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The Consumer Financial Protection Agency bill passed by Frank’s committee, nominally establishing a new agency to police consumer lending fraud and abuse, exempts 98 percent of the nation’s banks as well as car dealerships from oversight, and allows the federal government to override state consumer protection laws that are tougher than federal regulations.

Credit card companies are currently waging an all out war against “shallow pocketed” individuals, and this includes most of us. Anyone who cannot instantly pay off their remaining balance is subject to attack. Consumers simply have no recourse other than to pay the exorbitant amounts or file bankruptcy.

What if the companies that imposed the penalties were no longer able to receive any benefit from them? What if the revenue streams from penalties and fees were redirected to another entity such as a credit reporting agency, conflict-resolution company, or governmental regulatory body.

In the foreword to RBS’s 2006 annual report, published in April 2007, Sir Fred wrote: ‘Sound control of risk is fundamental to the Group’s business . . . Central to this is our long-standing aversion to sub-prime lending, wherever we do business.’

On the principle that people deny something only when there’s something to deny, this remark might be the biggest single clue anywhere in the RBS accounts as to the risks the bank was running. RBS turned out to have quite a lot of exposure to sub-prime risk, and to be steadily acquiring more.

Put simply, this is an insurance scheme. The government is insuring the banks against losses on their assets. There’s nothing unusual about such schemes: they’re a standard feature of the banking world. In fact, they are one of the sources of the current crisis. In the commercial world, a deal in which one financial institution insures another against defaults, in return for a fee, is called a credit default swap, or CDS. In effect, the UK government has undertaken a CDS with our imploded banks.

The story was a distraction from the real scandal about AIG, which is what was happening to the other 99.9 per cent of the money the government was pumping into the company. Since AIG wrote CDSs, which are effectively insurance against losses, and since those losses had occurred, why then the cash was going to companies that had lost money in the credit crunch: companies such as Société Générale, which received $11.9 billion; Goldman Sachs, $12.9 billion; Merrill Lynch, $6.8 billion; Deutsche Bank, $11.8 billion; Barclays, $8.5 billion; BNP Paribas, $4.9 billion. Nothing could better illustrate the way in which this has be- come a systemic international crisis than the fact that the US Treasury is transferring these gigantic sums to foreign banks, because they feel they have no choice if they’re to keep the financial system functioning.

I guarantee that at this very moment, somewhere in the world, somebody at one of the big banks is sitting with his head in his hands, looking at the company’s balance sheet and sweating over this very problem. If the global economic crisis can be reduced to one single phenomenon, it is this: the fact that nobody knows which banks are solvent.

1. Because the government would be bad at it. This is the only reason governments are willing to give in public, and it fails the most elementary test of all: only a professional politician can say it with a straight face. Bad at running the banks, compared to the bankers who broke capitalism? Please.

All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.

As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked.