Treasury brokers asset sale after Dunfermline collapse

Fevered negotiations to find a buyer for building society's retail arm

The Treasury-brokered sale of the collapsed Dunfermline Building Society's less-toxic assets is expected to be confirmed this morning.

The proposed rescue deal for Scotland's biggest mutual fell apart at the weekend, leaving the Government poised to take the chancy commercial property loan book into public ownership and Treasury officials feverishly trying to build a deal for the group's healthier retail assets.

Big names said to be involved in the discussions include Santander, National Australia Bank and Bank of Ireland, alongside the Nationwide, Yorkshire and Skipton building societies. None of the institutions would confirm their interest last night.

Dunfermline is expected to announce this week losses of £26m for 2008, caused by writedowns on commercial property. The institution's loan book shot up from zero to £260m in five years and is more than 15 per cent of the institution's lending – an unusually high proportion for such a small society. The group also made multimillion-pound writedowns on IT developments.

The original rescue deal combined £35m of taxpayers' money with £15m from a building society agreeing to take over Dunfermline. But potential suitors were spooked by the scale of its potential liabilities. "Nobody wants the whole business because is has so much rubbish in it," a source at a major rival said. "For a building society to consider a merger, it has to be commercially viable for members and a good use of their money. Anything that might have an impact on our members' capital, we wouldn't touch with a barge-pole."

With a rescue merger out of the question, and the Government unwilling to take over, Dunfermline became the first building society to collapse. The plan is for a Bradford & Bingley-style dismemberment, with the Government taking on toxic commercial loans while selling off – piece by piece or in a package – a £2bn savings book, a prime mortgage book, 34-branch retail network, and registered social lending.

The non-toxic assets are not unattractive. Building societies, required by law to finance at least 50 per cent of their activities from retail funding, are typically well-capitalised. And retail deposits are especially appealing now because they obviate the need to go to crunch-struck wholesale markets.

But commercial lending is not the only unpredictable part of Dunfermline. Any third-party mortgage books it bought for critical mass are unlikely to sell. "Any buyer will likely only want to take on self-generated mortgage books that have been forensically looked at and underwritten," a source close to the sale discussions said. "By definition, third-party books are trickier and include prime and sub-prime lending."

A war of words followed the collapse of the rescue talks on Saturday. The Government is placing the blame squarely at the door of the Dunfermline. Yvette Cooper, the Treasury Secretary, said the problems were due to executive decisions rather than the wider crisis, and Scottish Secretary Jim Murphy branded the previous management "reckless". Graeme Dalziel, former chief executive, was replaced by Jim Willens at the start of the year.

But Dunfermline chairman, Jim Faulds, hit back, claiming the break-up is unnecessary and the Government's actions a scandal. "We are extremely disappointed with the Treasury's decision," Mr Faulds said. Scotland's First Minister, Alex Salmond, also waded in, declaring that his government was "deeply disappointed" that the Treasury had given up on saving the society.