Lloyds Banking Group, the product of the disastrous forced marriage between Lloyds and HBOS, has a serious problem.
The 43 per cent government-owned bank has been told by the European Commission that it must disgorge 632 of its branches and the back-up systems so as to satisfy rules governing state subsidy. Some £20 billion of taxpayers money was pumped into the enlarged Lloyds in the aftermath of the Lehman Brothers collapse in 2008.
The problem for Lloyds is that at a time of great uncertainty in British and European banking the would-be buyers are not exactly queuing up.
In December 2010, when its Portuguese chief executive Antonio Horta-Osorio was temporarily incapacitated, Lloyds pressed ahead with the branch sale, nicknamed "Project Verde", and announced that it was in exclusive talks to sell the surplus Lloyds branches to the Co-operative Bank.
The other potential bidder, NBNK, a new banking franchise created by former chairman of Lloyd's of London insurance Lord (Peter) Levene and Gary Hoffman, formerly of Barclays and Northern Rock, was told to go away.
The Co-op offer for Lloyds branches looks in jeopardy
In the interim the Co-op bank bid has been found wanting. The Co-op's integration of its previous purchase, the much smaller Britannia building society, has not gone well. If this proved difficult then the jump in size for the Co-op bank from 345 to 1,000 branches was likely to be even more challenging.
Lloyds has discovered that the Co-op bank is not quite what it seems. Firstly, the Co-op bank was not entirely untouched by the US sub-prime crisis. Secondly, as the banker to the Labour Party it has been criticised in the past for granting some large overdrafts.
More serious is the opaque nature of the Co-op bank's ownership. Co-operative financial services is a separate entity but ownership rests in the hands of the national Co-operative movement, which in turn is made up of a series of regional co-operative societies. The bank and financial services arm are technically responsible to a series of unaccountable committees.
It is this Byzantine governance structure, together with demands by the Financial Services Authority for more capital, that has placed the offer for Lloyds branches in jeopardy.
The Co-operative movement is no ordinary business. It remains in thrall politically to the regional committees and susceptible to political lobbying.
The vulnerability of the Co-op to pressure groups was evident in late April when the food retailer announced it will stop doing business with four Israeli food exporters after pressure from the Palestinian Solidarity Campaign, because of their ties to settlement producers.
The decision to end the trade came despite extensive discussions with the Fairplay Campaign that sought to reverse the decision.
The behaviour of the Co-op's grocery arm provides evidence of governance shortcomings at the Co-op. This partly explains why the FSA has been determined that the bank has more than adequate regulatory capital before it can inherit the bank accounts of hundreds of thousands of ordinary people across the UK.
Fears that the Co-op bid will not pass muster has allowed Lord Levene's NBNK back into the negotiations.
The success of an NBNK approach may well depend on it being able to source funds from Middle East investors. The company is understood to have held talks with Qatar Holdings and Abu Dhabi's Mubadala fund. Both Gulf states have extensive interests in the UK.
It would be paradoxical if NBNK was able to attract Middle East funding. George Osborne had been seeking to sell around one-third of the government's 80 per cent holding in the Royal Bank of Scotland to Middle East investors as part of a programme to make RBS shares more marketable.
Despite some high profile publicity that deal has not been done. Maybe Levene and Hoffman will succeed where the Treasury has failed.
Alex Brummer is City Editor of the Daily Mail. He is author of Britain for Sale published by Random House Business
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