The business - Patrick Hosking wonders if HMQ uses tax havens

God and Mammon do not make a profitable partnership, as an Edinburgh bank discovered to its cost whe

Three years ago the righteous, God-fearing executives of the Bank of Scotland found themselves a new friend. They hatched a joint venture with Pat Robertson, the right-wing American evangelical preacher,

to sell financial products to members of his flock. It quickly ended in tears after Robertson made derogatory comments about Scotland in general and Scottish homosexuals in particular. The gay lobby erupted. A boycott was launched.

The appalled Edinburgh bankers blustered for a few weeks, then pulled the plug on Robertson and apologised for their lack of judgement in having anything to do with him in the first place.

Today the bank has a new best friend - the entrepreneur Philip Green. Green in his own way is just as colourful and controversial as Robertson.

This has nothing to do with his political views, but his patchy early track record and his aggressive, hectoring manner. Ten years ago Green was persona non grata in the City, forced out of the public company Amber Day after he failed to meet a profits forecast. During his spell there he managed to go through no fewer than five different stockbroking advisers. To put it mildly, it was a tempestuous ride.

Green's rehabilitation since has been dramatic. He bought and successfully turned around Bhs. He made headlines with an unsuccessful tilt at Marks & Spencer two years ago. Now he has just clinched an audacious deal to buy Arcadia, a stable of stores that includes Burton, TopShop and Dorothy Perkins. Suddenly Green is one of Britain's biggest employers. Arcadia alone employs 25,000 people. If you believe the sums of his friends, Green is personally worth more than £1bn. Pukka firms such as Merrill Lynch and KPMG have rushed to do his bidding. Last weekend, the Sunday Times called him "a genius".

But, interestingly, while Green - with his lavish toga parties, his yacht, his Monaco home and his sessions at the roulette table - makes the headlines, it is Bank of Scotland that is picking up the tab. Green is chipping in £69m of the purchase price, Bank of Scotland is coughing up £800m. Admittedly, most of this is in the form of loans and some of it may be syndicated to other banks to spread the risk. But this is a huge exposure to a single client. The deal is also highly leveraged. If things go well, that will magnify the returns; if they go badly, the buyout company could be crippled by its interest payments.

The bank, now part of Halifax, likes to see itself as the embodiment of cautious Presbyterian financial rectitude. If it were a politician, it would be Gordon Brown. Yet it has nailed its colours firmly to Green's mast. It promises to be an interesting relationship.

Beware Greeks bearing gifts, and banks trying to sell you "capital protected products". As share prices bomb, investors are being wooed with a flood of these newly created investments. Some purport to offer all the benefits of stock-market upside if share prices recover, with none of the downside, if shares plunge further.

The rocket scientists in the big investment banks have been ingenious in devising these new investments, but even they cannot abolish the laws of the market. The truth tends to be buried in the fine print. One ploy is to promise a return equivalent to the growth in the benchmark of blue chips, the FTSE-100 index. This is not at all the same as being invested in the stock market, because the index takes no account of dividends. You don't need to be particularly gloomy to believe that dividends are likely to provide the lion's share of total share market returns over the next few years.

Another is the get-out clause of a seemingly improbable event that invalidates the capital guarantee. One capital-protected bond says all bets are off if the market falls by more than half at any one time. That might seem unlikely, but bear markets are characterised by brief lows when share prices spike through the floor.

Here's a thought. Is the Queen a hedge fund investor? Does she "go short" - selling shares she does not own, in the hope that the price falls so she can buy them back for less and turn a quick profit? Does she surf the currency markets, picking off weak currencies, like George Soros humiliating Norman Lamont with his famous attack on the pound in 1992? Does she operate far from the eye of regulators by using funds domiciled in Caribbean tax havens?

The chances are, yes. Coutts, her bank, has for some time been a cheerleader for hedge fund investment. It urges its well-heeled clients to allocate a fifth of their savings to hedge funds. Now Cazenove, her brokers, has joined the bandwagon. In a discreet advertisement in the Financial Times, the secretive Caz alerts clients that it has the expertise to place their money in hedge funds.

The Palace could well be being encouraged to dip a toe in these waters.

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