SBC Holdings and Nomura Holdings, appear to have money at risk from the massive fraud alleged to have been perpetrated by New York money manager Bernard Madoff.

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Madoff Is Thorn In HSBC, Nomura's Side
Tina Wang, 12.15.08, 03:02 AM EST
Asian financial giants may be exposed to Ponzi scheme, but their losses should be limited.

HSBC Holdings PLC
01/09/2009 4:08PM ET

Some big names in Asia, HSBC Holdings and Nomura Holdings, appear to have money at risk from the massive fraud alleged to have been perpetrated by New York money manager Bernard Madoff. However, their losses are likely to be limited.

HSBC (nyse: HBC - news - people ) reportedly loaned $1 billion to clients who invested about half a billion dollars of their own money with Madoff, who was arrested Thursday on suspicion of running a $50 billion Ponzi scheme that could be the costliest financial fraud orchestrated by an individual in history. (See "Madoff's Money")

"Based on the information we have, it shouldn’t be that big a deal for HSBC," said Tai Fook Research analyst Paul Lee. "Ultimately, HSBC is not lending directly to Madoff, it is only lending to institutional investors with exposure to Madoff who need to repay as long as they remain solvent."

BOCI Research analyst William Kwok-Wai Wong estimates that the impact of its exposure on earnings will be negative, but limited. In the unlikely worst case--a complete write-off--it would erode HSBC's forecast 2008 profit of $15.3 billion by around 10%, he said.

London-based HSBC, whose bread and butter business is in Asia, said it is reviewing its position but did not expect its exposure to Madoff to be "material," according to a Sunday report in The Financial Times. In line with deep cost-cutting efforts in the financial industry, it has slashed up to 1,600 jobs globally since September.

Nomura Holdings (nyse: NMR - news - people ) said Monday that its exposure to Madoff totals 27.5 billion yen ($302.5 million), but said that the impact on its capital position would be limited. The Japanese securities house reportedly touted Madoff's funds to investors, arranging leveraged investments for clients by adding $3 in borrowed money to every $1 invested in those funds, amplifying the potential losses for those investors.

The collapse of Madoff's alleged scheme has left a wide swath of victims in its wake, including a number of European banks. Spain's Banco Santander (nyse: STD - news - people ) said it has a $3.1 billion exposure to Madoff-linked investments, France's BNP Paribas (other-otc: BNPQY - news - people ) said it had $472.0 million indirectly at risk, and Royal Bank of Scotland (nyse: RBS - news - people ) said it has $600 million in exposure.


HSBC would have conducted normal due diligence procedures on the Madoff-related transactions but it would have been "relatively difficult" to uncover intentional cover-up or fraud through those procedures, Wong said. Madoff's reputation--he's a former chairman of the Nasdaq Stock Market--may have also played a role, as it would have been natural for HSBC and many major global financial firms to have conducted business with Madoff's funds, he added. "Being one of the largest banks globally, I think the exposure is not out of line with their size," Wong said of HSBC.