Yesterday’s Sunday Times reported a City analyst saying that RBS may report losses of up to £28 billion for 2008 when it reports its full year figures.

If it does, or if reports a mere £20 billion of losses for last year, that means all the extra capital pumped in by UK taxpayers will have gone in just a few months of ownership. Many of the losses will be on foreign banks and overseas investments within the RBS group.

In the meantime we do know, now that RBS shares are trading around 42p, that the taxpayer has lost a small fortune on the shares – around £8 billion at current market prices.

When the government first started briefing that it was thinking of buying stakes in several major banks I urged them to carry out due diligence, to ensure the assets they were buying were realistically valued. Why on earth, I asked, should taxpayers have to take the hit after they bought in? Surely any sensible person buying into such banks would demand write offs before putting in so much money?

I was told the government was in a hurry and would not therefore do what any commercial purchaser would do. They could have applied a sensible discount to the asset value when constructing the deal, but even that proved too much for this feckless and naïve government. Their bail out of the banks was their ERM – and its impact will be far worse than the damage the ERM did to the British economy.

Taxpayers have thrown their money down the drain, putting it into banks that had not written down their assets sufficiently to warrant the new capital. Nor have they cut their costs enough. If a bank is losing such huge sums it cannot afford all the people it is currently employing, and cannot afford the giddy level of salaries and bonuses it is paying to the managers and directors. The government should have insisted on proper write offs and proper action to cut costs before purchasing any shares. Instead we are all losing a packet, without helping fix the banks, who carry on incurring costs as if the world was still the same as during the boom.

Now we need to know from the Regulator whether it will inisist on replacing the lost capital or not. A few weeks agao when the government and Regulator increased the banking panic by insisting on extra capital we were told it was essential they have a higher capital ratio – i.e. more share capital relative to their lending. Does that rule still apply to RBS, or will it be allowed now post any losses to have a lower ratio again? If it is allowed a lower ratio can we have some assurance these losses mark the end of the likely write offs? Will the government do some due diligence on the figures this time to make sure they are prudent?

If the Regulator is still insisting on the higher capital ratio, where is the money coming from? Are taxpayers to be made to put more in, as Mr Bean of the Bank of England hints? Or will they now get on with selling assets and cutting costs in a way which gets the bank’s balance sheet back into better trim?

What should they do? Demand a full independent audit of the assets. Agree realistic values. Agree with Regulator and the bank an appropriate capital structure for the revised position. Then get the bank to raise any extra capital it needs through cutting costs and retaining more profit, selling assets, or finding someone other than taxpayers to put up the money. Taxpayers have had enough.

I pointed out in Parliamentary debates that the 3 banks with state shareholdings could lose the equivalent of the defence budget in a year. According to the Sunday Times RBS may have done most of that on its own within the first few months of state ownership!