Dec 16, 2008

Business - US pyramid fraud hits European banks, US to liquidate Madoff firm

WASHINGTON (AFP) – Europe's biggest bank, HSBC, joined a list of top names in world finance admitting huge potential losses on Monday in a suspected pyramid fraud scam run by ex-Wall Street heavyweight Bernard Madoff, whose brokerage was to be sold off.

The Securities Investor Protection Corporation (SIPC), which helps investors at failed brokerage firms, said Monday it was liquidating Bernard Madoff Investment Securities LLC.

"It is clear that the customers of the Madoff firm need the protections available under federal law," said SIPC president and CEO Stephen Harbeck in a statement.

But, he warned, "it is unlikely that SIPC and the trustee will be able to transfer the customer accounts of the firm to a solvent brokerage firm" due to the state of the firm's records.

Shares in Santander, the biggest bank in Spain and the second-largest in Europe after HSBC , plunged after the lender said it had exposed more than three billion dollars to Madoff Investment Securities in New York.

Fortis Bank Netherlands said it stood to lose up to a billion euros (1.37 billion dollars) in the suspected scam, despite lacking direct exposure to the Madoff firm.

"If, as a result of the alleged fraud, the value of the assets of these funds is nil and the respective clients cannot meet their obligations, Fortis Bank Nederland (Holding) N.V.'s loss could amount to around 850 million euros to one billion euros," (1.17 to 1.37 billion dollars) the bank said in a statement.

US authorities have said they are liquidating the failed Madoff venture, following his arrest for alleged fraud to the tune of 50 billion dollars.

The Securities Investor Protection Corporation (SIPC), which provides a Congress-authorized special reserve fund to help investors at failed brokerage firms, said it was liquidating the Madoff company.

News of the action by the SIPC comes as British, French, Japanese and Spanish banks and funds said investments totaling billions of dollars could be wiped off their balance sheets in a scandal set to affect some of the world's richest people.

"The potential exposure under these financing transactions is in the region of one billion US dollars," the London-based HSBC said.

Royal Bank of Scotland said it could lose about 400 million pounds (612 million dollars).

France's Natixis investment bank, already brought low by subprime losses, put its maximum exposure at 450 million euros (616 million dollars). Retail banking giant BNP Paribas revealed potential losses of 350 million euros (480 million dollars).

Japanese financial giant Nomura said it could lose up to 303 million dollars and officials in South Korea said financial institutions there had a total exposure of some 95 million dollars.

Madoff, a 70-year-old Wall Street veteran, was arrested on Thursday, and allegedly confessed to defrauding investors of 50 billion dollars in a scam that collapsed after clients asked for their money back due to the global financial crisis.

International Monetary Fund chief Dominique Strauss-Khan said he was shocked US regulators had failed to identify and prevent the fraud.

"The surprise is not that there are some thieves in the system, the question is where were the police? It's very surprising to find you're living in a system where a failure of the regulatory system was so big," he told a news conference in Madrid.

Banks have rushed to disclose potential losses in an apparent bid to avert any deepening of the suspicion that has frozen credit markets.

US authorities allege that Madoff delivered consistently strong returns to clients by secretly using the principal investment from new investors to pay out other investors in what is known as a "pyramid fraud."

US Vice President Dick Cheney said in a radio interview that the alleged scam by the former Nasdaq chairman was "very disturbing" but blamed a few "bad apples."

The scheme apparently worked as long as Madoff could attract new investors but seems to have unraveled when some of his clients asked to withdraw their investment -- only to discover that his seemingly brimming coffers were empty.

British investment fund Bramdean Alternatives Limited, which revealed it had invested about 31.2 million dollars in Madoff's company, said the scandal raised "fundamental questions" about the US financial regulatory system.

"It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades, while investors have continued to invest more money into the Madoff funds in good faith," the firm said in a statement.

Spain's El Pais newspaper reported the country's second-biggest bank, BBVA, could lose around 500 million euros (686 million dollars) in the scam .

Italy's biggest bank, UniCredit, said its exposure was around 75 million euros (103 million dollars) and one of its investment units may also have been indirectly affected.

Geneva's private banks could lose up to five billion dollars (3.7 billion euros), Swiss newspaper Le Temps reported.

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