The collapse of the Irish economy is pretty impressive – if the word ‘impressive’ can be understood to indicate magnitude and without any positive connotations whatsoever. From bust to boom and then back to bust again. Time will tell whether several southern European economies, plus perhaps some in central and Eastern Europe, will join Ireland on skid row and perhaps bring down the euro to boot.
But, sad to say, this is not simply a private sector excess, as the media reports might tend to lead readers to believe. This is just as much a failure of governance in the mutual sector as it is in PLC banks. Two of the institutions sitting at the heart of the banking crisis were mutuals – the Irish Nationwide Building Society and EBS (formerly the Educational Building Society). Ireland’s credit unions were also caught up in events, lending unwisely in some cases. So, too, was Northern Ireland’s Presbyterian Mutual Society. This also became insolvent.
There is one consistent story, which has been true through every major global financial crash in history. People caught up in an asset bubble assumed short term trends were permanent. As a result they over invested, over borrowed, over loaned and ended up over exposed. Typically it was the banks – and building societies and credit unions – that over loaned, while their customers borrowed too much. In a few cases, it was the same people who made the full set of mistakes.
This is where we come to Michael Fingleton, the former chief executive of the Irish Nationwide Building Society. Irish Nationwide is one of several financial institutions saved by the Irish government from actually ceasing to trade – other institutions bailed-out are the EBS, the Anglo Irish Bank, the Allied Irish Banks and the Bank of Ireland. In making its bail-outs, the Irish government over stretched itself to the point where it had to be rescued by bigger players in the eurozone.
But Michael Fingleton is an interesting and central character in the drama. One person who knows him told me that Fingleton was a domineering leader, unwilling to delegate. This opinion is backed by a report into the collapse from Ireland’s Central Bank: Fingleton dominated both his board and other senior managers. When Fingleton became chief executive, the Irish Industrial Benefit Building Society – as it was then called – was a small society with just six staff. At its peak three years ago, Irish Nationwide had €16bn (£14bn) in assets.
Fingleton must have also been a persuasive figure. As well as leading the Irish Nationwide into terminal difficulty, he also persuaded the Royal Bank of Scotland’s Irish operation, Ulster Bank, to loan him €13.5m (about £11.5m). A court judgement last month instructed Fingleton to repay the money to Ulster Bank urgently. It will be interesting to see if Fingleton now has the means to do so: court records show that he has property assets valued at around €13m, but these would be difficult to liquidate at present.
According to the court records, Ulster Bank (which effectively now means the UK taxpayer) did not even obtain asset securities from Fingleton before it advanced him the funds. Nor did it ask Fingleton to provide an inventory of his assets. This is a clear sign of the extent to which there was a cosy circle in which leading bankers and property investors trusted each other and trusted asset values to permanently rise. It was an error of judgement on both parts.
The multi-million pound loan to Fingleton was to be invested in a major new property scheme, in which his partners were leading property developers and a senator (member of Ireland’s upper house) from the ruling Fianna Fail party. Fingleton was also a backer of a new hotel resort in Montenegro, on the Adriatic. Both schemes have now stalled and may have little realisable value.
Meanwhile, Fingleton – who retired from the Irish Nationwide last year – is reportedly avoiding the press and others in an apartment in a Marbella golf resort that is affordable only by the super rich. It is safe from any restitution claims, as the property is apparently held in the name of Fingleton’s wife. Another person who has frequently visited the resort is Sean FitzPatrick – regarded as a close friend of Fingleton and chief executive of the biggest financial disaster of them all, the Anglo Irish Bank. Irish Nationwide was involved in a year end transaction with Anglo Irish that had the effect of providing a misleadingly positive impression of the financial situation of Anglo Irish. But the now collapsed Anglo Irish may eventually suck in around €34bn of Irish taxpayers’ funds. And yes, the €34bn (£29bn) is not a mis-print – we are talking billions, not merely millions.
Ulster Bank was criticised in Ireland’s Commercial Court for its lending practices in making such large sums available to Fingleton, who was not an existing customer of the bank when the loan was awarded. Justice Kelly asked how the bank could “lend to someone they don’t know and rely on general reputation of wealth before proceeding to lend millions”.
It was a similar story with Irish Nationwide’s own lending practices. Leading politicians and journalists, as well as property developers, were loaned vast sums, without adequate security or scrutiny. Fingleton took a close personal role in awarding these large loans. Under Fingleton’s leadership, Irish Nationwide moved from being a lender on residential properties, to becoming a provider of funds for commercial property development – the market that particularly sank. (Some commercial property sites valued once at millions are now effectively worthless.)
Despite Fingleton’s reverse Midas touch, he may still be able to enjoy his retirement. ‘Fingers’ – as he is known, even in the Financial Times – walked away with a €1m pay-off, having had a €2.3m annual salary and accumulating a €27m pension pot.
But perhaps not everything is negative. Let us at least take some lessons from this mess. However small or large a mutual is, no chief executive should be given too much power or influence. Accountability and effective corporate governance are fundamental to the proper running of any mutual. Those principles were not adequately applied at Irish Nationwide, at the Presbyterian Mutual Society, or at some Irish credit unions. Let’s try to make sure that members of all building societies, co-operatives and other mutuals reflect on these lessons and pledge to prevent these calamities from recurring.
To quote Spanish philosopher George Santayana, “Those who cannot remember the past are condemned to repeat it”.