Banking Mayhem Madoff Crisis Hits Europe Hard

Billion-dollar writedowns seem to be on the horizon as some of Europe's largest banks reveal their entanglement in Madoff's mess.
Von Mark Scott

Europe's banking sector is ending 2008 just as it started the year -- with the announcement of potential billion-dollar writedowns. Yet instead of exposure to subprime or securitized assets, this new round of prospective losses relates to European banks' links to the alleged $50 billion (€36.5 billion) fraud of hedge fund manager Bernard Madoff.

Details about Madoff's activities are slowly emerging, but some of Europe's largest financial companies revealed their exposure on Dec. 15 to address investors' mounting concerns. That includes Spain's Banco Santander .. the largest bank by market capitalization in the 15-member euro zone -- which said it had €2.3 billion ($3.1 billion) of exposure through a Geneva hedge fund. Iberian rival Banco Bilbao Vizcaya Argentaria also announced €300 million ($405 million) in potential losses, while France's BNP Paribas confirmed its exposure could top €350 million ($473 million).

Media reports on Dec. 15 said Britain's HSBC -- the largest bank overall in Europe -- may have to write down $1 billion in losses, although a spokesperson declined to comment. Royal Bank of Scotland, which is 60 percent owned by British taxpayers, similarly announced £400 million ($607 million) in potential losses, and France's Natixis reported exposure of €450 ($611 million).

Further Consolidation?

All told, European potential losses to the alleged fraud could exceed $11 billion. That comes on top of mark-to-market losses of $1.2 trillion (as of October 2008) that the Continent's financial companies already have announced over the course of the protracted financial crisis. The Dow Jones Euro Stoxx Banks index has fallen 63.5 percent this year, and experts reckon Madoff-related writedowns could well lead to further consolidation in Europe's contracting financial services sector.

"We're expecting additional writedowns in the fourth quarter; the numbers will be fairly significant," says Ralph Silva, research director at financial services consultancy Tower Group. "Most banks will want to do it all in one go. They need to bury this [exposure] as quickly as possible."

European bourses on Dec. 15 offered a mixed response to the flurry of bank announcements. By early afternoon trading, shares in BNP Paribas and HSBC had fallen 7.98 percent and 1.50 percent respectively. Others, though, performed better: France's Société Générale, with less than a €10 million ($13.5 million) exposure, and Britain's Man Group, with potential losses of $360 million, rose 0.84 percent and 3.15 percent respectively.

Fraud Fallout

Some of Europe's largest banks will have to eat billion-dollar writedowns in their fourth-quarter results, but analysts say it will be smaller financial institutions that could suffer the most from Madoff's alleged fraud. That includes several private Swiss banks, including Union Bancaire Privée and Benbassat, which reportedly could face multibillion-dollar writedowns. Both banks declined to comment, but Swiss newspaper Le Temps quoted sources saying UBP may lose $850 million and Benbassat's exposure could top $935 million.

"The smaller banks without deep pockets will probably suffer more," says Tower Group's Silva. "Customers are looking to the safety of larger brands, so any further writedowns, combined with a slowing of new business, doesn't bode well."

For Europe's larger banks, the potential of multibillion-dollar writedowns certainly isn't welcomed, but they also face the daunting prospect of trying to recoup the money they invested with Madoff. According to Simon Gleeson, a partner at law firm Clifford Chance, that won't be easy. First of all, it remains unclear whether there's any money to recover. Until investigators figure out where the investments have gone, which analysts say could take months, banks won't know how much they can recoup. "For legal recourses to be useful, there needs to be something to get back," Gleeson notes.

If and when that's established, lawyers then must wade through the complexities of deciding which institutions are repaid first. Gleeson says institutions with direct debt exposure to Madoff's funds will get first shot at any recoverable assets. Banks with indirect links -- such as those, like BNP Paribas, that provided lending to others to invest in Madoff's instruments -- will be given lower priority for potential financial recovery. London analysts with stockbrokers Keefe, Bruyette & Woods estimate $7.8 billion of Europe's total $11 billion exposure is through indirect investments.

"There's no reason to believe European bank creditors will do any worse than their US counterparts," Gleeson explains.

That may help some institutions eventually recover their investments, but analysts say it'll take time for investigators to unwind Madoff's dealings. After already writing down billions of dollars in assets so far in 2008, this latest scandal certainly won't help Europe's beleaguered financial services sector. But battle-weary investors seemed to take the news in stride.

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