US fraud scheme is major blow to European banks

15th December 2008, Comments 0 comments

Banks and investment funds in Europe may face losses of billions, following reports of the failure of a pyramid scheme run by New York broker Bernard Madoff.

MADRID – Two months after being hammered by the collapse of Lehman Brothers, banks and investment funds in Europe are trembling in the face of the massive fraud allegedly perpetrated by New York broker Bernard Madoff.

Private European banks and investors specialised in the placement of high-risk hedge funds could have exposure of up to several billion dollars in the scandal.

Madoff was arrested on Thursday for allegedly defrauding his customers through a giant pyramid scheme, with prosecutors alleging that the 70-year-old, a decades-long veteran of Wall Street, confessed to losing at least USD 50 billion (EUR 37.4 billion, CHF 58.9 billion) in the so-called Ponzi scheme.

Madoff's company, Bernard L. Madoff Investment Securities LLC, attracted "the world's financial aristocracy", said the Spanish newspaper El Pais.

Among his clients were international banks as well as discreet private banks and companies involved in managing the fortunes of a single wealthy family.

Swiss bankers face losses of up to USD 5 billion, Geneva's Le Temps newspaper said.

It said that Union Bancaire Privee, a major asset management institution specialising in hedge funds, could be exposed to the tune of USD 1 billion.

UBP refused to comment on the report, which said that 90 percent of fund management companies operating in Geneva invested in Madoff products.

Spain, a country with less prominent financial tradition, could also be directly hit. The Bank of Spain quickly decided to open an investigation to determine the level of involvement of Spanish companies, the Spanish daily El Mundo said.

The only official statement on the scandal has come from the country's second largest bank, BBVA, which said it had not commercialised "any Madoff product".

Spanish newspapers reported that Optimal, an investment firm of Banco Santander, was heavily exposed and that investors in Spain risk losing some USD 3 billion.

Santander, Europe's second largest bank, has made no comment.

Another Spanish fund manager, MandB Capital Advisor, headed by the son of Santander president Emilio Botin, could also be exposed up to hundreds of millions of dollars.

Spanish authorities appear to be taking the scandal very seriously, and the central bank on Friday began assessing the impact of the fraud, El Mundo said.

If the figures are confirmed, the fraud could have a bigger impact in Spain than the collapse of US bank Lehman Brothers earlier this year, in which Spanish investors had exposure of between EUR 1.3 and 2.6 billion.

In London, an investment fund that counted itself a client of Madoff criticised the "systemic failure" of regulators in the United States.

Bramdean Alternatives Limited said the accusations against Madoff 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.

Bramdean Alternatives invested around GBP 21 million (EUR 23.3 million, CHF 27 million), or around 9.5 percent of its portfolio, with Madoff's company.

Several British newspapers reported that among Bramdean's clients is property magnate Vincent Tchenguiz, one of Britain's richest men, who apparently invested 40 million pounds with the firm.

A spokeswoman for Royal Bank of Scotland told AFP on Sunday that the bank had "some exposure" to Madoff's company, but declined to give details.

Meanwhile, Europe's largest bank, HSBC, declined to confirm any relationship with the alleged fraudster.

[AFP / Expatica]

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