Societe Generale put Madoff on black list in 2003

/Home/Madoff Enablers and Madoff Naysayers/Madoff Naysayers/Soc gen doubted reliability fo performance in 2003

European banks tally losses linked to Madoff
By Nelson D. Schwartz Published: December 17, 2008


PARIS: In early 2003, as word of Bernard Madoff's apparent Midas touch spread among affluent Europeans and money managers, a team from Société Générale's investment bank here was sent to New York to perform some routine due diligence.

What it found that March was anything but routine: Madoff's numbers simply did not add up. Société Générale immediately put Bernard L. Madoff Investment Securities on its internal blacklist, forbidding its investment bank from doing business with him, and also strongly discouraging wealthy clients at its private bank from his investments.

The red flags at Madoff's firm were so obvious, said one banker with direct knowledge of the case, that Société Générale "didn't hesitate. It was very strange."

While the bank kept the discovery to itself, as is common in the secretive world of wealth management, the information saved Société Générale more than embarrassment: its total exposure to Madoff's apparent Ponzi scheme is less than €10 million, or $13.8 million.



That's a fraction of the losses at competitors like BNP Paribas or HSBC, which made loans to institutions that invested with Madoff, who prosecutors say paid investors by raising money from others rather than generating real profits.

But the size of the scheme calls into question why other big reputable banks in Spain, Britain and especially Switzerland, the world's premier wealth haven, failed to spot the risks of putting billions of euros, pounds and Swiss francs into Madoff's hands.

Indeed, Switzerland has long prided itself as the home of Europe's most discreet and cautious bankers. But now, "L'affaire Madoff" is front-page news in Geneva and the talk of cantons like Lucerne and Zug, which specialize in managing other people's money.

Elsewhere in Europe, the losses do not just stem from individual investors who were burned. Large banks like HSBC and the Royal Bank of Scotland lent more than $1.5 billion to money management firms, which leveraged larger returns on their investments with Madoff. In return, these big banks received collateral in the form of assets in Madoff's firm, which are most likely worthless now.

The latest European victim to reveal losses is Bank Medici of Austria. Two funds at the bank, based in Vienna and 75 percent owned by its chairwoman, Sonja Kohn, invested $2.1 billion entirely in Madoff's firm, the bank said on Tuesday. So far, financial institutions on the Continent and in the United Kingdom have announced $10 billion worth of exposure.

Europe appeared to represent a potentially lucrative territory for Madoff, whose alleged scheme would have required a regular flow of new funds to continue. Although Société Générale's ban on investments in his fund dates from 2003, so renowned was Madoff that some of the bank's clients were demanding access as recently as early this year.

Société Générale's audit at the time was conducted by three people who visited Madoff's headquarters in the red-granite skyscraper on Third Avenue in Manhattan. They were part of a larger 25-person group examining a potential acquisition of Zurich Capital Markets, which had lent money to investors in Madoff's firm, among others.

Madoff's employees told the team that his strategy consisted of balancing holdings in large Standard & Poor's funds with options to buy and sell shares, known as puts and calls, according to the banker, who was not authorized to speak publicly about the matter.

Ideally, this approach produces low volatility and minimizes risk. But when Société Générale back-tested the strategy, it could not match the results that Madoff claimed to have produced.

"It's a strategy that can lose sometimes, but the monthly returns were almost all positive," the banker said. "Something wasn't right." Société Générale was also troubled by the fact that Peter Madoff, Madoff's brother, was the chief compliance officer.

Ultimately, Zurich Capital Markets, then a unit of Zurich Financial Services, was sold to BNP Paribas, the cross-town rival of Société Générale.

BNP Paribas has nearly $500 million in exposure to Madoff, a major contributor to the $1.4 billion loss the Paris giant's corporate and investment banking unit announced on Tuesday for the first 11 months of 2008.

Like HSBC, BNP Paribas had losses on money it lent to hedge fund firms, which in turn invested the cash with Madoff. BNP Paribas's collateral, quite possibly worthless, included a stake in the Madoff fund.

Madoff's firm had been especially appealing to Continental investors because it appeared to offer the kind of steady, predictable returns with a minimum of volatility that conservative European institutions — and especially private family money managers — typically seek.