This piece first appeared in the money section of the Saga website on 1 April 2009
The text here may not be identical to the published text

AND THEN THERE WERE 53….

The failure of Dunfermline Building Society marks another key moment in Britain’s part of the global economic crisis. Small though it is compared with the major High Street banks which have been rescued or even Bradford & Bingley which failed, it is important because this is the first building society to go bust since at least World War II.

Dunfermline collapsed because it did things building societies are not supposed to do. It lent almost £650 million to businesses who were investing in – gambling on we might say now – commercial property. Most of these loans were made when the price of commercial property was at its highest. So many of the borrowers will not be able to repay their debt. It also spent more than £270 million on buying mortgage loans from two American banks. These were not the famous US ‘sub-prime’ loans but mortgages largely in the UK made on the basis of ‘self-certification’. In other words whatever the borrower said their income was the bank believed them. Not the safest way to lend money. Accountants estimate that the loss on all these dodgy loans might be as high as £100 million.

All the risky bits of the business are now the property of taxpayers. The good bits of Dunfermline were taken over by Nationwide building society. It now has another £3.23 billion of deposits from more than 300,000 customers and more than £1 billion of good mortgages lent to 20,000 customers. It has also has gained 34 branches, a headquarters building in Fife it may not need and 534 staff – some of whom no doubt ditto.

Just a week before Dunfermline collapsed Nationwide’s Chief Executive Graham Beale was complaining that building societies had to bear their share of the cost of the Financial Services Compensation Scheme (FSCS). He wrote in The Times “It seems inequitable that Building Societies, as prudentially managed operations, should be penalised for the failure of others.”

It is not a line that can really be sustained any more now that a building society has failed. Particularly by Nationwide which has gained customers, cash, mortgages, and buildings as well as a £65.8 million sweetener to cover “ongoing management and integration costs”. All the net liabilities of the transferred society were covered by a cheque from the Treasury for £1.5 billion. Ultimately most of that will be repaid by the FSCS and by far the biggest share of that cost will fall not on the remaining 53 building societies but by their much bigger cousins, the banks.

 


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