They may be turkeys but banks don't need trussing

Regulation is an invitation to get round the rules, a challenge to seem to comply without actually doing so. The banks have spent the last decade practising this dark art, making fortunes for a few at the expense of the many. No wonder we want to make sure it never happens again.

Except that we can't. We've tried voluntary regulation with the first version of the Financial Services Act, stiflingly prescriptive regulation with the second, followed by so-called "light touch", applied after demands from the banks that they were big and ugly enough to look after themselves.

As we know now, they weren't. So far we have yet to uncover a massive fraud, and New York's record-breaking Ponzi scheme makes our home-grown scams look like small change. We can only gasp at the clever people who were taken in, try to repress the feeling of schadenfreude, and draw a little comfort against the losses we've sustained on our bank shares.

Yet even if nothing similar emerges here, we're not going to escape a Dangerous Banks Act. It's part of the process of revenge and catharsis, and the best we can hope for is that it doesn't make things worse. So the Treasury should use this golden opportunity to make rules simple enough for us to understand, starting with a clear divide between deposits with a government guarantee and those without.

Jim O'Neill of Goldman Sachs pointed out here on Monday that the state already owns a functioning, efficient bank in Northern Rock. It's being run down, a policy which might have made sense a year ago, but looks perverse today. The state is now also the controlling shareholder of RBS and Lloyds, and as the horrible truth about their commercial lending oozes out, the taxpayer may end up with 100% of both.

These banks already have an implicit government guarantee. Make it explicit, as it is with National Savings, and impose the same restraints on how much interest they can pay on deposits. Any day now, that rate will be as close to zero as makes no difference. It's the price of safety in today's markets. If savers are prepared to accept it, then the money can be lent out cheaply.

Barclays and HSBC, by contrast, can already pay whatever they choose to attract deposits, but under new rules there would be no state guarantee. The building societies already have their own self-help scheme, and savers could then decide how much risk they want to take to get a return on their money.

Unfortunately, we're highly unlikely to get anything so simple. Instead, the banks, private and state-owned, will be trussed up with more regulations, exhorted to lend more at lower rates, while simultaneously being told to raise their reserve ratios.

They might as well be invited to believe in Father Christmas. Ronald Reagan had it about right when he said: "The scariest sentence any businessman can hear is 'I'm from the government and I'm here to help'."

If only Brown had given us the gold
THIS week's chart points upwards, for a change, but it hardly points towards a glad, confident economic morning. Gold has been a disappointment to its army of international followers, but they don't account in sterling, and the usual chart fails to adjust for the plunging pound. In our debauched currency, gold is at an all-time high of £547 an ounce.

Gold bugs reckon the price has been held back by the global liquidity squeeze, and once that eases, it will carry on upwards. There are more than 8000 tonnes in Fort Knox, but to cover the US National Debt gold would have to reach around $40,000 an ounce - even before Helicopter Ben starts carpet-bombing Manhattan with freshly-printed dollar bills. I can't resist reminding readers of Gordon's brilliant reading of this market, when he ignored the experts and dealt in size at the bottom in May 1999. Unfortunately, he was a seller not a buyer, and dumped 400 tonnes at an average of $275 an ounce. The loss on this deal is now approaching £3 billion, or nearly equalling the cost to the reserves of John Major's futile defence of sterling in 1992.

Had Brown turned the bullion into coins instead, he could have given every man, woman and child in the country a gold sovereign, which would be worth about £150 today, and would have given us one good thing to remember his disastrous reign by.

Oh dear Nicola, this is a right old Horlicks
THERE wasn't a dry eye in the Collins household as we listened to Nicola Horlick's deeply moving defence of her contribution to the Madoff Benevolent Fund on the wireless. Golly, was she cross with those incompetent US regulators. What on earth were they doing, she spluttered, to allow my company to lose money? Pausing only to point out that she wasn't the only one to have been duped, she swept out, presumably to go to work at Bramdean Alternative, the listed company she runs.
One of the first things her team did was to edit the company website, but not quite fast enough to beat the bloggers at Bronte Capital, who downloaded this gem before it disappeared: "Robust and thorough due diligence is at the heart of our investment process. Our detailed manager monitoring programme ensures that our clients' investments are subject to ongoing and effective governance." Quite right too, considering that Bramdean charges 1.5%, not to manage other people's money, but to find others to do so (who will also skim off the top).
Well, full marks for Nicola for coming forward so quickly, and nul points for doctoring the website. She has proved herself brilliant at exploiting her position as a woman in a male-dominated world, but her credibility as a fund manager is shot, and Bramdean should seek Alternatives. Her investors, who have seen their shares halve in two months, might remember Woody Allen's definition of a stockbroker as someone who invests your money until it's all gone.

For 3i, maybe smaller was beautiful after all
ONCE upon a time long, long ago, there was a business called Investors in Industry. Owned by the big banks, it would back promising small businesses with equity, and pledged never to look for the exit. It was a steady business, but rather dull.
So they renamed it 3i, making it harder for those small firms to find it in the phonebook, and went public. Later, the management noticed that everyone in private equity was making buckets of money, and that the rewards were much fatter in big deals, rather than in dozens of those tiresome little "legacy" holdings.
For a while things went rather well, but private equity is not, after all, the road to effortless riches, and now 3i could do with some fresh equity itself.
In recent weeks, the shares have collapsed, and at 258p stand at a huge discount to Cazenove's current estimate of assets worth 828p. It's the increasingly familiar story of returning too much money to shareholders during the good times, leading to fear that the company may run out of cash. As it is, net debt is nearly half net assets, a proportion that rises rapidly with falling asset values.
The big liability is the £430 million 3.625% convertible bond, due for redemption in 2011. When it was issued, the fond hope was that it would convert into shares, but that won't happen now. Refinancing it could be tricky and will certainly be expensive.
Still, it's an ill wind; the bonds, currently trading at £78.50, offer buyers a 27% gain over less than three years, and a yield of 4.6% until then — assuming 3i doesn't default, of course.

NEIL COLLINS' ARCHIVE
www.standard.co.uk/neilcollins