Sir Fred Goodwin, the former chief executive of Royal Bank of Scotland, has earned the newspaper sobriquet “the world's worst banker”. Few British taxpayers, who now own 70 per cent of RBS, would consider he has earned a pension of £650,000 a year. Yet that is the retirement package he is entitled to under pension arrangements negotiated at RBS. Sir Fred's leadership of RBS caused massive destruction of the value of the company. It is a public scandal that, while his business decisions have incurred immense social costs, his compensation package confers huge personal benefits.

But it is important to distinguish two responses: anger at the package, and demands that it be rescinded. The first response is reasonable; the second is not. It now appears that Lord Myners, the City minister, agreed to the financial terms of Sir Fred's departure when the Government provided the bank with an emergency capital injection of £20 billion last October. If Lord Myners did indeed clear that deal with Sir Fred, then he has embarrassed the Government and put the Chancellor in the position of giving a false impression to the public. For the Government to seek to renege on an agreement because it is now in a political fix would be outrageous.

There is much blame to attribute in the enfeebled state of RBS. The strategic errors made by the bank under Sir Fred's leadership are legion. The most grandiloquent was the acquisition of ABN Amro, the Dutch bank, in 2007 at the top of the market for a hugely inflated price of €70 billion. With a large banking network in the United States, RBS was cripplingly exposed to the cascading bad debts in the sub-prime mortgage market. It expanded its trading in risky derivative products, while steadily depleting its capital base. Through all of this ran shades of Ozymandias: a huge new headquarters for its US investment banking operations, and a corporate culture of uniformity to the point of mandating the wearing of ties with the company logo.

These are massive, culpable errors. They led to the biggest loss in British corporate history, at £24 billion for last year. The bank would no longer exist as an independent concern but for the huge sums given by the taxpayer in fresh capital and guarantees against losses on risky assets. Sir Fred is directly responsible for decisions that destroyed shareholders' wealth and whose unravelling now requires redundancies in the tens of thousands. Any reasonable conception of the link between performance and compensation would rule against Sir Fred's munificent pension. The old board of RBS ought never to have agreed to it. But it did agree.

The Government is justified in attacking Sir Fred's lamentable performance. Indeed, it has an obligation to the taxpayer to explain what has happened at RBS, and to ignore the sensibilities of those who caused its ruin. It is something else, however, to seek to overturn by legal manoeuvres a contractual obligation that the Government inherited from a dysfunctional RBS board, and then agreed to.

Contractual arrangements that are a symbiosis of incompetence and cupidity are still legally binding. What is more difficult to accept, but ought to be recognised, is that they are also morally binding. A system of rules protects worthier cases than Sir Fred from public hostility.

Attempts to alter contracts retrospectively are inequitable in principle. When they involve reneging, out of political expediency, on previous undertakings they are also morally reprehensible. Westminster has nationalised the owners of National Westminster Bank; but in its handling of the former chief executive, it has shown, at the first hurdle, incompetence in its management of the bankers.