RBS: big losses, big bailout
Royal Bank of Scotland has not only announced the biggest loss in British corporate history - but it's also being shored up in what some will see as Britain's biggest ever bailout.
The Treasury has announced that we as taxpayers will provide insurance to Royal Bank against future losses on £325bn of loans and investments.
First losses of up to £19.5bn on those impaired assets will be taken by Royal Bank.
But to prevent the losses wrecking the bank, we as taxpayers will be injecting up to £19bn of new capital into it, in the form of non-voting shares.
Also, losses greater than £19.5bn will be born by us - by taxpayers. In a prolonged severe recession, those losses could be substantial.
What we're getting in return is a £6.5bn fee - in the form of yet more of these non-voting shares.
And RBS has given a legally binding commitment to increase lending by £25bn in 2009.
We already own 70% of Royal Bank - and that stake could rise to a maximum of 75% after today's deal with the Treasury.
So it matters that Royal Bank becomes a profitable bank again.
Its new chief executive, Stephen Hester, announced RBS would be reducing its running costs by more than £2.5bn a year.
I put to him on the Today Programme that this would lead to job losses around the world of more than 20,000. His non-denial was that job cuts would be substantial.
Or to put it another way, in rebuilding this pillar of our economy there'll be pain for employees and possibly for taxpayers.
UPDATE, 11:56AM: Here are a few additional thoughts about the mother of all banking bailouts.
First, the total injection of capital by shareholders - that's including the £20bn we subscribed in October - looks set to hit £39bn.
That's a colossal amount of our money at risk - although in theory we could make a profit on it in a few years if Stephen Hester were to succeed in mending RBS and in flogging our shares back to the market (but to state the bloomin' obvious, the value of shares can go down as well as up).
It is of course reassuring for us as taxpayers that Royal Bank's share price has risen very sharply this morning, as we own 70% of the ordinary shares (and, as I've explained, that stake could rise to 75%).
But there's probably a ceiling through which the existing ordinary shares will struggle to break for some years, because of the pre-emptive rights over dividends of the new B shares that are being issued to the Treasury (to taxpayers).
As for the potential hit that could be taken by taxpayers on the massive insurance policy we've written, that's anyone's guess.
If there were - say - losses of 10% on the insured loans and assets, our share of that loss would be just under £12bn. Or rather more than the £6.5bn fee we're being paid.
So let's hope the rescue of Royal Bank - and the similar underpinning of Lloyds that's expected tomorrow - has the virtuous consequence of limiting the depth of the recession and thus feeds back to the banks in a positive way, in the form of reduced losses on loans.
And since we're on to Lloyds, it would be wrong to assume that the Treasury will insure its loans on identical terms to those provided to Royal Bank.
My understanding is that the government views the corporate loan book that Lloyds acquired when it bought HBOS as more poisonous than most of the assets it has insured at Royal Bank.
Which means that Lloyds may well have to pay more to taxpayers - to you and me - for the life-preserving protection we're giving it on around £300bn of ill-judged loans.