Lloyds Banking Group has called on shareholders to raise an extra £4 billion just one day after its chairman, Sir Victor Blank, announced he planned to step down from the bailed-out bank.
The proceeds of the cash call will be used to pay off loans from the government in an attempt to reduce the number of preference shares bought using taxpayers' money.
If investors fail to take up the offer to buy new shares then the Treasury may have to increase its shareholding in the bank to 65%, up from its current 43% stake.
The move to raise new money comes one day after Sir Victor announced he would step down as chairman of the bank. Its shares rose in light of his decision.
Sir Victor paid the price for the disastrous merger between Lloyds TSB and HBOS, to create the new Lloyds Banking Group, which left the bank teetering on the edge of collapse and forced the taxpayer funded bail-out by the Treasury.
The cash call announcement is part of the fall out from the merger; Lloyds had been a conservatively run bank prior to the move and focused on low-risk investments to fund its high dividend payment.
It appeared to have avoided the worst effects of the financial meltdown prior to the HBOS merger, which was approved under Sir Victor’s watch. It was only after the deal had been rushed through that the true state of HBOS finances became clear - forcing the newly formed Lloyds Banking Group to go cap-in-hand to the government.
City sources say Sir Victor was put under intense pressure to agree to the merger by a government that was frightened by the consequences of HBOS - at the time Britain’s biggest mortgage lender - collapsing.
However, investors may have little sympathy with this as it is they who have paid the most for the merger, which required a string of competition rules to be waived because of the dominance of the newly merged banks in many retail markets (including mortgages and current accounts).
Sir Victor’s defence of the deal has cut little ice with them and he could have faced a move to unseat him had he failed to fall on his own sword.
In a statement, he said: "I will continue working until my successor is appointed to ensure the successful integration of the two banks. This remains - in the medium term - a unique value-enhancing opportunity."
Colleagues offered the obligatory tributes. Lord Leitch, who was appointed deputy chairman of Lloyds with immediate effect following a board meeting, insisted that Sir Victor was a "first-class chairman".
"We are very sad about Sir Victor's personal decision to retire, although we respect and understand his reasons for it," he added
And the chief executive of Lloyds, Eric Daniels, said Sir Victor has played "a very important role" as chairman during a period of "significant change and at a time when there has been unprecedented volatility in the markets".
City bookie Cantor Index yesterday quoted Lord Leitch as 2-5 favourite to be confirmed as Sir Victor’s replacement. Other names in the frame are Lords Davis at 3/1, Lord Digby Jones at 5/1, Gerry Grimstone at 6/1, Sir David Walker at 10/1 and Harvey McGrath, who is an outsider, at 12/1.
The bank will attempt to place the new shares - priced at less than half its current share value - in the market if investors fail to cough up, before the government will step in.
The taxpayer’s stake in the bank could ultimately reach as much as 77% thanks to its participation in the government’s toxic loan scheme, designed to protect banks from the consequences of the bad loans they have made.
Much of Lloyds' bad loans hail from HBOS.