Analysis

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 yesterday Sir James had to be sacrificed as a 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 It was Gordon Brown who appointed Sir James to the FSA, Gordon Brown who appointed him to write a report on ID cards and Alistair Darling who appointed him to advise on the mortgage crisis.

Until yesterday, when he was dropped like a hot potato, Sir James was widely described as an ally of Mr Brown and one of his closest advisers. He was now no longer an adviser and it was right that he stepped down from the FSA, Mr Brown told the Commons. He 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 mortage borrowing far too aggressively and fuelling the borrowing bubble that 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 whistleblower.

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 £22m in fees for auditing, tax advice, information technology work and compliance advice at HBOS.

It may have been the most scrupulous arm's-length investigation but it looks bad to be looking into your own affairs.

The unmasking of one of Mr Brown's banking advisers as the alleged architect of the downfall of HBOS is not just embarrassing. It strengthens the Tory narrative that Mr Brown, and the people he choses to advise him, are part of the problem he is trying to solve.

The iron chancellor's armour has taken a big dent.

Click here to comment on this story...