Sunday 11 December 2016

Warnings over Fingleton's toxic €5bn Nationwide fatally ignored

Building society had 'little idea' of risks it faced

Tom Lyons

Published 19/02/2012 | 05:00

LOSS: Michael Fingleton oversaw loans for doomed projects
LOSS: Michael Fingleton oversaw loans for doomed projects

A damning letter to the management of Irish Nationwide by its auditors KPMG identified serious failings in the toxic building society at the peak of the boom in 2006.

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The litany of failings, some of which had been allowed go on for more than a decade, reveal the utter failure of internal controls within the society, whose collapse cost the taxpayer €5.4bn.

The management letter, which was seen by the Financial Regulator, reveals the society had problems under 21 different headings, which, if they had been addressed earlier, might have reduced the cost of the society's collapse to the public.

KPMG said the society never bothered to look at the bigger picture by applying an "overall grade" to the total loans from individual borrowers and, in the case of at least one major loan facility, KPMG was "unable to locate board / credit committee approval".

After reviewing the society's entire credit loan book, the auditors said they had found widespread "inconsistent" grading of loans, with some loans never being graded at all in terms of risk. Some 900 loans worth €638m were "not classified," under any category KPMG said -- and as properties were developed, documents were rarely updated, despite this being a requirement of the Financial Regulator.

All of these failings combined to mean the society had little idea of the overall risks facing it, as its boss Michael Fingleton oversaw billions of euro in loans to developers for doomed projects. According to KPMG, Irish Nationwide -- which boasted to the media of its ever-surging profits on foot of loans to high-roller developers -- in reality did not know how good its security was on loans to its top 30 borrowers, who owed a combined €4.5bn.

KPMG noted that, in relation to these top 30, "the information relating to cross-charging of collateral for different loans was not available".

Goldman Sachs, which was asked to advise the Government on whether to guarantee the liabilities of the society ahead of the bank guarantee in 2008, had cited this letter, which it was given in 2007 when it was trying to unsuccessful flog the society.

Nevertheless, it told the State that there was "real value" in the society's top 30 loans.

KPMG also found that the Belfast office of Irish Nationwide only had four employees -- despite lending more than €5bn to developers in Britain.

The accountants said the Belfast branch manager was so all-powerful that, if he ever left, it could "impact on the society's ability to effectively operate and control the Belfast branch".

The letter also notes that, historically, "a number of external solicitors" had to be reported to the Law Society for "not correctly stamping mortgage documents" on residential loans, exposing the society to potential losses.

Cheque mandates were another issue, with KPMG noting that one member of staff was still authorised to sign cheques on behalf of the society two years after they had ceased working for it.

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