High-risk and sloppy lending practices at Irish Nationwide were reported to the board of the building society and the Financial Regulator by external accountants over a long period but did not change its behaviour, according to the lender’s new management.
The building society yesterday reported a loss of €2.5 billion for 2009 after writing off nearly €2.8 billion in loans – almost a quarter of its €10.5 billion loan book – due to high-risk lending to property developers and land speculators under former chief executive Michael Fingleton.
This compared with a €243 million loss for 2008, Mr Fingleton's last full year as chief executive after 37 years running the lender.
"The losses reflect unprecedented levels of impairment on our loan book which gave rise to losses on a massive scale," said the society's chairman, Danny Kitchen.
Gerry McGinn, Mr Fingleton's successor at Irish Nationwide, said the building society had engaged in "highly unusual" lending where, in a substantial number of cases, it lent more than 100 per cent of the value of land and took a share of the profit when it was sold on in a rising property market.
Mr McGinn said that banks seemed content with profits made from rising property values "until the music stops" and they are left with large losses due to the collapse of the property market. What had happened at the society was "an outrage", he said.
Irish Nationwide requires a €2.7 billion Government bailout, leaving it effectively in State ownership as it prepares a viability report for European Commission.This must include a cost assessment of a wind-down.
Mr McGinn said that reports had been prepared for the old board of the building society – which included Mr Fingleton – on lending practices that were "well below standard" and "inadequate" credit checks on borrowers. These reports were passed on to the regulator and were prepared as far back as the mid-2000s, he said.
"We are aware of a number of reports commissioned by the old board," said Mr McGinn. He said that credit approval at the building society "wasn't as disciplined as it ought to have been".
"Some pretty basic information on the paper trail" was absent from loan documents and there were "gaps" in credit approval.
This was one of the reasons why Irish Nationwide has been hit with the highest discount of 58 per cent on the first loans acquired by the National Asset Management Agency (Nama) last month.
Mr McGinn said that the overall discount on all loans totalling €8.7 billion moving to Nama would be "at the outer spectrum" due to missing loan documents, the high value of its loans and the large proportion of development loans.
Asked to comment on Mr Fingleton's management of the building society, Mr McGinn said: "I am not going to pass moral judgments."
Mr Kitchen had written to Mr Fingleton seeking the return of a €1 million bonus paid weeks after the introduction of the bank guarantee in September 2008 – as he had promised – said Mr McGinn.
The building society had received a "non-committal" reply from Mr Fingleton to its letters, the most recent of which was sent during the past month. Irish Nationwide had explored its legal options and the repayment of the bonus "remains on our radar screen", said Mr McGinn.
He said that he was "surprised" and "taken aback" with "sloppy practices" he had discovered at Irish Nationwide when he joined in June 2009. There were only seven lenders managing loans of €10 billion when he arrived.
Mr McGinn said Irish Nationwide's merger talks with rival building society EBS were on hold as both prepared viability plans for the European Commission. He said Brussels "may not be positive" on a merger as it prefers a market solution and not one involving two institutions in receipt of state aid, he said.
