Fallout From Madoff Scandal Hits Europe's Big Banks

The Bernard Madoff financial scandal has spread to Europe, where reaction has been similar to that in the U.S.: disbelief that so much money could have disappeared with so little scrutiny.

European banks that seemed to be weathering the financial storm that has hammered U.S. financial institutions say they're being hit hard by exposure to the Wall Street money manager alleged to have run a $50 billion scam.

Just this fall, as the rest of the world's banks seemed to be collapsing, Emilio Botin, the head of one of Europe's largest banks, Santander of Spain, explained how his institution had survived the worst of it.

"If you don't fully understand an instrument, don't buy it. If you would not buy for yourself a specific product, don't try to sell it. If you don't know very well your customers, don't lend them any money," he said.

But after Madoff, a Wall Street money manager, was arrested and accused of running a $50 billion scam, it became clear that Botin wasn't taking his own advice.

Europe's More Conservative Players Hit, Too

Santander says its total exposure to the Madoff scam is about $3 billion. For Swiss bank Union Bancaire Privee, it's $1.25 billion; for British bank HSBC, $1 billion; and for French banks, a total of about $1 billion, too. The list goes on.

"It's really interesting to see that some of the more conservative players at the European scene have been involved in this," said Helge Berger, a professor of economics at the Free University of Berlin. Berger says Santander had seemed like the classic, savvy, more conservative European bank.

"You cannot be savvy all of the time on all fronts, and they made some big mistakes here on the asset side that eventually caught up with them," Berger said. "You know, if you look for high profits, you have to face higher risk, and that's what essentially caught up with them."

Pushing For Punishment

According to European newspapers, many of the wealthy clients who have been left exposed to the fraud were put in touch with Madoff through word of mouth in the networks of Spain's high society, including some of Spain's financial aristocracy. A company run by Botin's son and son-in-law is reported to have marketed Madoff's funds to wealthy Spanish investors.

Politicians across Europe, like British opposition leader David Cameron, have been pushing not just for more regulation but also for punishment of the guilty parties.

"There should be a day of reckoning for those whose behavior ... helped to bring about the financial crisis," Cameron said.

But if you heard a slamming noise, that was the sound of the stable door being closed after this particular horse had bolted.

'Confidence ... Is Falling Apart'

Confidence in the City of London, Europe's largest financial center, is already at rock bottom because of the turmoil of the past few months. Stephen Pope of brokerage Cantor Fitzgerald says there is concern that there could be more Bernie Madoffs out there.

"If this can happen under the eyes of the SEC, where else in the world is it going on, who is running the schemes, who is exposed, and while those doubts are around, confidence in partners for trading, etc., is falling apart," Pope said.

For now, no large-scale scams have come to light in London or elsewhere in Europe. But Berger says that doesn't mean that none have taken place.

"Frankly, the competence level of regulators in Europe is not any higher than it is in the [United States]. German and French and others ... cannot claim that they have been ahead of the game, they have just been lucky that their financial systems are structurally a little bit more conservative than the American or the British," he said.

Perhaps, many analysts say, in weeks to come, that luck will run out. As Warren Buffett is fond of saying, it's only when the tide goes out that you see who has been swimming naked.

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