Sadly, but inevitably, Northern Rock shareholders are being mercilessly squeezed by Sir Richard Branson and his consortium partners. Sadly, but not so inevitably, it is possible that the proposal, if not carefully structured, could end up putting an extra squeeze on taxpayers, too.

The hit to shareholders is radical, although you might miss it from a casual reading of the Rock announcement yesterday. Of £1.05 billion of cash being injected into the bank, Sir Richard expects existing shareholders to chip in the bulk – £650 million. If they don’t, they end up with only 6 per cent of the newly structured Rock. Even if they do choose to risk throwing good money after bad, they still surrender control, ending up with 45 per cent.

Sir Richard is also putting his Virgin Money business into the mix, but to value this, as Rock does, at £250 million, looks a bit of a stretch, even allowing for its speedy growth and the Virgin brand. It made only £10 million in pretax profit last year.

The fact is Rock shareholders would be drastically diluted if the deal goes ahead. This is disappointing to the army of shareholders who have stuck with the bank, but while taxpayers remain on the hook for years to come, it is only fair that investors come away with only a token prize. The positive share price response yesterday seems to have been more about technicalities and a panic by bears than any genuine reevaluation of the prospects for Rock.

Nevertheless, the proposal has been elegantly structured. Shareholders who believe Sir Richard can deliver the necessary magic and breathe new life into the rapidly cooling carcass that is Rock at least get to share in the potential upside.

Compared with the JC Flowers approach, which wanted to take the business off the stock market, and the Luqman Arnold proposal, which lacked detail and firm funding, it is easy to see why ministers and regulators preferred Virgin. It may just have the consumer appeal to restore depositor credibility to the bank. A pioneer of offset mortgages and tracker savings products, it has been a customer-friendly innovator.

But it will still be a difficult task to rethink completely the business model without destroying the business itself. For all the talk of Rock’s strong asset base, there are bound to be some toxic assets in there. This, after all, is a bank that has for years been offering to lend 125 per cent of a home’s value.

The big unknown is the treatment of the debts owed to the Bank of England and any additional claims that may be necessary upon the public purse.

Taxpayers will still be writing a blank cheque. Moreover, the Rock is under the impression that it will be permitted to pay back the strongly secured £11 billion tranche of Bank debt, while continuing to borrow the less well secured £12 billion.

If that interpretation proves correct, the Bank will hand back the £11 billion of AAA-rate collateral it has taken as security, one of its best bargaining chips.

Bankers advising on the deal insist that taxpayers won’t be any worse off and that the Bank will make future loans to the Rock on terms just as good as those demanded by the commercial banks. But there was no such reassurance from the Treasury yesterday.

Ministers must come clean on the liabilities taxpayers are underwriting and may in future be called upon to underwrite and the precise form of the collateral they will hold in return.

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