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British banks lose £1billion in Wall Street fraud
Nick Goodway and Jonathan Prynn15 Dec 2008
TWO of Britain's leading banks are thought to have lost more than £1 billion in the world's biggest fraud, it was revealed this afternoon.
HSBC said its exposure to the Bernard Madoff Wall Street swindle was “in the region of” £688 million.
Royal Bank of Scotland said its loss will be about £400 million. Half of any losses incurred by RBS will fall on the taxpayer following the government bail-out last month.
Dozens of other leading City institutions, including its biggest hedge fund, Man Group, sponsor of the Booker prize, and Nicola Horlick's Bramdean Asset Management have been stung.
Spanish bank Santander, owner of Abbey, Alliance & Leicester and the savings business of Bradford & Bingley, said its potential exposure was more than £2 billion.
The losses could not have come at a worse time for a British banking industry struggling with the credit crunch and the economic downturn.
The vast fraud came to light on Friday when Madoff, 70, a former chairman of the Nasdaq stock exchange, was arrested and charged with defrauding investors out of as much as $50 billion through his New York-based firm's business advising rich people, hedge funds and institutions.
Madoff, one of Wall Street's most respected fund managers, won followers all over the world because of the consistent high returns from the funds run by Madoff Investment Securities.
But his operation was in effect a giant pyramid scheme with money from new investors paying for the profits for established backers.
The economic downturn led investors to begin demanding their money back from Madoff's company and it emerged he had lost nearly all their savings.
The FBI said members of Madoff's own family turned him in after he confessed his fraud to them.
The collapse has caught out many of the City's and Wall Street's biggest names. Man Group admitted that it had $350 million invested in two funds that “are directly or indirectly advised by Madoff Securities”.
Ordinary investors who gave Madoff their money told stories of losing everything from £26,500 to an entire nest egg worth £670,000.
Today, questions were being raised over how the American authorities had failed to regulate the scheme.
The US authorities were accused of a “systemic failure of the regulatory and securities market regime in the US”.
Ms Horlick's Bramdean Asset Management fund said: “It seems that criminal activity has continued unfettered and undetected for years.”
The key question being asked on Wall Street is how the main US financial regulators, the Securities and Exchange Commission, failed to see that a vast fraud was being carried out right under their noses.
Today it emerged that the SEC had not inspected Madoff's investment advice business since it was first registered with the agency in 2006. There was growing concern that Madoff's impeccable political, business and charity connections meant it was easier for him to pull the wool over the eyes of the regulators.
The failure has led to fears that thousands of lightly-regulated hedge funds could be concealing similar difficulties. Madoff was well known on the social scene in Palm Beach where he persuaded wealthy backers to invest billions with him over decades.
Madoff was charged with one count of securities fraud after apparently confessing “it's all one big lie” when he was arrested at his New York flat. He faces up to 20 years in prison and a £3.3 million fine if convicted.
Other victims of the scam are said to include Fred Wilpon, owner of the New York Mets baseball team, Ezra Merkin, chairman of General Motors' financing arm and Mortimer Zuckerman, a Manhattan property tycoon who owns the New York Daily News.
Banks around the world are also massively exposed, including BNP Paribas, which has lost up to £200 million and Nomura, which had invested £232 million.
Among older, Jewish investors Madoff was known as the “Jewish bond” because investments with him paid out between eight per cent and 12 per cent every year.
The list of victims of the fraud in the US ranges
from giant financial institutions to tiny local foundations. Museums, hospitals, a Jewish youth charity in Boston and pensioners are all thought to be among the victims.
Harvey Pitt, a former chairman of the SEC, said the fact that foundations and charities could lose out is the “real tragedy”, adding: “There were a lot of very sophisticated people who were duped, and that happens a great deal when you've had somebody decide to be unscrupulous.”
Reader views (40)
What role have ‘absent’ fund managers played in all of this? From where I am sitting it seems that fund managers invest their client’s money with Madoff. He then crookedly uses new money invested to pay inflated returns to these managers. They sit on their asses wait for the money to roll in and then claim credit for the ‘success’ of their funds. Of course, as a successful fund manager one now expect to receive generous compensation at the end of the year.
- James Delane, Thornton Heath, Surrey, 16/12/2008 10:38
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Is the USA to be called "Terrorists" now by Dodger Brown? He was quick enough to label Iceland with that name. Or is he going to claim once again that the mess we're in here is "Nothing to do with me Guv. It's them over there". Rotten America has caused so much cultural and actual damage to the world that it deserves Obama and much else besides.Yes, they helped us 'win' the last war but boy have we paid for it over and over again, not only with actual cash - payments which, I believe, only ended recently but in every other way too.
- Judith Chisholm, London, UK, 15/12/2008 17:58
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J Hale - Not true. Earlier investors were paid returns with the later money, there were no profits. When the withdrawals exceeded new investors money coming in the game, like all Ponzi schemes, was up. There is never a pot of money at the bottom of these schemes when they bust. Who got paid in full over the years with high returns is the list you should want to see......it could be very interesting but Madoff may have destroyed this information.
- Kr, Florence ITALY, 15/12/2008 17:22
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Please don't tell anyone. Labour borrowed the 50 billion to support the banks
- Peter Noterfed, Paris, France, 15/12/2008 17:05
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It would be Royal Bank of Scotland wouldn't it!
- Nick, London, 15/12/2008 16:50
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I bet somehow, some way tGordon brown gets the blame for this too!
- Keith Price, Luton, England, 15/12/2008 16:38
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The police should follow the money and see who has had the $50bn and where it is now residing. One man's credit is another man's debit.If the business was inspected in 2006 can we assume that the fraud has occurred since then. Or were the regulators incompetent.
- James Hale, Doncaster UK, 15/12/2008 16:08
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The ironic thing is that although a certain minority of Middle Easterns are set on bringing the '1st' world down, we're doing that very successfully ourselves and the only people who have any money left are the Arab States.
- Claire, Londn, 15/12/2008 16:02
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John Redwood is still campaigning for less regulation of the Banking Industry and until recently Camoron was backing him one hundred percent. However John doesn't get so mouch press coverage these days.
- Michael Ransome, Ruislip England, 15/12/2008 15:50
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Just when we thought Gordon had saved the world...
- Broomstix, London, 15/12/2008 15:17
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Mr Jon Vickers, your comments are a frefreshing pearl of wisdom. One would wish there were more people like you. God Bless You
- Arthur Lincoln, London, 15/12/2008 14:57
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I am so disgusted by the recent events with so called "big business". The masses will have to pay and most of the fat cats will come out unscathed.
- Shannon, san diego, ca usa, 15/12/2008 14:48
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I don't understand what all this fuss is about. All it needs to be done it is for Gordon to throw a few more £billions at the banks concerned and voilà!
This will go a long way towards insuring that the gamblers, I mean the bankers get their fat Xmas bonus as if nothing had happened. Simple, isn't it?
- John Smith, London, UK, 15/12/2008 14:45
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When the banking industry were filling labours coffers everyone was turning a blind eye to the way in which our bankers were behaving, now that we face a growing number of banks which should have gone bankrupt but were bailed out by labour, wo will fill labours tax coffers now! there will be billions missing which will have to met by the tax man which will take more than one generation to fill. The time has come escape from this country (if you can afford to)
- Raminder Bhalla, Northolt, 15/12/2008 14:43
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How many more stories like this are there yet to come out. The tide has gone out and now we are discovering who is swimming without trunks!
- Pete, London, 15/12/2008 14:34
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Hoorah! Dont you just love capitalism.
- Eric Bristowe Morkinthin, Epsom, 15/12/2008 14:20
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So where is the money?
- Martin H Watson, Teddington, 15/12/2008 14:03
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I have been saying to my wife for years the reason why we have peace of mind is because we don't have stocks, bonds shares or even savings. we pay as we go and watch the rest of the world go into hysteria and tailspins. I am so glad that we have no spare money, never had spare money, and it's more than likely that we won't ever have it, but we sure are happy.
- Jon Vickers, SC USA, 15/12/2008 13:45
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I hope like a drug dealer he looses the lot, houses, cars, planes etc.
Prison is too good for the lot of them. What a con ,what kind of people are looking after my money and my pension?
- Davi Patterson, glasgow, 15/12/2008 13:44
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Is there anything else the US can throw at us, single handedly they are destroying the world.
- Paul Hopkins, London, England, 15/12/2008 13:40
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It's a bit scarey that only the economic down-turn has exposed this fraud. So... how many more are out there?
- Luciano Payne, Streatham Common, 15/12/2008 13:38
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So for "losing" $50 billion he gets a fine of $3.3 million. I wonder who has got the odd $49 billion or so?
- Patrick Griffin, Dalston, London, 15/12/2008 13:13
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"Don't fool yourself - none of these people, banks institutions are idiots. Everything that has happened is all be design, part of the global chess game moving us at a rapid pace into servitude
- Kelly, Muscat Oman"
ABSOLUTELY SPOT ON!! Well Said Kelly.
- David Moon, Seaford, UK, 15/12/2008 13:12
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Madoff has made off with the loot!
- Nobby Clark, Perth, Scotland, 15/12/2008 13:07
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When the mystics always told us the we live in an illusion made by the mind: we scoffed at them. Perhaps now we know what that means as the illusion starts to tumble down around us, like an earthquake. Observe well so you live differently in the future..
- Mr Boludo, uk, 15/12/2008 12:53
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If you think the bankers are stupid, then wait till the stuff hits the fan held by this looney labour lot, as a result of their looney tunes budget and bailout schemes.
- Frederick, London UK, 15/12/2008 12:36
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Follow the trail and you'll find where some (not all of the money has gone)
I think the level of corruption in the financial industry must be endemic to allow this level of fraud to continue unchallenged for so long.
Root and branch reform is required.
Robbing the wealthy? Bad but they can take the hit.
Robbing charities that help the poor and needy? Scandalous.
The man is a disgrace.
Hopefully taxpayers won't be asked to foot the bill for this charlatan....
- Neil Stewart, Clay Cross Derbyshire, 15/12/2008 12:35
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When something appears to be too good to be true, it usually is.
- Adam, Harrow, UK, 15/12/2008 12:31
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I'm waiting for all the usual American commentators to wake up and post - you know: the ones on Friday who derided Londoners for their naivity in banking security and for The City allowing clever American banks to flog their dodgy wares on the London Exchange when they weren't allowed to sell them in the States . . . looks like naivity, stupidity and carelessness was pretty global after all, huh?
- Roz, Chamonix, France, 15/12/2008 12:15
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Why has this bloke been allowed out on bail?
The moral is - if your going to commit a crime wear a suit and tie. You can get anway with anything!
- Rick In Hackney, Hackney Wick, 15/12/2008 11:59
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It will probably be the rich who take the pain on this $50bn episode. Yes, those people already so well off that I can't quite understand why they need to go the extra mile and invest in hedge funds to add another million or so to their fortunes. No sympathy here I'm afraid.
- Steve, Essex, 15/12/2008 11:52
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Just goes to show that in this business it is just a question of the blind leading the blind. That analysts doing the due diligence at banks like Paribas and HSBC couldn't smell a rat is unbelievable! As for all the wealth managers that sold this to unsophisticated private clients - shame on you! Simple lesson. If you don't understand how a strategy makes money don't invest.
- Sam, Switzerland, 15/12/2008 11:41
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It was also noticeable that when the Banks were saved with Taxpayers money the first thing they were concerned about was making sure they got their Bonus payments.
- Eric Barnes, Uxbridge England, 15/12/2008 11:38
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Unfortunately I don't have any money to spare, so I won't be affected by this one either!
- Steve, London, 15/12/2008 11:37
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So Superwoman is busily blaming everyone but herself.
But this time she has been found out.
No fund manager in there right mind would invest a whole 10 perecnt of there assets with one manager.
For years Super Nicola has been painted as a genius by the press but has rarely out performed the basic indexes.
She is another example of people celebrating mediocrity.
People should get there money out while they still can.
- Mr Van Der Lay, London, 15/12/2008 11:24
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I don't think our bankers are all idiots but they are all very very greedy and they allowed self greed to cloud judgement. The level of opulence seem from the outside was astonishing with the regulators either silly or just as greedy.
Then compound that with Communist/Marxist/Trotsky government, eventually total disaster.
Think about it this way, if you'd have asked Darling, Brown or any of the loonies 10/15 years ago would/could they bring down capitalism and the banking system they would have died for the chance. So once again stop faffing and ask yourself "Do turkeys vote for Christmas" Comrades ! Get use to it!
- Mike,, London, 15/12/2008 11:00
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Don't fool yourself - none of these people, banks institutions are idiots. Everything that has happened is all be design, part of the global chess game moving us at a rapid pace into servitude
- Kelly, Muscat Oman, 15/12/2008 10:48
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This raises fundemental concerns. How can regulators regulate a market they do not understand? The FSA has singularly failed along with all other NGO's that are charged with regulation and supervision. Civil Servants are not financial specialists and have little knowledge of the markets they are regulating. Laws and Penalties have to be stricter. The Government must have appointed Directors to the Board that understand the Banking business to protect the Taxpayers. If not following the money they will lose it all. Beware Brown and cohorts.
- Nigel, Epsom, England., 15/12/2008 10:17
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Isn't it amazing that small businesses are unable to borrow from our banks, but our banks will 'invest' in a pyramid scheme.
What level of IQ is required to be a banker?
- John, London, 15/12/2008 10:16
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So much for bank integrity and private enterprise. Even my grandson knows that pyramid schemes are not only fraudulent but that they are structured so that they can only end in total loss for someone. Question - So why did Britain's frontline banks invest in this idiocy? Answer - Because they are idiots.
- Len, Perth, Australia, 15/12/2008 10:08
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