US/France

French banks may lose almost one billion in Madoff fraud

Article published on the 2008-12-15 Latest update 2008-12-15 15:38 TU

Madoff conducted his fraudulent scheme from the 17th floor of this New York building
(Photo: Reuters)

In an effort to reassure markets, several European banks have released potential losses related to the fallout of the fraudulent investments of New York hedge fund manager Bernard Madoff. French banks say they may lose up to 1 billion euros from related investments. Madoff was arrested in connection with the fraud on Thursday and was released on bail of 10 million dollars.

French BNP-Paribas, the eurozone’s largest bank, estimates a 350 million euro loss, though it said it did not invest directly in the funds managed by Bernard L Madoff Investment Securities. Another French bank, Natixis, said its maximum exposure was about 450 million, which could vary depending on how many assets it could recover.

Société Générale, still recovering from its own fraud scandal after the trader Jerome Kerviel allegedly defrauded the bank out of 5 billion euros, said it has minimal exposure, of less than 10 million euros.

Those most exposed were Spanish banks with the country’s largest, Banco Santander, set to lose up to 2.3 billion euros through its hedgefund Optimal. The country’s second biggest bank, BBVA, said it could lose some 300 million euros.

Madoff was arrested Thursday for allegedly defrauding investors for the past 20 years. He is accused of convincing people to give him money to invest – most of them golf partners at the Palm Beach country club – and using their money to pay off previous investors, a classic "Ponzi" scheme.

"A Ponzi fraud is one where you get money in, invest it, and make losses. The way you cover these is by getting more money in and using that to pay off people who wish to withdraw their money," said Roger Alford, a professor from the London School of Economics.

"In other words, you are simply bringing in money to pay off other people with debts. So if you're not careful, you'll end up with a large amount of borrowed money and no assets, because they've all made losses," added Alford.

The fraud came to light after people started asking for their money back as the economy worsened, and he could not pay them back.

Madoff is accused of defrauding investors of up to 50 billion dollars (37 billion euros).

Prosecutors say he claims to have been working alone, though it is hard to imagine running an operation of this magnitude without help.

He is currently on bail and is prohibited from travelling outside the New York area.