LONDON - EUROPE'S biggest bank, HSBC, joined a list of top names in world finance admitting huge potential losses on Monday in a suspected pyramid fraud scam run by ex-Wall Street heavyweight Bernard Madoff.
Shares in Santander, the biggest bank in Spain and the second-largest in Europe after HSBC, plunged after the lender said it had an exposure of more than three billion dollars to Madoff Investment Securities in New York.
British, French, Japanese and Spanish banks and funds said investments totalling billions of dollars (euros) could be wiped off their balance sheets by a scandal that is set to affect some of the richest people in the world.
'In the interests of clarity, HSBC confirms that it has provided financing to a small number of institutional clients who invested in funds with Madoff,' London-based HSBC said in a statement.
'On the basis of information presently available, HSBC is of the view that the potential exposure under these financing transactions is in the region of one billion US dollars (S$1.48 billion).'
Royal Bank of Scotland said it could lose about 400 million pounds (S$882.6 million) and two British investment funds announced potential losses in the hundreds of millions of dollars.
France's Natixis investment bank, already brought low by subprime losses, put its maximum exposure at 450 million euros (S$894.5 million). Retail banking giant BNP Paribas revealed potential losses of 350 million euros.
Japanese financial giant Nomura said it could lose up to US$303 million and officials in South Korea said financial institutions there a total exposure of some US$95 million to Madoff's scandal-hit investment scheme.
Madoff, a 70-year-old Wall Street veteran, was arrested last Thursday.
He is alleged by US prosecutors to have confessed to defrauding investors of US$50 billion in a long-running scam that collapsed after clients asked for their money back as a result of the global financial crisis.
International Monetary Fund chief Dominique Strauss-Kahn said he was shocked US regulators had failed to identify and prevent the alleged 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 told a news conference in Madrid.
Banks have rushed to disclose potential losses in an apparent bid to avert any deepening of the suspicion which has frozen credit markets, and in stark contrast to reticence as the subprime mortgage crisis unfolded.
US authorities allege that Madoff delivered consistently strong returns to clients by secretly using the principal investment from new investors to pay out to other investors in the scheme in what is known as a 'pyramid fraud'.
The scheme apparently worked as long as he could attract new investors but seems to have unravelled when some of Madoff's clients asked to withdraw their investment - only to discover that his seemingly brimming coffers were empty.
British investment fund Bramdean Alternatives Limited, which revealed it had put about US$31.2 million in Madoff's company, said the scandal raised 'fundamental questions' about the American financial regulatory system.
'It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades, while investors have continued to invest more money into the Madoff funds in good faith,' the firm said in a statement.
Spain's El Pais newspaper reported that the country's second-biggest bank, BBVA, could lose hundreds of millions of euros in the scam. The report said 'some managers put the figure at around 500 million'. French insurance giant Axa on Monday said its potential losses were below 100 million euros and top banks Societe Generale and Credit Agricole each said that their exposure was under 10 million euros.
Italy's biggest bank, UniCredit, said that its exposure was around 75 million euros and that one of its investment unit may also have been indirectly affected. Banco Popolare said its exposure amounted to 68 million euros.
In Switzerland, Geneva private banks could lose up to US$5 billion in the scam, Swiss newspaper Le Temps reported, while private bank Reichmuth & Co said it may have lost US$328 million. -- AFP