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Once upon a time, when the problems in the credit markets were little more than an awkward lump in the inter-bank rates, and Northern Rock looked like a bizarre aberration, Royal Bank of Scotland (RBS) shares cost over four pounds apiece. Today, even after the rush for rubbish that has characterised the current share rally, they cost just 50p. Surely they must be cheap?

Er, well, not exactly. After a rights issue and two government rescues, there are now 56,365,721,284 RBS shares in issue, compared to a mere 10,006,215,087 at the end of 2007. The chart for the market capitalisation of the bank shows a rather different picture to that of the share price. At 50p, today's RBS is valued at 28 billion pounds, which is hardly a giveaway, even if the worst of the provisioning against the dud derivatives and doubtful debts is now past.

The good news, though, is truly extraordinary. According to Deusche Bank's calculations, the UK government's average cost price for its controlling slice of RBS is 50p a share. This would take a whole year to shift if dribbled out into the market, but (don't laugh) it could give every man, woman and child in the country 500 free shares in RBS, worth 250 pounds, and still leave HMG with plenty left to sell.

Alternatively, it raises the possibility of the state selling at least some of our multi-billion investment at a profit. Who'd have thought it?

Disclosure: No positions

Source: Don't Bet That RBS Is Cheap