Lloyds TSB was last night still trying to extract concessions from the Treasury that would allow the bank to pay its dividend while taking advantage of the Government's £37bn sector bailout.
The bank remained hopeful that the Government would ease the terms of its capital injection into Lloyds, despite a hardline stance from the Treasury throughout the day.
Lloyds announced on Monday that it would raise £4.5bn of capital by selling new ordinary shares underwritten by the Government. It also agreed to sell £1bn of preference shares to the Government. The preference shares rank above ordinary stock for repayment and would pay 12 per cent interest.
The Government's plan to recapitalise Britain's banks ruled out the payment of dividends to shareholders while the Government holds a bank's preference shares. Lloyds' share price has fallen since the terms of the deal were set out as income investors who relied on the bank's apparently safe payout sold the shares.
However, the Prime Minister yesterday dismissed talk of renegotiating the terms. Gordon Brown said: "Where we have preference shares, dividends would not be paid until we withdraw our preference shares."
The Treasury was also adamant, saying the banks knew what the terms of the bailout plan were when they signed up to the deal. However, it is understood to be willing to look again at the dividend question after a year if a bank can prove it has boosted its capital position to protect the taxpayer.
Lloyds has faced pressure since the deal from unhappy shareholders raising fresh questions about its rescue takeover of Halifax Bank of Scotland. The Government helped broker the deal and waived competition rules so that Lloyds could step in to stop HBOS going bust.
Lloyds shares fell 0.7 per cent to 150.2p yesterday while HBOS's rose 0.5 per cent to 85p, leaving HBOS shares trading at a 5.5 per cent discount to the implied 90.75p value of Lloyds' all-share offer.
Lloyds accepts it will have to suspend the payout for a year but is seeking an understanding that it will be able to renegotiate after that time. Options to boost capital before then include selling off assets once the HBOS deal goes through.
The Treasury will consider letting banks seek capital from the market as Barclays is trying to do. But the Government is unwilling to let banks raise preference capital in the market while taking the Government's money in return for ordinary shares.
The Government sees preference shares as a key element because they provide taxpayers with a buffer against bank losses and would pay interest to compensate the taxpayer for taking on risk.
The Treasury also rejects the idea that banks could choose to repay the preference shares early. Any change from the plan set out on Monday is in the Government's gift, officials stressed.
In further fall-out from the hastily assembled rescue package, the British Bankers' Association is investigating whether the creation of giant semi-nationalised banks will distort the market for inter-bank lending. The BBA is concerned that state-sponsored lenders would gain an unfair advantage of cheap funding in the market.
Dimon applauds 'very cheap' US capital
Once we decided to go with the programme, the JPMorgan Chase chief executive Jamie Dimon said yesterday, describing the US government's infusion of capital into the country's banks, "I was thinking, can we get $50bn (£28.9bn)?"
The American taxpayer is putting $25bn into JPMorgan, $100bn more into eight other institutions, and earmarking a further $125bn more for other US banks.
By an order of magnitude, the US government is getting less in return, and attaching fewer conditions, than the UK government has demanded of the banks that have been nationalised on the other side of the Atlantic.
The capital from the US government is "very cheap", Mr Dimon said. "The government has made this not an unattractive thing, so that people can get the capital and hopefully do some good with it."
The UK is demanding board representation, has taken common stock that has significantly diluted existing shareholders, and has curbed dividend payments – but the US has rejected all these punishments. It is taking preference shares with an annual dividend of just 5 per cent, a modest amount of warrants (allowing it to buy common stock in the future), and is so keen not to interfere that it won't even vote those shares, let alone take a board seat.
"The terms are relatively painless for the participating banks," said Meredith Whitney, an analyst at Oppenheimer & Co.