ĂŰŃż´«Ă˝

You’ll have read around the place this morning that Northern Rock has now borrowed almost £30bn from the Bank of England.

That’s wrong. The Rock has in fact borrowed just over £25bn from all of us in the form of taxpayer-backed loans.

How do I know? Errr. Well I’ve been told by a couple of people I trust.

But it would be equally wrong to point fingers at the journalists who have printed the inflated erroneous number.

Because they have done a perfectly sensible calculation.

More importantly, the Bank of England – as a point of principle – is refusing to correct or guide journalists. And the Rock has been prohibited by the Bank from correcting them.

One Rock executive said to me that there was absolutely nothing he or his colleagues could do to prevent the press reporting exaggerated numbers on the Rock’s borrowing from taxpayers.

Why won’t the Bank of England be more helpful?

That’s very unclear.

But you may be able to draw your own conclusions if I explain how journalists have been obtaining these numbers.

The first thing to do is click on .

That takes you to a page on the Bank of England’s website called the Bank Return.

On that page the bank’s weekly balance sheet is published.

Now click on the Banking Department’s balance sheet for September 12 – or the day before the Rock went cap in hand to the Bank of England for emergency help.

In the bottom right hand corner is a category of assets called “other assets” – and its value is £13.1bn.

Now click on the Banking Department’s balance sheet for November 28. There you’ll see that the value of “other assets” has shot up to £42.3bn.

What we know is that the Rock loans are in that category of asset.

And if you assume – which is what journalists have done – that all the increase in the value of that asset is represented by Rock lending, then current Rock lending by the Bank of England would be £42.3bn minus £13.1bn. Which is £29.2bn.

But it’s a false assumption.

There were other kinds of loans in that “other assets” category before the Rock debacle and there are other kinds of loans now.

So not all the increase is down to the Rock.

But what are those loans?

Well, I haven’t a clue. And the Bank of England won’t say.

Inevitably, its silence has fuelled the conspiracy theories, even within the Rock itself – whose executives have persuaded themselves that other banks must be in receipt of secret emergency help from the Bank of England, which somehow it has managed to keep quiet.

It seems unlikely to me that would be the case.

But I can’t be certain because the Bank of England won’t say.

It’s all a bit odd and troubling.

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The from and were the occasion for a modest sigh of relief.

They were the banks perceived by regulators and markets as most vulnerable to a hysteria-induced run caused by the debacle at Northern Rock in mid September.

But in extraordinarily challenging conditions in credit markets, they have succeeded in securing requisite funds from commercial sources – with A&L obtaining a jumbo two-year loan to cover maturing debts.

And although neither of them steered clear of the poison of structured credit, their losses from collateralised debt obligations, asset-backed securities and SIVs fall into the category of embarrassing and irksome, rather than life threatening.

Of the two, Alliance & Leicester has a bit more egg on its face from structured credit than its rival.

So far, so reassuring.

What about the outlook?

Well three-month sterling Libor has been climbing for the past fortnight and is back at almost 6.6 per cent – well above the Bank of England’s policy rate of 5.75 per cent. It means that funds for banks are both expensive and are still relatively difficult to obtain.

So Alliance & Leicester expects to lend less in 2008 and charge more for what it does lend.

It’s symptomatic of a new rationing of credit that will make most of us feel a bit poorer.

Interestingly, however, A&L doesn’t expect to be able to increase the interest rates it charges customers on mortgages and other loans quite enough to compensate for the rise in its cost of funds.

So its profits will fall.

Bradford & Bingley is more optimistic about future conditions in its core market of providing mortgages for buy-to-let purchases – although that optimism is based on the unprovable expectation that in a housing market downturn there will be an uptick in demand for rented accommodation.

Note that, according to the Nationwide, there was a sharp fall in house prices in October.

That decrease precedes the full onset of tighter credit conditions for all of us – although statistics published minutes ago by the Bank of England show that there was a sharp fall during October in both mortgage approvals and mortgage lending by British banks.

So it’s all reason enough to fear that we may be about to experience the most prolonged downturn in the housing market for 15 years or so.

The conditions in credit markets are a turbulent icy wind, wreaking sporadic damage and making us all feel colder and gloomier.

UPDATE 10:40 AM: The Governor’s statement to the Treasury Select Committee this morning is almost enough to make grown men weep. It says that the Monetary Policy Committee is expecting an unspecified period of rising inflation and slowing growth and that the outlook is “highly uncertain”. Yuk.

Mervyn King also fears a further deterioration in money-market conditions as we approach the year end. He is particularly concerned about the possibility that short-term interest rates will spike relative to the policy rate.

So he has announced a new five-week liquidity facility to assure the big banks there will be enough cash in the banking system over the Christmas holiday period.

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Something remarkable happened after the news was broken by me on the ĂŰŃż´«Ă˝ last Sunday that the consortium led by Virgin had been selected as the preferred bidder for Northern Rock.

The rate at which the Rock's depositors were withdrawing their cash slowed by 75 per cent.

Although the fully fledged run on the Rock ended more than two months ago, many depositors had continued - in a more orderly fashion - to move their cash elsewhere.

The staunching of this outflow was a big thumbs up by one important constituency for the Virgin deal.

But those who own the Rock, its shareholders, were less pleased.

They were miffed that Sir Richard Branson and his chums were offering ÂŁ200m for a business that was worth ÂŁ6bn only a year ago.

And malcontent shareholders have the ability to block the Virgin deal.

It requires approval of 75 per cent of voting shareholders.

With hedge funds controlling well over 15 per cent already signalling that they don't want what they perceive as Virgin's pittance, Sir Richard Branson has a fight on his hands.

Which is why the Rock's board and the Treasury have indicated to me that they are beginning to look almost favourably (almost) on a more shareholder-friendly rescue proposed by , a financial company

Or to put it another way, they are at last supplying info to Olivant which would allow it to turn its idea into a detailed formal proposal.

Olivant's basic plan is simplicity itself. It would inject new senior management into the Rock. It would launch a rights issue of new shares to raise more than ÂŁ500m of new equity capital. And it would allow existing shareholders to retain ownership of most of the Rock.

But what about taxpayers, you shout? How are we going to get our ÂŁ26bn back?

Well the Virgin Consortium's press release for its proposal makes it clear that the jumbo loan it plans to raise from a group of banks led by Royal Bank of Scotland and Citigroup is potentially available to the Rock, even if the Virgin bid flops.

So it should be avallable to a Rock reorganised by Olivant and its boss, Luqman Arnold. Which means that they, like Virgin, could repay ÂŁ11bn of the taxpayer-backed loan from the Bank of England on day one.

Shareholders might yet actually find themselves with a choice of offers. Which won't eliminate the dire capital loss suffered by most of them, but it could reduce the pain a bit.

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Having received the thumbs-up from Northern Rock’s board, will the consortium led by Virgin actually carry off Northern Rock? Or will the battered bank’s shareholders reject his offer?

Well, on the plus side for shareholders is that Branson is offering them the opportunity to subscribe new capital into the Rock on the same terms as he would do.

He proposes to inject around ÂŁ1.3bn of cash into the business in return for new shares priced at 25p each.

All of these will be underwritten by the Virgin consortium, so the money would be guaranteed.

But the Rock’s existing shareholders would be given the chance to buy half of them.

On the basis that the existing Rock business is valued at around £200m – considerably less than the current market valued of £362m – and that Virgin Money (which would be injected into enlarged bank) is valued at £250m, Branson’s group of investors would end up with 55 per cent of the bank, leaving current shareholders with 45 per cent.

Here’s what it means:
1) Branson is putting a negligible value on the Rock in its current mess;
2) But he is giving shareholders the opportunity to obtain a good chunk of the gains, if he turns it around.

What is perhaps encouraging is that Branson himself will have a good deal of skin in the game (to use the City cliché). I am told he is putting more than £200m of his own cash into this deal.

What are the alternative for shareholders? Not happy ones.

They are either nationalisation of the bank, or the placing of it into administration under UK insolvency procedures.

And both of those would probably mean that the value of the shares would be wiped out completely and there would be no chance of rebuilding that value through the commitment of new capital.

As I said last night, the Treasury has given its approval of the Virgin offer.

What’s in it for taxpayers?

Well, after ÂŁ11bn of the taxpayer-backed loan from the Bank of England is repaid, a residual loan will be reconstructed so that it is identical in every way to a new loan provided by commercial banks (this new loan is being provided by banks led by Royal Bank of Scotland, Citigroup and Deutsche Bank).

The taxpayer loan and the commercial loan would charge the same interest rate. And they would be backed by identical collateral.

The Treasury is confident that on this renegotiated basis, the taxpayer loan will not be seen as illegal state aid by the European Commission.

But there are residual risks for the taxpayer.

Branson plans to pay off the public purse over two to three years. If there were a severe housing market recession in that period, we might not get all our money back.

However the equity he is putting into the business – including more than £200m of his own money – would be wiped out in those circumstances.

In other words, he could not profit from our misery, even though some will doubtless accuse the Treasury of using our money to help him make spectacular potential long-term gains.

UPDATE 3:30 PM - I have now spoken to Philip Richards at RAB and - contrary to some reports - he is opposing Virgin's takeover offer. He says the value it puts on Northern Rock is "too low" and he describes the bid as "cheeky".

His opposition represents a major obstacle for Virgin and an embarrassment for the Rock board.

Opposition to the deal may now be from shareholders controlling around 15% of the shares. RAB has 6.7%. But the biggest shareholder is now another hedge fund, SRM, which was buying Rock shares in the market on Friday and again today. SRM, which may now own more than 7% of the Rock, is also thought to oppose the Virgin deal.

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Sir Richard Branson’s consortium has taken a huge lead in the contest to acquire , the troubled mortgage bank.

I have learned that the Rock wants to name it as the preferred bidder, although an announcement is being delayed pending formal approval by the .

If that approval is given, an announcement will be made early tomorrow morning.

Right to the last, the Treasury has been considering a radical alternative, which was to nationalise the bank. But it appears to have decided that taxpayers' interests are more likely to be protected by a private-sector solution.

However, if the Rock’s shareholders were to complain that they are not being offered enough by , which seems likely, the company and the Government are likely to make it clear that the alternative would be to put the bank into administration under insolvency procedures.

If the Rock went into administration, shareholders might end up with nothing.

There have been around 10 expressions of interest from financial institutions in the possible takeover of the Rock.

In the end, it came down to a two-horse race, between the Virgin team and a proposal made by JC Flowers, the US private equity house that specialises in the takeover of banks.

Their advantage over other possible bidders is that their plans were far more advanced – and the Treasury was insisting on a swift decision.

The Treasury’s central concern is to secure repayment of an estimated £25bn of taxpayer-backed loans to the Rock made by the .

Virgin is proposing to raise between £10bn and £15bn of loans from a syndicate of banks led by , and one other unnamed bank – and would use the proceeds to repay some of the money owed to the Bank of England.

As for Flowers, it plans to raise ÂŁ15bn from a similar group of banks (its syndicate is led Citi, RBS and ) for the same purpose.

The Rock board preferred the Virgin proposal largely because it was offering more to the bank’s existing shareholders.

Both Virgin and the Rock would pump around ÂŁ1bn of new equity capital into the bank, thus diluting existing shareholders.

But Flowers put a negligible value on the Rock’s shares and was told to go away and come back with a better offer.

Under the Virgin scheme, the Rock’s shareholders would retain around a third of the Rock and would also receive a share of any future gains made by the new owners.

Virgin’s proposal also had several other significant presentational advantages: it would continue to make a modest annual contribution to the Rock’s charitable arm, the Northern Rock Foundation; and it would guarantee a proportion of the Rock’s employment.

If Virgin emerges as the new owner, the Rock will continue to benefit from taxpayer backed loans running to billions of pounds for two or three years. It is believed that these would get around a European Union prohibition on state aid by being reconstructed so that they would be identical in every way to the new commercial bank loan: the interest rate would be the same; and they would be backed by identical collateral.

UPDATE 18:51 The Treasury has said yes. So the Rock will announce that Virgin is the preferred bidder tomorrow.

Here are some additional details:

1) The Virgin consortium will repay ÂŁ11bn of taxpayer-backed loans from the Bank of England on the day the takeover of Northern Rock is formally completed.

2) A similar size loan from the Bank of England will remain in place. It will be on exactly the same terms as the commercial loan – arranged by Citigroup and Royal Bank of Scotland – that the Virgin consortium is arranging to refinance part of the taxpayer loan. So the Treasury is confident that the continuing Bank of England loan will not be viewed as illegal state aid.

3) Virgin has agreed it will only pay itself “normal” dividends from Northern Rock until all public money is repaid – thus avoiding the potential embarrassment for the Treasury of the Virgin making spectacular profits with the help of the taxpayer-backed loan.

4) The Treasury will give three-months notice before withdrawing 100 per cent protection for the Rock’s depositors.

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The largest shareholder in Northern Rock, , is limiting the room for manoeuvre of the bank's board as it seeks a solution to its financial crisis.

In an interview with me, broadcast on the Today Programme, the chief executive of RAB – which controls almost 7 per cent of – says that he would not hesitate to vote against any takeover of Northern Rock which did not properly value its shares.

Northern Rock's preferred route out of its current crisis is to sell itself off in whole or in pieces to other banks or financial institutions.

Almost any rescue of the Rock would require shareholder approval, so RAB – one of London's leading hedge funds, with around £4bn under management – has clout.

Philip Richards, RAB's chief executive, is trying to reinforce his influence, by insisting that even relatively small asset-sales by the Rock should not take place without a shareholder vote.

He does not want Northern Rock to sell assets now, because he fears it would obtain a terrible price for them, due to the crisis in money markets

Richards wants a solution that leaves Northern Rock more or less intact and with existing shareholders in control of a significant proportion of the bank's shares - which would rule out many of the rescue proposals being considered by the Rock's board this weekend.

Richards says that the preliminary rescue proposals from a consortium , and a separate one by the former chief executive of Abbey National, , seem to offer the best prospects for shareholders of those on the table.

He characterises other proposals that have been put to the Rock board as coming from “vultures”.

Richards is potentially at odds with the , whose first priority is to secure repayment of around ÂŁ25bn of taxpayer-backed loans to the Rock and is less concerned about returns to shareholders.

If the Rock were put into administration under insolvency procedures, as some have urged as the best way to secure repayment of public funds, Richards does not rule out suing the Treasury – though he hopes it would not come to that.

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A battalion of former military bigwigs Gordon Brown of being tight-fisted on Britain’s defence. Which adds resonance to today’s that taxpayers were short-changed in the sale by the of a stake in , the technology and defence business.

The charge which sticks against the MoD and the (which always oversees these deals) is that they made a schoolboy error in the sale-process. They ran an auction and identified the , as the preferred bidder before nailing down all the financial variables.

Carlyle then succeeded in significantly negotiating down the price it would eventually pay, exploiting the absence of any rival acquirer. At the crucial moment, there was no competitive tension, which undermined the MoD’s bargaining position.

The deal was also done in the least favourable market conditions, when share prices were on their knees. So credit to Lord Moonie, who at the time was a defence minister, because he argued for the deal to be delayed. As he told me in an interview for the Ten O’Clock News , it was the Treasury which was as keen as mustard on a transaction and – no surprise here – the Treasury got its way.

That said, the uplift in the value of Qinetiq since Carlyle acquired its third stake has been a benefit to the taxpayer, because the MoD kept a majority holding. Realised and unrealised proceeds total about £800m for the public purse – which ain’t bad going for a research operation that may well have been a liability rather than an asset only ten years ago.

But let’s not overstate the gain for the Exchequer. For the Department, according to the NAO, the internal rate of return on this deal (the yardstick for success used by the private equity houses) was 14 per cent a year – which is respectable for the public sector, reason enough to open a good bottle of cider.

Carlyle’s internal rate of return was a staggering 112 per cent per annum. This wasn’t just a vintage deal for Carlyle, it was vintage Krug.

For those who ran Qinetiq, it was Krug in diamond-encrusted, solid gold goblets. The top ten executives in the business made £200 for every £1 of their own cash they invested in the business. Sir John Chisholm, Qinetiq’s chairman, turned £130,000 into £26m; Graham Love, the chief executive, scooped £21m from £110,000.

As it happens, they deserved to do pretty well, because they transformed a research cost-centre into an international hi-tech business with great prospects – and the UK has too few of those.

Did they “deserve” to do quite as well they did? Unanswerable question.

They benefited from the gullibility of the Treasury and the MoD, who sold off Carlyle’s equity at the least propitious moment in the stock-market cycle.

It’s spilt milk, lapped up by Sir John, Mr Love and a few other former civil servants at Qinetiq. And if there’s an unattractive sound from the NAO, it’s the mewling of public officials that there’s no cream for them.

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With Northern Rock's share price in free fall this morning, there must be a concern that a false market has developed in the stock.

There are so many rumours swirling around, arguably it should publish a statement rather more detailed than what it put out .

Here is what would concern me if I were a shareholder.

The two leading bidders, the consortium led by and , both estimate that the Rock needs an injection of ÂŁ1bn of new capital - which they are each proposing to provide (by the way, Flowers's formal proposal is being submitted at last today).

This represents an astonishing deterioration in the strength of the Rock's balance sheet since July - when its directors thought it had excess capital and secured the agreement of the to pay out this supposedly unnecessary capital in the form of permanently higher dividends!

And just to be clear, the Rock has confirmed to me that it needs this additional capital. But if its mortgage book is in such great shape, as the chancellor claimed yesterday, why does it need so much?

Now I am told it has suffered some losses on SIV investments (yes, it's been hit by that sucker punch). And it may well need to increase loan loss provisions on unsecured consumer lending (as will all banks, probably).

And, of course, its margins have been squeezed by what it's being charged for the Treasury-backed Bank of England loan (though as I disclosed yesterday it is only being charged a cash interest rate of 5.75%, with the 1.25% premium being rolled up into a long-term, subordinated loan from the Treasury.

So far so gloomy. But it's beyond me why all that requires a billion of new permanent capital. Enlightenment from the company would be nice.

Anyway, if it needs all that wonga, is a takeover the only way to find it?

Well, and his investment company believe that - even at the current squished share price - the Rock could raise a billion from existing shareholders in a massive rights issue. Olivant itself would contribute ÂŁ200m of that.

And he thinks that he could raise between £10bn and £15bn of commercial funding to replace at least some of the taxpayers’ loan facility.

It would take him three weeks to put together a business plan that would allow this financial reconstruction, he estimates.

What's stopping him? The Rock board won't give him access to its books unless he signs a confidentiality agreement that would prevent him lobbying shareholders for financial backing. And he, of course, can't raise the new equity unless he can talk to investors.

Arnold is a credible banker. And Rock shareholders may therefore wonder, as the price of the stock tumbles earthward, whether their company's board should at least give him the info he wants. After all, this bank does not have a glittering array of possible escapes from its predicament.

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Alistair Darling doesn’t want taxpayers to lose a penny on the enormous financial support provided by the to .

And in a statement to the Stock Exchange he has said this morning that there is no certainty that any bidder for the Rock will have access to Treasury-backed Bank-of-England loans after February – which is when the current support package expires.

Those loans currently total about ÂŁ24bn.

But what he didn’t point out is that there is a smaller financial exposure to the Rock by the Treasury which is not supposed to be repaid for five years (although there are options allowing earlier repayment).

Or to put it another way, the Treasury has already made one very long financial commitment to the Rock.

It arose because in October it – and the and the – became concerned that the relatively high interest rate being charged on the Bank-of-England loan could do severe damage to the Rock.

So the terms of the Bank-of-England loan were altered.

The Rock would only have to pay interest in cash equivalent to the Bank’s 5.75 per cent interest rate.

A further interest rate “premium” – which I understand is 1.25 per cent – is rolled up into what is called “subordinated term debt” with a minimum term to maturity of five years. And this subordinated debt is owed to the Treasury, not the Bank of England.

It actually qualifies as part of the Rock’s capital base. To be more precise, it ranks alongside tier II capital under BIS rules.

One very important characteristic of this subordinated debt is it would rank very low down the list of any creditors in any wind-up of the Rock. It is just a hairsbreadth away from being equity. Or to put it another way, the Treasury has already come very close to taking shares in the Rock.

And what should also matter to taxpayers is that if Northern Rock continues to borrow substantial sums from the Treasury – and the bank itself can’t see how to do otherwise – this subordinated debt could grow quite big indeed.

If for example the Northern Rock’s loans from the Bank of England averaged £20bn over two years – which is a realistic scenario – the rolled up interest would total £500m.

There are two ways of looking at all this subordinated debt.

Some will see it as a taxpayer subsidy to a bank which got itself into a mess and was unable to raise money in a conventional way.

However shareholders are likely to view it as a potentially crippling burden on the company which – if the Treasury wanted it back – could wipe out the value of Northern Rock’s shares.

Update 08:00 Northern Rock's shareholders have had a huge dose of bad news this morning.

The company says that the preliminary bids for the business all value it at significantly less than the current market value.

And the Treasury has said that neither bidders or the company should assume that the ÂŁ24bn of loans made to it by the Bank of England will be kept in place after February.

The Treasury has also warned that the support it has provided to the Rock represents state aid under EU rules and may therefore turn out to be illegal.

It means that Northern Rock's battered share price will fall further this morning.

And it also means that the future of the Rock, for its 6000 employees, remains highly uncertain.

However the Treasury has reiterated that the Rock's depositors have nothing to fear.

It will continue to guarantee that they do not lose a penny.

And its other aim - which may be harder to achieve - is to prevent the taxpayer losing a bean.

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There have been more proposals to buy all or part of Northern Rock than the bank might have expected even a couple of weeks ago.

However of the ten-odd expressions of interest, two stand out.

They are from the US private equity firm, JC Flowers, and from a consortium led by Sir Richard Branson's Virgin (Flowers is finalising its bid and will submit it formally by Tuesday morning; Branson's went in yesterday).

Both would buy all of it, not just a supposedly profitable rump.

Both would inject a significant amount of new capital into the business - in Virgin's case, a billion in cash plus an in-kind injection of its existing financial business, worth somewhere between ÂŁ100m and ÂŁ200m.

And both would supply a new management team, including a chief executive and chairman.

Virgin is slightly out in front, according to those involved in scrutinising the bids.

If Virgin were to emerge as victor, its consortium would end up owning around two-thirds of the equity – leaving the existing shareholders with a third of the business.

The ball is now in the court of Alistair Darling, the Chancellor.

No deal can be done till he makes up his mind about how long he is prepared to sustain the enormous financial support he has provided - in the form of insurance for depositors and a Treasury-backed loan from the Bank of England of around ÂŁ24bn.

His actual and potential exposure is well over ÂŁ40bn.

How long he is prepared to keep that in place has wide ramifications, particularly for shareholders.

If he wanted his money back tomorrow, for example, the bank would go straight into administration under insolvency procedures and the shares would be worth nothing.

If he is prepared to leave the financial prop in place for three years – subject to not falling foul of EU state-aid rules – existing shareholders might recoup some of the losses they’ve incurred.

Now Darling made it crystal clear, in letters to the Public Accounts Committee and the Treasury Select Committee, that protecting shareholders is not on his to-do list in any shape or form.

And he won’t be feeling under any moral obligation to help the ten big investment institutions – hedge funds and more conventional investors – which control more than 50 of the Rock’s stock. It’s caveat emptor for them, Darling would say.

However, some 20 per cent of the Rock is owned by 150,000 small shareholders – many of whom received their stakes as payment for their previous de facto interest in the Rock as a mutual building society.

They are not, on the whole, experienced investors. Few of them had any inkling of the risks of equity. And for many the shares were an important retirement nest-egg.

Could Darling really contemplate wiping them out, even if it’s his official responsibility not to subsidise them with taxpayers’ money?

It is a potential nightmare for him.

And here’s what complicates matters.

He said during and after the run on Northern Rock that the bank is solvent.

As much as anyone, therefore, he is responsible for giving hope to small shareholders.

The political backlash were he now to dash that hope would be something to behold.

PS Many apologies for the difficulties you have been experiencing in posting comments. Apparently the publishing system is working again. Thanks for your patience.

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Credit where it’s due: the performance of Barclays Capital, through the wild storms in credit markets of the past few months, has been incomparably better than that of Citigroup and Merrill Lynch.

So as I predicted here, the publication of a trading statement has squeezed the bears: Barclays’ share price has bounced this morning.

This is no small achievement. Barclays Capital was a market leader in reprocessing low-quality US sub-prime loans into the allegedly high-grade bonds of collateralised debt obligations. It was (and is) a specialist in converting muck into brass.

And in the past few weeks there has been an unfortunate collision of economic reality and investment-bankers’ wishful thinking: the price of these bonds has collapsed.

The precise mechanism for this collapse has been the accumulating evidence of the difficulties experienced by US homeowners who had borrowed these sub-prime mortgages – which in turn forced the credit-rating agencies to downgrade the ratings of tens of billions of dollars of securities manufactured from these mortgages.

So if you happened to have a load of these securities on your balance sheet, you were not happy.

How has Barclays avoided the calamitous losses of a Merrill or a Citi?

Well it appears to have hedged and reduced exposure at just the right moments: viz just before the onset of the August credit crunch and again just before the tsunami broke over collateralised debt obligations in October.

Luck or judgement? That matters to shareholders in the long term in respect of how they value this business. But right now the overwhelming emotion is relief. For Barclays Capital to be on course to make record profits in this dreadful climate is impressive.

But is the ÂŁ1.3bn of write-downs for the four months to the end of October really as bad is it is going to get for Barclays Capital?

Is there any wishful thinking in its valuation of impaired assets?

Here is its retained exposure:

1) £3.8bn of exposure to “high grade” collateralised debt obligations linked to sub-prime, where the four-month write-downs seem to have been of the order of 16%;
2) ÂŁ1.2bn of mezzanine exposure linked to sub-prime, where the write-downs have been of the order of 25%;
3) £5.4bn of “whole” sub-prime loans and a trading book of sub-prime loans and CDOs, which seems to have been written down 7%;
4) Minimal exposure to SIVs and SIV-lites of ÂŁ700m, where the write-down has been 9%.

Could the value of all that stuff fall further? Of course. Do those write-downs capture in a reasonable way the horror of recent market conditions? Probably.

However, if I have some residual anxiety about Barclays it is about its ÂŁ7.3bn exposure to the private-equity deals carried out at the peak of the market in the spring of this year.

Just to be clear. I am not suggesting that the businesses it lent to – including Alliance Boots and the company created by the merger of AA and Saga – are likely to run into financial difficulties.

But it has taken a write-down of just 2.5% on these loans, which seems to me to understate the fall in the value of this stuff (and the net write-down is de minimis after adding back a staggering ÂŁ130m of fees linked to these private-equity deals).

And what about all those rumours that Barclays has been – or could become – chronically short of liquidity?

Well it says it has benefited from inflows of deposits and increased credit lines from counterparties.

And its conduits – those vehicles created by almost all banks as a way of making a turn from raising cheap-short term money to fund long-term assets – seem to be in reasonable shape.

It says they are fully-funded by commercial paper. And that even if all that funding disappeared, the drain on its own resources would be £19bn – which sounds a lot, but is not critical for a business with £1200bn of gross assets.

Does this all mean that it’s back to business-as-usual for Barclays?

Absolutely not. The outlook for credit-markets remains volatile and difficult. And prospects for the economies on which it depends are deteriorating.

But Barclays is in better shape to cope with those difficult conditions than many believed.

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Shares in Schadenfreude Inc are soaring to new highs, as evidence accumulates that the private-equity boom of 2006 and early 2007 may be turning into something dark and dismal.

As I mentioned yesterday, even before any pronounced slowdown in the economy, the debt of several British companies acquired by private-equity funds is trading well below par.

Last night, for example, holders of bonds issued by Countrywide – the UK’s leading estate agency business – were nursing very pronounced losses.

Which is unsettling given that the buyout of Countrywide by the US private-equity house, Apollo, was carried out only last May.

It was one of the last private-equity deals of any size to be completed, before the market collapsed in the summer. And the deal valued Countrywide at over ÂŁ1bn.

The takeover was financed with around ÂŁ300m of equity and ÂŁ640m of debt, which were sold to investors as three different kinds of bonds.

There was ÂŁ370m of senior secured floating rate notes, which were priced last night at 76p in the pound.

There was another ÂŁ100m of senior secured floating rate notes that have a toggle, allowing the borrower to pay interest in cash or roll it up depending on whether money becomes tight.

The toggle was a bull-market innovation that transferred power from the lender to the borrower – in that if a borrower runs into difficulties, it can simply add the interest to the principal owed and delay the day of reckoning.

Perhaps unsurprisingly, these toggling notes are trading at 70p in the pound.

And then there was ÂŁ170m of senior unsecured notes, which is trading at 54.5p in the pound.

All told, providers of Countrywide’s loans are nursing losses of £195m. Which is a lot of humiliation and pain for the lenders. And what seems extraordinary is that we’re less than six months from the completion of this takeover.

What is the equity worth? Goodness knows. But, in theory, if the debt has fallen in value by that much, the losses on the equity may be spectacular.

Except that, like so many of these top-of-the-market buyout deals, the holders of the equity managed to transfer many of the risks normally associated with the equity to the debt.

As Countrywide itself puts it, “our bonds instruments do not contain any maintenance covenants, only incurrent covenants”. What that means is that if the performance of the business were to run into serious difficulties, bondholders have precious little ability to take control of the business or seize assets unless and until the smelly stuff is all over the fan.

So perhaps the equity will be worth something one day, if Countrywide comes through the next phase in the housing cycle in reasonable shape.

What’s actually been happening to Countrywide as a business? Well Countrywide’s third-quarter results, which have this morning been sent to its bondholders, show that conditions are becoming tougher for it – though it is cutting costs and it has succeeded in increasing the cash that it holds on its balance sheet as a protection against elements.

Its revenues fell 6% to ÂŁ167m in the three months to the end of September. As for the measure of profit favoured by private-equity owners, earnings before interest, tax, depreciation and amortisation, that fell 5% to ÂŁ31.9m. And Countrywide generated a useful amount of incremental cash in the period.

The more forward-looking measures make for gloomier reading. The pipeline of sales for the company going into the last quarter of the year is 16% lower than at the start of the second quarter – and the volume of properties on its books rose 5% over the summer as properties took longer to shift.

Why has the price of its debt fallen quite so much?

It’s partly that loans to buyouts are out of fashion right now.

And it also shows what providers and buyers of the loans think of the outlook for the British housing market – which, to state the obvious, isn’t very positive.

In a way, Countrywide is part of the same phenomenon as the calamitous factors that brought us the crisis at Northern Rock: financial institutions’ newly found dislike for certain kinds of debt created in what they see as the bubble conditions of 2006 and early 2007; and their particular wariness of anything dependent on the volume and price of house sales.

Anyway, the vendors of Countrywide should be feeling pretty chirpy. They appear to have sold right at the peak.

Actually there was another big private-equity takeover of an estate agency chain that was completed just a few weeks later.

That was BC Partners purchase of Foxtons for ÂŁ380m, financed by ÂŁ180m of senior debt, ÂŁ70m of mezzanine debt and ÂŁ130m of equity.

The banks that provided the ÂŁ250m in aggregate of loans for the deal, Bank of America and Mizuho, are thought still to be holding much of it. And like many big banks, they are probably singing the buyout blues.

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The clever lads at have got hold of the sale memorandum for Northern Rock and put it on their website.

And – curses – it doesn’t include the one really vital piece of information for any bidder, which is precisely what the Rock is paying for its Treasury-backed loan from the Bank of England.

The Government, I am told, regards this detail as too sensitive even to tell prospective purchasers.

All the document says is that "any potential purchaser/investor... will need to have discussions with the Bank of England and its advisers before concluding any proposal."

Too right they will.

The value of the business for shareholders depends almost totally on the length and cost of this borrowing facility.

What the sale memo does disclose is that the Rock expects to have borrowed ÂŁ24bn from the Bank as of Jan 1 2008 (though, curiously, the Bank of England believes it may well have lent ÂŁ30bn by then).

The memo talks about this loan being refinanced – though it is not explicit about whether such a refinancing would continue to involve Government support.

However those involved in the sale process tell me it is simply impossible for this facility to replaced by a pure commercial deal in the foreseeable future.

So we are talking about the Government loan rolling on to the horizon. And according to the sale memo, even in 2010 the Rock will need to be in receipt of £6bn from what it calls a Replacement Facility – which, as I say, is in effect the current Bank of England loan by a different name.

Anyway, the memo outlines three possible different destinations for the Rock:

• sale of the whole company;
• sale of the basic physical infrastructure of the business, viz. the branches, IT and call centre, which might or might not also include Northern Rock’s £13.5bn of retail deposits and matching assets;
• sale of the infrastructure plus all those securitised mortgages, leaving behind a rump of assets and liabilities for orderly run-off.

Now, it looks to me as though the jobs of most of the Rock’s 6,000 employees should be retained, under these scenarios.

But if I were a Northern Rock shareholder I would be alarmed, because the possibility of retaining the Rock as a listed company in its current form is simply not mentioned as an option.

And the point about the status quo is not that it is necessarily the best option. But you would expect it to be the base case for any examination of what should happen to the company – such that any deal would only be done if it created more value for shareholders than sustaining the current structure and ownership.

The implication therefore is that Treasury simply wants to get shot of the business – though it would deny any such intention, largely because it can’t be seen to be pulling the strings for fear of being forced to take more formal responsibility for the Rock’s welfare as a shadow director.

Also it won’t wish to be seen to be short-changing the 150,000 or so small shareholders in the Rock, many of whom acquired their shares when it converted from a building society and saw their stake as a retirement nest egg.

But the contents of the sale memo imply that the initiative put forward by Luqman Arnold and his Olivant financial business is going nowhere. This credible former boss of Abbey National and UBS believes he can stabilise and grow the Rock as a going concern. His plan would be to retain the Rock’s listing and inject some new capital into it in return for a stake of less than 20 per cent.

Unsurprisingly, a number of the Rock’s larger shareholders – including the hedge fund, RAB – believe Arnold deserves a proper hearing. So they won’t be pleased if he’s already been effectively ruled out.

In the memo, the Rock is given the cutesy codename "Blackbird". Its shareholders will hope that’s not because a decision has already been taken that this bank is going for a song.

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I’m feeling gloomy. Here’s why.

1) Stock on the books of British estate agents jumped almost 9% in October, when new agreed sales were at their lowest level since the first started polling their members. If that’s not a rush for the exit…

2) In the US, the chief operating officer of Blackstone, the world’s biggest private equity firm, who has his ear pretty close to the market, “the mortgage black hole is, I think, worse than anyone saw. Deeper, darker, scarier.”

3) Analysts at Morgan Stanley estimate that the cost of borrowing money for British consumers, as a result of this summer’s seizing up of financial markets, has risen by 70 basis points, or 0.7% (against a 0.15% rise for companies). They say this would reduce consumption by 1.4% (all else being equal).

4) The price of junk bonds has plummeted, yields have soared, so that on November 8 the average junk yield was almost 5 percentage points above US Treasuries. That implies a default rate of around 5%. What it means is that the debt markets expect a sharp enough US economic slowdown to cause significant damage to US companies.

5) The debt of several British buyouts completed in the past year – at the peak of the private-equity boom – is already trading at well below 100 pence in the pound, which implies that they are already running into repayment difficulties.

6) Only one listed high-street British bank, HSBC, had tangible equity of 4% or more as a proportion of assets at its last half-year end. At this stage of the banking cycle, it is that kind of equity cushion which any prudent bank would want. Only two others, HBOS and Bradford & Bingley had 3% ratios. As we approach the season of writedowns on past lending mistakes, the relatively low level of tangible equity within the British banking system is cause for concern. It means the banks’ ability to provide credit may become even more constrained, as they endeavour to rebuild those equity-asset ratios (and, of course, their share prices will remain under pressure).

What does it all mean? Well, debt markets are saying there will be a sharp economic slowdown in the US and UK, far worse than what equity markets are currently discounting. So either debt-markets will enjoy a miraculous recovery or the stock market will slump. For what it’s worth, Morgan Stanley yesterday sided with the debt-market bears.

As for the wider economy, the brakes are being slammed on and we’re going to feel less prosperous pretty soon. Which is why I was slightly bemused that the Bank of England didn’t cut interest rates (though apparently no one else was), to prevent us being bruised excessively by the jolt. Keep your seatbelts fastened.

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On Tuesday I was rung up by a couple of mates in the City to congratulate me on a scoop they had heard I was about to broadcast on the Ten O'Clock News.

They informed me that they had been informed I would reveal an enormous financial black hole at

I was simultaneously amused and slightly alarmed - because I wasn't planning to broadcast any such thing.

What the incident shows is how jittery the City has become about the prospects for our biggest banks. And what it may also show is that some unscrupulous speculators are taking advantage of the jitters to spread false rumours - in an attempt to profit from the manipulation of share prices.

Driving down Barclays’ share price right now would be to go with the flow. The stock has dropped 17 per cent since the beginning of last week, it is down 39 per cent from a high for the past year and has fallen more than 4 per cent so far today.

So I thought I had better find out just what is going on. Now the first thing to point out is that if Barclays' profits and prospects were massively different from its previous public guidance, it would have needed to make an emergency statement, under listing rules. That it hasn't made such a statement should be reassuring.

Point two is that the media and punter obsession with Barclays is to miss something quite big – which is that shares in have actually been falling further and faster (off almost 7 per cent today, down 19 per cent over nine days, and a staggering 44 per cent below a 52-week high).

If you are a bear of the banks, the disproportionate fall in RBS stock is rational – because it has the to digest and because it has far greater exposure than Barclays to the softening consumer economy in the US.

Point three is that although Barclays has a large global investment bank in , whose activities are too opaque for comfort, it’s probably not as deep in the merde as a , a or a

So although Barclays is bound to suffer writedowns on the private-equity leverage and sub-prime securitised rubbish that's stinking away at almost all the banks, its losses may well turn out to be less than its peers and less than the spivs and speculators expect.

What's more my sense is that the rest of Barclays is running well, such that profit growth in other substantial operations will be strong.

So when Barclays updates its shareholders about what’s really going on, there is a fair chance that its shares will bounce – and that the bears will be squeezed (which doesn’t feel like a tragedy).

But there’s a “but”. I’m not sure how much of a bounce it will turn out to be. First, the opacity of precisely how Barcap makes its money will continue to unsettle investors, in market conditions where opacity is attracting a massive market discount.

Second, Barcap made a fortune out of the credit bubble and it’s fair to ask whether it can prosper now that the credit-bubble has been pricked.

Finally, all banks will feel capital-constrained in the coming months, as we progress through this second phase of a financial-markets downturn.

First we had the liquidity drought of the summer and early autumn. Now, with growth slowing in the US and infecting the rest of the world, we are moving into a phase of losses on loans, of an inevitable morning-after hangover for almost all banks.

They provided the wrong credit to the wrong people at the wrong time. They mispriced the risk of lending, they banked profits on loans which weren’t real profits, and now they are having to write those profits off.

So for many months to come, all British banks will want to conserve their capital. They will lend less. Their earnings will grow less or even stagnate. And their share prices will languish.

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What I hope also came through in the programme on Northern Rock (which can be heard by clicking here) is the extent of the disagreement between the and the on how banks can be helped using the Bank of England’s regular money-market auctions.

Or to put it another way, they are not as one about whether could have been rescued in an inconspicuous way, thereby averting a run.

, the chief executive of the Financial Services Authority, said this to me:

“If you have a single company, i.e. in this case Northern Rock, and it is not able to get funding from the commercial markets, the only other place it can get funding from is the central authorities, i.e. through the Central Bank. And it is also the case here that if smaller amounts of funding could have been given to it earlier, it might not have required large amounts of funding later.

“And given our responsibility for supervising Northern Rock, we would have set out those arguments with regards to the specific set of circumstances for Northern Rock for the Bank of England to consider. But it’s the Bank of England’s responsibility to then make the decision whether making an individual intervention would have a potential knock-on effect and it can be justified in terms of the long term and wider impact on the economy in the financial markets system as a whole.”

So Sants is saying that the FSA told the Bank of England that the Rock’s funding difficulties could have been lessened by pumping more liquidity into the banking system and allowing it and other banks to swap mortgages for what’s known as “term” funding (or loans of longer maturity than just overnight).

This is in stark contrast to what , the Governor of the Bank of England, said to me. He said it was clear to the Bank of England from the outset that the Rock needed far too much money – £30bn in his estimate – for it to be helped in this way.

King told me that if the Bank of England had used its money market procedures to channel substantial funds to Northern Rock, it would not have taken journalists or bankers very long to work out that something very strange was going on. Northern Rock’s frailty would have been quickly spotted, thereby sparking a crisis of confidence and a possible run.

This is no trivial debate. It goes to the heart of what central banks do.

And what seems to be at issue is this. The FSA believes that if the Bank of England had given smallish amounts of help to the Rock via market-funding procedures early in the crisis, the markets would not have concluded that the Rock was in trouble but that the reverse was true, that the Bank was providing exactly the kind of liquidity that would ensure the Rock could stay afloat – such that other financial institutions might in time have regained their confidence in the Rock and might have started to fund it again.

So, in its view, we wouldn’t be where we are today, where the Bank of England – backed by the Treasury – has provided £20bn of emergency loans to the Rock and expects to have provided £30bn by Christmas.

By contrast, King and the Bank of England saw such a course of action in regard to the Rock’s plight as naïve and dangerous.

And here, it seems to me, is where the – and any other future enquiry – must direct most of its attention. It must adjudicate about whether the Bank or FSA is right and whether reforms are needed.

I don’t wish to overstate this, but the international competitiveness of the City of London depends – to an extent – on there being confidence that the central bank will provide the right kind of liquidity at the right time.

Right now, that confidence is not what it ought to be.

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Broadcast interviews by , the governor of the Bank of England, are as rare as optimistic bankers in the City of London’s current gloom. And what the governor told me, in a conversation recorded for a documentary to be broadcast tonight, gives fascinating new insights into the seizing up of money markets this summer and the crisis at Northern Rock.

I spoke to him in an elegant meeting room next to what the Bank calls his parlour, at the heart of his neo-classical fortress in the City. We spoke for more than an hour about what he did and why, in the run-up to the Northern Rock crisis and during the first run on a British bank for 141 years. Such was the insight he gave into his actions and his state of mind that the difficulty we had was deciding what not to broadcast, since so much of what he had to say was gripping.

One of the most important questions was why he did not attempt to rescue Northern Rock over the summer in a quiet, inconspicuous way – which would have avoided all the drama of providing an emergency loan – by pumping additional liquidity into the banking system. Apart from anything else, that was what many big banks had been demanding and my understanding is that the City watchdog, the , supported their case.

Northern Rock’s chief executive, Adam Applegarth, told MPs on the Treasury Select Committee that if his bank had been based on the continent, it would never have suffered a crisis. He claims it would have been able to raised sufficient funding by exchanging its mortgages for loans from the in a way that wasn’t then possible in the UK.

King was blunt in dismissing Applegarth’s claim. He says the Rock chief executive is wrong, because it was clear from the start that Northern Rock needed far too much money to be propped up in a way that would not have raised the alarm to the market about its funding difficulties.

The governor says that the Bank calculated that Northern Rock would need £30bn in support. And that it was impossible to “rig” a money market auction to direct that level of funding to it without alerting journalists and other bankers to what was happening. What’s more, an “unrigged” auction would have been ludicrous, because it would have involved injecting mind-boggling sums into the banking system – thus raising fears that the entire banking system was effectively bust.

So, for him, there was no option but to direct support to the Rock using the Bank’s role as lender of last resort – once, that is, the Rock concluded beyond any doubt that it could not fund itself in the normal way from commercial sources.

So the decision of the Treasury and the Bank to provide in this form was their first momentous decision.

Their second momentous decision was not to announce, at the same time as providing the loan, that no depositor at the Rock would lose a penny – that the Treasury was guaranteeing their savings.

This was eventually made by the Chancellor, on the evening of September 17. And it did stop the run. But by then the run had been raging for four days in branches and on the internet.

And it was the run that did so much damage to the reputation of British banking. As the governor describes, for a few days during and after the run, there was an international flight of capital out of the British banking system by global managers of great pools of cash, because they had been so shocked by the television pictures of the run.

If that capital flight hadn’t been stopped, well who knows what damage could have been wreaked on other substantial banks? The chairman of one big British bank was so worried that he went to see the head of the civil service and the head of the Treasury to express his concern.

What’s more, this retail run contributed to the steady withdrawal of funding from Northern Rock by other banks and financial institutions – such that the Rock has now borrowed some £20bn from the Treasury and expects to have borrowed £30bn by the end of the year.

There is therefore a fair body of evidence that the run has had damaging long term consequences both for the Rock and for confidence in the British banking system.

It is also likely that it could have been avoided if the chancellor had guaranteed that savers would not lose a penny right at the outset.

So why didn’t that happen? Well you will have to listen to File on 4 tonight for the detail.

But both King and – the FSA’s chief executive who was also interviewed by me for the programme – say that there was discussion of the possibility of a run before the emergency loan was granted. And that the idea of providing a 100% guarantee to depositors was raised by them in conversations with the Treasury.

And, as Sants says, only the chancellor could provide this guarantee.

They did not regard a run as inevitable however – which seems to be why the Treasury did not provide this guarantee till the run was raging in full frightening force.

But neither Sants, nor the chairman of the FSA, , nor Mervyn King were prepared to give media interviews to reassure Northern Rock’s depositors during the run because they all regarded the existing system of deposit insurance as inadequate. King actually says it would have been “dishonest” to tell the Rock’s savers they had no reason to worry.

Which in the starkest terms shows why the delay by the chancellor in guaranteeing all Rock savings was momentous.

You can read the full transcript of Mervyn King's interview .

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frighteningly large new losses were triggered by two events: a further housing market this autumn; and downgrades of sub-prime US mortgage-related assets by rating agencies.

Here’s the worrying thing about Citi’s . Much of the losses related to $43bn in “ABS CDO super senior exposure” backed mainly by “sub-prime RMBS collateral”.

I’ll translate that for you. It means Citi is suffering humungous losses on the reprocessed and repackaged bits of sub-prime – or exposure to US homebuyers with a poor credit history – that were supposed to be top quality, not far off the quality of top corporate bonds or government debt.

Citi has given the lie to the idea that was so prevalent in markets over the past few years that financial engineering – through the medium of collateralised debt obligations and structured credit – could turn ordure into gold.

So let’s hope that the painful experience of Citi and other institutions leads bankers to once again show due respect for one of the golden rules of banking: you may be able to make money from merde, but don’t pretend you’re selling anything but merde.

Citi estimates that since September 30 (the end of its previous accounting quarter) the decline in the value of its sub-prime exposure will reduce reported revenues by between $8bn and $11bn.

That would be enough to bankrupt many a good size bank. But then many a good size bank isn’t big enough to accumulate exposure to sub-prime on the scale of what Citi did, or some $55bn as of September 30.

And don’t forget that these losses relate to just one portion of Citi’s business. This is a bank which grew its assets – primarily its lending – by an astonishing $769bn or 48 per cent over the past 21 months.

Such asset growth is astonishingly and disturbingly fast at a time when there were bubble conditions in many markets. Not all of that new lending will have been top quality.

Anyway, it’s funny what people end up doing. I’ve known since the 1980s, when he was just a youngish man on his way up as head of the small London merchant bank, Schroders. Now he’s a grand old man of world banking, and is stepping into the breach at Citi, the world’s biggest bank as chief executive – albeit on a temporary basis, until a permanent replacement can be found for .

The other interesting board change is that the former US Treasury Secretary and one-time Goldman head honcho is to become chairman – apparently on a permanent basis.

The previous incumbent of those two posts, Prince, says he is doing the honourable thing by going, though honour may have been prompted by hard economic reality. Still, his exit will cause a frisson among senior bankers all over the world, because few of their organisations will escape unscathed from the problems in credit markets.

That said, Citi’s hit from sub-prime is spectacular. And it will cause widespread concern that other banks will be forced to disclose increased losses from their respective holdings of sub-prime, CDOs and the rest of the gilded rubbish, probably exacerbating a downturn in bank shares that acquired momentum last week.

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Figures published just now by the indicate that has to date borrowed around ÂŁ23bn from it.

That is in effect a loan from all of us, since the is indemnifying the Bank of England for the entirety of the credit extended to the Rock.

What that means is that each of us as a British taxpayer is in effect lending ÂŁ730 to the battered mortgage-provider.

It is a colossal sum.

So what's going on, given that the retail run on Northern Rock - when its depositors queued to withdraw their savings - ended on September 18?

Well, there has been a separate run, a wholesale run, involving much more money.

Famously and notoriously, three quarters of the Rock's funding came from wholesale markets, through the sale of bonds and other securities and from finance provided by banks and financial institutions.

As their loans to Northern Rock have fallen due for repayment over the past few weeks, these banks and financial institutions have been demanding their money back.

And the Rock has found it impossible to either roll over these loans or raise money from other commercial sources.

Why? Well most banks and financial institutions have been shunning any unnecessary risk, since the credit markets seized up in the summer.

So the Rock has had no option but to tap the emergency facility provided by the Bank of England – and on a colossal scale.

What does it mean?

Well, first of all the money provided by the Bank is not cheap - so paying the interest on it is making a big dent in the Rock's profits.

But the more worrying implication of the sheer magnitude of the wholesale run is that none of the three putative bidders for the Rock can possibly buy it without a cast-iron guarantee that the Government-backed loans will stay in place.

To be clear, the extent of public sector support goes beyond those direct loans. The Treasury has also indemnified a further ÂŁ20bn odd of deposits.

So we are talking about total public-sector exposure to the Rock of ÂŁ40bn - equivalent to around 3 per cent of our entire economy. And that exposure could become much bigger, as other loans to the Rock fall due for repayment.

The burden of responsibility this places on the new Chancellor, , is huge.

He has to prop the bank up, for fear of damaging confidence in the banking system.

But it will be unnerving for him that all this public money has been provided to a company whose senior management – still in place – was responsible for the crisis, in the way they chose to finance the bank in the first place.

It is an unpleasant choice for him. He can continue to provide arms-length loans to a bank whose executives he dare not try to influence, for fear of becoming even more responsible for Northern Rock’s ultimate fate as a shadow director.

Or he can replace management and admit he is running it as a shadow director.

Or he can nationalise the bank.

As for Northern Rock’s board, it’s a bit odd we haven’t heard from them on the impact all this expensive borrowing from the Bank is having on its profitability.

In the absence of any statement from them, we have to assume the directors believe the bank’s shares are worth their current price of 170p or £800m in aggregate – even though, as a matter of definition, the bank would not be a going concern without the Government prop.

UPDATE 19:45 How much will the Rock end up borrowing from the Bank of England? Well the Rock and the Bank of England are both expecting the amount borrowed from the emergency facility to rise to ÂŁ30bn by the end of the year. How much more it rises after that will depend on the rate at which homeowners pay off their mortgages, but bankers tell me ÂŁ30bn may not be the peak.

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