In a classic asset stripping exercise the government has broken up the Dunfermline Building Society. Acting as asset strippers they have sold off the good parts to the Nationwide and given the toxic parts to us the public.

The old mutual business of deposits with mortgages backed by these deposits has been bought by Nationwide – although even these prime mortgages are likely to become toxic as housing prices continue to decline.

We get the so called “toxic assets” which has become a euphemism for any financial asset that is loosing money. The billion pounds of loans to commercial property developers and UK sub-prime loans is where the Dunfermline was haemorrhaging money. It’s microcosm of the larger financial crisis: where speculative loans that took advantage of very low short-term borrowing rates are declining in value as the recession drives down the underlying value of assets that the loan is based on.

Commercial property is set to continue its fall as the demand for business and retail property declines at the demand for the economy carries on shrinking on the back of the most severe recession since the 1930s – ask the companies behind the Cannongate project about that!

The UK sub-prime loans are based on:
Self-certification is where people could declare their own income and have it ratified by themselves and have a loan based on this!
And the buy to let market where people bought homes on an interest only basis, rented it out and hoped to cover the repayments from rental income while making a profit from the increase capital value of the property.

Both types of loans have turned sour as the values of the properties the loans were secured have fallen below the value of loan and as people lose their jobs and have difficulty making the loan repayments.

The Dunfermline Building Society although not a quoted company was under pressure to generate better returns for its depositors as other banks and de-mutualised former building societies could offer higher rates of return to their depositors, ironically through similar such speculative financial investments.

The assets underlying the toxic loans had declined by about 10% or £100m which the Dunfermline Building Society had to write down with no capitals to do that. With property, commercial and residential, set to decline by about another 20% the Dunfermline would have been sitting on about £300m of losses with no capital to cover those losses. Now we own the further downside as well as the £100m lost so far and will face higher taxes and cuts in public spending to pay for these losses.

The Dunfermline Building Society was not essential to the functioning if the financial system so the government decided to break it up to try minimising the losses and getting some money back from the sale of the “good parts”.

The alternative was to take over the sub-prime loans and turn them into social housing with a stream of rental income for up to 150 years in the future. This would have transformed these liabilities into assets at a stroke and meant that any tenants would not end up on the street homeless.

A similar plan could have solved the commercial property problems with the property being used for housing or incorporated into a social plan to meet the real needs of society.

But that would be finding solutions in the interest of the majority of the population rather than as the government is doing solving the crisis for the bankers and the rich.