How Dunfermline fell

Here are the important numbers that explain how Dunfermline lost its independence.

It has made £648m of commercial property loans in Scotland and the North of England. Of that, around £500m of these loans were made in the past three years - which means, in view of the collapse in commercial property prices, that losses on these later, top-of-the-market loans are likely to be very significant.

In addition, Dunfermline acquired £274m of buy-to-let and self-cert mortgages from the likes of defunct Lehman Bros and from GMAC.

All of these loans, or a bit more than £900m in total, have been hived off and put into what's called the Building Society Special Administration Process, where they'll be managed by KPMG as administrator.

Total losses on these impaired assets are expected to be in the range of £60m to £100m, according to an independent assessment for the Financial Services Authority that has been carried out by KPMG.

Now there are two big points to make about these unattractive loans.

First is that they destroyed Dunfermline as a going concern, because Dunfermline was not earning enough from its mainstream savings and mortgage business to absorb the losses - and it had no ability to raise additional capital from conventional, commercial sources.

Also, no private sector bank or building society wanted to touch these smelly loans with a barge poll. Which is why it was impossible to transfer the whole of Dunfermline as a going concern to another financial institution.

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.

In theory, the Treasury could have filled the gap, by putting in a few tens of millions of pounds of taxpayers' money, as happened on a much more substantial scale with the rescues of Royal Bank of Scotland and HBOS, for example.

The chancellor has not explained in detail why he considered Dunfermline to be so different from Royal Bank, but presumably it's to do with the alternatives that were actually available.

In the case of RBS, the choice was a stark one between a systemically important bank going bust - thus devastating our economy - and it being propped up by taxpayers.

In the case of much smaller Dunfermline, there was the opportunity to take advantage of the new Special Resolution Regime created by recent banking legislation to hive off the bad bits of Dunfermline and transfer the good bits to the UK's biggest building society, Nationwide.

It'll be controversial in Scotland that the chancellor took this route - because it means that a Scottish financial institution has lost its independence and there are bound to be significant job losses among the 289 people who work in Dunfermline's head office (though Nationwide would expect to retain the 245 who work in Dunfermline's branches).

But in a British context, the form of the rescue chosen for Dunfermline may be regarded as acceptable, since it probably minimises the potential losses for taxpayers.

Although the Treasury is transferring around £900m of taxpayers' funds to Nationwide to make good the difference between the assets and liabilities that Nationwide is acquiring from Dunfermline, very little of this money is a risk for taxpayers.

That money will be recouped from whatever can be realised over time from Dunfermline's lower quality loans that have been put into administration.

However, even if the losses on these loans turn out to be £100m, 90% of those losses will not fall on taxpayers.

They will fall principally on banks and building societies, under the Financial Services Compensation Scheme.

Probably only 10% of the losses would ultimately be carried by taxpayers, or up to £10m.

It may be a bit complicated, but this kind of private-sector solution may be seen by many as the best of some pretty dismal options.

There are three other important points to make.

1) The £500m of social housing loans that are being transferred temporarily to a "bridge bank" are good quality loans. Nationwide didn't want them because they don't fit with its other operations. But they are not to be confused with Dunfermline's imprudent loans - and they'll probably be picked up soonish by another building society or bank.
2) Dunfermline's collapse is no overnight affair. The FSA has been trying to find a solution to its woes for many months.
3) The rest of the building society sector is in pretty good shape. Barring an economic disaster, no other substantial building society is expected to need rescuing in this way. So it remains the case that the UK's building societies have weathered the recession better than our commercial banks.

And finally, for me perhaps the most shocking element of the Dunfermline debacle is what it has revealed about the uselessness of their 2007 annual accounts. It's impossible to identify in these the size or nature of its exposure to commercial property.

If Dunfermline's savers and borrowers were shareholders in this organisation, rather than members of a mutual, they would probably be incandescent about how little they were told about the risks being run by their society.

UPDATE, 11:10:

I made a little boo-boo in my calculation of how much cash the Treasury would put into Nationwide to cover the gap between the assets and liabilities of Dunfermline that are being transferred.

In fact, the Treasury is putting in £1.5bn.

What I stupidly ignored was the £500m of social-housing loans that are being put into a specially created "bridge" bank.

However my estimate of the potential losses for taxpayers remains in the right ballpark, I think - because there is supposed to be little risk of loss on these social-housing loans.

UPDATE, 16:15:

There's evidence that the authorities are confident that no other society is facing disaster - because there is only one significant building society whose new PIBs (capital issued by societies) the Treasury hasn't been prepared to guarantee through the credit guarantee scheme.

The sole society of any size categorised as too feeble to receive the guarantee was - you guessed - Dunfermline.