all in the 1990s. He suggested creating a third banking force by acquiring TSB or ACC. In 1995 he was openly talking about buying TSB and then floating the merged entity within a couple of years. He also suggested that a change in the law would allow Irish Nationwide to form a partnership with a bigger international bank. At one stage he even suggested creating a mutual bank, in other words to stay as a mutual but become a full bank with a banking licence.

  Fingleton began to lobby politicians to have the legislation changed to abolish the five-year rule and allow for a straight trade sale. He had first really raised the issue in public in 1995, a year after the Irish Permanent flotation. In 1996 he said the society was not necessarily committed to maintaining its mutual status. ‘Mutuality is a concept which is still relevant,’ he said, ‘but not to the exclusion of other options, and the board of Irish Nationwide would not presume on behalf of its members to exclude any such options.’

  He began to step up his lobbying campaign. He had one major obstacle: EBS. How could a government change the law to suit one building society and do so in a way that would leave the other vulnerable to takeover? EBS wanted to stay mutual and be protected by the existing rules.

  Apart from Irish Nationwide itself, EBS was the last remaining genuine mutual society by the late 1990s. First Active had already announced its intention of floating and did so in 1998. EBS had decided that with the flow of exits from mutual status, remaining as a building society should be its point of difference. It also believed that a change in the legislation such as Fingleton sought would undermine its mutual status.

  Fingleton felt differently about it. He felt that the building society structure was too restrictive for his ambitions for the society. But because EBS didn’t want the law changed, a change in the law would look as if it was being introduced specifically for Michael Fingleton and Irish Nationwide. This made it all more politically sensitive. EBS’s opposition to a change in the legislation left Fingleton alone on the issue and facing active opposition from a rival building society.

  But introducing legislative changes to suit a single company was hardly new for Fianna Fáil governments. And it looked like an open-and-shut case when just before the 1997 general election Charlie McCreevy backed the idea. He was opposition spokesman on finance and expected to become the next Minister for Finance.

  In February 1997 a Dáil committee discussed joint amendments by Fianna Fáil and the Progressive Democrats to the Central Bank Bill that would have cleared the way for building societies to quickly enter a joint venture or agree to a takeover after flotation. The ‘rainbow’ coalition government was opposed to the amendments.

  While Fingleton continued to insist that no decision had been taken, he had nevertheless advanced his political lobbying pretty far. ‘We haven’t decided to go public,’ he said. ‘We always have to consider our options. It would be negligent of us not to have all possible options available.’ This seemed like a reasonable approach, except that forming such a joint venture or being bought out was not an option. It was simply not allowed in the legislation.

  The amendments had been proposed by Charlie McCreevy of Fianna Fáil and Michael McDowell of the Progressive Democrats. The PDs would have seen it as simply opening up financial services to greater competition and creating a more level playing field. McCreevy, who had similar views on the free market, agreed. He appeared to be quite close to Fingleton. (A few years later he would receive a fast-tracked loan from Irish Nationwide of €1.6 million to buy a house at the K Club that at the time was valued at €1.5 million.)

  At the time of the Dáil committee debate Fingleton said he had been lobbying for such a change to the legislation for the ‘last five years,’ suggesting that he had been trying to influence politicians on the issue since 1992. ‘We are in a free market now. We are all facing competition. All we want is to have the same options as other financial institutions.’

  But the coalition government of Fine Gael, the Labour Party and Democratic Left was having none of it. Both the Department of Finance, headed by Ruairí Quinn, and the Department of the Environment, headed by Brendan Howlin, were opposed to the idea. If the legislation changed in the way Fingleton wanted it, what was left of the mutual sector could simply evaporate. If enough members supported a move by the directors of any institution they could simply put themselves up for sale. EBS argued that the existing legislation allowed building societies to float if they wanted, but the safeguards that existed discouraged boards from just opting for a quick sale.

  McCreevy may have liked the idea before the 1997 general election, but once he got into government he didn’t move
on it. Nearly two years later Fingleton had to tell the members at the annual general meeting in April 1999 that there was still no change. It is not clear whether McCreevy could not get the backing of his government colleagues, especially in the Department of the Environment, or whether he went off the idea. Alternatively, he may just have moved his focus elsewhere.

  EBS had been very quiet about its lobbying efforts during this period, but clearly it was winning the behind-the-scenes battle.

  The 1990s drew to a close with Fingleton presiding over an Irish Nationwide that perhaps had not changed very much in the decade. He was still the dominant, all-powerful figure. The society was run in pretty much the same way as it had been ten years earlier. But all around him the entire banking landscape had changed. The European Union was heading towards a single currency. Most of the mutuals were gone. The economy had taken off, and property was becoming a bigger part of it. House prices were rising as young couples and investors snapped up houses on the market. Lower interest rates had become the norm, leaving mortgages a lot more affordable as wages began to rise sharply.

  But there were problems on the horizon too. On the one hand the ready availability of cash from other banks in Europe left Irish lenders with lots of money to lend; but the arrival of new competitors in the mortgage market, such as Bank of Scotland (Ireland), was savaging the profit margins that lenders could make on mortgages.

  Fingleton had grown the Irish Nationwide mortgage book as the property market had taken off. But it wasn’t such a hugely profitable business to be in. There was money in it, but it was extremely competitive.

  Fingleton had found another way of keeping up profit margins. A core group of property developers were making a fortune on the strength of the property boom and rising prices for development land. Fingleton had built up relations with them and had discovered whole new ways of making money from his dealings with them.