London/Madrid/Milan/Stockholm: British bank HSBC, the world’s third largest by capitalization, revealed on Monday it had exposure of about $1 billion (nearly Rs4,800 crore), becoming the latest among top world financial groups to reveal massive potential losses from an alleged $50 billion scam run by Wall Street trader Bernard Madoff, all admitting they were fooled by a classic pyramid investment fraud.
British, French, Japanese and Spanish banks and funds said investments totalling billions of dollars could be wiped off their balance sheets by a scandal that is set to affect some of the richest people in the world.
Exposed: Bernard L. Madoff.
Royal Bank of Scotland said it could lose about $598 million, joining a growing list of banks and investors in Europe, Asia and the US struck by the scandal.
Shares in Santander, the biggest bank in Spain and the second largest in Europe after HSBC, plunged after the lender said it had an exposure of at least $3.07 billion to Madoff Investment Securities in New York.
Japanese financial giant Nomura said it could lose up to $303 million, and officials in South Korea said financial institutions there had a total exposure of some $95 million to Madoff’s scandal-hit investment scheme.
Madoff, a 70-year-old Wall Street veteran, was arrested last Thursday. He is alleged by US prosecutors to have confessed to defrauding investors of $50 billion in a long-running scam that collapsed after clients asked for their money back as a result of the global financial crisis.
Banks around the world have rushed to disclose potential losses from the scandal in an apparent bid to avert any deepening of the suspicion, which has frozen credit markets, and in stark contrast to widespread reticence in recent months as the subprime mortgage crisis unfolded.
US authorities allege that Madoff delivered consistently strong returns to clients by secretly using the principal investment from new investors to pay out to other investors in the scheme, a version of what is known as “pyramid fraud”.
The scheme apparently worked as long as he could attract new investors but seems to have unravelled when some of Madoff’s clients asked to withdraw their principal—only to discover that his seemingly brimming coffers were empty.
This fraud is also known as a Ponzi scheme after a US swindler from the 1920s, Charles Ponzi, who cheated thousands of mostly small-time investors of their savings by promising returns of 40% by means of foreign exchange arbitration on international reply-paid postage stamps.