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Set the baying mob on Sir Fred Goodwin. It is a cheap way for a struggling government to divert attention away from Gordon Brown’s third attempt to rescue the same wobbly UK banks he “saved” back in October. The asset protection scheme offered to Royal Bank of Scotland on Thursday is much bigger than expected, covering 15 per cent of the bank’s £2,200bn of assets. RBS eats just the first £19.5bn of losses, a mere 6 per cent of an insured asset base of just over £300bn. After that first hit, the government sucks up 90 per cent of further losses, with RBS retaining a residual 10 per cent exposure. The one-off fee is also superficially cheap: RBS is “paying” the government with £6.5bn of non-voting B-shares, implying a sub-Citigroup rate of 2 per cent for the insurance.

Direct line to the government

Unfortunately for shareholders, that is not the whole picture. RBS also loses its tax shield as part of the deal. This means that it sacrifices the £5bn shelter on its balance sheet, as well as the tax-deductibility of losses it is likely to make in the next two to three years. This in effect doubles the cost of the insurance, taking it to nearer 4 per cent. Shareholders also stand to be once again heavily diluted. RBS will issue enough new share capital to the government to enable itself to fund the first tranche of losses: the government will subscribe to a further £13bn of B-shares, on top of the shares for the £6.5bn fee, and then also give RBS the option to raise an extra £6bn from it at some point in the future.

The good news: these £25.5bn B-shares convert into ordinary ones at 50p, double Wednesday’s close. Hence Thursday’s 24 per cent jump in the shares towards the ex-rights price of about 35p. But the reality is that this is another big step along the road to state control. Assuming all B-shares convert, the government ends up with over 84 per cent of RBS. Even though it will sell down to 75 per cent (creating massive overhang), this is a Potemkin-like pretence at private-sector capitalism. It should forestall nationalisation, barring disaster, but RBS will be a public sector company in mind, body and spirit for years to come.

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