IN his evidence to the Scottish Affairs Committee in the House of Commons last week Jim Faulds, former chairman of the Dunfermline Building Society, expressed his frustration as the board struggled to find the capital they needed to stay independent. The deal hammered out last week to save West Bromwich must be adding to his irritation.
Part of the problem for Faulds was pinning down somebody in government who could make a decision. "If you are not dealing with the decision maker you are in the dark," he said. Was it the Financial Services Authority or the Treasury? Treasury ministe
r Lord Myners offered only "tea and sympathy".
Faulds has previously claimed that Dunfermline would not be alone in facing a financial shortfall, as proved to be the case when West Bromwich's troubles came to light. West Brom was saved last week after the FSA came up with a new financial instrument that helps restore its capital and retains its independence. All done by creating a debt-for-equity vehicle that allows the society to raise external funds, a process hitherto denied to building societies.
How the board of Dunfermline must be wondering what might have been if the FSA had come up with this plan a few months ago.
There had been talk of Dunfermline raising funds through permanent interest-bearing shares, a form of loan which does not count as tier 1 capital, a measure of a society's strength. Its failure to come up with the required sum – a figure that kept changing – forced it into the arms of Nationwide.
West Brom has been saved by allowing holders of its subordinated debt to exchange it for profit participating deferred shares (PPDS). Debt holders effectively take dividends from the society's profits, breaking with tradition. Crucially, these shares have no repayment date so they do qualify as core tier 1 capital. Dunfermline would have struggled to get away with this because, according to a source at the Treasury, an expectation of future losses would not have given the debt holders the option of a dividend.
That may prove to be a further point of contention. In the meantime, the West Brom is saved: its ratio soars from 6.8 per cent to 11.6 per cent – one of the highest in the sector – and it need not concern itself with finding a merger partner. For once, the Nationwide's cavalry – previously called in to acquire the Cheshire, Derbyshire and, of course, Dunfermline – have been stood down.
Understandably, the FSA is crowing about this as it has found a way of avoiding what could have been a wider crisis in the building society movement. Furthermore, this is a private transaction so it involves no taxpayer funds. The FSA merely had to sign it off. It hopes that other societies will make use of the PPDS instrument, though there is some concern that it will dilute benefits to members and that siphoning profits also puts pressure on societies to offer competitive deals. There is always going to be a downside, but as a means of giving societies access to external funds this looks to be as good a solution as any so far devised. It's just a pity the Dunfermline missed out.
Quality rather than quantity for new jobsTHE days when the big battalions of Japanese and American electronics plants were charging into Britain, providing thousands of jobs and changing the industrial landscape, are becoming a distant memory. We'll probably never see a transformation of that kind and scale for at least another generation.
When First Minister Alex Salmond addresses the Forbes conference at Gleneagles tomorrow he'll make much of the £500 million of inward investment that was drawn to Scotland last year, by no means a meagre sum, but hardly on the scale of earlier years when foreign multinationals poured billions into the country and flooded the former industrial heartlands with computer assembly plants.
Much will be made of last year's investment, particularly during a severe recession. But on the face of it, £500m does not seem an awful lot. After all, it equates to the annual budget last year of Scottish Enterprise. So for every pound brought in, we spent the same sum on trying to stimulate the economy. It seems we're merely treading water.
But there is a more positive note to this. The quality of the jobs being attracted is far different to those that filled the electronics sheds in the 1970s and 1980s. There may be fewer of them – 1,800 last year is about equal to a single investment in the heyday of Locate in Scotland – but they are more highly qualified and higher paid. As such, there is more likelihood that they will be anchored in Scotland, rather than hop off to a cheaper destination when the fancy takes them.
