Martin Flanagan's Business Blog: Banks braced for Madoff impact

Published on Monday 15 December 2008 11:09

GREAT Dr Strangelove-type name for an alleged corporate fraudster of the highest echelon, isn't it? 'Madoff'.

'Madoff's gone off on one again, hasn't he', one imagines a frightened underling whispering with regard to Bernard Madoff's alleged $50 billion 'pyramid scheme' that is said to have stung some of the biggest names in world finance.

That eerie dorsal fin has cleaved banking's barely-becalmed waters yet again, with banks queuing up with big exposures.

Royal Bank of Scotland yesterday admitted that it might face a potential loss of 400m from its exposure through trading and collateralised lending to funds of hedge funds invested with Bernard L.Madoff Investment Securities on Wall Street.

It will certainly vindicate those who believed the next big domino waiting to fall in the banking game after sub-prime would be banks playing footsie, even indirectly, with hedge funds.

Spain's largest bank, Santander, which also owns the UK High Street banks Abbey, Alliance & Leicester and Bradford & Bingley, said one of its funds had 2.8bn invested in the firm run by Madoff. While it is said HSBC may have a potential exposure of 668m.

France's BNP Paribas estimated its exposure to be more than 300m, wile French rival Natixis, a subsidiary of Caisse d'Epargne and Banque Populaire, said it could potentially lose up to 404m.

One of the world's biggest investment groups, Man, said it had invested about $360m (240m) through its RMF institutional fund of funds business, representing 0.5 per cent of its total funds.

In other words, these are very big numbers, far from losses at the margins.

It certainly probably puts one issue to bed. After RBS's 690m-plus loss at the halfway stage of 2008, there was a lot of speculation about whether it would plunge to its first annual loss as well this year.

Even before this potential 400m exposure, the odds were pretty short that it will indeed be the case that RBS makes a yearly loss. This potential exposure to the arrested Bernard Madoff's opaque operation even more likely.

Madoff's investment advisory business is known to have managed at least one hedge fund.

It is thought the banks' problems here may be via loans they made to institutional clients, mainly hedge funds of funds, that wanted to invest with his firm.

This looks a can of worms, and the last thing the banking industry needed.

Martin Flanagan is The Scotsman's City Editor. You can read more of his blogs at the scotsman.com Business Club. Click here to find out more.