UK: Nationwide gets the best bits of Dunferline: taxpayer takes the risky stuff

Scottish Secretary Jim Murphy told the BBC in an interview broadcast on Saturday that the problems centred on "some reckless decisions by previous management because of overexposure to commercial loans, involvement in the subprime mortgage market in the U.S. and really bad decisions on their technology."

For Dunfermline, the problem was made worse that, even before the current crisis, it operated just into profitability - just GBP2 million in 2007, the year many financial institutions were reporting super-profits. For a building society operating as such, that's a point of credit and pride. But not if the management goes off piste.

Dunfermline appears to have been willing to take risks that other building society's - mutual savings and loan institutions - were not willing to take or, even, considered to be outside the scope of their permitted activities. The combination of these two factors meant that - even though it said it needed "only" some GBP150 million to see it through this crisis - it would probably not be able to meet the repayments on its debt.

Being insolvent on a balance sheet basis is bad enough, but compounding it by being insolvent on a cash-flow basis is disastrous. However, given the number of UK banks that were in or dangerously close to that position last October, the Dunfermline has arguably been treated differently.

Whether that is good or bad remains to be seen. In a cleft-stick, the Bank of England conducted what the Treasury calls "a competitive process" over the weekend. The winner was Nationwide - the UK's largest building society. It will take over the staff, premises, deposits and mortgage business plus some other lending. Another building society was interested but - crucially - so were two banks.

The question of a sale to banks raised two huge issues: could the government and regulators force the disposal of a mutual entity into the hands of a public company? Could the members block the transfer and the effective de-mutualisation of their interests?

Secondly, if a bank bought it, where would the money come from? The British public is already furious with Gordon Brown and his next door Darling , the Chancellor for, as they see it, profligate use of future revenue to support a small number of bankers and their shareholders. They were particularly incensed when it appeared that rescue money might be used for corporate development.

Dunfermline's social housing scheme and associated deposits will be transferred into what it termed a "bridge bank." The Treasury, Bank of England and FSA will decide how to deal with that when the dust has settled. It is hoping to sell it to the Scottish government.

But the commercial loans, acquired residential mortgages, subordinated debt and most treasury assets are regarded as lost causes and have been placed into administration - which implies that they were left behind when the other assets were transferred and that the entity that was the DBS is left with the risks that killed it.

At 10:30 this morning, the Dunfermline website went off line. Two minutes later, it was back with an explanation of what was happening.

But there remains the following poignant "About us" on the front page: "Dunfermline Building Society Dunfermline Building Society is the largest Scottish building society. Established in 1869, Dunfermline Building Society continues to assist people in buying their own home. We are now Scotland's largest Building Society playing an important part in the savings and mortgage market. The Society is a mutual organisation and as such, exists to serve the needs of members without the necessity to satisfy shareholders. Profits made are sufficient only to provide for the costs of the business. With significant and continuous investment in communities across Scotland through sponsorship and support to various organisations, the Society has earned the title of "SCOTLAND'S BUILDING SOCIETY."

Until today.

From today, the Dunfermline's customers are customers of Nationwide. Its staff are staff of Nationwide.

But, stick at the end of the penultimate paragraph of a long information release - in a four-line long sentence of routine and dull comment, is the following statement: "Treasury provided consent for the use of public money."

Quite for what, and how much, and to whom, remains to be seen.