Bernard Madoff, the former Nasdaq chairman and founder of Bernard L. Madoff Investment Securities, was arrested on December 11 for running an alleged Ponzi scheme; duping investors out of an estimated US$50 billion. Ponzi schemes are investment vehicles that run on the theory that you can pay dividends to early investors with investment monies gathered from new investors, effectively hiding that they are not real investment funds.
The fallout from this particularly large scam has fallen much further than suspected; at first many believed just the super-wealthy were affected, but now that the dust has settled, some of the victims are quite surprising: universities, foundations, charities, pension-funds, towns and cities have been affected in addition to privately and publicly held corporations.
Let's take a look at two of the biggest publicly traded corporations (which also happen to be banks) that potentially have lost billions by investing with Bernard Madoff.
|Source: Wall Street Journal, Dec. 22, 2009|
Level Of Exposure
Banco Santander, Spain's largest bank, had a great deal of its customer funds invested in Madoff's alleged scheme. US$2.9 billion or 2.3 billion euros were divided up between institutional and private banking customers as 2 billion euros and 3.1 million euros respectively. The banks can be found all across the globe, and Santander had recently taken over as the largest bank in Europe - knocking HSBC out of first place following the financial crisis of 2007-2008.
By not investing directly in funds that Madoff managed, HSBC's exposure came about differently than most. HSBC provided financing to a few institutional clients who invested in Madoff's funds. HSBC, is a global bank (with no single geographical area dominating its earnings), which is incorporated in London, England. Listed on many stock exchanges, including New York, London, Paris and Hong Kong, dealings by this company truly have a global impact.
While many everyday investors wouldn't think of investing in high-risk hedge funds (like the one Madoff ran), not to mention entrusting large portions of their savings without doing proper due diligence, it isn't a far stretch to believe the same investors could have an exposure in at least one of the many entities that did invest. So far this scheme has hit the large, like Banco Santander and HSBC, and small, like Fairfield, Connecticut's town pension fund - which covers police, fire and other town employees - who had $41.9 million invested with Madoff. This scandal has gone global and touched the innocent and the greedy.
Avoid becoming a statistic and learn some of the gimmicks modern-day swindlers use against you in our Investment Scams Tutorial.