Alleged scam set to cost the big banks billions.

Byline: Peter McCusker

BANKS have lined up to reveal billions in potential losses as a result of alleged fraud by Wall Street investment manager Bernard Madoff.

The Royal Bank of Scotland - 58% owned by the taxpayer - said pounds 400m was at risk in the hedge funds invested with 70-year-old Madoff, who was arrested last week after police said he admitted a pounds 33bn scheme to defraud investors.

Spanish bank Santander, which owns Abbey and the savings business of Bradford & Bingley, said its potential exposure was more than pounds 2bn, while HSBC could reportedly lose up to pounds 668m.

Nicola Horlick, who manages Bramdean Alternatives, which had 9% of its funds invested with Madoff's scheme, said the case raised serious questions about the regulatory system in the US. She said it had been given a "clean bill of health" by the Securities and Exchange Commission.

"I think now it is very difficult for people to invest in things that are meant to be regulated in America because they have fallen down on the job," she said.

"All through the credit crunch this has been apparent. This is the biggest financial scandal, probably, in the history of the markets."

She said that, even if Bramdean Alternatives was forced to write off its entire investment in Madoff's scheme, it would still only be down 4% on the year while the stock market had fallen 35%. According to court documents, Madoff - a former chairman of New York's Nasdaq stock exchange - told his employees that his operations were "all just one big lie" and "basically, a giant Ponzi scheme".

A Ponzi scheme is a fraudulent investment vehicle which pays very high returns to existing investors paid for by money put into the scheme by newcomers. Madoff's arrest will raise questions about the effectiveness of regulatory authorities, which failed to notice the scam.

Hedge fund giant Man Group said: "Based on information available to date, it appears that a systematic and comprehensive fraud may have been committed, evading a range of structural controls."

The company, which said it had approximately EUR360m (pounds 239m) of exposure, added that Madoff Securities was registered with the Securities and Exchange Commission (SEC), which monitors investment funds.

Madoff Securities was also a member of five self-regulatory organisations, including US independent securities regulator Finra and the Nasdaq.

The FBI said members of Madoff's own family turned him in after he confessed his fraud to them.

A criminal complaint filed with a court in Manhattan said he told senior employees of his firm before his arrest that he had blown more than pounds 33bn with fraudulent financial moves.

Other financial institutions with potential exposure include Nomura, Japan's largest securities company, which has pounds 204m invested with Madoff.

Switzerland's Reichmuth & Co said the private bank had pounds 218m of exposure. It told investors that it "sincerely regretted" being affected.

French bank BNP Paribas estimated its exposure to Madoff's fund could lead to pounds 311m in losses.

HSBC's exposure could reach EUR1bn (pounds 668m). The banking giant's exposure is understood to have come from loans it made to clients, who invested around pounds 500m of their own funds in Madoff's venture.

"This is the biggest financial scandal, probably, in the history of the markets

CAPTION(S):

ARRESTED Bernard Madoff, chairman of Madoff Investment Securities.