At close of business last Friday, the UK government held £5 billion in preference shares and a 50% of the ordinary shares of RBS. I calculate the market cap of all of the company’s ordinary shares at £8.33 billion, so the total government holding of prefs and ordinaries would have been worth about £9.16 billion.
At the weekend the government cut what it thought was a good deal to exchange the prefs for ordinaries at a price 8.25% below the Friday closing price, giving the government a 70% interest in the ordinaries. With the discount on the ordinaries, the government would have thought they held about £9.56 billion of shares at the start of business on Monday. Unfortunately the share price fell 67% on the day leaving the market cap of RBS at £4.58 billion, and the UK government’s 70% share at £3.2 billion. So instead of getting a benefit of a £400m discount on the conversion price, the government took a £5.96 billion loss on the day, or rather the tax payer took that loss.
If the rating of UK government debt is downgraded as has just happened to Spain, then the banks will still be short of capital and the whole exercise will have been in vain.