Sunday, 12 October 2008

The scale of potential taxpayer losses on the proposed bank package

Following the share price of one bank should illustrate the scale of just how large are the potential losses for taxpayers in the proposed bank bailout.
On Friday the price of shares in Royal Bank of Scotland (RBS) was 71.70p. That made its market capitalisation £11.9 billion.[1] However this year RBS raised £12 billion in a shares rights issue. This means that the entire shareholding prior to the rights issue is now valued at zero.
The rights issue was, however, made at 200p a share with the small remaining part placed on the market at 230p. This means that those who bought shares in the rights issue have lost two thirds of their investment or approximately £8 billion. Furthermore there is clear downward potential in RBS shares.
This loss of £8 billion is however only on one bank. The proposed bank package proposes £50 billion across many banks - that is taxpayer exposure would be £50 billion. The potential loss for taxpayers therefore, with no hint of exaggeration, runs into tens of billions.

[1] The figure in this Sunday Times article is inaccurate to one decimal point on the market capitalisation, which makes no practical difference whatever, but the figure here has been corrected by data from Google Finance.

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