Watchdog that failed to bark

POOR Sir Howard Davies. Having been charged with creating the biggest, most comprehensive and cumbersome financial regulator in history, he now has the Treasury Select Committee biting a lump out of his leg.

This is not the stuff that future Bank of England governors want on their CV.

One of the worst sins in this country is to mislead the House of Commons. That is what the hapless John Tiner, who heads the FSA's investment directorate, may have done in the split capital trust scandal that has gobbled up £3bn of investors' cash.

At the last hearings, Tiner denied knowledge of correspondence from the Guernsey regulator warning of problems with the trusts. That has now turned up and Tiner's defence is to say that all this took place before he moved from Arthur Andersen (RIP) to the FSA.

The committee is right to take umbrage. The letter from the Guernsey Financial Services Commission makes it absolutely clear that its investment director Peter Moffatt was running up the red flag over splits in April 2001. He pointed to the 'incestuous nature' of the business. The response of the FSA to this and other warnings was to carry out 'some research'. This failed to raise sufficient concern to take matters further at that stage.

In many ways, this is a repeat of the Equitable disaster. In each case the FSA's initial response was inadequate and valuable time was lost for rescue and retribution. The FSA claims this happened because it was so focused on its own internal business of stitching together a dozen or so diverse regulators, but it may have left itself open to legal claims.

The most important quality for a watchdog is instinct - the ability to smell a rat. This is where the former investment regulator Imro failed in looking into Robert Maxwell's pension funds. But it recovered its poise and dealt swiftly and strongly with the Morgan Grenfell Asset Management scandal.

Maybe the FSA is simply too large after all.

HSBC's action man

YOU never quite know where Sir John Bond and HSBC will strike next. What we do know is that it will act with a boldness lacking in other British banks. Look for instance at the failure of Lloyds TSB to secure a transforming European deal.

HSBC has wanted to augment its North American earnings for some time. But the assumption was that it would take out an investment bank such as Merrill Lynch.

It has confounded everyone. Household International is a move downmarket. It is only now extricating itself from a big dispute with 20 US states over discriminatory interest rates charged to its poorest customers, and is a world away from HSBC's last US buy, the Republic group - private banker to the super-wealthy.

HSBC shares were marked down. This reflects distaste for the dilution in the deal and concern about buying into a credit group when the US has not quite shaken off the bubble of the last decade.

But HSBC has done its homework. It is paying a one-third premium to the Household share price, but this follows a bleak period in which the group lost two-thirds of its market value.

Household is no stranger to these shores. It offers credit card services to stores groups such as House of Fraser. In the US, it supplies credit cards and deals to General Motors customers. HSBC hopes to connect Hispanic customers in the US to its Mexican subsidiaries.

That might be a nice touch, but this deal is really about diversifying HSBC's earnings base. Hong Kong, the former core of its operations, is not what it was before the Beijing takeover. With this deal the business will be more evenly split between the Far East, the Americas and Europe.

It now has the chance to challenge Citibank more effectively on its home turf, just as Sandy Weill's beleaguered giant has been snapping at HSBC's heels in Asia.

C&W's unhappy reunion

THE sudden collapse in the business prospects and shares of Cable & Wireless rekindled memories of last year's crisis at Marconi.

Perhaps this was inevitable. Cable & Wireless traces its origins to 1866, when Isambard Kingdom Brunel designed the steamship Great Eastern, which laid the first transatlantic cable.

The Eastern Telegraph Company was formed a few years later to manage the cable, and in 1929 merged with Marconi (the original, that is) to form Imperial & International Communications. This changed its name to Cable & Wireless in 1934.

Now Marconi and C&W find themselves bracketed together again. Ouch!