Politics, Bail Outs, & the Dunfermline Building Society.

The Dunfermline Building Society is the latest financial institution to find itself in trouble. According to the Telegraph, “The Government is thought to be preparing a £60 million bailout of the Dunfermline Building Society.” It will be interesting to see how this one turns out.

I’m particularly interested, though, in a couple of comments from politicians. First, from Willie Rennie, the Liberal Democrat MP for Dunfermline and West Fife. He said the building society must remain “independent, Scottish, mutual and strong”. Must it? Why? These things may be nice, but surely the priority is that savers get their money back. I’m particularly astonished that it “must” remain Scottish. Why is that? What exactly is the problem with it merging with say, the Nationwide? This looks like naked flag-waving politics to me.

Give a thought to Northern Irish investors in the Presbyterian Mutual Society. The PMS has gone into administration and many of its savers have lost large amounts. Nobody is calling for it to remain “independent, Scottish, mutual and strong.” They just want the savers to get their money back. So far, the government has been reluctant to act.

Which brings me to the other interesting political comment. Scottish Secretary Jim Murphy, is quoted as saying “The UK Government hasn't allowed any financial institution to fail over recent months, despite the remarkable turmoil in the world and UK markets.” Aye, right.

The irony here is that it is widely believed that government action was partially responsible for the problem. According to Donald Patton of the Presbyterian Church in Ireland, the problem was sparked when the Government “propped up [the financial system] with the introduction of a credit guarantee scheme to the banks last October. Alert to the implications, some investors in the Presbyterian Mutual Society, based in Belfast, realised their money was not covered by the guarantee. This triggered a run on the liquid assets of the Society.”

Some councillors in Magherafelt have spoken more bluntly of the government’s responsibility: “Let’s call a spade a spade, this debacle was fathered by the Government and the Prime Minister Gordon Brown when the decision was taken to afford guarantees to investments with the banks, thereby creating an unlevel playing field. This unfortunately created a run on the dry cash of the society.”

The government’s handling of this matter does not look good, and the way it has gone about throwing tax-payers' money at bailing out institutions is questionable.

But the big question seems to be “Is it just a co-incidence that the government has been quick to move when institutions in Labour heartlands get into trouble - like the Northern Rock and the Dunfermline Building Society - but remarkably slow to act in Northern Ireland where there are no Labour votes?"

Update: For more details on what happened to the Presbyterian Mutual Society, see here.