Getting your insurance company to give you the money to pay its premium is a clever wheeze, but that’s what Lloyds Banking Group is planning. If it finances its participation in the government’s bad-debt insurance scheme with a rights issue, the state, as largest shareholder, will have to stump up the biggest part of the £16bn cost.

That’s the problem with becoming too close to government. First the government ordered the bank to raise new capital and then bought the new shares when others declined. Now the government orders the bank to have asset-protection insurance, offers to act as insurer – then says it will take more shares as payment for the premium.

The first have of this nationalisation left the Treasury owning 43 per cent of Lloyds. If the bank issues extra shares to the state to finance the cost of the insurance the Treasury stake will rise to 60 per cent, making Lloyds the government its parent.

The bank’s preferred option is to ask existing shareholders to provide the money – but the main shareholder is the government. The talk is of a £15bn rights issue to finance most of the insurance premium, but if the state takes up its share, as 43 per cent shareholder, that will cost it £6.5bn.

So the government would pay out £6.5bn to receive £15bn and still hold the same proportion of the bank. Its alternative is to receive no net funding but increase its stake in the bank and hope to sell the shares later (probably years later) at sufficient price to compensate for receiving nothing now.

But the government could call Lloyds’ bluff by shunning its rights entitlement, leaving its £6.5bn of shares with the underwriters. The state would receive any immediate profit over the rights price as those shares were placed – though if the government did shun the issue, Lloyds’ price might plummet.

As a £15bn rights issue would already be a UK record, even placing that rump would stretch financial markets. So perhaps the answer is that the government, already the bank’s investor and insurer, also acts as its capital-markets underwriter.

If the Treasury underwrites Lloyds’ giant share issue the state would take up its shares and also pick up a fee of £300m that would otherwise go to City banks and be paid out in bonuses. That way the taxpayer gets something back for its support and Lloyds can still avoid becoming a state subsidiary.

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