Ireland on Brink as `Beggar' for Aid After Losses by Fingleton

As a young accountant, Michael Fingleton took his do-it-yourself attitude from Dublin to Lagos, Nigeria, to sort out the finances of the Catholic archdiocese.

“He stayed for a year and a half, cleaned up the books and put in a system to allow them to keep it up after he left,” said John O’Loughlin Kennedy, co-founder of the charity Concern Worldwide and a friend of the Irish priest who asked Fingleton for help in the late 1960s. “He did a very good job.”

That same can-do spirit enabled Fingleton, now 72, to turn what was a century-old Irish lender with six employees when he joined in 1971 into a firm with 16.1 billion euros ($22.2 billion) of assets at its height in 2007. It also led Dublin- based Irish Nationwide Building Society to put too much power in one man’s hands, with too few risk controls, according to a May report by Irish Central Bank Governor Patrick Honohan.

Fingleton’s rise and fall, and that of Irish Nationwide, is a microcosm of the financial catastrophe that led to a bailout of five of the country’s biggest lenders. Customer-owned Irish Nationwide, which began much like George Bailey’s Building and Loan in the 1946 movie “It’s a Wonderful Life,” is hooked to a 5.4 billion-euro lifeline of taxpayer money to help it avoid bankruptcy. The government seized control of the company this year and is looking to sell or merge it with another firm.

‘Crazy Loans’

Meanwhile, the end of a decade-long property boom, fanned by reckless bank lending to developers and home buyers, plunged Ireland into the worst recession since at least 1947.

The economy shrank 3.5 percent in 2008 and 7.6 percent more last year, and is expected to contract by 0.3 percent this year, according to the International Monetary Fund. The unemployment rate shot up to 13.6 percent in October from 4.7 percent three years earlier, Ireland’s Central Statistics Office reported. Commercial property prices have fallen 59 percent since September 2007, according to an index compiled by London-based Investment Property Databank.

The extra yield investors demand to hold Ireland’s debt rather than German bunds has more than doubled in the last three months and now stands at 6.20 percentage points, according to data compiled by Bloomberg. The government laid out a plan last week to cut spending and raise taxes by as much as 6 billion euros in 2011.

“It was the banks doing crazy loans, it was borrowers taking crazy loans and a failure by government and regulators to do their jobs properly,” said Sean Kay, a professor of politics and government at Ohio Wesleyan University in Delaware, Ohio, who spent three months this year in Dublin interviewing officials for a book. “There was no adult supervision.”

‘Severe Distress’

Fingleton retired in April 2009 amid criticism in parliament and the press over a 1 million-euro retention payment he received in late 2008, part of the 2.4 million euros he was paid that year. He was also the sole beneficiary of a defined- benefit pension plan transferred in 2007 to an outside organization and valued at 27.6 million euros at the time, according to the company’s 2008 annual report.

The former chief executive officer, who sports a white goatee, isn’t facing any charges. A Commission of Investigation, created by the government on Sept. 21, is looking into why senior management at Irish Nationwide and Anglo Irish Bank Corp. implemented “business and lending practices which resulted in those institutions experiencing severe distress.”

Fingleton’s lawyer, Paul Tweed, said his client declined to comment. Fingleton didn’t respond to three voicemail messages left on his mobile phone.

Booterstown Wood

“It is beyond the imagination that he can walk away with millions, after losing billions,” James Wickham, 84, said as he walked in front of an Irish Nationwide branch on Dublin’s Lower O’Connell Street that had posters with the tag line “Take a fresh look” hanging in its windows. Fingleton and his fellow bankers “have turned Ireland from a prosperous country into a beggar,” Wickham said.

The collapse of Ireland’s real estate bubble -- home prices almost quadrupled in the decade through 2007 -- can be seen in the knock-down prices of apartments in Dublin’s Booterstown Wood complex, owned and developed by Irish Nationwide, and in the 170 million euros of loans made to the developer of a hotel, conference center and research cluster now being liquidated.

Irish Nationwide had the most toxic loan book of the five financial companies whose bailout could end up costing the government 50 billion euros, according to a Sept. 30 estimate by Finance Minister Brian Lenihan. The National Asset Management Agency, set up to help cleanse the financial system, applied the biggest discount to face value -- as much as 72 percent -- to loans it bought from Irish Nationwide, according to statements on NAMA’s website. The agency is buying all of the building society’s commercial loans, Chairman Danny Kitchen said May 12.

Special Purpose Vehicles

Irish Nationwide is facing discounts in part because of its practice of lending on high loan-to-value ratios and lax paperwork, Gerard McGinn, who took over as CEO in June 2009, said at an April 19 press conference. The company reported a 2.5 billion-euro loss that day as it set aside 2.8 billion euros against bad loans.

“What has happened here is an outrage,” McGinn said, adding that risk management was inadequate. “There were gaps in some pretty basic information in the paper trail” of commercial property loans. McGinn declined to comment for this article.

Under Fingleton, Irish Nationwide structured many of its deals in the U.K. through special purpose vehicles, in which loans were secured solely by the value of the underlying land and not on any of the borrowers’ other assets, said a person with direct knowledge of how the loans were arranged. The former CEO also had little check on his decisions, according to Central Bank Governor Honohan’s report.

‘Unsustainable’ Position

“The central management figure in INBS was seen as an overly dominating figure that needed to be surrounded by a stronger governance structure,” Honohan wrote.

He also said regulators failed to grasp how vulnerable lenders were to property-price declines and faulted them for a lack of assertiveness in challenging banks or following up on corrective actions.

Fingleton and Irish Nationwide illustrate the decision- making that undermined the nation’s financial system over the past decade, bringing its banks close to collapse. The rising cost of the rescues has prompted some investors, including Stuart Thomson, a fund manager at Glasgow-based Ignis Asset Management, who helps oversee about $110 billion, to speculate that Ireland may need to cede its economic sovereignty by seeking a bailout from the European Union and the IMF almost 90 years after winning its independence from the U.K.

“We have little doubt that Ireland’s fiscal position is unsustainable,” Thomson said in an interview Nov. 4. “At some point in the next two years, they will be forced to borrow from the European Financial Stability Fund.”

Abramovich Debt

The government said on Sept. 30 that holders of Irish Nationwide and Anglo Irish subordinated debt should help shoulder some of the bailout costs, which may equal about one- third of Ireland’s annual economic output, even as it ruled out defaulting on senior debt.

That includes Russian billionaire Roman Abramovich, whose Moscow-based Millhouse LLC, an asset-management firm, bought some of the 126 million pounds ($203 million) of five-year, lower Tier 2 debt Irish Nationwide sold in August 2009 and that was guaranteed through September. The move would cost Ireland a “huge reputation loss,” Millhouse said on Oct. 1.

The full cost of Ireland’s bailout may be higher than Lenihan’s estimate, according to Mark Grant, managing director at Southwest Securities Inc. in Fort Lauderdale, Florida, who sends daily commentary to about 5,500 institutions.

“However this gets played out, it’s going to be quite ugly,” he said.

Defunct Creameries

Fingleton grew up in Tubbercurry in western Ireland, the son of a policeman, according to a person who worked for him for more than a decade and who refused to be identified.

Irish Nationwide wouldn’t provide any biographical information about its former CEO. A 2006 profile in the Irish Independent said that after receiving a degree in commerce from University College Dublin, Fingleton landed a job at the Dairy Disposal Agency, a state body that took over defunct creameries. He studied for an accounting certification at night before going to Nigeria, the newspaper said.

After he returned to Ireland, Fingleton was hired in 1971 as the top manager at the Irish Industrial Benefit Building Society, a mortgage lender founded in 1873 by a group of Dublin working-class men with assets of about 2 million euros. While on the job, he also earned a barrister-at-law degree from King’s Inns in Dublin.

Rising Profits

Fingleton made his ambition at the tiny lender clear early on, changing the name to add the word Nationwide to show that the company intended to become a financial powerhouse, said Eanna Johnson, who served with Fingleton on the board of directors of Concern Worldwide in the 1970s and 1980s.

Between 1971 and 2007, Irish Nationwide’s profits rose each year, according to a copy of a speech given by then-chairman Michael Walsh at the company’s annual meeting in April 2008. The firm increased its net book value by more than 1 billion euros to 1.5 billion euros from 1997 through 2007 and had the highest return on assets of any large lender in Ireland, Walsh said.

It was early last decade that Irish Nationwide, along with other Irish banks, plunged fully into commercial-property lending and surged into the U.K. Between 2001 and 2007, Fingleton multiplied the company’s assets almost fourfold to 16.1 billion euros and its loan book by a similar amount to 12.3 billion euros, according to annual reports. In 2008, commercial property loans including residential development accounted for 78 percent of the total, the company’s annual report shows, with more than half of that lending in the U.K.

Seventh-Floor Office

Working alone on the wood-paneled seventh floor of Irish Nationwide’s corporate headquarters, with views of South Dublin and the mountains beyond, Fingleton personally approved many of the loans that built the company, according to two people with direct knowledge of the firm’s operations. Losses on loans also tore down Irish Nationwide, according to Honohan’s report.

Fingleton continued to expand the company’s loan book in 2007, even after the real estate market began to sour.

“The Society’s objective is to continue to build up significant income streams based on secured property lending,” Irish Nationwide wrote in its directors’ report dated March 10, 2008, less than a week before the U.S. government kept Bear Stearns Cos. from collapsing by brokering a sale to JPMorgan Chase & Co.

Empty Rooms

On Sept. 19, 2008, four days after Lehman Brothers Holdings Inc. filed the biggest bankruptcy in U.S. history and less than two weeks before Ireland’s government stepped in to guarantee loans and deposits of its biggest lenders, Fingleton wrote a letter to regulators saying his firm “is a very profitable financial institution” with “a strong capital position.”

He predicted Irish Nationwide would report pretax profit of as much as 175 million euros for 2008 and need to provision no more than 100 million euros against bad loans. In fact, the company posted a 243 million euro loss for the year on provisions against loan losses of 464.3 million euros.

Today, about 250,000 square feet of empty conference rooms, theaters and residential and research space in a development called New Springfield stand as silent witness to some of Fingleton’s loans. A 2002 Irish Nationwide loan of 40 million euros for the project in Kilternan, nine miles south of Dublin, grew to 170 million euros by 2008, according to a person involved in the transaction who declined to be named because of a court-ordered liquidation. The land may now be worth 50 million euros to 70 million euros, the person estimated.

Taking Control

At Booterstown Wood in the heart of affluent South Dublin, built on land Irish Nationwide bought about three decades ago, prices have also plummeted. Apartments, set around a courtyard, are priced between 215,000 euros and 445,000 euros. If all sell for their asking prices, the complex will raise about 19 million euros, or about half of what they would have sold for in 2007, said David Cantwell, agent for real estate agency Hooke & MacDonald, which is marketing the apartments.

Ireland’s government took control of Irish Nationwide in March by injecting 100 million euros for a special investment share and 2.6 billion euros of capital in the form of promissory notes. The state will use promissory notes for an additional 2.7 billion euros to cover expected losses on the firm’s remaining loan book, Lenihan, the finance minister, said on Sept. 30.

The government, which said in March that Irish Nationwide didn’t have a future as a standalone organization, is in discussions with the European Commission and the institution itself about selling the company or integrating it into another lender, Lenihan said on Sept. 30.

‘So Scared’

Fingleton said in an interview on RTE television on Aug. 18 that he had remorse about the financial situation in Ireland resulting from bank losses.

“Of course I have,” he said. “Like anybody else.”

For Barbara Scully, 48, a housewife and part-time writer in Dublin, such expressions don’t do much to ease the pain of reliving a difficult youth she thought she had left behind.

She watched friends leave the country in search of work in the recession of the early 1980s. Her 23-year-old daughter, still living at home, said goodbye last month to one of her best friends who left to work as a nurse in England. Ireland lost 34,500 people in the 12 months through April, the most recent data available, the biggest net emigration since 1989, according to the country’s central statistics office.

“People are so scared,” said Scully, who has looked unsuccessfully for a job for the past year and whose husband is a freelance photographer. “For the last two years it’s all stopped. He went from being very busy to full stop. The phone stopped ringing. It was like we were all frozen. Seeing him sitting here all day long was very hard.”

‘Fantasy World’

The wreck of Irish Nationwide and Anglo Irish, whose former chairman Sean FitzPatrick helped bankroll many of the developers behind the property boom, is also on the mind of Fiach Mac Conghail, director of Dublin’s Abbey Theatre.

FitzPatrick resigned in December 2008 after revealing what he called his “inappropriate and unacceptable” practice of moving loans, sometimes in excess of 80 million euros, from the bank he ran to Irish Nationwide over an eight-year period to avoid disclosing them in detail to shareholders. Fingleton told RTE in August that he was cooperating with an inquiry by the Irish fraud police and that his firm “had no responsibility whatsoever with those loans.” FitzPatrick, reached on his mobile phone, declined to comment on Fingleton.

The Abbey Theatre mounted a revival last month of Henrik Ibsen’s “John Gabriel Borkman,” an 1896 play about a disgraced banker that played to sold-out Dublin audiences.

“It talks about the fantasy world of people in power,” Mac Conghail said of Ibsen’s play. “At what point did they think they were absolutely untouchable?”

To contact the reporters on this story: Alan Katz in Paris at akatz5@bloomberg.net; Joe Brennan in Dublin at jbrennan29@bloomberg.net.

To contact the editors responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net; Robert Friedman at rfriedman5@bloomberg.net.

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