By Ian Pollock
Personal finance reporter, BBC News
RBS boss Stephen Hester says the firm has a central position in society
How is it possible that hundreds, and possibly even thousands, of staff at the state supported Royal Bank of Scotland group (RBS) are in line for bonuses totalling about £1.5bn at the end of this year?
News reports of the bank's apparently impending generosity towards staff in its investment banking division emerged last week.
Although the bank refuses to confirm any such figure, un-named executives have been quoted widely in the press as saying bonuses on this scale are justified because the investment banking division at RBS will make profits this year of about £6bn.
However the financial statements published by RBS this year show that one reason why the RBS investment bank has seen a surge in profits has been due to a big change in the way it presents its accounts.
Last year was the one in which RBS reported an extraordinary pre-tax loss for the whole year of £41bn.
As we learned very recently, the bank was saved from closing down in the autumn of 2008 only by an emergency loan from the Bank of England of £37bn.
In February the new chief executive Stephen Hester announced that the bank would, in future, concentrate on low risk activities, rather than the more esoteric high risk lending and borrowing that had brought it to the edge of catastrophe.
Thus the largely loss-making activities and assets that the bank did not want anymore were hived off into a section of the accounts described as "non-core" while the remaining parts were deemed to be "core".
The effect of this reshuffling of profits and losses had a dramatic effect on the apparent fortunes of the investment banking division, known in the bank's jargon as global banking and markets or GBM.
As a direct result of the loss-making assets and activities being moved out of it, and put under the new heading of "non-core" activities, the investment banking loss of £160m for the first three months of the year was instantly transformed into a profit of £3.65bn.
Still in the red
This change becomes apparent by comparing the original first quarter financial results, published in May, with the revised figures, published in August.
Mervyn King revealed he lent RBS £37bn to keep it open last year
That process continued in the second and third quarters of this year.
The most recent results, published in November, show that the various "core" parts of the RBS group made operating profits for the first nine months of the year of £7.4bn.
Of that £5.1bn came from investment banking on its own.
But on the other hand, the various activities that had been hived off as "non-core" continued to rack up massive losses - £12.3bn in just those nine months.
Thus the bank's overall position is still one of being deeply in the red, to the tune of £4.9bn so far this year, at what the accountants like to call the operating level.
And if those "non-core" assets had never been moved out of the investment banking operations it is clear that this seemingly profitable division would still be hugely in the red too.
No public comment
So how can RBS even consider thinking of offering bonuses to its investment banking staff when, if the losses were added back to the profits, the bank's supposedly most profitable section would still be deeply loss-making?
The firm has yet to comment on the expected bonuses
RBS declines to make any public comment.
But privately it says no decision at all has been made about the level of bonuses for investment bankers, and will not be made until the year is over.
In line with already agreed public policy, any bonuses will not be in cash but shares.
They will not be cashable for three years and they will be subject to claw-back if the profits on which they were based turn out to be illusory.
Any bonuses will be calculated not according to how the whole of the investment banking division performs, but according to the performance of the business units within it and how well individuals do.
Is the bank not simply proposing to reward those who lost it enormous sums in the first place?
Apparently a lot of the people who were responsible for all those horrible losses have left the bank.
Those who remain in the various parts of its "core" investment banking division - such as traders in bonds, currencies, commodities and shares - are now making real profits based on a very big increase in cash income.
All this will help strengthen the bank's finances and, so the argument goes, make it a more attractive bet for any future buyer of the government's massive controlling stake in the RBS group.
RBS, like the other UK banks, has had the good grace to acknowledge it has benefitted from a substantial degree of good fortune.
"Everyone at RBS is acutely aware of the fact that we are in a fortunate position to be able to restructure the bank with the support of the UK government behind us," said Stephen Hester, introducing the bank's half-year results in August.
"This support exists because of our central position in the fabric of society and the economy, both in the UK and internationally," he added.
A quick translation might be: "Aren't we lucky the government and the Bank of England bailed us out and the world's central bankers kept the entire system afloat with hundreds of billions of pounds of taxpayers' money?"
Napoleon said he wanted lucky generals.
Should we want our bankers to be lucky too?