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.


Company Potential Loss
Banco Santander
(NYSE:STD)
$2.9 billion
HSBC
(NYSE:HBC)
$1.0 billion
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.

Bottom Line
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.

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Entrepreneurship

    Multilevel Marketing Isn't Always A Scam, But It Often Is

    Nerium and Amway are popular direct sales companies that recruit new buyers and sellers to make a profit. Sadly, many direct sales firms are scams.
  3. Products and Investments

    There's a Reason They're Called Junk Bonds

    The closing of Third Avenue Managemet's Focused Credit Fund is a warning to investors and advisors. Beware the junk.
  4. Stock Analysis

    Tribune Media: An Activist Investment Analysis (TRCO)

    Learn more about the breakup of Tribune Company, once a powerful newspaper and broadcasting giant, and the role of activist investor Cliff Robbins.
  5. Stock Analysis

    Air Products and Chemicals: An Activist Investment Analysis (APD)

    Learn about the productive, and uncommonly friendly, activist investment made by Bill Ackman into Air Products and Chemicals.
  6. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  7. Investing News

    ABC's Madoff Miniseries Explores His Charm, Smarm

    An ABC miniseries on Ponzi scheme king Bernie Madoff gets inside the head of a man who was, in fact, not too big to fail.
  8. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  9. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  10. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
RELATED FAQS
  1. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  2. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  3. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  4. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  5. Can hedge fund returns be replicated?

    You can replicate hedge fund returns to a degree but not perfectly. Most replication strategies underperform hedge funds ... Read Full Answer >>
  6. Can foreign investors invest in US hedge funds?

    U.S. hedge funds are open to accredited investors. When they distribute profits to investors, those proceeds are taxed at ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center