More on Madoff: The Financial Perspective
Ponzi scheme operated by Bernard Madoff, a former chairman of the NASDAQ, with allegedly $50 bn of assets is by far one of the largest scam in history of financial markets. To put it in perspective, it literally dwarfs that of Enron and Worldcom/MCI in the corporate arena. With investors already battling massive losses on their investment portfolio, a scam of this magnitude could further dampen their confidence. As most of the exposure for leading banks and financial institutions towards Madoff's investment was indirect exposure in the form of clients' assets with minimal direct exposure, the potential capital loss / write-downs in the financial statements could be limited for these financial institutions. However there could be significant indirect impact in terms of future inflows and/or redemptions for their asset management and private banking division.
- The main impact from a systemic point of view is that it undermines the levels of confidence which is already being plagued by economic slowdown and financial woes. This cannot be understated. Take a look at the comparison of some of the biggest, most renowned Wall Street banks' performance as compared to the performance of the research model of this blog, my proprietary performance, and that of the broad and global equity markets. I didn't make this stuff up. The marketing machine of the street will take many years to repair the damage that fraud, combined with relative underperformance has wrought on their business.
- Since most of the money belonged to institutional investors, international and high net worth clients of private-banking business, the potential losses will probably affect one of the profitable segments for banks - Private and Wealth management business. This is a segment that was aggressively pursued by many medium and large financial institutions, along with the prime brokerage business, whose near to medium term growth prospects have been significantly overestimated. Expect a significant drag on these business segments that have seen a significant ramp up in resources, and significant opportunities to small and nimble entrepreneurial operations such as this hybrid new media/investment/ financial analysis publication from which you are currently reading. There will be an enormous impact for the hedge fund industry in form of higher redemption pressure. Already Hedge fund performance has been dismal due to slumping market situation See "In the Great Global Macro Experiment, the next bubble to burst is.." for more on this topic. In September 2008 alone Hedge Funds faced redemptions of $43 bn. This scam could further aggravate the redemption pressure for hedge funds which could in turn lead to massive global de-leveraging. With increased redemption and de-deleveraging the stock prices could witness further downside.
- Also the scam could enforce tighter regulation for the hedge fund industry. The financing requirements for hedge funds could get adversely impacted as they would be required to post more collateral with financial institutions that could limit their leverage.
In the table below we have highlighted some of the entities with largest exposure in Madoff investments (both direct and indirect).
|Institution||Potentila loss /
|Exposure type where available|
|US $ mn||Euro € mn|
|Fairfield Greenwich Group||$7,500|
|Banco Santander SA||$3,298||€ 2,347||Indirect exposure - 2.3 bn Euros. Direct exposure - 17 mn Euros|
|Bank Medici AG||$2,100|
|Ascot Partners LLC||$1,800|
|Fortis NV||$1,405||€ 1,000|
|Union Bancaire Privee||$1,250|
|HSBC Holdings Plc||$1,000||Indirect exposure|
|AXA SA||$703||€ 500|
|Natixis||$632||€ 450||Indirect exposure|
|Royal Bank of Scotland||$623||Through trading, collateralized lending|
|BNP Paribas||$506||€ 360||Potential loss (however indirect exposure)|
|Banco Bilbao Vizcaya Argentina SA||$422||€ 300||Potential loss (however indirect exposure)|
|Man Group||$360||€ 450|
|Reichmuth & Co||$327|
|Nomura||$302||Impact on P&L virtually nil|
|Maxam Capital Management LLC||$280|
|UniCredit SpA||$105||€ 75||Indirect exposure|
|Swiss Life Holding AG||$79||Through fund of funds|
|Nordea Bank AB||$67||€ 48|
|Credit Agricole S.A||$14||€ 10|
|Bramdean Alternatives||9% of portfolio|