Treasury forecasts £77bn loan losses for Lloyds and RBS
A new measure of the scale of our big banks' recklessness in the boom years has been provided in the Treasury's annual report for the past year.
It says that it expects the public purse to incur a loss of £25bn in respect of the Asset Protection Scheme.
That's the safety net provided by the Treasury for Royal Bank of Scotland and Lloyds, which was announced on 19 January as an alternative to full public ownership of these banks.
It involves taxpayers providing insurance to RBS and Lloyds against possible future losses on £325bn of loans and investments made by RBS and £260bn of credit extended by Lloyds.
Negotiations are still in train on the fine print of this insurance arrangement. But the Treasury says that "on preliminary analysis of a sample of assets initially proposed to be included in the scheme", it estimates it could lose £25bn (as my colleague Stephanie Flanders has written about here).
However it adds that the estimate "could be subject to substantial revision (up or down) as further due diligence reports are completed" and that "altered economic and market conditions would clearly also effect estimated losses" (doh!).
Now you'll probably find this slightly odd, but I think this statement is more interesting for what it says about RBS and Lloyds than for what it says about potential costs to us, to taxpayers.
The reason is that it's impossible at this stage to forecast with scientific precision the shortfall between the loans provided by these banks and how much they'll ultimately get back from overstretched borrowers.
But here's the important point.
There would be no estimated loss to the Exchequer at all unless the Treasury was confident that the banks would use up the entirety of their excess - their liability to take the first loss - on this insurance scheme.
Or to put it another way, the Treasury would not and will not incur a penny of loss on the Asset Protection Scheme unless and until Royal Bank of Scotland suffers £42.2bn of additional eye-watering losses on those £325bn of loans and investments and Lloyds incurs £35.2bn of losses on its £260bn of insured assets.
It's worth saying that again. Royal Bank and Lloyds - which already reported record losses for 2008 - are expected by the Treasury to suffer further losses on their loans and investments of at least £42.2bn and £35.2bn, or £77.4bn in aggregate.
That's the kind of financial calamity that makes me feel slightly dizzy.
Of course, these losses will be incurred over a period of months and years. And they will be offset to some extent by profits that are being generated from the unpoisoned parts of the two banks.
But to call these losses the toxic fruit of reckless lending doesn't quite capture the magnitude of these banks' departure from sensible prudential standards.
And I ought to add that if the Treasury were right that the loss to the Exchequer turns out to be £25bn on top of these losses for the banks and their shareholders (that us again, of course, since taxpayers are set to own 84% of RBS and 62% of Lloyds), there would be further losses for the two banks of £2.5bn (losses over and above the first loss are shared 90:10 between taxpayers and banks).
As it happens, I can conclude with marginally better news for taxpayers.
Which is that the net loss for the taxpayer on the APS may eventually turn out to be zero.
It's true that there will almost certainly be a substantial gross loss for the public sector as insurer of those ill-judged loans and investments.
But, as with all insurance schemes, the banks are paying substantial fees for the protection. And in the case of Royal Bank, it has also agreed not to claim tax losses or allowances relating to its disastrous loans and investments.
Once those fees and tax benefits are taken into account, the taxpayer may well break even on the deal.
Which, of course, is not to argue that this is good business for the public sector.
We'd all have been better off if the banks' lending binge hadn't been so wild and prolonged.
But small virtue can be extracted from this hideous financial necessity.