The Government has been forced to pay out around £1.6 billion for a portfolio including toxic loans and questionable mortgages as part of the rescue of Dunfermline Building Society by Nationwide Building Society today.

The Treasury is made the cash payment to Nationwide, which this morning agreed to take on the healthy parts of the Dunfermline, including its 300,000 strong army of depositors, in a rescue deal hastily put together over the weekend.

The deal leaves taxpayers holding a large portfolio of commercial property loans, buy-to-let mortgages and self-certified mortgages — sometimes called "liar's loans" because borrowers do not have to provide any proof of income.

The deal exposes taxpayers to the risk of substantial losses if the newly appointed liquidator, KPMG, fails to gain sufficient proceeds as the assets are sold.

Alistair Darling, the Chancellor, today defended the deal, stating there would be a “small residual exposure for the Government”.

Nationwide said it would be "business as usual" for the depositors and most borrowers of the Dunfermline. Branches would open as usual and the business would keep its separate brand name.

All 530 Dunfermline staff have transferred to the Nationwide. Branch staff were guaranteed no compulsory redundancies for three years but Dunfermline head office staff have been given no such promise.

The state-backed rescue brings to six the number of UK deposit takers saved with direct taxpayer cash. The others are the Northern Rock, Bradford & Bingley, Royal Bank of Scotland and HBOS and Lloyds TSB, now merged into Lloyds Banking Group.

The Treasury said the Dunfermline would not have been able to pay back depositors without the rescue, which was undertaken through the newly enacted Special Resolution Regime, which allows the Government to seize control of bust financial institutions.

The deal, which was struck at 8am this morning after frantic weekend negotiations, sees £2.3 billion of retail deposits transferred to the Nationwide, along with its 34 branches and its £1.02 billion prime mortgage book.

The rescue deal echoes that of Bradford & Bingley, which was broken up last September with Banco Santander of Spain taking on the deposit base, leaving the mortgage book — including poor-quality buy-to-let loans — with the Government.

The Dunfermline, which has a £3.3 billion balance sheet, was expected to report losses of about £26 million this week.

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