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US regulators criticised for Madoff scheme

Published on 17/12/2008

London – US financial regulators came under increased attack Tuesday for failing to stop a USD 50 billion (EUR 37.4 billion, CHF 58.9 billion) fraud that Wall Street heavyweight Bernard Madoff is accused of running as more banks and investment funds reported losses.

But some observers also had harsh words for professional investors taken in by the scheme.

A day after Spain’s biggest bank Santander announced potential losses of more than EUR 2.19 billion from Madoff Investment Securities’ scheme, Spain’s stock market regulator said investment funds there also had direct exposure of EUR 106.9 million.

Spanish newspapers tore into the US regulators.

"The supposed meticulous supervision by (US financial watchdog) the SEC has failed in the task of preventing massive fraud," Spanish newspaper El Pais said.

"It must be asked how it is possible that no one had detected anything abnormal about his activities," said La Vanguardia newspaper.

Madoff, 70, was arrested Thursday and allegedly confessed to defrauding USD 50 billion in a scam that collapsed after clients asked for their money back due to the global financial crisis.

US authorities allege that Madoff secretly used money from new investors to pay interest to other investors, in a fraud known as a Ponzi or pyramid scheme.

Howard Wheeldon, senior strategist with BGC Partners in London, recalled former British Prime Minister Ted Heath’s description of a previous financial scandal as the unacceptable face of capitalism.

"I choose to call this the unacceptable face of human greed," Wheeldon wrote.

But British investment consultants PIRC pointed out that many of those hit were professional investors.

"We therefore might also ask what financial institutions actually do for their management fee if being able to spot, and avoid, a pyramid scheme isn’t part of the service?"

Jean-Pierre Jouyet, France’s former European affairs minister who this week took over at France’s financial markets watchdog, the AMF, said: "For the fourth time, American regulation is in question."

He cited three previous crises: the 1998 collapse of US hedge fund managers LTCM; the 2001 false-accounting scandal involving energy giant Enron; and the collapse in September of the Lehman Brothers bank.

On Monday, Dominique Strauss-Kahn, director general of the International Monetary Fund, expressed shock at the failure of US regulators to spot warning signs at Madoff’s firm.

US Republican Senator Chuck Grassley was scathing about the US Securities and Exchange Commission (SEC) regulators.

"They failed," he said. "This person was registered as a broker dealer, they should have known what he was doing all the time, and particularly if you have whistleblowers."

Japanese financial firms joined the growing list of those caught up in the scandal. The Aozora Bank said its exposure might amount to 12.4 billion yen (EUR 97.3 million, CHF 173 million).

Nipponkoa Insurance Co and Mitsui Sumitomo Insurance Co and Daiwa Securities Group put their losses at most at several hundred million yen – relatively small sums compared to those already announced elsewhere.

After Santander, the other big losers included Dutch bank Fortis, which announced exposure of at least USD 1.2 billion, and Britain’s HSBC at USD 1.0 billion.

A string of other European banks have announced exposure of up to hundreds of millions of dollars.

The Securities Investor Protection Corporation (SIPC), which provides a Congress-authorized special reserve fund to help investors at failed brokerage firms, said Monday it was liquidating the Madoff company.

But Jeffrey Dawkins, Chief Investment Officer at US-based asset managers The FQ Group, argued against any state help for the alleged victims.

"Actions such as these not only compromise the foundation of our free enterprise system, but point to nepotism and influence as the controlling factors for success not honesty and hard work," he commented.

In Germany, Deutsche Bank, Postbank and the German federation of public banks VOeB all told AFP Tuesday they had no exposure to the scheme.

Germany’s second biggest bank, Commerzbank, declined to comment.

Swiss insurance group Zurich Financial Services said it had no exposure, Swiss Re said it had indirectly invested less than USD 3 million. Swiss Life did not give a response.