Reckless decisions’ sink Dunfermline!

‘Reckless decisions’ sink Dunfermline
By Andrew Bolger and Jim Pickard
Published: March 29 2009 22:56 | Last updated: March 29 2009 22:56
FT.com





An extraordinary expansion in commercial lending lies behind the collapse of Dunfermline Building Society, which has cast another pall over Scotland’s beleaguered financial sector.

At the end of 2007, when prices in commercial property had already started to fall, the group had £270m worth of commercial loans on its books.

In spite of signs of an impending property market collapse, the building society ramped up its lending to the sector to £650m – a sevenfold increase over just three-and-a-half years.

A spokesman for Dunfermline said on Sunday that the mutual’s problems were almost entirely concentrated in its commercial property lending book.

It would appear that the institution, founded in 1869, had been swept up by property mania just as the cycle turned. It also emerged the group had significant exposure to bonds based on non-conforming UK mortgages.

Only last year, Graeme Dalziel – who was ousted in January after eight years as chief executive – had boasted that Dunfermline had “absolutely no exposure to subprime lending”.





It is also thought likely that several institutional investors will abstain or vote against.

Yet the mortgage-backed securities on Dunfermline’s books were bought from GMAC and Lehman Brothers, renowned as two of the most aggressive subprime lenders in Britain.

Jim Murphy, Scotland secretary, said the previous management had made “reckless decisions” because of its over-exposure to commercial loans, involvement in the subprime market and unfortunate decisions on technology. Dunfermline was forced to make a £9.5m write-off on last year’s £11m profits because of a failed IT system.

Much of that exposure will now be taken on by taxpayers, although Treasury officials hope the value of the loans will recover in the medium term. Any loss to the state will depend on default levels in the loan book.

The frantic negotiations over the weekend came as the building society prepares to publish its annual accounts later this week.

The figures are expected to show a substantial loss, worsened by Dunfermline having to contribute £7m last year to the government’s Financial Services Compensation scheme.


A new Fred?





The deposit insurance scheme has been hit by the troubles of the banking sector, in particular the collapse of Bradford & Bingley and the Icelandic banks, and building societies have complained they have been asked to bear a disproportionate share of the costs.

The Treasury’s decision to force a break-up sale of Dunfermline is an embarrassing distraction for the prime minister, whose constituency lies near the mutual’s headquarters.

On Sunday night Downing Street refused to say whether Mr Brown held an account at the building society.

The failure of the group is a setback for government plans to use the mutual model to rebuild the UK lending system. A Treasury white paper next month will lay out plans for an expansion of the sector, based on the premise that it is generally a safer system than the plc banking model.

But the rescue of Dunfermline – the fifth “benevolent takeover” in the sector in one year – may undermine that premise.

Dunfermline’s chairman, Jim Faulds, revealed on Sunday that the group had been in touch with the Financial Services Authority for the past six months. In the past fortnight there have been rounds of discussions to try to find another group to rescue the building society.

The Treasury finally acted after being told on Saturday that no individual group was prepared to take on Dunfermline as a single entity.

Alex Salmond, Scotland’s first minister, expressed disappointment that Dunfermline could not continue as a going concern. The Scottish National party leader said the Holyrood government had offered money to support the mutual, but this would have required Treasury approval.

Dunfermline, which has 500 staff, is a strong supporter of social housing and has loaned hundreds of millions of pounds to housing associations in recent years.

Copyright The Financial Times Limited 2009


Nationwide takes over Dunfermline




Reported in the Scotsman

Vince Cable, the Liberal Democrats' Treasury spokesman, told MPs the Dunfermline board had been guilty of "disastrous management" and a failure of oversight in allowing it to run up a £24 million loss for 2008.

That required the Treasury, Bank of England and FSA to put the rescue package in place which has resulted in the Dunfermline's staff, retail and wholesale deposits, branches, head office and original residential mortgages being transferred to the Nationwide.

A "bridge bank" has been set up to oversee its social housing portfolio in Scotland, while accountancy firm KPMG has been appointed to sell off commercial loans, which will be used to help repay the £1.6 billion to the taxpayer.

Mr Cable told the Commons DBS made a £10 million loan two years ago to Lancashire property firm In House plc – a company that was "loss-making, insolvent and had never filed any accounts".

He added: "There were substantial numbers of loans of this kind taking place. Is this not an absolutely gross failure of regulation by the FSA? It's very difficult to see how this could have happened under the old building society regime, which kept a much closer eye on the conduct of these societies."

Papers seen by The Scotsman suggest that In House used the 2007 loan to provide 100 per cent mortgages on multi- occupancy or rundown terraced homes in Hull, Stockton and Lancashire, and an industrial unit in Scotland.

A year later, it obtained a second £10 million loan from the Dunfermline, and it has withdrawn some £3 million to £4 million for similar lending. About 25 of the properties are said to be uninhabitable because of the amount of repairs required. The firm could not be reached for comment last night.

Mr Cable, Mr Darling and George Osborne, the shadow chancellor, were united in condemning the failures of the mutual's board and its decision to purchase more than £150 million of self-certified loans from the two US firms – GMAC and the Lehman subsidiary – and embark on £650 million of commercial property lending.

Mr Darling said the Dunfermline's toxic investments were made shortly before the credit crunch that led to the collapse of the residential and commercial markets. He added that the Dunfermline was now losing money as a result of firms collapsing or defaulting on repayments.

Mr Darling said Nationwide had promised there would be no compulsory redundancies for the next three years for the 345 staff of the Dunfermline's 34 branches in Scotland. However, he could give no guarantee for head office staff.