By Ian Dunt
The Liberal Democrat Treasury spokesman has quit over the Project Merlin deal, which he branded "pitiful".
Lord Oakeshott, a close ally of business secretary Vince Cable, accused the Treasury negotiating team of "arrogance and incompetence" over the deal, which started to unravel minutes after being announced by chancellor George Osborne.
The Merlin deal saw Britain's biggest banks agree to control bonuses, lend to businesses and reveal the remuneration of their highest paid executives.
But the move was instantly followed by enormous bonuses to RBS chief Stephen Hester and outgoing Lloyds boss Eric Daniels.
There were no cast-iron commitments on bonuses and no details on the earnings of the traders on the floor who can often be paid much more than chief executives.
"We have done the best we can to get the best deal but I don't think it is a good deal," Lord Oakeshott commented, in a series of colourful interventions after the plan was announced.
"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."
He added: "They've done the best they can, but I'm afraid when you look at the small print, it's really not as good as it looks? A multi-million pound bonus is still a multi-million pound bonus, even if you've got to wait two years to buy the yacht.
"If this is robust action on bank bonuses then my name's [Barclay's chief executive] Bob Diamond and I'm going to claim my £9 million bonus."
Hours later, chief secretary to the treasury Danny Alexander confirmed on live television that Lord Oakeshott had stepped down by "mutual consent".
Shadow chancellor Ed Balls said Lord Oakeshott had paid the price for "telling the truth".
He continued: "Mr Osborne's cosy deal with the banks is unravelling by the hour. The small print of the agreement has a clear get-out clause which allows the banks to do whatever they wish to enhance the interests of their shareholders."