Mr. Michael Fingleton:

Good morning Chairman, members of the committee. I appear before this committee on a purely voluntary basis. I will, of course, co-operate fully with the inquiry in so far as it is legally possible for me to do so given the issues that have been the subject of correspondence between my solicitors and the committee. I've already submitted a detailed witness statement which addresses the lines of inquiry as requested by the committee. This opening statement deals with the issues set out in that written statement. I prepared that statement on the basis of my recollection and the limited documentation available to me. My statements were prepared without access to information and documentation from the society which has not been available to me since my retirement in April 2009. I will confine my opening statement to a summary of some of the evidence given in my statement, together with some relevant comments.

The society's motivation for entering the commercial property market was the shortage of housing in Ireland in the early '90s following the extended downturn in that market in the '80s. The explanatory memorandum issued with the Building Societies Act 1989 encouraged building societies to get involved in residential development and provided specifically that building societies should be a "major source of funding for housing by investing directly in residential development". Following the entry of Bank of Scotland and the other foreign-owned banks into the market in 1999 it became increasingly difficult for the society to compete in the residential loans market. Their entry resulted in a period of intense competition, with all major lenders taking steps to protect and increase their market share, sometimes irrespective of price considerations. In addition, the brokers who controlled up to 50% of the market were predominantly aligned to the larger financial institutions.

It was decided by the society for good commercial reasons that it would off ... not offer 100% home loans as a matter of policy. Such loans were only provided by the society in exceptional circumstances. For the same commercial reasons, the society also refused to introduce tracker mortgages. We did not engage in self-certification of income mortgages or expand into the sub-prime lending market, and for some time resisted the term extension of loans to 30 and 35 years. The society also refused to lend at margins of 1%, which at that time was a prevalent practice in the market. In this prevailing climate, it was difficult for the society to grow its residential loan book. I would note that our fellow building society, the EBS, had 90% of its loan book in residential lending and it was not saved from the effects of the economic collapse as house prices fell nationally by up to 60% following the crash.

In 1995 the society came to the conclusion that building societies as stand-alone institutions had no long-term future and that the best option for the society was to seek a change in section 102 of the Building Societies Act 1989 which would enable it to effect a trade sale, thus realising the full value of the society for the shareholders. The enabling legislation was finally passed in August 2006 after ten years of unnecessary and inexplicable delay. The desired sale did not materialise for reasons detailed in my opening ... in my statement. Once it became apparent that we would not effect a trade sale of the society in the short term, I reviewed the society's position in the market and decided to downsize its balance sheet, reducing its commercial loan book, and from September 2007 I began taking appropriate steps to do so. I'd every expectation that this would achieve a significant reduction in the society's exposure based on the premise that in excess of €5 billion of the loan book was due to mature in 2008. At this time the society accepted the market consensus that in the event of a downturn in the property market, a soft landing scenario would apply.

Under this scenario, it was anticipated that a fall in real property values of around 20% would occur over an extended period. The society would have, at this time, welcomed such a development on the basis that it was in the interests of a more stable market. We were influenced in our views by the forecasts and commentaries arising from successive reports by the Central Bank, the IMF, the OECD, the EU, the ECB, the Department of Finance, the EIB, the World Bank, the ESRI and the NESC. In addition, all the economists in the banks, stockbrokers and academia were of the same view. Indeed, this consensus view appears to have been prevalent in every one of the 69 countries affected by the crash. In addition, prior to the general election of May 2007, all major political parties were seeking to increase spending, and indeed some campaigned on the basis of a proposed reduction in taxation. It was clear that parties on all sides of the House expected that the revenues from the property market would continue to accrue to the Exchequer.

The financial crisis which preceded the property crash originated in the US on the back of the sub-prime debacle which caused the banking crisis in which the rating agencies played a major role. A range of powerful institutions which went bust or had to be rescued or nationalised, such as Washington Mutual, AIG, Merrill Lynch, Freddie Mac and Fannie Mae, and, in April 2008, Bear Stearns. On 26 September 2008, the bankruptcy of Lehman's caused the collapse of the liquidity market in Europe and in the United States. As David Doyle, former secretary of Finance, said in his evidence, and I quote: "Lehman was the killer". If Lehman's and, to a lesser extent, Bear Stearns had not been allowed to fail in 2008, then things may have been different and the ultimate extent of the crash may have been somewhat moderated.

I reiterate, for the reasons outlined in my statement to the committee, that the society was not insolvent on the night of the guarantee. No individual financial institution could have prevented the property bubble in Ireland. The only entities that could have acted to prevent the property bubble were the regulator, the Central Bank, the Department of Finance or the Government. The ECB, who had the powers to compel the Central Bank to take any necessary action - sorry, the ECB also had the powers to compel the Central Bank to take any necessary action. However, none of them chose to do so.

The losses from property lending incurred by the banking sector in Ireland were not just confined to Irish institutions. The foreign-owned banks, namely, Ulster Bank, Bank of Scotland Ireland Limited, ACC, Danske Bank and KBC, all incurred significant losses estimated to be collectively in the region of €40 billion. The Building Societies Act 1989 states that it shall be the duty of the auditors to carry out such investigations as will enable them to form an opinion on whether the society has kept proper accounting records and maintained satisfactory systems of control of its business and records and systems of inspection. Where the auditors are of the opinion that the society has failed to keep proper accounting records or systems of control, they shall state so in their report. The committee should note that since their appointment as auditors of the society, KPMG, in each and every year have expressed satisfaction that the financial statements of the society correctly showed the financial position of the society and that proper books of accounts and records have been kept and that the directors had established and maintained reliable systems of control and, accordingly, issued full audit reports - full unqualified audit reports.

I do not accept that the NAMA valuations provided an accurate assessment of the value of the society loans. The extent of the losses attributable to the society on the back of the NAMA valuations of the society's commercial book is an issue which is in dispute. It is, in my view, that NAMA exceptionally discounted the society's loans in the absence of any, or with little credible, challenge to their valuations.

On 23 May 2012, in its address to the chartered certified accountants in Galway, Mr. Frank Daly, chairman of NAMA, said that having completed the due diligence of the property portfolio and having assessed the property portfolio in more detail, NAMA's view was that the assets had more potential than they initially had reason to expect. He went on to say, "A high proportion of the property assets in Ireland ... are located in or close to counties with large urban centres of population (Dublin and neighbouring counties, Cork, Limerick and Galway) and the long-term prospects for much of this property will be better after the economic situation stabilises." It is a matter of record and fact that the society's Irish commercial properties, including development lands, were located in precisely those locations - in Dublin, Wicklow, Meath, Kildare, Cork and Limerick. A reference to that is KPMG due diligence report, June 2007.

In the United Kingdom, where the society had the majority of its commercial loan book, with 60% of its lending to the London market, I have identified profits that have accrued or will accrue to NAMA in the region of €1 billion from sales relating to a relatively small number of borrowers. I am awaiting the receipt of further information and documentation in relation to many other borrowers to enable me to conduct a similar evaluation. I outline now examples relating to three properties to illustrate my point: property A - NAMA valuation £18 million, realised £200 million, excess £182 million; property B - valuation ... NAMA valuation £12 million, realised £100 million, excess £88 million; and property C - NAMA valuation £165 million, realised £250 million, excess, £85 million. The total accumulated profit in relation to those three properties amounted to £355 million, equivalent to €443 million. It must also be noted that at the time when NAMA was calculating the discounts, UK property prices were already on the rise again, particularly in the London area. The London property market has clearly performed strongly since this time.

I believe the society was a victim of the financial crisis which originated in the sub-prime market in the US, precipitated by the bankruptcy of Lehman's. However, I accept that the society was a contributor to the resulting property crash that followed by being unable to sufficiently reduce its exposure to the commercially property market, despite having realistic expectations to do so, while the decision of the society to downsize its commercial loan book in September 2007 and despite having diversified geographically its market exposure.

The financial crisis which occurred was in the ... was an event, the occurrence, size and magnitude of which was unforeseen by even the most astute observers of financial markets. As a result, the collateral damage caused by the collapse was immense for everybody concerned. Almost all commentators, as already said, accept that the financial collapse was not foreseen and could not have been reasonably foreseen. In my 30 years ... 38 years with the society, I had, prior to the economic collapse, gone through three recessions and downturns in the property market. I did not expect the predicted slowdown to be any worse than any of those previous recessions and none of the other market participants did either. Having built up the society in a competitive, innovative and cost-efficient manner over the years from a business with €20,000 profit and five employees with one branch office to almost €400 million profit and 455 employees with 50 full branch offices, it was an absolute shock and bitter disappointment to me that the society succumbed to such a cataclysmic financial crisis, a one-in-100-year event which caused such huge damage to every element of the nation, both corporate and personal. I regret very much ... I have and I am continuing to pay the price, personally, as a result.

In particular, I regret it for the society's employees, shareholders and borrowers, who all became casualties of the crisis, and I regret it for the taxpayer and the State, who had to fund the deficit.

Thank you, Chairman. I am happy now to take your questions.