Dunfermline BS - examples of bad and slightly better financial journalism

Horrors! From yesterday's Times: "The Government has been forced to pay out around £1.6 billion for a portfolio including toxic loans and questionable mortgages as part of the rescue of Dunfermline Building Society by Nationwide Building Society today. The Treasury is made the cash payment to Nationwide, which this morning agreed to take on the healthy parts of the Dunfermline, including its 300,000 strong army of depositors, in a rescue deal hastily put together over the weekend."

Ah ... I see! From today's FT: "Nationwide, Britain’s biggest building society, has acquired £2.4bn of savings accounts from the Scottish group. It has also picked up the mutual’s staff, brand, 34 branches and head office as well as a £1bn portfolio of residential mortgages. The £1.6bn payment from the government to Nationwide is because the building society is only acquiring part of the group’s asset book but all of its liabilities. It includes £68.5m of integration and running costs from the deal."

What most people overlook is that 'savings' are a liability from the bank's point of view - those accounts are money that it has to pay out again sooner or later. So Nationwide does not appear to have pulled a fast one; it acquired £1,000 million mortgage assets (worth perhaps £900 million) and £1,600 cash (= £2,500 million) and assumed liabilities* of £2,400 million (customer deposits) and £70 million of integration and running costs, net value of transfer = negligible.

The amount that the government paid to Nationwide appears to be 'about right' and is thus irrelevant.

The bit that is important is how much the government will recover from Dunfermline BS's asset book; whether that will be less than the £1,600 billion it is out of pocket so far; and who else could have taken the losses on the chin.

I've checked Dunfermline's most recent accounts (for 2007**) and they appear to have non-customer liabilities*** of £465 million. Assuming the government had the nous to keep those liabilities within Dunfermline BS (it's not clear from the FT whether they did this, thus reducing the amount it had to pay Nationwide by £465 million) it could repay itself first and those liabilities last (a kind of forced debt-for-equity swap), then even if a quarter of the asset book is irrecoverable, the cost to the taxpayer would be minimal. Once the government has its money back, it hands over the keys to the other creditors and tells them to salvage what they can.

That's that fixed. Next.

* To confuse the issue, customer deposits at a BS are referred to as 'Shares' in the balance sheet, are they heck, in practice they are more or less the same as customer deposits at a normal bank.

** Either the Dunfermline BS was totally PC or it was targetting the wrong sort of customer; the pretty photo's of typical customers that adorn the first few pages are of a single mother; an Asian couple; and a pensioner couple.

*** "Amounts owed to credit institutions", "Debt Securities in Issue" and "Subordinated Liabilities", per balance sheet, page 19 to the accounts.