Unanswered questions in The Derbyshire's merger

The chief executive of the Derbyshire Building Society has put a brave gloss on its merger with the biggest building society of them all, the Nationwide.
It may be a merger in name, but the truth is that the Derbyshire had painted itself into a financial corner. A rescue by the Nationwide – and that is what this risks being seen as – appears to have been the only way out.
Last year, the Derbyshire flushed £10m away not on rotten mortgages but on a rotten IT project. Never mind the credit crunch, this was a mess in its own right, one for which a mutual like the Derbyshire really ought to have offered members a fuller explanation.
Instead, we had a boardroom clear-out, a new man in charge and assurances that, though there were some mortgage-related concerns, the Derbyshire would remain independent.
Here we are a few months later digesting the news of a merger that has been completed in the space of a few days.
This will have come as a bolt from the blue for most members, who are entitled to wonder what on earth has been going on.
Banking veteran Graham Picken, who came in as the new chief executive in the wake of the IT cock-up, must have realised early on that the Derbyshire’s venture into the world of sub-prime mortgages (home loans to people with poor credit histories) had lumbered it with a festering financial sore.
Just how festering it was became apparent during a strategic review, when a Society which had produced useful surpluses only a couple of years ago discovered it was facing a £17m loss in the first six months of 2008 alone. There were, we were told yesterday, other ‘financial uncertainties’.
In other words, it was unable to say how much it might lose in the future on the £1.4 billion of low quality mortgages that were burning a hole in its books
Losses are not unheard of in ordinary businesses, but in a mutual – an organisation owned not by private shareholders but by the people who save money with it – this is a sign of something gone seriously wrong.
The Derbyshire is not a Northern Rock. It is not a bank, and it did not base its entire business strategy on fundamentally risky assumptions (which the Rock did).
But why did an organisation whose savers and borrowers generally assume it to be a conservatively-managed safe haven start dabbling in an area of the market full of people who routinely struggle to pay?
Building societies are simply not expected to engage in risky strategies that might yield fat profits. Yet that is what the sub-prime area - where the Derbyshire has lost a packet - was all about.
With the fevered state of the markets, we’ll never know whether the Derbyshire had the financial clout to battle its way through what would still have been a thoroughly embarrassing storm.
Instead, we are left wondering whether the Derbyshire knew that if it didn’t take action then the Financial Services Authority might.
The ‘merger’ is the result. The FSA would not have wanted to see another Northern Rock and nor, frankly, was there any need for one.
So The Derbyshire (and The Cheshire building society, the other part of the ‘merger’) will continue. It’s a fundamentally sound business and under the large and robust umbrella of the Nationwide, the money of Derbyshire building society members is now probably safer than ever.
The ‘merger’ may also give them access to financial products and services offering better rates than those the Derbyshire was able to secure.
We are living in uniquely difficult times where many of the routine operations of the world financial markets which organisations like the Derbyshire rely on are still not operating properly.
Perhaps The Derbyshire’s management would argue that it is this that left them in a tight corner.
But other building societies have not – apparently - made the same mistakes.
So worrying questions remain, questions which everyone who thinks their money is safe in a building society has a right to have answered.