The Royal Bank of Scotland Group has revealed it may lose as much as £400m as a result of its exposure to Bernard L Madoff Investment Securities (BMIS), which is under scrutiny after its US founder was arrested last week. The Scottish bank said it had exposure through trading and collateralised lending to funds of hedge funds.
Bernard L Madoff Investment Securities LLC was founded by Bernie Madoff, a former chairman of the Nasdaq stock market, who has been arrested and charged with running a US$50bn hedge fund fraud in New York. Madoff is alleged to have been running a pyramid-type investment scheme through his hedge fund business.
RBS said this morning that if as a result of the alleged fraud the value of the assets of the BMIS hedge funds is nil, RBS's potential loss could amount to approximately £400m. The news has not had an immediate impact on the share price of RBS, which as of 8:45am saw a rise in price of just over 3% to price the stock at 57.80p, according to Hemscott data.
It has been reported that Spanish bank Santander, which owns Abbey and Bradford & Bingley in the UK, has more than £2bn tied up in similar investments. The majority of Santander’s exposure is said to be via its investment fund Optimal. Its share price has been slightly affected this morning, dropping by 1.04% to price the stock on the FTSE Eurotop at 573.00p as of 8:45am.
Other European banks and investment firms are currently trying to place an estimate on their potential exposure to Madoff’s business.
The arrest of Madoff stems from an alleged fraud, which was only discovered last week when massive withdrawals from investors revealed there was not enough money to meet redemptions.It is understood the fraud could potentially have been perpetuated for years.
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