Madoff fall-out spreads worldwide

Published: December 15 2008 19:47 |Financial Times

The fallout from Bernard Madoff’s alleged $50bn fraud spread through the global financial system on Monday as more banks revealed exposures to his firm and the beleaguered hedge fund industry braced for withdrawals from worried clients.

The potential losses reported by large financial institutions that invested or lent to investors in Mr Madoff’s failed venture reached $10bn after HSBC confirmed the news, first reported in the Financial Times, that it could lose up to $1bn.

The nationalised Dutch arm of Belgian bank Fortis admitted losses could reach €1bn ($1.4bn), while Royal Bank of Scotland joined BNP Paribas and Banco Santander among the high-profile victims of the scandal, saying it might lose up to £400m ($612m). Japan’s Nomura has Y27.5bn ($300m) at risk.

The affair has called into question the business model of funds of hedge funds – which run about $685bn in assets – after many of the biggest failed to spot warning signs. London-listed Man Group, Arki Busson’s EIM Group, and Tremont of the US have all admitted holdings in funds linked to Mr Madoff.

Funds controlled by Tremont, owned by the insurer MassMutual, had more than $3bn invested with Mr Madoff, said people close to the situation.

The investments by the hedge funds came despite the fact that some experts and Wall Street traders had raised concerns over the internal controls, business model and suspiciously consistent good performance of Mr Madoff’s business.

“This was the train wreck that happened in broad daylight,” said Jim Hedges, a hedge fund adviser who did not place any investors’ money with Bernard Madoff Investment Securities.

Hedge fund managers said they expected withdrawals as clients and funds of funds rushed to raise money to cover losses from the alleged “Ponzi scheme” – in which investors’ pay-outs are funded not with real returns but with cash from new investors.

The Securities Investor Protection Corp, an insurance body funded by the securities industry, said it had begun liquidating Bernard Madoff Investment Securities.

But as federal investigators and the court-appointed receiver sifted through the New York headquarters of the firm, the list of victims continued to grow.

Banque Benedict Hentsch, a Swiss private bank, on Monday terminated its three-month-old agreement to merge with Fairfield Greenwich, a hedge fund, after Fairfield revealed more than half its $14bn under management was held by Mr Madoff.

Reporting by Francesco Guerrera, Henny Sender, Deborah Brewster, Nicole Bullock and Saskia Scholtes in New York, and James Mackintosh in London