Lloyds in talks with Treasury to insure £250bn of toxic debt

Lloyds Banking Group and the Treasury were thrashing out terms of a deal to insure more than £250 billion of the bank's toxic assets.

It would see the taxpayer increase its stake in Lloyds from 43 per cent to as much as 70 per cent. But Lloyds is reluctant to hand too much control to the Government and the bank and the Treasury were today haggling over exactly what stake the taxpayer will take.

Lloyds bosses are furious that details of a potential deal were leaked and today insisted an agreement has not yet been reached even after a week of negotiation.

Chancellor Alistair Darling has agreed to an outline deal that would see the Government insure £258 billion of toxic assets held by the bank, which was created by the emergency takeover of failed lender HBOS by Lloyds TSB.

Mr Darling and his Treasury officials have proposed a fee to insure assets that would increase the stake in the bank held by the taxpayer. Lloyds chairman Sir Victor Blank and chief executive Eric Daniels are understood to think this is unreasonable.

The stakes could not be higher for the bank or the Government, which has already injected £17 billion of emergency funding at the time of the merger.

That deal was brokered by Gordon Brown and his friend Sir Victor but has since turned sour as massive losses at Halifax and Bank of Scotland owner HBOS dragged Lloyds into the mire.

One big investor in Lloyds suggested Sir Victor's head should roll. "His move to buy HBOS has blown up the bank," the investor said. Another added: "It is a great pity that Lloyds management got itself into this mess by agreeing to buy HBOS."

Many in the City and Westminster believe full nationalisation of struggling banks is now inevitable. A Lloyds spokesman said: "We have not yet concluded our discussions and there can be no certainty about the outcome. Our objective is to secure the best possible deal for our shareholders."

The Treasury said: "Discussions are ongoing. A deal will be announced at the conclusion."

The proposed deal is part of the Asset Protection Scheme set up to insure banks' riskiest assets against further losses in an effort to get them lending again. RBS signed up last week to insure
£325 billion of assets.