George Osborne should have stayed in bed. There was no need for the chancellor to go on the radio at 7.30am to forewarn the markets about his £800m add-on to the bank levy. Investors shrugged their shoulders. Bank share prices were gloriously untroubled. Lloyds Banking Group even ended the day among the top 10 risers in the FTSE 100 index. Some tax-grab.

The City, of course, had twigged the real story: the immediate increase in the levy to £2.5bn was a face-saving gesture by a chancellor who knows the Project Merlin "peace deal" with the banks will be seen widely as a surrender on the part of the government. In other words, the £800m inconvenience for the banks has prevented anything truly nasty.

As more details of the Merlin deal emerged, that impression was reinforced. It seems the banks will not have to disclose the rewards of their top five earners outside the boardroom, as previously thought. Instead, the requirement will apply to the top five individuals who report to the chief executive. The cute change of emphasis means that the bonuses of the biggest earners – the traders who have their own divisional bosses – will remain out of sight. These bankers are clever.

Naturally, the banks also tried to muster some fury over the £800m charge. Illogical and inflammatory, they muttered, but only behind the scenes. It would be amazing if Merlin is killed by the increase in the levy.

Instead, we should prepare to acknowledge a brilliant political manoeuvre by Merlin's creator, John Varley, former chief executive of Barclays. He saw that Vince Cable was right when he said last autumn that there was a potential "train crash" as bankers' bonuses collided with spending cuts. The government was hooked by the thought that disaster could be averted.

Will it be? Well, Varley's successor at Barclays, Bob Diamond, will shortly collect a £9m bonus. Via the magic of Merlin, it falls to Osborne to explain how some loosely worded commitments on bank lending represent a negotiating triumph for the government. Good luck. We'll all set our alarms for that one.