Two major European banks said they have exposure worth billions of dollars to a US broker accused of a $50bn (£33bn) Wall Street fraud scheme.
Spain's largest bank, Santander, which also owns three UK banks, said one of its funds had $3.1bn invested in the firm run by Bernard Madoff.
France's BNP Paribas estimated its exposure to be more than $460m.
Mr. Madoff has been charged with fraud, in what is being described as one of the biggest-ever such cases.
Correspondents say the case is likely to fuel uncertainty about the entire hedge fund industry.
'Systemic failures'
Mr Madoff is alleged to have used money from new investors to pay off existing investors in the fund.
Investors are assessing their exposure to the alleged fraud Mr Madoff is said by prosecutors to have confessed to.
US Prosecutors say Mr Madoff, a former head of the Nasdaq stock market, masterminded a fraud of massive proportions through his hedge fund and investment advisory business.
A federal judge has appointed a receiver to oversee Mr Madoff firm's assets and customer accounts, while the 70-year-old banker has been released on $10m bail.
"While BNP Paribas has no investment of its own in the hedge funds managed by Bernard Madoff Investment Services, it does have risk exposure to these funds through its trading business and collateralised lending to funds of hedge funds," BNP said in a statement.
Santander said its exposure to Madoff was through its investment fund Optimal.
Santander also owns the UK High Street banks Abbey, Alliance & Leicester and Bradford & Bingley.
UK-based asset management firm Bramdean Alternatives accused US regulators of "systemic failures".
The firm saw its share value drop by over 35% after it revealed that about £21m - nearly 10% of its holding - was exposed to the New York broker.
"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.
"The allegations made appear to point to a systemic failure of the regulatory and securities markets regime in the US."
High returns promised
Mr Madoff founded Bernard L Madoff Investment Securities in 1960, but also ran a separate hedge fund business.
Investors have withdrawn from hedge funds amid market volatility.
According to the US Attorney's criminal complaint filed in court, Mr Madoff told at least three employees on Wednesday that the hedge fund business - which served up to 25 clients and had $17.1bn under management - was a fraud and had been insolvent for years, losing at least $50bn.
He said he was "finished", that he had "absolutely nothing" and that "it's all just one big lie", and that it was "basically, a giant Ponzi scheme", the complaint said.
He told them that he planned to surrender to the authorities but not before he used his last $200m-$300m to pay "selected employees, family and friends".
Under a Ponzi scheme, which is similar to pyramid schemes, investors are promised very high returns on their investment, while in reality early investors are paid with money collected from later investors.
Credit crunch unmasks former Nasdaq chair:For years there were whispers on Wall Street about Bernard Madoff’s hedge fund. The cynics said the returns were too good, too steady and Madoff’s operation always looked too slim for the tens of billions of dollars it was managing. But given Madoff’s more than four decades of experience as trader and past service as chairman of the Nasdaq stock market, the wealthy kept giving him their money. Well, it looks like those concerns were right all along now that federal prosecutors have charged the 70-year-old Madoff with securities fraud in what could amount to one of the biggest Wall Street scams ever. Securities regulators, in a civil complaint, say Madoff’s scheme may have cost investors up to $50 billion. At a minimum, it appears the $17 billion Madoff was managing earlier this year may be gone.
The allegations against Madoff describe a classic Ponzi scheme, in which money is taken in from new investors to pay out money to earlier investors. Madoff, authorities allege, even told his sons earlier this week that the hedge fund was nothing more than “a giant Ponzi scheme.’’
It didn’t take long for investors in Madoff’s fund to begin crying foul. Hours after the news of Madoff’s arrest broke, investors were contacting lawyers to determine how they can get their money back — assuming there is any money left over. The Securities and Exchange Commission is moving to appoint a receiver to take control of the Madoff fund to protect whatever assets remain.
It’s way too soon to know how long the alleged scheme had been going on, although authorities allege it began years ago, after Madoff tried to cover up for past losses. But it appears Madoff ultimately was unmasked by the worst financial crisis since the Great Depression. Just like many hedge fund operators, Madoff received a wave of redemption notices in recent months, from investors looking to preserve cash. Authorities say investors sought to pull out some $7 billion from the fund — money Madoff apparently did not have. In the end, most Ponzi schemes collapse when too many investors seek to pull their money out at the same time, and the operator doesn’t have the cash on hand.
But the financial crisis appears to be hastening that unwinding process, as it has dried-up all sources of liquidity. Banks are unwilling to lend and investors are fleeing hedge funds, stocks, bonds, commodities and other asset classes for the safety of cash. In September, another alleged Ponzi scheme collapsed, when federal prosecutors arrested Minnesota businessman Tom Petters. Federal prosecutors allege that much of Petters’ empire, which consisted of buying up distressed businesses, was based on a series of lies. He’s been charged him with bilking some six dozen hedge funds out of $3 billion. Petters’ alleged scheme came undone when some of the hedge funds that lent him money had gotten redemption requests from their investors and began asking Petters to pay off his debt. Just like Madoff, Petters apparently couldn’t come up with the cash.
A lack of liquidity may have been behind the bizarre scheme involving New York attorney Marc Dreier. Earlier this week, federal prosecutors charged the high-profile attorney with allegedly scamming several hedge funds into giving him up to $100 million by selling shares in what appears to be a fraudulent real estate venture. It appears Dreier’s 250-lawyer firm was running low on cash and had failed to make payments on a bank loan.
As the financial crisis deepens, don’t be surprised if other scams get flushed out in the coming weeks and months.
No comments:
Post a Comment