Benbassat & Cie was reported to have $935m of exposures to Madoff Ponzi Scheme

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Europe's banks reveal $8bn of exposure to alleged fraud
RBS, HSBC and Man Group among institutions detailing dealings with Madoff
By Sean Farrell, Financial Editor
Tuesday, 16 December 2008


European banks including Royal Bank of Scotland and HSBC have so far revealed more than $8bn (£5.2bn) of exposures to Wall Street trader Bernard Madoff's alleged $0bn investment fraud.

RBS said it could lose up to £400m from loans to hedge funds of money secured against shares in which the hedge funds had invested through Madoff Investment Securities. The money is said to have been invested in blue-chip shares in the S&P 500 and FTSE 100 but if the assets are worthless, then the cost to RBS would be £400m.

HSBC also revealed that it was exposed to about $1bn in losses from a "small number" of institutional clients who had invested with Mr Madoff.

Barclays declined to comment but a source close to the bank said its exposure to Mr Madoff was small in relative and absolute terms and that there were no plans to issue a statement.

Also in the UK, Man Group, the London-listed hedge fund manager said it had $360m of exposures to Madoff through its institutional fund of funds business, RMF. Man Group said the investment represented about 1.5 per cent of RMF's funds under management and 0.5 per cent of funds for Man Group as a whole.

Santander, the Spanish bank that owns Abbey and Alliance & Leicester, said clients of its Optimal fund of funds faced losses of up to €2.3bn (£2.1bn). Just over €2bn came from institutional and international private banking clients and €320m from wealthy customers in Spain through structured products partly linked to the Optimal subfund's performance. Santander's direct exposure is €17m. The bank said the clients exposed to Madoff were "qualifying investors". Santander is said to have no plans to compensate them for losses of what was an alleged fraud though it will take legal action to defend their interests.

Santander pointed out that HSBC was the custodian of Optimal and its subsidiary funds. HSBC said it did not believe its custody clients who had invested with Madoff would be a source of exposures to the bank.

But analysts at KBW said European institutions might not be able to escape the consequences of their indirect involvement with Madoff.

"Reputational and litigation risks will likely haunt those banks that appear to have failed to carry out due diligence," the analysts said. "With minimal assets left in the fund, it is hard to see how investors will recover their assets. We see a risk of clients suing asset managers and custodians for failing to carry out due diligence and failing in their fiduciary duties although it is far from certain if the legal basis for such claims exists."

BBVA, Spain's second biggest bank, said it had no direct exposure but its clients faced a loss of up to €300m and its international operations were facing a €30m loss.

Other European institutions caught out by the world's biggest alleged Ponzi scheme include the French investment bank Natixis, which revealed up to €450m of exposures. The Swiss private bank Union Bancaire Privée said its potential losses were less than $1.1bn while its rival Benbassat & Cie was reported to have $935m of exposures.

Another Swiss private bank, Benedict Hentsch, said it had unwound its merger with the alternative investment specialist Fairfield Greenwich, which said it had put half its assets in a fund set up by Mr Madoff. Italy's UniCredit revealed exposure of about €75m.

Other smaller exposures included Sweden's Nordea, with €48m, and Switzerland's Neue Private Bank, with $5m. Nicola Horlick's Bramdean Alternatives asset management company had $25m invested with Mr Madoff's venture, which was exposed last week as an alleged fraud.