Margareta Pagano: Fraud Office probe is the only way to rebuild confidence

We can't rely on anyone else to sort out the banks

You can almost taste the smell of decay wafting over Westminster. It's the stench of burnt fingers, singed scalps and backroom stabbing, as ministers and their spin doctors dance around each other in a desperate bid to distance themselves from the greatest banking scandal ever to hit this country.

Leaking the news of Sir Fred Goodwin's plump pension pot was clearly a ploy to anger the public, taking our attention away from the massive scale of the bailout required for Royal Bank of Scotland – one that appears to be growing daily. Whoever was responsible for attempting to set Sir Fred up as public enemy number one again must have done so hoping, in addition, that the leak would take the sting out of the relentless criticism of Gordon Brown, his handling of the economy as Chancellor, and now the banking crisis.

But the spinmeisters got it wrong. The attempted public humiliation of Sir Fred backfired. Now he's more likely to be martyr than scapegoat. The pension may be huge, but even greater is the knowledge that the Government knew about it when it took over RBS. It has owned RBS since October and could have changed the terms at any time, but it didn't suit it to do so. Now it does. That Brown and Alistair Darling claim they didn't know anything about the pension beggars belief. Either way, they are crucified.

Such incompetence goes to the heart of this crisis. We took it for granted that the Government, the Financial Services Authority and the Treasury Select Committee were regulating the City over the past decade. How wrong we were. As Lord Turner, now the head of the FSA, told the committee last week, the FSA was not "fit for purpose" and Brown's "light touch" regulation gave rise to reckless bank lending. And that's from Lord Turner, a Labour man.

Another vicious attack came from top law enforcer Sir Ken Macdonald, who rubbished the UK's entire financial regulatory system by pointing out the shocking inconsistencies of our approach to fraud in this country. As he said, no one in Britain has any confidence that fraud in the banks will be prosecuted as a crime: "If you mug someone in the street and you are caught, the chances are that you will go to prison. In recent years, mugging someone out of their savings or their pension would probably earn you a yacht."

That's the point. We are still being asked to trust the very same politicians and regulators who were responsible for creating this mess to get us out of it now. What's even worse is that several of those in charge of sorting out the crisis are unelected –from Lord Myners, whom Sir Fred quite rightly blames for the pension row, to Lord Mandelson, the Business Secretary.

There is only one way the Government can redeem itself if it is to remove the smell of corruption. It must ask the Serious Fraud Office to investigate RBS and HBOS, and specifically their corporate lending. As Richard Brunstrom, chief constable of North Wales, said on radio recently that if the banks were on his beat, he would be investigating both of them and can't understand why inquiries haven't been launched. Nor does anyone outside the Westminster village.

How vaunting ambition destroyed Lloyds, one of the best banks in the world

When the history books come to be written about the Great Crash of 2008, the Lloyds rescue of HBOS will surely go down as one of the worst corporate deals of all time, along with RBS's takeover of ABN Amro. In one swoop, the top executives of Lloyds, Sir Victor Blank and Eric Daniels, destroyed one good bank by buying a toxic one. Even they cannot have anticipated quite how bad HBOS would turn out to be. But they should have known, or at least found people who could do the numbers for them.

When Sir Victor, on becoming chairman, bought shares in Lloyds in January 2006 they were 515p. Before he took over HBOS, they were around 230p. On Friday night Lloyds investors owned shares worth about 60p.

Sir Victor and Daniels cannot blame the Government for forcing them to rescue HBOS. It was a deal they had hankered after for years but knew they couldn't ever get past the competition authorities. So when Gordon Brown asked Sir Victor to help out, he and the board jumped at the chance. Their ambition was for the merged bank to become a European superpower.

Long-term, they may well achieve their ambition. In the meantime, though, thousands will lose their jobs from the merger, while thousands of pensioners will be worse off as they lose the income from Lloyds dividends.

Until this disaster, Lloyds was one of the best-run banks in the world. Sir Brian Pitman famously refused to be drawn into the investment banking activities that seduced his peers at Barclays and RBS or the big corporate lending portfolio that landed HBOS in such trouble.

As a head-hunter said to me last week, they all fell in love with their own cleverness and artistry. We will look back and see that it was brave bankers such as Sir Brian who were the real artists.

Power walk PM should beware of unflattering comparisons

Quite why Gordon Brown is so excited to be the first European leader (Canada's PM was the first westerner) to visit President Barack Obama is hard to fathom. I guess he must be hoping that the magic surrounding the President will rub off on him when they meet on Tuesday. After Mr Brown speaks to Congress, the two are expected to get down to the really hard graft, working out the agenda for the G20 meeting here next month, at which, hopefully, they will show awareness that China and India must be given much bigger roles in our international agencies. Mr Brown should be careful what he wishes for on his trip. As any woman knows, standing next to someone really beautiful is a horrible way to show off your flaws.