Lloyds TSB has managed to sweeten the acquisition of HBOS for its shareholders thanks to a large helping of Government fudge. Since most Lloyds investors held the shares for the dividend, they were not too thrilled when the terms of the Government recapitalisation were announced.

This stated that Lloyds would not be able to pay a dividend on its ordinary shares until it had redeemed the £4 billion of Government preference shares. But these could not be redeemed for five years, otherwise they could not be treated as permanent capital. So, no dividend for five years seemed the clear implication.

Eric Daniels, the Lloyds chief executive, was having none of this. After all, he was doing the Government a favour by rescuing HBOS.

So the Government has now indicated it would “encourage” the repurchase of the preference shares for a mere 1 per cent premium as soon as practicable.

But the Government insists that any such repurchase arrangement must allow the preference shares to be treated as permanent capital. Which seems to mean there must be no arrangement until there is an arrangement.

This sleight of hand should mean Lloyds can repay the shares soon after the HBOS deal is consummated and it is already lining up investors from which to raise the money.

That should allow it to restart paying ordinary dividends in cash at much the same time as rival Barclays. This may leave a rather sour taste in mouth for Barclays shareholders.

Barclays decided not to take Government money so that it would not face the same restrictions. But it is paying more for its money from Gulf investors than Lloyds is paying the Government, without the ability to redeem early. And, at least in terms of flexibility on dividends, the benefits seem minimal.

The other issue worrying Barclays is the flexibility to pay large bonuses. This is much more of a concern for Barclays than for Lloyds, since it has a large investment bank that has now been expanded with the purchase of Lehman's US business.

On paper, those banks taking Government money face no greater restriction on bonuses than those imposed on all banks by new FSA guidelines. But there must be a chance the Government will be tougher.

The Chancellor has appointed a heavyweight to look after the State's bank shareholdings in the form of John Kingman, currently second permanent secretary at the Treasury.

And there is no doubt the politics will be worse for those banks part-owned by the taxpayer. Look what happened to the BBC over Jonathan Ross's pay packet. And he didn't bring the global financial system to its knees.

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