Sunday, December 14, 2008

Santander May Fall After Disclosing $3 Billion Madoff Exposure

(Bloomberg) Banco Santander SA, Europe’s second- biggest bank by market value, may drop after saying its hedge fund unit invested 2.33 billion euros ($3.1 billion) of client funds with Bernard Madoff, who allegedly ran a Ponzi scheme that cost investors $50 billion.

Santander’s Optimal Investment Services unit placed money with Madoff through its Optimal Strategic U.S. Equity fund, the Spanish lender said in a statement yesterday. France’s BNP Paribas SA may lose 350 million euros and Swiss private bank Reichmuth & Co. could have $330 million of losses as Madoff’s scheme reaches victims across the Atlantic Ocean.

“People are going to take it badly in the market,” said Alberto Espelosin, who helps manage the equivalent of $7.7 billion at Zaragoza, Spain-based Ibercaja Gestion. “It’s not Santander’s own money, and they’re not to blame, but of course it will be taken as something negative.”

Santander, based in the Spanish city of the same name, lost 53 percent of its market value this year. Madoff, 70, who had advised the U.S. Securities and Exchange Commission on how to regulate markets, was arrested Dec. 11 and charged with operating what he described as “one big lie.”

BNP Paribas, Europe’s third-largest bank, said it may lose as much as 350 million euros through indirect exposure to Madoff’s investment advisory business. Reichmuth told investors in its Reichmuth Matterhorn fund of hedge funds that they face losses of as much as $330 million. Neue Privat Bank AG, a Zurich-based bank, said clients may lose as much as $5 million invested in a fund linked to Madoff.

Irish Arm

Optimal Strategic is a fund run by Optimal Multiadvisors Ireland Plc, an Irish arm of Optimal Investment Services, Santander’s hedge fund management arm. Of the 2.33 billion euros invested through Optimal Strategic, 2.01 billion euros belongs to institutional investors and international private banking customers, Santander said.

The remaining 320 million euros are investments by Spanish private-banking clients and mostly relate to structured products partially indexed to the performance of Optimal Strategic, the bank said. Santander also had 17 million euros of its own money invested through another fund, the lender said.

“Optimal will undertake the legal actions which may be needed to defend the interests of shareholders in the subfund,” Santander said in its statement.

The custodian for Optimal Multiadvisors is HSBC Institutional Trust Services (Ireland) Ltd., part of HSBC Holdings Plc, Santander said. HSBC is the biggest European bank by market value.

In October, Banif, a private banking unit of Santander, said it would compensate clients who lost money from products linked to failed U.S. investment bank Lehman Brothers Holdings Inc. Expansion newspaper reported at the time that Lehman losses for Banif clients were an estimated 400 million euros.

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