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The FSA and Treasury seem determined to throw the whole arsenal of legal weaponry - developed in the 70s and 80s to crack the IRA in Northern Ireland -  against those who  might dare to abuse London’s precious financial markets.

From the Guardian on Friday:

Alistair Darling is to give Britain’s financial watchdog new powers to clean up the City by adopting a US-style whistle-blower system that will grant immunity from prosecution in return for evidence about market manipulation.

Alarmed by the illegal raid that drove down the share price of HBOS last week, the chancellor will outline plans for new legislation over the next few months that will give the Financial Services Authority plea bargaining powers already granted to tax officials, the Serious Fraud Office and the director of public prosecutions.

In an interview with the Guardian, Darling said: “I can’t allow us to get into a situation where people quite deliberately manipulate markets for personal gain and with the potential to destabilise the financial system.”

This will involve giving FSA officials “specified prosecutor status,” allowing the regulator to develop a system of City grasses shopping each other to save their own skins.

Let’s hope they use their new powers more wisely than the Serious Fraud Office, which has been clamouring for the abolition of juries for years - only to be told recently by the House of Lords that in the biggest case it had pursued in years — against Goldshield, the drug maker - the alleged fraudster had not even committed a crime.

According to supergrass expert David Bonner, author of Combating Terrorism:Supergrass Trials in Northern Ireland, criminal accomplices have been used as competent witnesses in English law for centuries. But it was only in the 70s, when the Metropolitan Police used the approach to crack a series of armed robberies in London and when the Italian authorities used such witnesses to prosecute the Red Brigade, that the term ’supergrass’ gained traction.

In Northern Ireland, this tool of the law came into its own, with some 500 alleged terrorists charged on the word of 27 supergrasses — seen by many at the time as a specific strategy to remove all suspects from the community in one extensive swoop.

How far and wide the FSA is now planning to sweep is anyone’s guess. But what is worrying here is that our chancellor, Alistair Darling, is framing legislation on the back of a supposed crime that didn’t actually happen.

The Magna Carta is being picked apart in response to a media invention - namely that a “modern day bank robber” syphoned £100m from mug punters on the London stock market by spreading false rumours last week about HBOS.

The truth is more prosaic. Rumours about companies - such as the one effecting HBOS - circulate every day, and have done so for 200 years. It is no more ‘organised’ now that it has ever has been. In the main, the tittle-tattle circulates among low-brow retail speculators, talking up their little books, and bad-mouthing someone else’s down.

For the most part it is ignored - or quickly tested and discounted. It is only during periods of great uncertainty that such chatter gains any sort of traction - as happened last week.

To respond by using measures best suited to extreme violent crime would be laughable if it did not betray how little the Treasury understands about the way financial markets operate.