Royal Bank of Scotland's potential £400m loss from the world's biggest alleged investment fraud came from the investment banking business it bought

Royal Bank of Scotland's potential £400m loss from the world's biggest alleged investment fraud came from the investment banking business it bought from ABN Amro. The exposure to loans used to leverage the investments of its clients in Bernard Madoff's giant $50bn (£33bn) pyramid scheme is the latest blow delivered to RBS from its purchase of ABN last year, a deal which accounted for about a third of RBS's £5.9bn of first-half write-downs. Investor anger at the takeover, which left RBS in a weak capital position, helped prompt the departure of the bank's chief executive, Sir Fred Goodwin, last month. RBS said on Monday that if it recovered nothing from its lending to hedge funds of funds the losses would be about £400m. Hedge fund industry sources said the business would have come from the equity derivatives operation that RBS took on as part of the ABN deal. "ABN had an equity derivatives team activity. That team would do a number of things, one of which is lending or providing leverage. They would issue a derivative instrument that an investor would put money into," one source said. RBS declined to comment but a source familiar with the bank said that a fraud on the scale of the one alleged in the Madoff affair could not be blamed on the ABN transaction.