US pyramid scheme hits European banks

WASHINGTON, D.C.: Europe’s biggest bank, HSBC, joined a list of top names in world finance admitting huge potential losses in a suspected pyramid fraud scam run by ex-Wall Street heavyweight Bernard Madoff, whose brokerage was to be sold off.

The Securities Investor Protection Corp. (SIPC), which helps investors at failed brokerage firms, said Monday (Tuesday in Manila) it was liquidating Bernard Madoff Investment Securities LLC.

“It is clear that the customers of the Madoff firm need the protections available under federal law,” said SIPC President and CEO Stephen Harbeck in a statement.

But, he warned, “It is unlikely that SIPC and the trustee will be able to transfer the customer accounts of the firm to a solvent brokerage firm” because of the state of the firm’s records.

Shares in Santander, the biggest bank in Spain and the second largest in Europe after HSBC, plunged after the lender said it had exposed more than $3 billion to Madoff Investment Securities in New York.

Fortis Bank Netherlands said it stood to lose up to $1.37 billion in the suspected scam, despite lacking direct exposure to the Madoff firm.

“If, as a result of the alleged fraud, the value of the assets of these funds is nil and the respective clients cannot meet their obligations, Fortis Bank Nederland [Holding] N.V.’s loss could amount to around 850 million euros to one billion euros [$1.17 billion to $1.37 billion],” the bank said in a statement.

Billions lost

British, French, Japanese and Spanish banks and funds said investments totaling billions of dollars could be wiped off their balance sheets in a scandal set to affect some of the world’s richest people.

“The potential exposure under these financing transactions is in the region of one billion US dollars,” the London-based HSBC said.

Royal Bank of Scotland said it could lose about $612 million.

France’s Natixis investment bank, already brought low by subprime losses, put its maximum exposure at $616 million. Retail banking giant BNP Paribas revealed potential losses of $480 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 some $95 million.

Madoff arrested

Madoff, a 70-year-old Wall Street veteran, was arrested on Thursday, and allegedly confessed to defrauding investors of $50 billion in a scam that collapsed after clients asked for their money back because of the global financial crisis.

International Monetary Fund chief Dominique Strauss-Kahn said he was shocked that US regulators had failed to identify and prevent the fraud.

“The surprise is not that there are some thieves in the system. The question is where were the police? It’s very surprising to find you’re living in a system where a failure of the regulatory system was so big,” he told a news conference in Madrid.

Banks have rushed to disclose potential losses in an apparent bid to avert any deepening of the suspicion that has frozen credit markets.

US authorities alleged that Madoff delivered consistently strong returns to clients by secretly using the principal investment from new investors to pay out other investors in what is known as a “pyramid fraud.”

US Vice President Dick Cheney said in a radio interview that the alleged scam by the former Nasdaq chairman was “very disturbing” but blamed a few “bad apples.”

The unraveling

The scheme apparently worked as long as Madoff could attract new investors but seems to have unraveled when some of his clients asked to withdraw their investment – only to discover that his seemingly brimming coffers were empty.

British investment fund Bramdean Alternatives Limited, which revealed it had invested about $31.2 million in Madoff’s company, said the scandal raised “fundamental questions” about the US 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.

More European banks

Spain’s El Pais newspaper reported the country’s second-biggest bank, BBVA, could lose around $686 million in the scam.

Italy’s biggest bank, UniCredit, said its exposure was around $103 million and one of its investment units may also have been indirectly affected.

Geneva’s private banks could lose up to $5 billion, Swiss newspaper Le Temps reported.
— AFP(ManilaTimes)


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