Photo: Kenneth Allen. CC BY-SA 2.0
The Scottish government has demanded that the Treasury gives a value-for-money assessment of its decision to break up Dunfermline building society.
“We’ve asked the Treasury for this but we still haven’t seen it,” said a source close to Alex Salmond, Scotland’s first minister. The Scottish Government wants reassurance that the Treasury took all factors into account before deciding to end the Fife-based mutual society’s independence last weekend.
“There is no question that Dunfermline had made mistakes,” said a Scottish Government source. “But we want to know whether the economic significance of having the headquarters jobs in Scotland figured in their calculations, or whether their decision was taken from a UK perspective.
“As a government, we would put a premium on the importance of headquarters jobs in Scotland.”
Following an assessment by the Financial Services Authority, the Treasury concluded that Dunfermline was not viable as a going concern as it needed a £60m to £100m capital injection but would have been unable to repay loans funded by the taxpayer.
This sparked the Treasury’s decision to underwrite the building society’s £800m of toxic loans, predominately made to the commercial property sector, and to hand the profitable parts of the business to Nationwide Building Society, which is based in Swindon, Wiltshire.
On Friday, the Treasury said that an assessment had not yet been sent to Salmond but promised: “We will provide the Scottish government with a sensible and credible explanation.”
It is understood that chancellor Alistair Darling believed it would have been irresponsible for the UK government to lend the society funds it was know to be incapable of repaying. Darling is thought to have feared a capital injection would have been a stop-gap arrangement, and that the society would have been unable to make the interest payments on any preference shares to which the government subscribed.
The building society’s tattered balance sheet meant that credit rating agency Moody’s downgraded it to D+, equivalent to junk bond status, on March 26.
A source close to Dunfermline conceded that there was no way it could have taken on £60m to £100m in additional debt, especially if the Treasury had charged 8% over Libor, as had been indicated.
Nationwide pledged to retain the Dunfermline brand name and branch network, but was unable to provide any certainty over the head office, which employs more than 250 people.
This article was published in The Sunday Times on 5 April 2009