‘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.
Tuesday, 31 March 2009
Friday, 6 March 2009
UK set for 70% economic stake in Lloyds
Financial Times UK
By George Parker and Jane Croft
Published: March 5 2009 23:49 | Last updated: March 6 2009 09:22
The enormity of Lloyds’ ill-fated takeover of HBOS will be exposed on Friday, as the bank’s board considers a Treasury rescue plan that could see the taxpayer take an economic stake of about 70 per cent in the merged bank.
Alistair Darling, chancellor, has agreed an outline deal that would see the government insure toxic assets of £258bn, but it would come at a heavy price.
EDITOR’S CHOICE
Martin Wolf: Big risks for the insurer of last resort - Mar-05
Bank pumps £75bn into economy - Mar-05
Notebook: Tesco banks on a modest HQ - Mar-05
Capital base solid, says Nationwide - Mar-05
Mr Darling’s officials have peered into the HBOS loan book and concluded that the final insurance fee charged by the taxpayer must reflect the high-risk nature of many of its investments.
After more than a week of negotiations, Mr Darling’s officials have proposed a fee that would see the government’s economic stake in the Lloyds Banking Group rise to about 70 per cent, through the issue of non-voting, but dividend-paying, B shares.
If the government were to increase its economic interest it would be a blow to the bank’s chief executive, Eric Daniels, and the chairman, Sir Victor Blank.
Mr Daniels said last year that he regarded the government as just another name on the share register but he did not wish state ownership to rise above 43 per cent.
One big investor suggested that Sir Victor’s head should roll. “His move to buy HBOS has blown the bank up.”
The Lloyds board is also considering a separate – but related – proposal that could see the government’s £4bn in preference shares converted into ordinary shares, a move that would also give the taxpayer majority voting control of the company.
The preference shares are an expensive form of capital for the bank, carrying a 12 per cent annual coupon and incurring an interest charge of £480m.
But a conversion of those shares into ordinary shares – as Mr Darling may insist – would take the taxpayer’s voting stake in the company up from 43 per cent to closer to 60 per cent. The additional block of non-voting B shares – the fee for the insurance scheme – would take the government’s economic interest to about 70 per cent.
Shares in Lloyds gained 4.7 per cent in early trading on Friday to 42.2p.
The Lloyds board has resisted handing over direct voting control to the taxpayer and the bank insisted on Thursday night that negotiations were continuing, but it may conclude it has little choice.
Mr Darling’s officials say they are “relaxed” over whether Lloyds converts the preference shares, but point out that when the Treasury struck a similar deal with RBS it insisted on turning them into ordinary shares.
“There are still extensive negotiations and the Lloyds board still has to get their head around this and agree to it,” said one person with knowledge of the situation, who suggested there was a 60 per cent chance of a deal being struck on Friday.
Peter Mandelson, business secretary, said on Friday that talks over Lloyds’ participation in the scheme were difficult.
”Obviously when you’re making a change like this, introducing new measures or instruments to enable the banks to to recover, it involves a negotiation about the terms, the pricing and all sorts of conditions that are attached and that involves a fairly difficult, tough negotiation between the government and the banks,” he told Sky News.
If the preference shares were converted into non-voting but dividend-paying B shares, the bank could use those to bolster its capital ratios but the voting stake of the government could remain at 43 per cent.
Last week, RBS announced it was putting £325bn of assets into the government’s asset insurance scheme, where the bank agreed to pay a “first loss” on bad loans while the taxpayer agreed to underwrite 90 per cent of remaining losses. The government could end up with a 95 per cent economic stake.
Another big investor said: “It is a great pity that Lloyds’ management got itself into this mess by agreeing to buy HBOS and there are investors who might be unhappy with Eric Daniels.”
Lloyds said its position had not changed and talks continued with the Treasury.
Copyright The Financial Times Limited 2009
------------------
Cost of UK Bank Bailout - Bloomberg!
By George Parker and Jane Croft
Published: March 5 2009 23:49 | Last updated: March 6 2009 09:22
The enormity of Lloyds’ ill-fated takeover of HBOS will be exposed on Friday, as the bank’s board considers a Treasury rescue plan that could see the taxpayer take an economic stake of about 70 per cent in the merged bank.
Alistair Darling, chancellor, has agreed an outline deal that would see the government insure toxic assets of £258bn, but it would come at a heavy price.
EDITOR’S CHOICE
Martin Wolf: Big risks for the insurer of last resort - Mar-05
Bank pumps £75bn into economy - Mar-05
Notebook: Tesco banks on a modest HQ - Mar-05
Capital base solid, says Nationwide - Mar-05
Mr Darling’s officials have peered into the HBOS loan book and concluded that the final insurance fee charged by the taxpayer must reflect the high-risk nature of many of its investments.
After more than a week of negotiations, Mr Darling’s officials have proposed a fee that would see the government’s economic stake in the Lloyds Banking Group rise to about 70 per cent, through the issue of non-voting, but dividend-paying, B shares.
If the government were to increase its economic interest it would be a blow to the bank’s chief executive, Eric Daniels, and the chairman, Sir Victor Blank.
Mr Daniels said last year that he regarded the government as just another name on the share register but he did not wish state ownership to rise above 43 per cent.
One big investor suggested that Sir Victor’s head should roll. “His move to buy HBOS has blown the bank up.”
The Lloyds board is also considering a separate – but related – proposal that could see the government’s £4bn in preference shares converted into ordinary shares, a move that would also give the taxpayer majority voting control of the company.
The preference shares are an expensive form of capital for the bank, carrying a 12 per cent annual coupon and incurring an interest charge of £480m.
But a conversion of those shares into ordinary shares – as Mr Darling may insist – would take the taxpayer’s voting stake in the company up from 43 per cent to closer to 60 per cent. The additional block of non-voting B shares – the fee for the insurance scheme – would take the government’s economic interest to about 70 per cent.
Shares in Lloyds gained 4.7 per cent in early trading on Friday to 42.2p.
The Lloyds board has resisted handing over direct voting control to the taxpayer and the bank insisted on Thursday night that negotiations were continuing, but it may conclude it has little choice.
Mr Darling’s officials say they are “relaxed” over whether Lloyds converts the preference shares, but point out that when the Treasury struck a similar deal with RBS it insisted on turning them into ordinary shares.
“There are still extensive negotiations and the Lloyds board still has to get their head around this and agree to it,” said one person with knowledge of the situation, who suggested there was a 60 per cent chance of a deal being struck on Friday.
Peter Mandelson, business secretary, said on Friday that talks over Lloyds’ participation in the scheme were difficult.
”Obviously when you’re making a change like this, introducing new measures or instruments to enable the banks to to recover, it involves a negotiation about the terms, the pricing and all sorts of conditions that are attached and that involves a fairly difficult, tough negotiation between the government and the banks,” he told Sky News.
If the preference shares were converted into non-voting but dividend-paying B shares, the bank could use those to bolster its capital ratios but the voting stake of the government could remain at 43 per cent.
Last week, RBS announced it was putting £325bn of assets into the government’s asset insurance scheme, where the bank agreed to pay a “first loss” on bad loans while the taxpayer agreed to underwrite 90 per cent of remaining losses. The government could end up with a 95 per cent economic stake.
Another big investor said: “It is a great pity that Lloyds’ management got itself into this mess by agreeing to buy HBOS and there are investors who might be unhappy with Eric Daniels.”
Lloyds said its position had not changed and talks continued with the Treasury.
Copyright The Financial Times Limited 2009
------------------
Cost of UK Bank Bailout - Bloomberg!
Wednesday, 4 March 2009
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