Treasury injects £3bn into Rock
The government is to inject up to £3bn of new equity capital into Northern Rock.
Or to put it another way, the nationalised bank is having a mega rights issue that taps its one shareholder.
The way to see it is as a tweaking by the government of its promise that all those taxpayer loans would be repaid.
It's now saying, in essence, that the final £3bn - plus £400m of preference shares that will also be converted into ordinary capital - will only be repaid if the bank is eventually sold and denationalised at a profit.
And it's anyone's guess, in the current ghastly climate for banks,.whether that will happen.
If Vince Cable, the LibDem Treasury spokesman, doesn't make hay out of this, he's asleep.
The reasons the Rock needs the capital are straightforward.
Its ratio of capital to assets - which was about 5% on the Tier One measure - is well below the industry average.
Most British banks - following their substantial capital-raising exercises - have Tier One ratios between 8 and 12%.
And the City watchdog, the Financial Services Authority, is insisting that Northern Rock be managed on exactly the same basis as other banks. So it too has to raise capital.
That said, £3bn looks massively over the top. On some measures, it looks about double what would need.
But the Treasury is probably being prudent in allocating as much as £3bn, for a couple of reasons.
1) Unlike other banks, Northern Rock has just one shot to recapitalise itself, because any such injection needs state-aid approval by the European Commission, which is typically granted only once.
2) It still has much reorganisation to carry out and - with prospects for the mortgage market looking pretty grim - it's probably as well to secure a bit more capital than it needs immediately.
In that context, it is relevant that the Rock made a loss of £585.4m in the six months to June 30 - and that arrears over three months on residential mortgages at the end of June were more than double as a proportion of loans what they were at December 31.
It's true that this arrears performance is still a tiny bit better than the industry average, but the trend is horribly in the wrong direction - and there are signs of particular strain for homeowners who took out the Rock's notorious Together loans, where the value of the combined mortgage and personal loans are significantly more than the value of the relevant secured properties.
Here's the most politically charged statistic: repossessed homes at the Rock have risen from 2,215 to 3,710 in the six months, or almost 70%.
The government has been urging banks not to repossess the properties of struggling borrowers, if they can possibly avoid doing so. The question therefore is whether the bank it owns, Northern Rock, has been sensitive enough to the problems of hard-pressed families.
The Rock's new capital will come from ceasing for a period the repayment of the giant taxpayer loan made to the Rock. What'll happen is that around £3bn of that will be converted into equity.
So what does it all mean?
Well the £3bn will probably - under our weird public accounting rules - be another £3bn added to the national debt, which the Treasury needs like a hole in the head.
And it will doubtless be seen by the government's critics as £3bn of taxpayers' cash very much at risk of loss.
Whether it is eventually lost, depends on two related factors.
First is when and whether the decline in the housing market is arrested and when prospects for the repayment of mortgages improve.
Second is when and whether investors become bullish about the prospects for banks again. If the government tried to sell the Rock into the private sector right now, the loss would be colossal.
I have been nudged into reconsidering my remarks that the conversion of £3bn of our loan into equity represents a political opportunity for the ubiquitous and often insightful Vince Cable. He, famously, was a longstanding proponent of nationalising the Rock, so if the capital injection is a sign of the nationalisation going a bit pear-shaped, then he can't really put the boot in.
It's more of a political opportunity for the Tories, since they consistently opposed state ownership for the Rock. Although they are a bit hamstrung in the impact they can make, since the shadow chancellor, George Osborne, is on his hols.
In fact the Tories might well ask whether it's appropriate that such a significant policy shift - which puts taxpayers right at the back of the creditors' queue for £3.4bn (the converted loan plus the pref that's being exchanged for ordinary shares) - should have been announced while the Commons is not sitting.