Rothschild Difference With Madoff Becomes Geneva’s Obsession

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Rothschild Difference With Madoff Becomes Geneva’s Obsession


By Warren Giles

May 8 (Bloomberg) -- There’s more than 250 years separating Baron Benjamin de Rothschild from Bernard L. Madoff.

This isn’t an insignificant issue in Geneva where at least eight banks had about 10 billion Swiss francs ($8.8 billion) with Madoff, who pleaded guilty in March to masterminding a $65 billion Ponzi scheme. Investors are preparing lawsuits against firms that gave their cash to the New York con man. Five Aurelia Finance SA fund managers, who invested with Madoff, were charged last month by a Geneva magistrate for mismanaging client assets.

“Madoff has become a filter for everyone’s perception of whether banks were doing their job,” said Leslie Gaines-Ross, chief reputation strategist at the Weber Shandwick consulting firm in New York and author of “Corporate Reputation: 12 Steps to Safeguarding and Recovering Reputation,” (John Wiley & Sons Inc., 2008). “Rothschild is one of the few that is still admired and holds true to its reputation.”

Baron Benjamin, head of the Geneva arm of the Rothschild family that financed the Suez Canal and Wellington’s victory at Waterloo, is betting that heritage will help his firm grow. Rothschild had no investments with Madoff.

Rothschild and Madoff are “poles apart,” said Cedric Tille, a professor at the Graduate Institute in Geneva and a former economist for the Federal Reserve Bank of New York. “Many private banks in Geneva have enough tradition to sell themselves as cool heads who don’t fall for the latest fad.”

‘Look for Safety’

Banque Privee Edmond de Rothschild Group received 1.7 billion francs of new assets in the first quarter. Pictet & Cie. and Mirabaud & Cie., two Geneva-based banks that trace their roots back to the 19th century, also attracted clients after avoiding Madoff, who’s in a Manhattan jail awaiting sentencing on charges that carry a maximum prison term of 150 years.

Officials at Pictet and Mirabaud declined to disclose first-quarter inflows. Pictet, founded a decade before Napoleon’s final defeat in 1815, attracted 17 billion francs of assets last year, three times more than Rothschild.

Geneva’s 140 banks and 700 independent wealth managers employ more than 34,000 people and have about 10 percent of the world’s private assets held outside investors’ home countries.

Rothschild depends on its record of preserving customers’ savings to set itself apart, said Werner Rutsch, co-author of “Swiss Banking -- Where Next?” (Neue Zuercher Zeitung, 2008).

“In difficult times, people look for safety and personalities,” Rutsch said.

Relative Returns

Unlike Geneva-based Union Bancaire Privee and Notz, Stucki & Cie., Rothschild avoided Madoff because “we couldn’t get the visibility we wanted,” said Claude Messulam, who has led the unit on a day-to-day basis since 1994, referring to the lack of information that was available on Madoff’s investment process.

Madoff reported annual returns of 8.5 percent to 11.7 percent during the past five years, according to Notz Stucki. Rothschild’s $746 million Prifund Alpha Uncorrelated dollar fund rose at an annual rate of 5.9 percent in the same period. Funds that invest in other firms’ hedge funds gained 3.47 percent, data compiled by Chicago-based Hedge Fund Research Inc. show.

Rothschild’s conservative approach means the firm has a “window of opportunity” that may last another 12 to 18 months before markets pick up, said Teodoro Cocca, professor of wealth management at Johannes Kepler University in Linz, Austria.

“There are times, like now, when Rothschild and wealth preservation will be more trendy,” Cocca said. “But there will come a time when investors swing back to the greater risk- taking” of Zurich-based banks such as UBS AG and Credit Suisse Group AG, he said.

Hiring in Latin America

Investors pulled 226 billion francs from UBS last year as it posted a record net loss of almost 21 billion francs. UBS oversaw 1.6 trillion francs for clients at the end of the first quarter, 19 times more than Rothschild’s assets, and Credit Suisse managed 667 billion francs, company reports show.

The Rothschild private bank in Geneva, founded in 1953 and controlled by the sixth generation since Mayer Amschel Rothschild and his five sons bankrolled European governments in the 19th century, is optimistic about further inflows.

“I see no reason why that shouldn’t continue,” Messulam said at offices hung with 19th-century oil paintings in the heart of Geneva’s private banking quarter. The company has “benefited from the fears of certain clients at the big banks.”

Rothschild is hiring wealth managers in Geneva, Latin America and Asia to sustain the gains, Messulam said.

Most Expensive Stock

Rothschild, 83 percent-owned by Baron Benjamin and his family, has Europe’s most expensive stock.

The shares have climbed 38 percent to 26,300 francs in Zurich trading since falling to a four-year low on March 9, giving the firm a market value of 2.37 billion francs. The 29- member Swiss Financial Services Index advanced 51 percent in the same period. UBS is valued at 47 billion francs.

Baron Benjamin, 45, is France’s 19th-richest citizen with a net worth of 2.9 billion euros ($3.9 billion), according to Challenges magazine. He’s also the wealthiest living Rothschild.

“In the same way as the Rockefellers or J.P. Morgan, these are well-known people who stood for something which is still valid today,” said Rutsch, the co-author of “Swiss Banking.”

Rothschild’s assets under management fell 18 percent last year to 82.3 billion francs, compared with an average 23 percent decline for the 10 biggest private banks with headquarters in Geneva, data compiled by Bloomberg show. By comparison, Zurich- based EFG International AG’s assets dropped 22 percent to 77.2 billion francs and those of Basel-based Bank Sarasin & Cie. declined 16 percent to 69.7 billion francs.

‘Dazzling Pyrotechnics’

Madoff told clients before his Dec. 11 arrest that their accounts were worth about $65 billion, prosecutors said.

“We are outdone at times by the markets’ dazzling pyrotechnics, but knowing that these invariably fizzle out we aim instead to deliver solid returns that will stand the test of time,” Baron Benjamin wrote in a statement posted on the bank’s Web site. “The value of wealth may depend at least as much on its age as on its magnitude.”

While Rothschild snubbed Madoff, he has mirrored his forebears with investments in Bordeaux vineyards, Brie de Meaux cheese and a slice of the French Alpine resort of Megeve. The promotion of what the bank calls its “art de vivre” reinforces the values and family history that are part of Rothschild’s marketing strategy, Cocca said.

Rothschild produces wine at four properties in France’s Medoc region, close to the Lafite and Mouton Bordeaux vineyards owned by the French branch of the family, and in partnership with South Africa’s Rupert family on a Huguenot farm 50 miles from Cape Town.

A bottle of Baron Edmond 2003 from the Rupert & Rothschild vineyard costs 49 francs on Geneva’s Rue du Rhone. The record price at auction for a bottle of 1787 Chateau Lafite, once thought to be owned by Thomas Jefferson, was $156,000.

“We’re the only bank with our own wine and cheese cellars, so whatever happens in the financial crisis, we have some margin,” Messulam said April 2, drawing laughter from journalists enjoying a three-course lunch served on plates marked with the family’s five-arrowed motif.

To contact the reporter on this story: Warren Giles in Geneva at wgiles@bloomberg.net

Last Updated: May 7, 2009 18:01 EDT