Fears of Rock-like chaos drove rushed takeover of mutuals

Fears that losses at the Derbyshire and Cheshire building societies would spark a Northern Rock-style customer upheaval drove the rushed takeover of the mutual lenders by Nationwide, sources close to the deal said yesterday.

The Financial Services Authority gave approval for the societies to push through the mergers without a vote from members at either Derbyshire or Cheshire, who will get no windfalls from the deals.

Derbyshire suffered a £17m first-half loss as credit losses mounted from commercial lending and sub-prime mortgages. Cheshire was hit by an £11.5m charge for a single commercial property loan, sending it to a £10.5m loss for the first six months of the year.

Graham Beale, chief executive of Nationwide, said: "They [Derbyshire and Cheshire] were concerned that in reporting a loss that was quite unusual for a building society, they would create concern for their memberships.

"There was a lot of uncertainty and delay in coming to a resolution for Northern Rock and that did a lot of damage to the financial services sector in the UK. What we have got here by contrast is a very clear set of decisions to minimise those risks."

The societies asked the FSA to let the mergers go through as board resolutions so the deals can be completed this year, avoiding up to 18 months of uncertainty if there had been a membership vote.

Hector Sants, chief executive of the FSA, warned societies in May about buying up books of mortgages, having a poor grasp of commercial lending, and the dangers of sub-prime loans. An FSA spokeswoman said: "We were involved in detailed discussions. We have taken the decision to use our powers in this way because we believe it is in the best interests of members."

Mr Beale said both societies were paying the price for diversifying their businesses and taking too many risks. Derbyshire had bought sub-prime mortgages and expanded in commercial loans in recent years while Cheshire "overextended themselves" in commercial lending, he said.

He said the deals were in Nat-ionwide's commercial interests but also to maintain confidence in the mutual sector. Nationwide will gain £12bn of assets, 95 branches and more than 900,000 customers. Britain's biggest society said it was confident that any further losses at Derbyshire and Cheshire would be covered by their existing reserves.