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BANKING - FINANCIAL CRISIS - FRAUD
HSBC faces $1 billion risk in Madoff scandal
MONDAY 15 DECEMBER 2008
Europe's biggest bank, HSBC, is the latest financial institution to admit that it is at risk in connection with a collapsed pyramid scheme allegedly run by Wall Street broker Bernard Madoff. The bank estimates its potential losses at $1 billion.
SPECIAL REPORT GLOBAL CAPITALISM ON THE BRINK?By FRANCE 24 (video)
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AFP - Europe's biggest bank, HSBC, joined a list of top names in world finance admitting huge potential losses on Monday in a suspected pyramid fraud scam run by Wall Street figurehead Bernard Madoff.
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 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.
"In the interests of clarity, HSBC confirms that it has provided financing to a small number of institutional clients who invested in funds with Madoff," London-based HSBC said in a statement.
"On the basis of information presently available, HSBC is of the view that the potential exposure under these financing transactions is in the region of one billion US dollars (740 million euros)."
Royal Bank of Scotland said it could lose about 400 million pounds (598 million dollars, 444 million euros) and two British investment funds announced potential losses in the hundreds of millions of dollars.
France's Natixis investment bank, already brought low by subprime losses, put its maximum exposure at 450 million euros (606 million dollars). Retail banking giant BNP 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 have rushed to disclose potential losses in an apparent bid to avert any deepening of the suspicion which has frozen credit markets, and in stark contrast to reticence 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 in what is known as a "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 investment -- only to discover that his seemingly brimming coffers were empty.
This fraud is also known as a "Ponzi scheme" after a 1920s US swindler from the 1920s, Charles Ponzi, who cheated thousands by promising returns of 40 percent through foreign exchange arbitration on international postage stamps.
British investment fund Bramdean Alternatives Limited, which revealed 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 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, 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 euros and top banks Societe Generale and Credit Agricole each said that their exposure was under 10 million euros.
Italy's biggest bank, UniCredit, said that its exposure was around 75 million euros and that one of its investment unit may also have been indirectly affected. Banco Popolare 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 and Commerzbank 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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