Europe's biggest bank, HSBC, joined a list of top names in world finance admitting huge potential losses in a suspected pyramid fraud scam run by ex-Wall Street heavyweight Bernard Madoff, whose brokerage is to be sold off.
The Securities Investor Protection Corporation (SIPC), which helps investors at failed brokerage firms, said last night that it was liquidating Bernard Madoff Investment Securities LLC.
'It is clear that the customers of the Madoff firm need the protections available under federal law,' said SIPC president and CEO Stephen Harbeck. 'It is unlikely that SIPC and the trustee will be able to transfer the customer accounts of the firm to a solvent brokerage firm due to the state of the firm's records', he warned however.
Shares in Santander, the biggest bank in Spain and the second-largest in Europe after HSBC, plunged after the lender said it had exposed over $3 billion to Madoff Investment Securities in New York.
Fortis Bank in the Netherlands said it stood to lose up to $1 billion in the suspected scam, despite lacking direct exposure to the Madoff firm.
British, French, Japanese and Spanish banks and funds said investments totaling billions of dollars could be wiped off their balance sheets in a scandal set to affect some of the world's richest people.
'The potential exposure under these financing transactions is in the region of $1 billion,' the London-based HSBC said. Royal Bank of Scotland said it could lose about £400m sterling.
France's Natixis investment bank, already brought low by sub-prime losses, put its maximum exposure at €450m. Retail banking giant BNP Paribas revealed potential losses of €350m.
Italian banking giant UniCredit said that the scandal could cost it up to €75m. Unicredit, Italy's biggest bank, is also indirectly exposed through its Irish asset management subsidiary Pioneer Investments, a statement from the bank said.
Japanese financial giant Nomura said it could lose up to $303m and officials in South Korea said financial institutions there had a total exposure of some $95m.
Madoff, a 70-year-old Wall Street veteran, was arrested on Thursday, and allegedly confessed to defrauding investors of $50 billion in a scam that collapsed after clients asked for their money back due to the global financial crisis.
International Monetary Fund chief Dominique Strauss-Kahn said he was shocked US regulators had failed to identify and prevent the fraud.
'The surprise is not that there are some thieves in the system, the question is where were the police? It's very surprising to find you're living in a system where a failure of the regulatory system was so big,' he said.
Banks have rushed to disclose potential losses in an apparent bid to avert any deepening of the suspicion that has frozen credit markets.
US authorities allege that Madoff delivered consistently strong returns to clients by secretly using the principal investment from new investors to pay out other investors in what is known as a 'pyramid fraud'.
The scheme apparently worked as long as Madoff could attract new investors but seems to have unravelled when some of his clients asked to withdraw their investment - only to discover that his seemingly brimming coffers were empty.
