Fallout from Madoff crisis spreads

THE FALLOUT from Bernard Madoff’s alleged fraud spread through the global financial system yesterday as more banks revealed exposure to his brokerage firm, and hedge funds, charities and other investors were left nursing possible big losses.

The potential losses reported by large financial institutions that invested or lent to investors in Mr Madoff’s failed venture reached $10 billion after HSBC confirmed the news that it could lose up to $1 billion. Royal Bank of Scotland joined BNP Paribas and Santander as victims of Mr Madoff’s alleged “pyramid scheme”, saying it might lose up to £400 million; Japan’s Nomura has Y27.5 billion at risk.

Hedge fund managers were braced for withdrawals as investors and funds of funds rushed to raise money to cover their losses.

The scandal has called into question the business model of funds of funds, which run about $685 billion in assets – more than a third of the industry. The funds charge investors fees to cover research. But some of the biggest funds of funds – including US’s Tremont, the RMF division of London’s Man Group and Switzerland’s Union Bancaire Privée and EIM Group – ran or bought into “feeder funds” that invested with Madoff.

Yet, hedge fund experts and Wall Street traders had raised concerns over the internal controls, business model and suspiciously consistent good performance of Mr Madoff’s business.

Some feeder funds received high fees for investments in the venture, earning more than 1 per cent in management fees and 20 per cent of gains, analysts say.

“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.

As federal investigators sifted through the New York headquarters of Mr Madoff’s firm, the list of victims grew. Banque Benedict Hentsch, a Swiss private bank, yesterday terminated its deal to merge with Fairfield Greenwich, after the latter revealed more than half its $14 billion under management was held by Mr Madoff. – (Financial Times service)