The political fallout from the banking crisis was always going to be messy. Yesterday it claimed the scalp of Sir James Crosby, the deputy head of the Financial Services Authority and there are hints of a greater scandal to come with the Serious Fraud Office revealing that allegations involving half a dozen financial institutions are being considered for criminal investigation.
Politically Gordon Brown’s reputation has been pummelled and Sir James had to be sacrificed as human shield for the Prime Minister.
Accused by a whistleblower of ignoring warning about the risk HBOS was taking while he was chief executive Sir James resigned just before mr Brown was due to appear in front of the Commons for his weekly grilling from MPs.
Until yesterday, when he was dropped like a hot potato, Crosby was widely described as an ally of Mr Brown and one of his closest advisers. It was Gordon Brown who appointed Sir James to the FSA, Gordon Brown who appointed to write a report on ID cards and Alistair Darling who appointed him to advise on the mortgage crisis. He was now no longer an adviser and it was right that he stepped down from the FSA, Mr Brown told the Commons. We was toast.
The allegations against Sir James by Paul Moore, the former risk manager turned whistleblower are two-fold. He claims he was sacked on the personal instruction of Sir James when he dared to speak out about the way the bank was being run.
The other, equally serious allegation from the pen of Mr Moore, is that Sir James presided over HBOS at a time when it was pushing mortgage borrowing far too aggressively and fuelling the borrowing bubble that eventually bust the bank.
In his resignation statement Sir James refutes the allegations and he is innocent, according to an independent investigation by KPMG which was hired by Lord Stevenson of Coddenham, the HBOS chairman at the time, to investigate the claims of the whistle-blower.
But HBOS is one of KPMG’s biggest clients in the UK it has emerged. In the last two years KPMG has earned more than £22 million in fees for auditing, tax advice, information technology work and compliance advice at HBOS. It may have been the most scrupulous arms-length investigation but to the public, and certainly the political world, it looks bad to be looking into your own affairs.
The "who guards the guardians" question becomes even more ironic when you consider that Sir James was last year appointed as a key adviser to the government on how to cope with the mess left behind by the housing bubble. According to Paul Moore’s account no one did more than Sir James to create that mess in the first place.
Paul Moore’s allegations may succeed in turning the political narrative. So far Gordon Brown’s claims that the banking crisis is a global phenomenon, mainly brought on by the credit crunch in the US market has edged ahead as the accepted orthodoxy.
Repeated claims by the Conservatives that Mr Brown presided over a decade of financial overstretch have been too generalised to stick. But the unmasking of one of his banking advisers as the alleged architect of the downfall of HBOS is not just embarrassing. It strengthens the Tory version that Mr Brown, and the people he chooses to advise him, are part of the problem he is trying to solve. The Iron Chancellor’s armour has taken a big dent.