Monday December 15, 01:48 PM
HSBC joins top banks with huge losses in US 'pyramid' fraud
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LONDON (AFP) - HSBC (LSE: HSBA.L - news) bank joined a list of top names in world finance admitting on Monday huge potential losses in a suspected scam by Wall Street figurehead Bernard Madoff, revealing they were fooled by a classic pyramid fraud.
HSBC said that its exposure to the alleged long-running scheme was about one billion dollars.
Shares in Santander (Madrid: SAN.MC - news) , 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 three billion dollars to Madoff Investment Securities in New York.
British, French, Japanese and Spanish banks and funds said investments totalling billions of dollars (euros) 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 (LSE: RBS.L - news) said it could lose about 400 million pounds (598 million dollars, 444 million euros), joining a growing list of banks and investors in Europe, Asia and the United States struck by the scandal.
France's Natixis (Paris: FR0000120685 - news) investment bank, already brought low by subprime losses, put its maxiumum exposure at 450 million euros (606 million dollars). Retail banking giant BNP (Paris: FR0000131104 - news) -Paribas revealed potential losses of 350 million euros.
Japanese financial giant Nomura said it could lose up to 303 million dollars and officials in South Korea said financial institutions there a total exposure of some 95 million dollars 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 dollars 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 which has frozenh 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 percent 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 dollars 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 (LSE: EMG.L - news) said it had invested 360 million dollars 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.
Spain's El Pais newspaper reported that the country's second-biggest bank, BBVA (Madrid: BBVA.MC - news) , 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 (Paris: FR0000120628 - news) on Monday said that its potential losses were below 100 million euros and top banks Societe Generale (Paris: FR0000130809 - news) and Credit Agricole (Paris: FR0000045072 - news) each said that their exposure was under 10 million euros.
Italy's biggest bank, UniCredit (Milan: UCG.MI - news) , said its exposure was around 75 million euros but added that an investment unit Pioneer Investments may also have been indirectly affected without giving any further details.
Banco Popolare (Milan: BP.MI - news) said its exposure amounted to 68 million euros.
In Switzerland, Geneva private banks could lose up to five billion dollars (3.7 billion euros) in the scam, Swiss newspaper Le Temps reported, while private bank Reichmuth & Co said it may have lost 328 million dollars.
Sweden's Nordea banking group said its exposure was 48 million euros.
Germany's Deutsche Bank (Xetra: 514000 - news) and Commerzbank (Xetra: 803200 - news) have declined to comment on the effects of the Madoff scam. A spokesman for Commerzbank told AFP that there would be no comment on particular investments because of "banking secrecy."
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