Failed lender Irish Nationwide Building Society (INBS) was operating akin to a merchant bank when taking “very strong lending positions on speculative proposals”, a state-appointed director has told the High Court case against former bank chief Michael Fingleton Sr.
State appointed chartered accountant Rory O’Ferrall on Tuesday told the court that a series of multimillion euro loans were “very unusual” in the face of an economic crash and were “hard to justify” given Mr Fingleton pledged in 2007 to the society’s board that the lender should be “risk averse” in the face of the financial climate.
The civil case against the former INBS chief executive and managing director alleges that he negligently mismanaged the building society and engaged in property “gambles” with high-net-worth individuals in an informal and speculative manner in the mid-2000s, leading to fatal losses.
Mr Fingleton (87), who cannot give evidence due to ill-health, joined the building lender in 1971 and retired in 2009 – he held the roles of both managing director and chief executive in that time. At its height in 2007, INBS had reported assets of €16 billion but was a high-profile casualty of the financial crisis of 2008.
Liquidators for Irish Banking Resolution Corporation (IBRC) have taken the case against Mr Fingleton, who denies the allegation of negligent mismanagement.
The total losses at INBS had been estimated to be €6 billion. However, only €290 million in damages is being pursued by IBRC, relating to five specific loans, allegedly approved by Mr Fingleton.
The court has been told that Mr Fingleton was allegedly “nodding through” top-ups and extensions to certain clients without the knowledge of the society’s board.
On Tuesday, Mr O’Ferrall likened the lending of the society to that of a “merchant” bank which, he said, takes higher risks in lending but takes a share of the proposed profit from loans made on projects.
He said this criteria of operating requires a different set of skills and expertise in specific industries and areas of the globe in fields such as shipping, railways, property and development.
Mr O’Ferrall said Irish Nationwide under Mr Fingleton had taken up “very strong lending positions” in property development on speculative proposals in the UK and France.
Mr O’Ferrall said that at around the time of loans issued between 2006 and 2009, there was a “generally held view by investors and banking” by 2007 that there was going to be a property market downturn and that by 2008 “all banks” were experiencing the predicted difficulties.
Mr O’Ferrall told Lyndon MacCann SC, for IBRC’s liquidators, that INBS no longer held a banking licence, was therefore not trading any more and that its only activity was in resolving various claims, including some from abroad.
Gerry McGinn, a former chief executive who arrived after the departure of Mr Fingleton, referenced a loan for a luxury hotel project in a skiing area in the south of France, referred to as ‘Ice Mountain’, which the borrower had valued at €32.85 million with planning permission.
However, the project had no planning permission and was then hit with a bill of €565,000 by French tax authorities. INBS paid the borrower, Cyril Dennis’, tax bill when requested to “stay in the game” regarding the asset, Mr McGinn said. The hotel was never developed.
When Nama bought the loan for Ice Mountain in 2010, it stood at around €31 million. Nama paid just under €11 million for the loan, resulting in a loss of €20 million for the taxpayer.
Mr McGinn said that when INBS received a valuation “about a hotel in a foreign country, and just getting a number on a page ... it is pretty meaningless”.
Mr McGinn said the interest of the society seemed to have been “secondary” to some of the relationships between Mr Fingleton and the borrower.
Mr McGinn said there were a number of different risks in lending into a foreign jurisdiction. He said that the society may have felt that it was a “gun to your head situation” in paying the French tax bill upon Mr Dennis’ request in order to avoid being “badly exposed”. It may, he said, have been a question of the society being stuck “between the devil and the deep blue sea”.
The case continues at the High Court.
