Maeve Sheehan: Warning that went unheeded as Christmas shoppers bustled by
Newbridge Credit Union, in a showdown with the regulator, revealed how it was over-reaching itself, writes Maeve Sheehan
WINTER in Newbridge, December 15, 2005. Christmas lights twinkled. Streets throbbed with Christmas traffic. Shoppers fanned through the town's spanking new shopping centres.
And on this dark, cold night the then financial regulator, Liam O'Reilly, left his offices in Dublin and braved the traffic to head to a meeting in this burgeoning Kildare commuter town.
The economy boomed, the property market had taken off and multiples of national and international banks were on a lending roll, fighting for increasingly prosperous Irish customers. Liam O'Reilly was three years into his role as chief executive of the Irish Financial Services Regulatory Authority (IFSRA), with a multi-million euro budget to match. He operated in the world of high finance.
What brought him to drive into this pre-Christmas maelstrom in Newbridge with three top officials in tow? It was, in fact, a persistent problem in the local credit union that, to put it in colloquial terms, had notions beyond its station.
From humble beginnings as a not-for-profit community enterprise in 1968, Newbridge Credit Union had grown to be one of the largest in the country, as the town took off during the boom. As locals prospered, so did this provincial credit union and lending patterns changed accordingly. Along with the usual personal loans for holidays or cars or family emergencies, it was lending ever bigger sums to developers, business expansions and elaborate house extensions.
As community lenders, credit unions weren't supposed to be lending hundreds of thousands to property developers, and they were supposed to restrict the period of the loans too, with a cap on the number of five-year and 10-year loans they could give out.
According to documents and correspondence seen by the Sunday Independent, its managers and board of directors were repeatedly reminded that they were in fact breaking the law.
Brendan Logue, as the registrar of credit unions, was the man charged with regulating the 400-odd credit unions across the country in 2005. According to documents, Logue had been monitoring the credit union for months.
There was a "site visit" in May 2005, followed by a meeting in September with the volunteer directors and the managers of the credit union.
But Logue still wasn't happy. It was he who wanted the board of Newbridge Credit Union to meet with his boss, Liam O'Reilly, to try to impress on the credit union the need to stay within the rules. But his attempts to set up this meeting proved something of a palaver, as leaked correspondence shows.
Logue wrote to the secretary of the credit union, Ben Donnelly, to ask for a meeting in Dublin with the entire board. The board of Newbridge Credit Union wasn't having it. Donnelly replied a week later: "The issue was discussed by our board and it was unanimously agreed that it is not possible for the board or the supervisory committee to attend as requested at your offices for logistical and other reasons." He invited Mr Logue and his colleagues to come to one of their monthly board meetings instead.
Donnelly "cc'd" Liam O'Reilly on the letter.
Logue was clearly annoyed. The documents obtained by the Sunday Independent include a note of an apparently heated telephone call between Logue and an unidentified senior figure in the credit union who made a record of it.
Logue, according to the author, wanted to stress the serious situation in Newbridge: "He stated that unless we changed our policy's (sic) he would be forced to invoke a sanction regime which would involve an independent investigation of our business . . .
"I was to impart this message to the board that the end result of this investigation would include severe financial sanctions for the board and the credit union. We could be potentially disqualified from the financial services industry as could our manager. I told him the board were well aware of this situation . . . I said that there were surely more credit unions than us in this situation . . . I also said that the act was out of date and did not deal with the situation on the ground."
Logue, it seems, wasn't happy to leave things at that. According to other correspondence, he also telephoned some of the volunteer directors at their homes. Donnelly objected: "We have discussed the issue at length and are increasingly concerned at the manner in which you appear to be conducting your business with our credit union," he wrote to Logue.
Logue wrote back: "I'm sorry that you are unhappy that I contacted volunteer board members at their homes. I did so in order to explain to them, informally, our position on the breaches mentioned above. Contacting members at home is the only effective means open to me. As I explained to your chairman, and to the chairman of your supervisors in my phone calls, it is our earnest wish that the matters at issue be resolved in an amicable manner, and I am pleased to hear that this is now your wish also."
And so with Newbridge Credit Union refusing to travel to Dublin to meet the financial regulator, the financial regulator came to Newbridge on December 15.
O'Reilly was accompanied by Logue and by two senior officials who were both deputy credit union registrars, James O'Brien and Martin Sisk. (Sisk is now the chairman of the health insurer VHI and President of the League of Credit Unions, while O'Brien took a senior position in the central bank of the United Arab Emirates).
The meeting was convenient to the 13-strong local voluntary board of Newbridge Credit Union. It took place at their offices on Moorehouse Street in the town.
The meeting kicked off at 8.10pm and ended at 8.35pm. Minutes seen by the Sunday Independent show how a regulator in charge of a multi-million euro banking sector alternately cajoled and warned the bullish managers of a provincial credit union to stop breaking the law, ultimately with little effect.
According to minutes, those present included: Breda Reid, Robbie Curley, Michael Murphy, Maria McDonald, Michael Mullally, Paul Maher, Paddy O'Carroll, Pat Ruddy, Pat Ryan, Anna Munko, Brid Nolan and Aine Foley. The treasurer, Joseph Murphy, a local accountant, was there, along with the general manager, Des Diver. They were mostly a combination of local business people and ordinary members of the community elected by credit union members. Some had been on the board for years.
The minutes were written and kept by Newbridge Credit Union, although it isn't clear who wrote them as they are unsigned.
According to the minutes, the meeting went like this: Pat Ryan did the introductions. Then Liam O'Reilly took the floor. The financial regulator didn't beat about the bush. He said there were two main issues that Newbridge Credit Union needed to comply with: Section 35 and Section 27.
He said the credit union was "way outside the limit"; he reminded the board and the supervisory committee that they had "a legal responsibility to comply with the law"; "and although our (Newbridge Credit Union's) recent letter indicated that we were in some way attempting to solve the problem, they needed to know when and over what period, in other words, they wanted a detailed plan by January 2006."
Joe Murphy, the treasurer, said they were "fully aware of the issues" but that the breaches had "happened with many other credit unions" and anyway, they had been "asking for two-and-a-half years for a change in the (Credit Union) Act".
Brendan Logue stated that "under the legislation we (Newbridge Credit Union) are obliged to comply with the law.
"Breda Reid (a director) then stated that in other words we should use an artificial stroke of the pen just to achieve compliance with an Act that is obsolete and doesn't meet the needs of credit unions. Brendan Logue then stated that it was not their fault but the law was in place and it was being flouted. Breda Reid said it was unfair and good credit unions were being penalised."
Liam O'Reilly, diplomatically praised Newbridge as a "very well-run credit union financially", according to the minutes.
He was repeatedly challenged by Des Diver and Joseph Murphy about getting the Credit Union Act changed so they would no longer be in breach of the rules.
According to the minutes, Diver said the law had to be changed sooner rather than later by the Department of Finance. The wording in Section 35 – the bit they were in breach of – was "flawed" and had the IFSRA made any progress in having it changed?
Again and again, Liam O'Reilly reminded them: "They were here to tell us we were in breach of the law and they wanted us to deliver a plan to bring us back into compliance," the minutes said. "Their job was to implement the law and they want to see a plan by the end of January otherwise they would place sanctions against NCU."
Pat Ryan, one of the volunteer directors, seemed to adopt a more diplomatic approach, stating that "we wanted to work with them, to be proactive and helpful and that we all didn't want to get into any trouble by ignoring things".
The treasurer went on to complain that the credit union was "summoned to a meeting, threats were made to volunteers in their work place and home and that NCU were dictated to in a manner that was unacceptable".
Someone must have disparaged the law, because according to the minutes, Brendan Logue said "the law cannot be referred to as an 'ass' and that it was difficult for him to visit Newbridge on a cold dark night".
Joe Murphy countered that the Newbridge Credit Union members were there voluntarily and had devoted many hours of work to it over many years. The meeting concluded with Liam O'Reilly requesting a commitment from every member of the board" that they would comply with the law.
"Liam O'Reilly stated they wanted to talk to the whole board. There were limitations to what they can do, they didn't create the problems – arrived in the middle of them and they had worse things to deal with in other Credit Unions. He warned that maligned (sic) forces existed and could turn against us!!!!!!"
Pat Ryan promised they would do "everything possible to be compliant" and O'Reilly and his three colleagues left the boardroom.
The Sunday Independent contacted Brendan Logue about the meeting. He recalled that they were kept waiting outside the boardroom for quite a long time and that the meeting was tense.
"We were being accused of presiding over a flawed legislation and doing nothing about it. That was not the case," he said. "Anyway, the meeting achieved little or nothing. Newbridge continued to trade outside the scope of the Credit Union Act and were in breach of the Act. Eventually we had to appoint investigators, third party investigators, to look into the matter."
At that time, there was no legal mechanism to take sanctions, despite the ongoing serious concerns of the financial authorities. He said they "made every effort to reach a reasonable settlement". He said they had "difficulty trying to get the board of Newbridge Credit Union to act in a co-operative manner with us in resolving the issues".
Logue retired in 2009.
The minutes and correspondence relating to this meeting give an extraordinary insight into how the humble community credit union over-reached itself during the boom.
But they are even more extraordinary given that despite the alarm bells ringing in the financial regulator's office in 2005, Newbridge Credit Union was allowed to continue down its self-destructive path for several more years.
The consequences will be felt by every Irish taxpayer.
Within three years, the property crash had plunged the credit union into crisis. Newbridge Credit Union wasn't alone. The Central Bank tightened up the lending rules, a fund was set up to merge those in trouble. But Newbridge was among the worst.
In January 2012, the Central Bank installed a "special manager" to take over the running of the credit union. People rushed to get their savings out. Loans defaulted. Its financial position got worse. The special manager offered Newbridge to other credit unions. There were no takers. So Finance Minister Michael Noonan proposed that the taxpayer-owned Permanent TSB take over its loan book. The news leaked out on a twitter account last weekend.
The Central Bank – fearing a run on savings – rushed to the High Court last Sunday to get the deal approved before the credit union opened for business last Monday.
The bailout will cost the tax payer €54m. And the affidavit submitted by the Central Bank is a morality tale about the over-reaching ambitions of a community credit union that acted as a micro-bank, lending millions to developers and business people who were never its target market.
A figure of €40m loaned out to 603 people was identified for write-off. These were unusual loans not common in the credit union sector. More than €14m in loans averaging €550,000 were lent for business development. The biggest loan of €3.2m – believed to have gone to a local developer – was in breach of regulations and as of September, €2.8m was still owing on it. At other credit unions, the average loan was €7,764. In Newbridge it was more than twice that at €17,218.
The affidavit blamed the "inadequate governance structures and practices" in Newbridge for the deterioration of the loan book: poor paperwork, failure to investigate the financial position of borrowers, or their ability to repay a loan and no consistency in lending practices.
Despite the threats of Brendan Logue all those years ago, the directors and the managers who ran the branch faced no sanctions for their steering of the sinking credit union. Des Diver remains the general manager while Joe Murphy retired as treasurer several years ago.
The Central Bank only got those powers in August this year, when a new regulatory system for credit unions came into effect.
The board issued a statement last week in which they blamed the media and the Central Bank for the credit union's collapse. They said concerns about the credit union's bad debt were "debatable"; they blamed the Central Bank for landing the credit union with a liquidity crisis that forced the takeover; they mentioned "rumours" that the Central Bank found nothing in the Newbridge Credit Union to "warrant its destruction".
Compared with the Central Bank's take on it, their statement appears delusional.
If the bailout did not happen, according to an affidavit by Patrick Casey, head of resolution mergers and acquisitions at the Central Bank, Newbridge Credit Union would be liquidated in 29 days. The shock would hit the entire credit union sector, savers would rush to get their money out, international financial markets would wobble – just as the Irish State was exiting the bailout.
"On that basis, Newbridge Credit Union's failure could contribute to instability within the banking system and seriously damage the financial system, the economy and the State," said Casey.
And that is how a provincial community credit union came close to threatening the Irish economy in the same historic week that Ireland exited the bailout.
How Newbridge CU breached the Credit Union Act
* Section 27: limits the size of member deposits.
* Section 35: says that only 10 per cent of its loans can be for 10 years or more, and 20 per cent for five years or more.