So the government has been taken up on its offer of buying shares in the major banks, to the tune of (at the time of writing) £50bn if you’re the Telegraph and £40bn if you’re the Guardian (fight, subs, fight!)

The takers are HBOS, RBS, Lloyds TSB and Barclays. The government will hold majority stakes in the first two. And here’s the thing. Apparently, we’re no longer talking exclusively about preference shares, but about ordinary shares too. This matters. It means nationalisation is an ever-more realistic word for what’s going on here.

Preference shares offer the purchaser more favourable terms than your common-or-garden ordinary share (usually higher rates, always priority payment) but no voting rights. A company can offer as many preference shares as it likes, offering a good investment deal to those who receive them and raising liquidity for themselves, without affecting the balance of power at its AGM. Ordinary shares, however, carry voting rights. If, say, the government buys a majority stake in HBOS and that majority stake is entirely made up of ordinary shares, the government has bought direct, indefinite control of HBOS via the share-dealing mechanism as surely as it bought Northern Rock by underwriting it. It’s no longer just an investor – it calls the shots.

Restrictions on individual banks’ behaviour in return for the whole largesse can now therefore be imposed from two directions: one, the agreement each bank signs up to before it has access to the money, and two, an open-ended rule-changing power in the government’s hands for as long as it owns and controls a majority voting share in a particular bank. This sets confusions bells ringing which may, in time, turn out to be alarm bells. Do the banks need regulation – yes. Is it a government’s place to impose regulation – yes.  Can this be done via the terms of an upfront agreement – yes. Is it a government’s place to implement regulation and micro-manage regulation on an indefinite basis via a legal mechanism which treats it as a rights owner – not really.

Pending details of the individual deals being known, this new element has the potential to undermine the impartiality of government as a regulator. What attention, one wonders, is being paid to legality in this frantic climate?

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