George Osborne’s Lloyds sale will be all about votes – just as Mervyn King warned

When a politician’s speech is spun ten days in advance, you know there’s trouble behind the scenes. Next week’s Mansion House dinner will be seen by City attendees principally as a farewell to Sir Mervyn King — and journalists present (including your columnist) will be timing the ovation to see how it compares with Eddie George’s full five minutes in 2003. But we learn that the Chancellor is ‘poised’ to use the occasion to ‘signal’ a public offer of Lloyds Banking Group shares that could raise up to £17 billion and mark a turning point in the post-crisis clean-up of the banking sector. By giving discounts to small investors, it might also swing votes away from Ukip. But we learn that UK Financial Investments, the entity which manages the Treasury’s shareholdings in Lloyds, RBS and the rump of Northern Rock, has been advising against a quick sale of the Lloyds stake, lest the share price soars afterwards and UKFI is accused of failing to maximise the taxpayers’ -interest.

Meanwhile the failure of Project Verde, the sell-off of 632 Lloyds branches to the Co‑operative Bank, is developing into another potential scandal. The bigger the black hole revealed in the Co-op Bank’s balance sheet, the more it appears Verde was politically driven in defiance of evidence that the Co-op was never strong enough to go through with it. Here the finger points at Vince Cable, who is accused of favouring the mutually owned Co-op for ideological reasons over a rival bid from Lord Levene’s ‘City grandee’ consortium NBNK, and has admitted, ‘I was really hoping this would happen.’

What’s worse is that small investors who hold Co-op Bank bonds and preference shares may be forced to take a 30 per cent ‘haircut’ as part of a capital reconstruction to fill the black hole — having been encouraged to hold them not only on the strength of the parent Co-op group but on the understanding that the bank was a favourite of the government.