Jeremy Warner: RBS shareholders pay a heavy price for asset protection

Outlook If it looks like a nationalised bank, behaves like a nationalised bank and is ordered around by ministers as if it is a nationalised bank, why not just nationalise and be done with it?

The answer to this question is not entirely clear, but one thing that is plain is that following another massive recapitalisation and the heavy costs incurred in subscribing to the Government's new "asset protection scheme", Royal Bank of Scotland and its £2.3trillion balance sheet are to all intents and purposes already in the public sector. Yet the Government still wants to maintain the charade that the Edinburgh-based bank is a fully commercial organisation run at arm's length to the politicians with outside shareholders to answer to.

Conversion of the new, non-voting capital would immediately raise the Government's stake in RBS to 85 per cent (though it has agreed to cap voting rights at 75 per cent), while once the costs of paying for the asset protection scheme are taken into account, the Government's economic interest in the bank will be something like 95 per cent. This looks like British Leyland all over again, which was never technically nationalised, or in any case not until very late in the day, but where repeated injections of new capital by the Government eventually diluted shareholders down to virtually nothing.

Despite everything, Stephen Hester, the chief executive, reckons it's a decent deal for shareholders even if he does admit that RBS had little choice in the matter. He signed with a shotgun held to his head. Yet he still thinks the "catastrophe" insurance he's bought is worth the price.

Mr Hester has already got an extraordinarily difficult restructuring to execute over the next four to five years which involves shrinking the size of the balance sheet by around a quarter. According to Mr Hester, the asset protection scheme buys him certainty that, however difficult economic circumstances become in the meantime, he'll still have a viable business at the end of it all. It also allows him to fulfil his commitment to the Government to provide another £50bn of lending to the UK economy.

Under outline terms announced yesterday, RBS is liable for the first £20bn of any losses sustained on the £325bn of assets it is insuring under the protection scheme. It will also be liable for 10 per cent of any residual losses thereafter. But the Government picks up the tab for the rest, or notionally at least. Actually no money changes hands other than a gilt-related interest rate until maturity, by which stage the loan may once again be largely recoverable. It's all a bit of a confidence trick really.

Nor does the insurance come cheap. The 2 per cent fee may look generous to shareholders compared with what Citigroup agreed for similar arrangements in the US, but it's expensive against what AIG is paying, and in any case the fee is virtually doubled by the fact that RBS is also giving up rights to past and future tax losses. Take the tax-loss concession into account, and the scheme looks just as expensive as Citigroup's.

The upshot is that RBS is being forced to raise a lorry-load of new capital from the Government as a way of covering the first loss and the subsequent premium on the insurance scheme. It all amounts to another massive bailout of RBS by the taxpayer, but one which the Government hopes will eventually pay for itself, or, if the economic crash doesn't fulfil the worst prophecies, might even yield a big fat profit.

Poor Mr Hester. He cannot have realised quite what he was letting himself in for when he agreed to take on the RBS chalice last October. Only half jokingly, he yesterday admitted that his chairman, Sir Philip Hampton, had in recent days begun seriously to worry about Mr Hester's emotional health. In any case, he must be fast losing what little hair he's got left.

He's bound to say it's a good deal for shareholders, but even taking account of RBS's parlous condition it's hard to agree. Actually, it's a much better deal for the Government, for it secures the taxpayers' interest relatively well and also helps to underpin the public policy objective of getting RBS lending to the UK economy once more. Minority shareholders are not well served by either of these purposes.

The share price is already so low that for them the risk of being wiped out by the "catastrophe" Mr Hester is insuring himself against is scarcely worth worrying about. Certainly it is not worth the dilution which they must now suffer. Yet as with Northern Rock, they'll be wiped out entirely if they try to kick against the plan. The Government would simply nationalise without compensation, claiming that RBS would be bust without taxpayer support.

As for whether the latest manoeuvrings will achieve the intended purpose of stabilising the banking system, like Mr Hester I've given up trying to make predictions. It's certainly a bold experiment, but perhaps too complicated to underpin confidence as soundly as needed. It's the turn of Lloyds Banking Group to agree something similar today.

But don't expect Barclays and HSBC to be rushing down the aisle to join them. So far they've managed to avoid taking the Government's shilling. They won't be any keener after seeing the terms of yesterday's bailout. Maybe it's the wrong call. We'll see. But at least they are not yet the political football that RBS has become.