Taxpayers are set to own almost half of the "super-bank" created from Lloyds TSB's rescue takeover of HBOS, the two banks confirmed today.
The offer of £13 billion in new shares from the duo to strengthen their finances was all but snubbed by existing investors - leaving the Treasury to buy them up.
This will leave the taxpayer owning around 43.4 per cent of the new Lloyds Banking Group, which is due to gain court approval in Edinburgh today and begin trading next week.
The share offerings by the pair were spurned because the price of the new shares had fallen well below the level at which they are currently trading.
HBOS said just 0.24 per cent of the 7.5 billion shares it offered to raise £8.5 billion were taken up. Lloyds TSB saw just 0.5 per cent of its 2.6 billion new shares to raise £4.5 billion bought by existing investors.
Based on Friday's closing prices, the taxpayer is sitting on combined losses of around £3.5 billion on its stakes in both companies.
Lloyds TSB chief executive Eric Daniels said: "We are pleased that the capital-raising process has completed and that the new, combined group will have a strong financial position.
"We understand that many existing shareholders did not participate because of the divergence between the offer price and the current market price."
The Government has also invested a further £4 billion in the two banks in return for preference shares. These come with conditions such as a ban on bonuses while they are still held by the Treasury.
The tie-up - brokered as HBOS became increasingly vulnerable in last autumn's financial crisis - will be one of the sector's biggest ever deals.
Alongside its stake in Lloyds-HBOS, the Government is also a majority shareholder in stricken Royal Bank of Scotland - owning almost 60 per cent of the bank. These shareholdings will be overseen by a new public company, called UK Financial Investments (UKFI).
Mr Daniels added: "We will look forward to working with UKFI, now that it has become a shareholder in the group pursuant to completion of the proposed acquisition.
"The objective of the new group will be to build a strong franchise and create value for all of our shareholders."