A HIGH-ranking Liberal Democrat peer stood down last night after criticising a deal struck between the government and the banks, exposing bitter tensions at the heart of the coalition.
Lord Oakeshott, the Lib Dem Treasury spokesman in the Lords, branded the long-awaited agreement on reducing bonuses and increasing lending as "pitiful" and said that officials at the Treasury "couldn't negotiate their way out of a paper bag".
In highly critical remarks after the results of Project Merlin were announced to the Commons, he said: "If this is robust action on bank bonuses then my name's Bob Diamond (the chief executive of Barclays)".
Lord Oakeshott, a former City financier, said the deal did not provide any guarantee of a net increase in lending to small business and that the pay disclosure measures did not go far enough.
"We have done the best we can to get the best deal but I don't think it is a good deal," he said.
"And I am bound to say I think the Treasury's negotiating tactics have not been very good. They have got an awful combination of arrogance and incompetence, most of them couldn't negotiate their way out of a paper bag and this has not been as tough a deal as it should have been."
Pressed whether the peer had been sacked, Lib Dem Chief Secretary to the Treasury Danny Alexander insisted he had given up the role "by mutual agreement".
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Mr Alexander said Lord Oakeshott had felt "unable to support" the government's arrangement with the banks.
"As a result he's no longer a Treasury spokesman in the House of Lords by mutual agreement," he said. "I think that's the right decision."
A Lib Dem spokesman added that Lord Oakeshott had not been sacked as "there is no post from which he could be sacked" but "it has been agreed he no longer speaks for us on Treasury matters".
However shadow chancellor Ed Balls said Lord Oakeshott had been sacked for "daring to tell the truth".
"It is symbolic of the shambolic and panicked way that the Chancellor has gone about agreeing this weak and toothless deal with the banks, that the Liberal Democrat Treasury spokesman in the House of Lords has been sacked this evening," he said.
"It is a sad commentary on this Tory-led government that Lord Oakeshott has been forced to pay the price for daring to tell the truth."The landmark Project Merlin agreement unveiled yesterday includes a limit on bonuses and 11 billion of extra loans to businesses.
The 190 billion which will be made available by RBS, Lloyds, Barclays, HSBC and the Spanish bank Santander to businesses, including 76 billion to small enterprises, was hailed a major success by Chancellor George Osborne, but some business leaders said the measures did not go far enough.
And Mr Balls described the deal as "a damp squib" as banks were allowed to go ahead with 6bn of bonuses this year, although the figure is slightly lower than last year.
Graeme Leach, chief economist at the Institute of Directors, said: "While we certainly don't oppose today's agreement, we doubt whether it will have a major impact on overall lending to business.
"The truth is that lending conditions are unlikely to improve until businesses and banks are confident about the durability and strength of the recovery. When they are, both the demand for and supply of money to businesses is likely to improve."
And the Federation of Small Businesses (FSB), whose members have struggled most to get loans, warned it would wait and see before accepting that the deal would have a significant effect.
FSB chairman John Walker said: "This announcement should not be allowed to let the government or the banks off the hook and is a preamble to what we hope will be bigger announcements from the Independent Banking Commission.
"While we welcome the intention to lend more to small businesses, we still need to see a major restructure of the sector."
The strictest limitations on bonuses fell on RBS, which is majority owned by the taxpayer, and Lloyds, which is part owned, where cash bonuses will be limited to 2,000 and the rest paid in stocks and shares.
However, RBS chief executive Stephen Hester will get 2m and the outgoing Lloyds chief executive Eric Daniels 1.45m, although neither will receive the bonuses in cash.
There will be no limits on cash for the other banks and the government also came under fire for only forcing limited transparency on bonuses.
The members of the bank boards will have their bonuses and pay published, as will the five most senior executives under board level. This will be increased to eight executives in 2012 when the government legislates for greater transparency.
However, the traders who are at the sharp end of the "casino banking" - that has been blamed for the banking collapse and receive the largest bonuses - will not have their pay revealed.
It was widely reported that Project Merlin was named after the wizard of Arthurian legend.
However, it emerged yesterday that was actually named after the bird of prey. John Varley, who was Barclays' chief executive when the talks with the UK government began, came up with the name. A Barclays spokeswoman said: "It isn't named after the wizard but after the bird of prey.
"John saw a merlin flying a couple of days before the first meeting and that's how he came up with the name. I don't think it has any deeper meaning."