16 Dec 2008

Banks reveal exposure to 'investment fraud'

2:00 pm on 16 December 2008

Banks and investment funds across the world have revealed they have invested billions of dollars in the companies of Bernard Madoff, accused by US authorities of masterminding a massive fraud.

Britain's HSBC Holdings Plc was the latest bank to join the growing list, saying it had exposure of around $US1 billion, making it one of the biggest victims of the alleged $US50 billion fraud.

Royal Bank of Scotland and Man Group in the UK, Japan's Nomura and France's Natixis also said they were hit by the worldwide scandal.

Financial companies, reeling after a year of enormous writedowns on bad credit assets, have so far tallied up more than $US10 billion in direct and indirect exposure to the possible fraud by Bernard Madoff, the 70-year old trader who was arrested on Thursday.

US prosecutors and regulators have accused Mr Madoff, a former chairman of the Nasdaq Stock Market, of running the fraud through his investment advisory business, which managed at least one hedge fund.

New Zealand's Reserve Bank says it knows of no New Zealand banks caught up in the collapse of the United States investment fund.

A rising number of banks across Europe detailed their potential losses from Bernard Madoff, who is also alleged to have set up a so-called Ponzi scheme, in which existing investors are paid out with money from new clients, not from actual investment returns.

Man Group, the world's largest listed hedge fund manager, said it was exposed to Bernard Madoff through its fund of funds business RMF, which has $US360 million invested in funds directly or indirectly sub-advised by Mr Madoff.

And Swiss private bank Benedict Hentsch said it had undone its recent merger with alternative investment specialist Fairfield Greenwich, which said it had put half of its assets in one of the funds set up by Mr Madoff.

On Sunday, three European banks announced a total of $US3.8 billion in exposure. Santander and BNP, the largest banks of Spain and France, respectively, and Swiss private bank Reichmuth & Co also detailed possible losses.

Other banks detailed potential losses at the start of the trading week, with Italy's UniCredit SpA revealing exposure of around 75 million euros.

RBS said its potential loss could amount to some $US595 million, if it assumed that the value of its assets in Mr Madoff's firm were nil.