Northern Rock’s market capitalisation has shrunk to less than 1 per cent of its assets. That means wild swings: within one hour yesterday the shares moved by 36 per cent. It has also attracted bottom-fishers, with a prominent hedge fund taking a stake and buy-out vehicles said to be circling. Clearly, if Northern Rock’s business recovered fully, it would be a steal on about two times 2006 earnings and half of adjusted book value. But there is a convincing case that the shares will fall further.

Critically, market borrowing rates – three-month Libor is 6.36 per cent – remain above the roughly 6 per cent yield on Northern Rock’s loan book. If this book was gradually run down and funding rolled over at market rates, net interest margins would turn negative. Citigroup takes adjusted book value of 380p per share and then deducts estimated running losses to get to a range of 200p to 324p. That is above yesterday’s close of 172p, but impairments must also be considered. After assuming write-offs of less than 1 per cent of assets, Citi’s standalone fair value range falls to 6p to 130p.