State bank rescue leaves taxpayers £6bn out of pocket

Today it was confirmed that the Treasury will own nearly half the new super-bank created by the forced merger of Lloyds TSB and HBOS. It already owns more than half of Royal Bank of Scotland (RBS).

Bank share prices have plunged since the Government announced its £37 billion bailout of the bank sector on 13 October. Because the Treasury agreed to buy ordinary shares at a fixed price it has been left with massive losses.

Its stake in RBS is worth £2.6 billion less than it paid for it. That in HBOS is worth £2.2 billion less than the Treasury will stump up and the loss on Lloyds is just under £1 billion. Those losses came even after a rise in the sector's shares today triggered by widely-trailed plans to boost lending via Government backing for bank loans.

The Government will argue this is the cost of saving the banking system and that it also gives it the clout to force banks to restart lending to businesses and individuals.

Existing shareholders in Lloyds and HBOS snubbed both banks' new share offers, leaving the Treasury on behalf of the taxpayer to pick up the vast majority of the £13 billion of new shares.

The Government today admitted that means it will end up owning a 43.4% stake in the newly-named Lloyds Banking Group when shares in the superbank start trading on the stock market a week today.

RBS was the first of the big High Street banks to be partly nationalised last month when the Treasury took a 58% stake.

It was always inevitable that the Government would end up buying the vast bulk of the new shares issued by Lloyds and HBOS since they were being sold at a much higher price than the existing shares traded at on the stock market.

HBOS's new shares were issued at 113.6p compared to the existing shares' current level of 841/2p. Lloyds TSB's new shares were sold at 173.3p while the existing ones were today 140.9p.

The Lloyds/HBOS takeover is just one of a host of deals across the world that are changing the face of global banking. Today, the breakup of Citigroup — once the world's biggest bank— came closer as it neared a deal to merge its Smith Barney brokerage with Morgan Stanley's operations. Such a deal, expected in days, would create the world's biggest retail brokerage and mark the biggest step yet in dismantling Citi.

"Governments are going to say, You are very big institutions to be bailed out, and it would be good if you were smaller and more manageable," said MF Global analyst Simon Maughan.