Sunday, 29 March 2009


Have just finished watching an angry Jim Faulds, the chairman of the Dunfermline building society, give an honest appraisal of the business situation since October last year, when he started communicating with the FSA.  They didn't communicate with him of course, oh no, they're above such things and it appears they left the building society high and dry and ready for slaughter.  How can a government sell off a mutual BS without the consent of the management and members?  Surely the business belongs to the members.  Yes I know I'm naive.

The decision to sell off the good bits and the Treasury will keep the bad bits seems ridiculous and surely the worse decision for the taxpayer. The Treasury are happy throwing billions at Northern Rock, Lloyds TSB, HBOS and RBS  but refuse to give Scotland's largest building society a loan in the millions.  I'm not going into the detail of all this because John Redwood and others will do the analysis far better, but I'm not in the least happy.  The way it has been handled shows the arrogance of the Westminster government and this decision wasn't just taken yesterday, it must have been taken some time ago.  Surely companies don't bid without seeing the structures of a business?  That takes more than 24 hours.

Alex Salmond, on the BBC website, has clearly stated the Scottish government's offer is still on the table and that other building societies are operating with far larger debts than the Dunfermline.  Jim Murphy doesn't have a clue as he's still pushing the American sub-prime mortgage excuse, even after Mr Faulds explained there was no connection.  When will Jim Murphy stop lying to us, it's becoming so irritating listening to him pushing the Gordon Brown line.

My little bit of savings will be withdrawn this week and put into the Scottish building society, a small business right enough but one recommended to me by friends in the last couple of hours.

I wonder if Lloyds is one of the bidders for the Dunfermline?


Mr. Mxyzptlk said...

John redwood said

"bad loans and silly investments Dunfermline has made"

"losses have come from Scottish business made by a Scottish institution under the not very watchful eye of the British Regulator."

Translation = Scottish people cant be trusted to run a bank without being watched by a Westminster (English) regulator.

Why do you even bother with Mr John redwood.And as for him talking about more regulation of private industry..
well anyone who remembers him when Margaret was about know what a slime ball he really is.

Sometimes Subrosa i wonder what type of politics you support.

And have to admit you and Alex are probably from different ends of the political spectrum.

subrosa said...

Niko I try to show a balanced view of politics - unlike some I could mention :)

I've told John Redwood on his blog that I disagree with his assessment and suggested he watch the Scottish Politics Show then have a rethink.

Isn't it best to see all the angles of something before you make a judgement?

Mr. Mxyzptlk said...


here u read this what a racist article..

According to the World Health Organisation, the main cause of death for young men in three Glasgow wards is homicide involving a knife. Why is the Scottish male and, in particular, the west coast male, such an aggressive beast?

Faux Cu said...

I think the Co-op.

subrosa said...

Someone mentioned the Co-op to me this afternoon FC. She has friends in the higher bits of the Dunfermline.

Oldrightie said...

Translation = Scottish people cant be trusted to run a bank without being watched by a Westminster (English) regulator.

Thick twat. He is saying that Labour are as shit North of The Border as they are South. Apologists for Labour have just about the worst job on earth right now. I am very happy to see their misery but not the damage caused.
We are nowhere near the bottom of the depression. Bastards.
Sorry for the language, Subrosa.

subrosa said...

It seems a west coast characteristic but I wouldn't say it confined to the west of Scotland niko. Liverpool also has a problem. No idea how to solve it except to try to bring back some moral responsibility to these youngsters.

I won't see that in my lifetime though because education, family and society in general has been allowed to disintegrate and it will take generations to claw a bit back, if it's even possible.

Anonymous said...

Subrosa i also have savings in the Dunfermline building society. Im not worried to much about them becouse either way we are protected. I hope the Scottish Gov offer is taken up.

I cant understand why Jim Murphy is telling fibs, your right other Building societys have far worse debts than the Dunfermline. Gordon Brown and labour dont really care about Scottish companies. They saved RBS becouse lets face it, the ones that would have lost out most would be down south. Each passing day i despise the labour party more and more..

CrazyDaisy said...


When Jim Murphy is lying his body language is difficult to read but a sure tell tale his is blinking increases (was going to say his lips move!) - next time you watch him you'll see.

After listening to Jim Faulds I'm certain that the UK Government is deliberately pulling the rug from under "Dumfs" feet.

If KPMG, an independent body, state that it could turn profit and repay the taxpayers then great - I doubt we'll see much money from the other big 4 from their bailouts!

I smell a jobby a great big smelly one, hopefully not much longer to endure these feckin idiots.


Mr. Mxyzptlk said...


Nah i am saying anywhere in the U.K the torys are untrustworthy scum who's only thought is how much money they can make.

And Tory by definition look down on and disrespect any one who isn't white middle class and preferably male and English.

Anybody else is a second class.

as for language being called a Tory is about as bad as it can get.
Makes a snp Nat sound like being an angel.


Aye We Can ! said...

I'd urge caution on everyone here. I just dont buy into the anti-scottish conspracy theories on this occassion

First of all it a Fife based bank dear to GB's heart. And it must surely be highly embarasing for him seeing a building society in his own back yard go under, especiallly as he hosts the G20 on Thurday. And you are right, compared to what the RBS got ( a scottish institution surely?) and HBOS (another semi-Scottish institution) the sums apparently required to "save the Dunfermline are small - £100 million tops we are told.

But I think the Traesury and the FSA, and I suspect Jim Murpy and Darling genuinely have concluded the Dunferline just cant be saved. It has not only made some pretty dreadful investment mistakes ( That IT deal was ridiculous - what were they playing at?), has of course sufffered from the credit crunch like many others, but essentially have no strategic future, with or without the recession, with or without a bail out.

It is common knwlelege in banking circles that the Dunfermline has itself been trying to merge/be taken over by a bigger building socity for at least a year. But they just aint interested, such are the dunferline's problems, This all the FSA and darling have concluded. So rather than bail it out as an stand alone entity - they are instead sensibly using taxpapers money to ease the transition to a merger - where the Dunferlines own management tried and failed to take the society.

I have notice what the SNP Government is saying ,and its quite mutted. Its offer? Nobody knows what it is, but where is the money coming from is what id like to know? John Swinney told us all only last month that he had no spare cash for lots of things - from LIT to teachers to bridges - but now seems to have up to £100m to save a very badly run building socity. It just dont square, and I for one am glad the SG aint pouring good money after bad, as under the block grant system, money fot something by definition means money off something else. I can think of worthier causes - dozens of them

Sad of you work there, and sad for Scotland. But an interview with a chairman who presided over the crisis dont convince me.

I dont buy the line that banks above all else must be saved. I never saw eck offer SG money to save knitwear factories in the Boarders, battling palts in Fife, or Semi Conductors in you city subrossa- or paper making factories in his own patch. Becuse there are limits to government , and certainly limits to devolved government

Why are we all running after banks? They aint the be all and end all, £100m could do loads in Scotland - so if you get it spend it. But not propping up lame duck that just wants it for now so as it can sell itself a year from now

subrosa said...

Don't worry about your language Oldrightie, what you say is correct. I'm just so angry at what I consider to be a scorched earth policy for Scotland. They know they're finished Brown and Darling and they couldn't care less now.

subrosa said...

Spook I'm not worried about my savings but why should I leave my money in the Dunfermline or whatever it's going to be called when it won't stay in Scotland and I have another truly Scottish company which I can use.

The Scottish BS may be small but it offers the same as the Dunfermline which was handy I suppose.

subrosa said...

CD Jim Murphy is a take recorder. He doesn't have any command of the financial position with the Dunfermline.

I must watch his blinking, never noticed that. I just sit and seeth when he's speaking because I know he's lying.

subrosa said...

Aye We can, thanks for your post although I disagree with most of it. Brown Darling and Co now know they've lost any credibility. The Dunfermline want £20m or so KPMG told them. KPMG have been more or less accurate all through this although their advice has been shunned much of the time.

Goodness me AWC, you don't know what the Scottish government is offering? Alex Salmond's been on radio and TV several times in the last week explaining what he's offering. Even I know.

The Dunfermline is NOT a bank it is a mutual building society. It does not have shareholders, a completely different setup to a bank.

It's Alistair Darling who is now saying it will be £100m - a loan not a gift btw. That's the figure the chairman disputed on TV today and I found his performance very open and honest.

scunnert said...

A scorched earth policy id ever there was one. Anything that can be moved south will be moved south. Everything else will be destroyed.

scunnert said...

'Jim Murpy and Darling genuinely have concluded ..."

AWC - yer a laugh a minute pal. said...

I reckon it's a mix of trying to save every scrap they can too enable another fiscal stimulus and Brown doing the hard man act for middle england in letting his local bank goto wall. Also it undermines the Scottish economy so as murphy has summit to craw on about.

I thought more importantly the BBC's handling of the interview today was setup for maximum propoganda value, by having the chairman on first, salmond second as a recorded piece and murphy live. Thus making salmond look out the loop by answering with old info and Campbell letting murphy off repeatedly, and allowing him to spout now(after chairmans interview) proven lies.

Subrosa. Can you start a cyber stalkers chart? The person with the most each week gets a fish supper.

I reckon I gotta win this week!

subrosa said...

Good assessment of the situation Juan, well done.

Start your own cyber stalkers chart - I do as much as I can already :)

subrosa said...

Aye scunnert, it just gets worse. The more I think about it the more angry I get. You can't get Channel 4 news can you? There's a clip on there with Jim Faulds.

It's also the way it's been handled with the out and out lies which angers me. I hope the people of Fife are taking note and the people of Edinburgh.

Anonymous said...

Isn't this what should have happened to Fred Goodwin? Jim Fauld and his mates get greedy, lend recklessly and do other stupid things and destroy the company. It's not the job of the taxpayer to rescue these idiots, we should be throwing them in jail.

Reading that Herald article it seems that Faulds was being as slippery as a politician when it came to talking about those bad assets. He ranted loudly about the English residential book they bought (still a stupid decision, whatever the label you put on it), but didn't mention that they'd built up £260m of commercial property loans which are presumably badly underwater now, nor the 100% LTV residential loans they were offering as recently as last year (which will also be in massive negative equity). Why should we bail these idiots out? And more to the point, what losses are there on these loans that we don't know about yet? We don't know - and that seems to be the key point at issue, the "optimists" are just looking at the past losses (mostly on the IT thing), the "pessimists" are looking ahead at the trouble they've stored up in their loan book that we don't know about yet.

I've only watched the C4 interview, but reading between the lines it seems that this KPMG report is saying "stick in £25-30m, and the society has a 'fair' chance of survival" - 50:50 perhaps? But given they've built up this big commercial property book in the last few years of the boom, and were still issuing 100% residential mortgages in 2008 - it's very easy to imagine that they've got another £50-100m of losses lurking in the loan books. So while I loathe the mob in Downing St with passion, I suspect that Darling probably is telling it straight when he says that you'd need £60-100m to sort them out properly. If you "just" give them £26m, it's like giving the smackhead a fix, he'll soon be back for more - and even if Edinburgh could do £26m now, the rest of the £100m would be coming out of schools and roads etc - but it's smart politics for the Nats to pretend that they could be in a position to do something. Typical politicians' BS that.

Yes it may be a smaller debt than RBS - but the cash flows are smaller too. A mortgage of £100k @5% interest is a "small" debt in comparison - but if you rent out the house for £250/month (£3k/year) then you have a problem. The crux of this seems to be that Faulds is saying "give us £26k now, we can easily pay that" - but in fact he's going to keep remortgaging until he's closer to £100k before he's out of the woods - but he's still only getting cash flow of £250/month. In fact his profitability will be going down as it's based on boom-time levels of lending.

For me the telling point is that building societies always look after their own, a society has never had to come to the taxpayer before. A good example is the way that Nationwide bailed out the Cheshire and Derbyshire a while back. The fact that Faulds has known about the historical losses for six months (probably more) and hasn't been able to organise a rescue deal suggests that there's future losses in there that no other society would touch on a normal commercial basis. Hence Faulds is left bleating to London to take out his mistakes, to leave a residue that the other societies are prepared to acquire. Maybe there is some funny business going on between Faulds and the FSA/Treasury - but it's an indication of how badly he's messed up that the FSA/Treasury are involved at all.

The other point is that anything other than a continuation of business as usual makes Gordon Brown look really stupid. Given the amount of other people's money he's thrown at the Edinburgh banks, you would have thought he would have done absolutely everything he could to preserve his "local" financial institution. The fact that hasn't happened suggests there really is some bad stuff in there. Of course, you could also view this as an internal squabble between the Rt Hon Members for Kirkcaldy and Edinburgh South West, and there probably is an element of that - but it's no coincidence that when this has been known about for six months, it has suddenly blown up just as McCavity is in Brazil.

Bottom line - I don't trust Darling further than I can throw him, but in this case I think it's Faulds who is trying to pull the wool over your eyes, whilst the Nats are going along with him so that they can make another imaginary promise for political advantage that would blow up in their face in reality. As usual management are going to get away with greed and incompetence rather than being locked up, whilst the "little people" working in the branches are the ones who suffer for their bosses' mistakes.

Sorry for rambling - I've not really thought about this until now. :-)

Anonymous said...

Just noticed Aye We Can!'s comments - I didn't mean to repeat a lot of what (s)he had said. :-) But I was trying to think this through from as unpolitical viewpoint as I could (well, I try to hate all politicians equally :-) ) and AWC seems to be doing the same, interesting that they've been trying to get another society to bail them out for a year now. That seems to be the best way of judging whether the society is truly viable or whether Faulds is just trying to cover up what a mess he's made.

Faux Cu said...


I posted on the John Redwood site yeaterday.

He was slaverring on about more Scottish incompetence etc . I know you also did so.

He responded to my piece saying he had never made any reference to the DBS being into Toxic USA debt. I did not, I had said that it was our Vice Regent J Murphy who had done so. He said that if the DBS could be save d why could they not have raised money commercially.

I replied that the DBS was a mutual building society and I doubt whether the rules allowed them to do so and pointing out the error re Murphy.

I see this morning he has had my reply deleted leaving his comments only.

Nasty bit of works this Redwood. He is a right wing Tory to his fingertips and there are more like him hiding in the woodwork behind touch feely Cameron (cloned Blair).

If Scotland does not vote for the SNP, and in big numbers, at the Westminster elections and Cameron gets in, God help Scotland.

I am worried about the sheep in Scotland retreating to Labour, thinking they will be safe from this Tory lot. Big mistake but Glenrothes tells us to be very afraid about sucking thumbs.

subrosa said...

'The fact that Faulds has known about the historical losses for six months (probably more) and hasn't been able to organise a rescue deal suggests that there's future losses in there that no other society would touch on a normal commercial basis.'

Thanks for your post el-sid. No mutual building society can organise a rescue without the permission of the treasury. They refused to give this. That's it in a nutshell.

Sadly the taxpayer now is saddled with the Dunfermline's bad debt. I would have thought it was worth keeping them independent and letting them sort it out themselves.

subrosa said...

Morning FC my thoughts too. Will this waken people up to what's happening? I'm not going to put a bet on it.

Faux Cu said...

Sorry Sub, I respectfully disagree with your post re "hidden" debt and the reluctance of other "societies" to take them over.

No same society in the current financial debacle will do such a thing, why should they need to do so?

Why pick up the miniscule of a possibility of such debt when if they wait long enough the Government will guarantee such a possibility and take away all risk.

Then they buy at fire sale prices?

Any sane business would not rescue a business in trouble. Better to wait and buy it off the receiver or better the liquidator.

The who thing stinks like Jacqui Smiths bed sheets.

subrosa said...

FC I'm sorry I'm a bit lost as I can't remember posting anything about hidden debt and the reluctance of other societies to take over the DBS. In fact they were queueing up to do so especially after the treasury decided they would take the bad debts. What a lovely present to the taxpayer isn't it.

Indeed the whole thing stinks.

subrosa said...

El sid, did you see tonight's Newnicht? Seems that one other BC with the support of others put an offer on the table at the weekend but the deal had already been done.

Faulds is the fall guy by all accounts although I'm not sure he was informed about the Friendly making an approach.

Still trying to find evidence that they needed to get permission from the FSA before they accepted amalgamating with another mutual.

Haven't heard anything about this whole year Aye We Can speaks about. Just can't find a thing.

More and more facts will come out in the wash but the DBS board don't look good right now and nor do Darling and Murphy.

Anonymous said...

Hi sub

Are you really saying that the "Treasury" have denied a conventional takeover of the whole society ("good" + "bad" bits) by another mutual? That would be seriously unusual. Yes the FSA would have to tick the boxes, but in the current circumstances that would be a formality. Have you evidence to the contrary?

On the other hand, it does seem that the Treasury may have refused in the past to sanction a deal which would see the "good" bits of Dunfermline taken over by a mutual and the "bad" bits bailed out by the taxpayer somehow (ie what we've ended up with, although the detail of the original deal was probably different). However, that's more than just box-ticking approval, that's using taxpayers' money, so it's a rather bigger decision than approving a takeover involving no public funds.

I'm a bit confused what actually happened - and I suspect Faulds is happy to keep us confused. We hear things like "the building society could have been saved if it was given access to around £20-30 million from the Government's liquidity scheme, said Mr Faulds.

"This was an unnecessary move by the Treasury," he said. "They clearly didn't want to take the risk. We could have had an independent, sustainable future.

"What we needed was not capital, but access to the liquidity scheme and the Financial Services Authority raised the bar for access to the liquidity scheme."

Now "the liquidity scheme" is normally taken to be the BoE's Special Liquidity Scheme, which doesn't hand out money at all, in fact it takes stuff in. It was the first attempt to help the banks about a year ago, the BoE would take ~£3 of dodgy assets from a bank, and give them £2 of good assets in return, that could be counted towards capital ratios - it was just improving the quality of their assets rather than their quantity.

Instead what he seems to be talking about is the Treasury's 2008 Credit Guarantee Scheme announced at the height of the chaos in October, the mechanism used to bail out RBS etc, by giving them Tier 1 capital in the form of PIBS. There was also a guarantee of short-term debt issuance at the same time. Now it's a bit worrying that Faulds doesn't know the difference between the SLS and CGS, or indeed the difference between liquidity and capital, but I'll let that pass.

I wonder if what Faulds is talking about is the handover from the CGS to the new Asset Protection Scheme announced in January, which was restricted to companies with >£25bn of dodgy assets. However I suspect that Faulds may have objected to the requirement that "its senior management team is credible, with demonstrable ability to deliver its
business model and delivery plan." :-) However, the APS is just another guarantee scheme, it's not a way of getting new capital into the society. The way I interpret the timetable is as follows :

Peston reports that £500m of the commercial loans were made in the past three years - ouch, ouch, ouch.

They will have surely known that they had a problem way back, both on the IT side and as the property market turned. Maybe they thought that little old Dunfermline was immune from Northern Rock-type problems, I don't know - they wouldn't be the first small institution in this crisis to think that they were cleverer than the market.

The fact that they were still doing 100% LTV loans in ?March 2008 tells you that either they thought the residential market would still go up (suckers), or that they had realised what problems they had in the IT division and were trying to trade their way out by grabbing market share in mortgages.

It was AWC who suggested that they started looking for a buyer at this stage, not me - but it makes sense, they were starting to come to terms with the sheer horror of the IT losses even if they maybe hadn't realised how bad things were in the commercial property world. TLOTF suggests that they still thought there was no problem in June. But again, maybe they didn't try too hard, or they had people come and look at them, and turn them down, we don't know. But this would be a good 6 months before :

September 2008 - Cheshire and Derbyshire are rescued by Nationwide. Both 2-3x bigger than Dunfermline, Cheshire in particular had had a one-off £10m loss but Nationwide obviously thought that they were worth rescuing. Faux Cu makes much of "why not wait to buy at firesale prices?" The answer is that the building society movement doesn't work like that. They make a big thing of the mutual principle, and that until the Dunfermline, no building society had ever got into trouble without being rescued by one of the others, lock stock and barrel. That's just the way they worked - and the Cheshire/Derbyshire rescue proves that Nationwide was willing to do a 100% takeover even as late as last autumn.

It seems that in October, they got the first formal accounts (the interims?) telling them what a mess they were in.

Also in October, the FSA told the society "that it needed an extra £20 million in capital. This figure later went up to £30 million and then £40 million". This seems to be explained here : "Dunfermline failed to meet tough demands to bolster its capital ratio from 5% to 8% and ensure it has enough money to meet future commitments." The FSA "stress test" in other words. At the height of the chaos, Faulds would have known that there was no way they could raise that kind of money, other than by merger or handout.

It's interesting that a few weeks later, Graeme Dalziel, the CEO that had overseen the reckless expansion of the society since 2000, resigned with a week's notice, to be replaced by a Nationwide board member. I think it's clear that a deal with the Nationwide had probably been pencilled in before Christmas, and they put their own man in to discretely work out the scale of the problem. A bit different to the way Lloyds was forced to take over HBOS without close examination of the books - HBOS will have weighed on Nationwide's mind and a lot of subsequent events can be interpreted as Nationwide trying to avoid becoming a Lloyds, dragged down by the unknown nasties in their target. It's worth noting that in December, Faulds described Dalziel as "a business leader of the highest integrity and ability" - even then Faulds thought that Dalziel had done a great job. The man is deluded.

20 March - final results due, but were delayed

22 March "A collapse in commercial property values means Dunfermline will be forced to write down assets...While the society remains solvent, the vulnerable capital situation is thought to explain why it has not signed off its accounts for the year. It is thought that Dunfermline and one other society failed the FSA's so-called 'stress test'. Dunfermline now risks being forced to find a merger partner, though it is believed no talks have taken place despite a number of informal approaches."

28 March : "Dunfermline was likely to fail to meet the FSA's threshold conditions for authorisation and that there was no other option available which would have enabled the company to satisfy the threshold conditions."

Why did Faulds and Dalziel not even talk to potential partners? I suspect that Dalziel quite liked being a fatcat on £290k/year, and a merger would have seen him lose his job. He would have been desperate to keep the society independent, and the only way he could do that was a bailout, either from Edinburgh or via London's CGS scheme. We've since learnt that "The Scottish Government cash would have been a 'contribution' to help being offered by other sources, said the First Minister" - Edinburgh would still have been relying on London to bail out the society. As so often, Salmond needs the English to deliver the promises he makes.

I think the key time will have been between the failure of the stress test in October, and Dalziel's replacement before Christmas. Dalziel appears to have relied on a PIBS issue under the CGS to keep the society independent and to keep his job. Given the bitterness being expressed, it seems that they think they were promised something, and then things changed - but they have deliberately muddied the waters as to what that problem was. I wonder if it was the clause in the Banking Act 2009 that would allow the government to use the PIBS to nationalise the society and cut back on executives earning £290k/year?

Incidentally, Peston reckons that the Dunfermline was looking at up to £100m loss on its loan book, of which the FSCS would take 90%, so taxpayer losses currently look like <£10m. Which is rather less than £26m or £60m. But given his access, one would assume those are the numbers that the Treasury are working on. It's clever, in that this route forces much of the pain onto the much-battered FSCS, rather than taxpayers.

Since I'm here, I'll just catch one or two other things that have been mentioned in other comments :
TLOTF - yes the rules are different for building societies, but most legislation allows for that. In particular the CGS can operate on both PIBS and preference shares, and the new Banking Act allows nationalisation via PIBS - although as mentioned above, the other building societies have always acted as the "nationaliser" in the past, and Nationwide had taken on two societies with combined assets 5x that of the DBS as recently as September.

"Why would a mutual Society buy a debt package like that???" - Dalziel thought he was cleverer than Lehmans, and got greedy.

"Only last June DBS said it had no toxic debt???? So where and when did this come from." First define "toxic debt" - it's "good" debt that isn't as good as you thought it was. :-) Here's an example. If they really thought that they had no problems with their loan book as recently as June, that suggests breathtaking complacency and incompetence, so I'd be interested in any sources you have for that June quote. But as has been mentioned already, they had added £500m to their commercial property book in the last 3 years, you could easily be looking at 10-20% losses on that bit alone, never mind the 100% LTV residential mortgages being offered in early 2008. If this June quote is true, they were still in denial about the state of the property market.

Anonymous said...

Oops - sorry sub, I hadn't seen your post, I'd had the window sitting open since earlier tonight. Yes they would have needed FSA approval for a merger with a mutual - but it would have been nodded through. In the current circumstances they'd be mad to do otherwise. I'm convinced that this "refused approval" was for some deal involving public money.

Faulds is in it up to his neck, as evidenced by his enthusiastic endorsement of Dalziel. Either that or he isn't fit to run a tiddlywinks club. I think at the moment Faulds' only aim is to dissociate his name from this disaster, he no longer cares about the members.

The whole year thing - it sounds like industry gossip from someone who's perhaps closer to the Edinburgh financial scene than I am. But plausible - once that IT disaster came to light they would have at least had other mutuals putting out feelers, whether Faulds and Dalziel put out feelers the other way we shall never know. Any competent management would have realised that they were doomed, at the moment we're just getting smoke and mirrors on the extent of Faulds and Dalziel's appreciation of the disaster as it unfolded during 2008.

I meant to mention this from Peston's blog :

"There was an attempt, under the auspices of the Building Societies Association, to come up with a collective industry solution, what's known as a lifeboat, to keep Dunfermline afloat as an independent entity.

But this flopped, because the societies in the putative consortium or lifeboat were not prepared to inject as much capital into Dunfermline as the FSA said was required."

Since Dalziel was desperate to keep independence, this would have been much his preferred option, so perhaps this was the point at which the FSA "betrayal" happened. Once the lifeboat option had gone, a deal with Nationwide for half the DBS was inevitable.

subrosa said...

Morning el-sid

I can't tell you anything about the offer by the much smaller Friendly BS and others as no detail was mentioned on Newnicht.

Faulds realises he was out of his depth in the job, I discovered tonight he used to own a big advertising business when I thought he was a banker. What on earth is happening in banks when nobody has banking qualifications?

Unfortunately I have no faith in the FSA and I'll do a post about that at a later date because it's rather complex. But the FSA has been shown it's incompetent and not fit for purpose.

If the old regulator was still be place, the DBS wouldn't have been able to buy these toxic debts. How they managed when the FSA say they were monitoring the situation I don't know as yet.

The Times are reporting Darling has asked for an enquiry. The handling of the whole thing is the usual mess from Westminster. Why Darling couldn't have told Salmond on the phone on Saturday I'll never know. Bit of big brother methinks.

Anonymous said...

Hi sub

Keep that thought at the front of your mind, Faulds is an advertising man. He's a spin doctor, a man who manipulates the truth to make his clients look good. Except in this case his only client is one Jim Faulds.

I simply don't trust the man, certainly not when he's trying to rewrite history to protect his reputation. Once an ad-man, always an ad-man.

As you say, he's used to a "hands-on" job managing a major business, so the idea that he didn't have a clue what was happening at DBS just beggars belief. I think this is a classic tale of a non-banker coming to a "sleepy" institution and thinking "these people don't know how to run things, we can apply modern commercial principles and make far more money. Those funny ideas about capital ratios etc are so outdated!" In Dalziel he had a willing accomplice and a "finance" man who could implement this new regime. That's my take, anyhow.

Don't get me started on the FSA, if you think I've done long posts hitherto, you ain't seen nothing yet! :-) On this specific case, I think you may be guilty of a bit of "grass is greener" thinking - the BoE was far more fit for purpose in many ways, but I'm not sure they would have naysayed the GMAC stuff. If anything could have stopped it, I'd guess it would have been statutory legislation on what BS's can and can't do. Possibly that kind of thing might have been relaxed under the legislation that allowed demutualisation in the mid-90's, but I suspect that the real problem was FSMA, which broke down a lot of barriers between banks and BS's. I don't know the nitty gritty. And as an aside, the biggest lot of toxic debts are the commercial ones originated by Dalziel, not the ones bought from GMAC.

Back to the FSA. Everyone I know who had contact with the financial world thought that it was going to be a disaster from the start. I'm no great fan of Peter Lilley, but he nailed it in November 1997 "With the removal of banking control to the Financial Services Authority--the "super-SIB"--it is difficult to see how and whether the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse...The coverage of the FSA will be huge; its objectives will be many, and potentially in conflict with one another. The range of its activities will be so diverse that no one person in it will understand them all....we fear that the Government may, almost casually, have bitten off more than they can chew. The process of setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day."

Brown can't say he wasn't warned.

More generally, there's been a lot of discussion of how the procedures of the FSA were wrong, but everyone I've talked to who's had direct dealings with the FSA has commented that almost the greater problem is that the quality of the people there was so awful, they just didn't have a clue - a classic case of "pay peanuts, get monkeys". They desperately needed some poachers to turn gamekeeper, but they weren't prepared to pay for the sort of people who understood the world of modern finance. It's worth thinking about that in the current furore about expenses and government spending - there's a lot of waste throughout the system, but in some places you do actually need to pay market rates to get people who know what they're doing, the alternative is disaster. I'm not saying that MP's are an example of this though! :-)

I've just come across this SOS article from Sunday, which shines a bit more light on what happened a year ago :
" the society is expected to announce a £26m loss primarily because commercial loans turned sour.[note not because of the GMAC loans they bought]...

Building Societies Association chairman John Goodfellow is eager to quash suggestions that the Dunfermline is being abandoned and allowed to fail by the rest of the sector. He said: "It is a simple question of numbers. Over the past 12 months we have digested five big mergers, and there comes a point where you have to say that for the time being enough is enough" one has stepped in to prop up Dunfermline, whose financial position looks considerably bleaker than the position that triggered the demise of the Derbyshire and Cheshire....

Regulators have an unwritten rule that societies are not allowed to make a loss because they are owned by ordinary savers, rather than sophisticated shareholders.

But the debacle at Dunfermline has torn up the rule book. At its last annual results it came close to making a loss after announcing a £9.5m writedown on a failed computer project, leaving it earning a £2m return on more than £3bn of assets.

Such a close shave would normally have prompted regulators to swing into forced merger mode. Its capital ratio at 4.4 was also thin, compared with the society average of 5.9, or more than nine at the strongest institutions, such as the much smaller Scottish.

But the Dunfermline was given a second chance, only to be driven onto the rocks again by bad debts on commercial loans, an area into which it had expanded aggressively, and disproportionately for a society of its size"

I guess any gossip picked up by AWC came after those results last March, which would have broadcast the fact that the DBS was in trouble. 4.4% capital ratio before allowing for any loan defaults? Big ouch. No wonder they were hoping in June that they had no bad debts - it would have only taken a few to go wrong for them to go below 4%. I guess if anyone wanted to try a class action, they might want to focus on that kind of thing, what Dalziel and Faulds thought their capital ratio was in the summer of 2008. I suspect they were breaching all sorts of regulatory limits. But it's interesting that the FSA feels they gave Faulds and Dalziel "a second chance" last March - might explain why the authorities were less willing to believe the ad-man's smooth talk the second time round.

It's sweet the way SoS quote a promise by the Prime Minister by way of reassurance. :-))

Oops - there's another long one. :-)

Faux Cu said...

I doff my chapeau to El Sid on this one but I cannot get it out of my greedy little head that the Nationwide got a better deal from Broon that they would have from the DBS before the announcement of the problems

Anonymous said...

Sure - they certainly would have got a better deal (in the purely financial, short-term sense) if they'd let the DBS fall into administration. But I sense that actually they're not very happy about the deal they ended up with, just because they've sacrificed this "mutuals always look after their own" thing, it's hard to quantify that sort of thing though. It's certainly not just about money - someone should be able to make good money on the social housing loan book, but the Nationwide aren't interested in it, because it's not the sort of thing they do. The real problem of course is that never before has a mutual been as badly run as the DBS - I thought the Cheshire was as bad as I'd ever see.

Perhaps it just means that you're more of a banker than a building society man, Faux Cu? :-))

Faux Cu said...

Businessman El Sid, Businessman.

subrosa said...

Thanks for your posts el-sid and you too Businessman :)

El-sid what is your website? Never heard of vidoop before but I'd like to have a look.

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