Madoff scandal brings a chill to Swiss center of wealth - Investors crushed by Madoff's Wall Street fraud

Madoff scandal brings a chill to Swiss center of wealth
By Warren Giles, Alan Katz
BLOOMBERG NEWS

Sunday, February 08, 2009

GENEVA — The waitlist at Geneva's Michelin two-star restaurant Domaine de Chateauvieux evaporated after Bernard Madoff's Dec. 11 arrest — along with about 10 billion Swiss francs ($8.5 billion) the city's banks and funds had invested with him.

Sales of $5,000 aluminum-titanium Zai Spada skis have slumped, and a decline in landings by private jetliners at Geneva International Airport accelerated last month.

"Madoff has been like a cold shower for Swiss wealth managers," said Sebastian Dovey, managing partner at private bank and wealth consultant Scorpio Partnership Ltd. in London.

The Madoff case hit Geneva particularly hard, after at least eight firms placed money with him.

Many of their investments were made through so-called funds of funds, pioneered by the city's bankers to pool client money and invest in multiple hedge funds run by outside managers.

Nestled between the Alps and Jura mountains at the tip of Western Europe's largest lake, Geneva has 140 private banks and 600 independent asset managers. The financial industry employs 34,400 people in a city of fewer than 200,000 and accounts for 58 percent of local professional taxes.

Madoff's alleged $50 billion Ponzi scheme highlighted a deficiency of risk management and transparency at some funds of funds, throwing into question the fees they charge, said Drago Indjic, project manager at the London Business School's Hedge Fund Centre. Firms that aren't adding value will disappear, he said.

"This is going to be a glitch on the computer screens of London and New York because we're not reliant on the funds-of-funds business," Indjic said. "Geneva is."

About $1.3 trillion is under management in Geneva, according to Steve Bernard, managing director of Geneva Financial Center, a foundation promoting the city. Bernard estimated the amount of Geneva-managed money invested with Madoff at 0.6 percent, about $8.6 billion.

The fallout from Madoff is hurting a city already grappling with the credit crisis and resulting recession in Europe, the U.S. and Japan. That has dampened Geneva bankers' willingness to spend money on luxury goods, said Christian Dunand, director of Hofstetter Sports SA, which has a shop downtown.

Spending on Dunand's most expensive skis, including the Zai Spada with a peek-a-boo window providing a glimpse of the ski's granite core, has dropped by more than 25 percent. He said he's heard from other store owners that the trend is the same for luxury watches.

"The client who can buy the 50,000-Swiss-franc watch and 6,000-franc skis has been the most hurt," Dunand said. "Those are the people who have been hit by the stock market plunge and by Madoff, so they're not buying this year."

Executives from watchmakers such as Cartier and Vacheron Constantin used to eat at Domaine de Chateauvieux's 500-year-old farmhouse four times a month, Valle said. Now it's once — maybe.

Geneva was a refuge for Protestants fleeing religious persecution before becoming a haven for moneyed exiles in the late 18th century. The 16th-century theologian John Calvin helped turn the city into the "Protestant Rome" and, important for its development as a banking center, overturned the Catholic Church's condemnation of usury.

"The shock comes from the fact that people have always linked Geneva and its banking system to something conservative that protects assets," said Jerome Lussan, managing director of Laven Partners, a hedge-fund consulting firm. "That so many are caught up in Madoff-related investments causes a certain unease."

At Geneva International Airport, takeoffs and landings of chartered private jetliners fell 26 percent to 1,602 last month, spokeswoman Aline Yazgi said. For privately owned aircraft, movements slumped 25 percent to 1,370 in January, after a 9 percent drop in December and a 7 percent decline in November.

Even the best snow in a decade hasn't kept some gloom from being felt in the local ski industry. In Verbier, a resort about 80 miles east of Geneva, everyone is talking about the Madoff scandal, said to Daniel Guinnard, director of a local real estate company.

Verbier's Coco Club has cut the price of house champagne and vodka to $215 a bottle from $260 to $300. "People are more cautious than last year," said Hayley Menzies, the club's head of marketing. "We're trying to be sympathetic to the current climate."

At Domaine de Chateauvieux, bankers canceled six-month-old reservations for holiday parties of a dozen or more, said restaurant manager Esteban Valle.

Chef and owner Philippe Chevrie — who says he didn't lose any money with Madoff — said Russian tourists are helping him weather the financial crisis.

"I reinvest everything I earn in my business," he said. "That's how you become successful long-term."