Top world financial groups on Monday revealed massive potential losses from an alleged scam run by Wall Street trader Bernard Madoff, admitting they were fooled by a classic pyramid investment fraud.
British, French, Japanese and Spanish banks and funds said investments totalling billions of dollars could be wiped off their balance sheets by a scandal that is set to affect some of the richest people in the world.
Royal Bank of Scotland said it could lose about £400-million, joining a growing list of banks and investors in Europe, Asia and the United States struck by the scandal.
Shares in Santander, the biggest bank in Spain and the second largest in Europe after HSBC, plunged after the lender said it had an exposure of more than $3-billion to Madoff Investment Securities in New York.
France’s Natixis investment bank, already brought low by subprime losses, put its maximum exposure at €450-million ($606-million). Retail banking giant BNP-Paribas revealed potential losses of €350-million.
Japanese financial giant Nomura said it could lose up to $303-million and officials in South Korea said financial institutions there had a total exposure of about $95-million to Madoff’s scandal-hit investment scheme.
Madoff, a 70-year-old Wall Street veteran, was arrested last Thursday.
He is alleged by US prosecutors to have confessed to defrauding investors of $50-billion in a long-running scam that collapsed after clients asked for their money back as a result of the global financial crisis.
Banks around the world have rushed to disclose potential losses from the scandal in an apparent bid to avert any deepening of the suspicion that has frozen credit markets, and in stark contrast to widespread reticence in recent months as the subprime mortgage crisis unfolded.
US authorities allege that Madoff delivered consistently strong returns to clients by secretly using the principal investment from new investors to pay out to other investors in the scheme, a version of what is known as “pyramid fraud”.
The scheme apparently worked as long as he could attract new investors but seems to have unravelled when some of Madoff’s clients asked to withdraw their principal — only to discover that his seemingly brimming coffers were empty.
This fraud is also known as a “Ponzi scheme” after a US swindler from the 1920s, Charles Ponzi, who cheated thousands of mostly small-time investors of their savings by promising returns of 40% by means of foreign-exchange arbitration on international reply-paid postage stamps.
British investment fund Bramdean Alternatives Limited, which said it had put about $31,2-million in Madoff’s company, said that the scandal raised “fundamental questions” about the American financial regulatory system.
“It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades, while investors have continued to invest more money into the Madoff funds in good faith,” the firm said in a statement.
Britain-based hedge fund manager Man Group said it had invested $360-million in Madoff Securities. The fund said in a statement that “it appears that a systematic and comprehensive fraud may have been committed”.
Property magnate Vincent Tchenguiz, one of Britain’s richest people, was reported to be potentially affected to the tune of millions of pounds by the scam, which the Wall Street Journal says has also hit wealthy US investors.
Meanwhile, Britain’s HSBC declined to comment on a report in the Financial Times that it had potential exposure of $1,5-billion. A spokesperson for HSBC in Hong Kong said he had “no comment” to make on the report.
Spain’s El Pais newspaper reported that the country’s second-biggest bank, BBVA, could lose hundreds of millions of euros in the scam. The report said “some managers put the figure at around €500-million.”
French insurance giant Axa on Monday said that its potential losses were below €100-million and top banks Société Générale and Credit Agricole each said that their exposure was under €10-million.
Italy’s biggest bank, UniCredit, said its exposure was about €75-million but added that an investment unit, Pioneer Investments, may also have been indirectly affected without giving any further details.
Banco Popolare said its exposure amounted to €68-million.
In Switzerland, Geneva private banks could lose up to $5-billion in the scam, Swiss newspaper Le Temps reported, while private bank Reichmuth and Company said it may have lost $328-million.
Sweden’s Nordea banking group said its exposure was €48-million.
Germany’s Deutsche Bank and Commerzbank have declined to comment on the effects of the Madoff scam. A spokesperson for Commerzbank said that there would be no comment on particular investments because of “banking secrecy”. — AFP