Wednesday, 21 January 2009

Recommended: Bloomberg Story on Madoff and Excesses by Santander´s Spain Bankers

Check this story by Bloomberg reporters Esteban Duarte and Charles Penty. It shows the excesses by which bankers ran for years -- and no regulator could ever trace down. Self-regulation, ethics must be part of the revamp of the financial industry.

Santander’s Madoff Sales Mean ‘Catastrophe’ for Teacher, Vendor

By Charles Penty and Esteban Duarte
Jan. 21 (Bloomberg) -- Banco Santander SA sold Bernard
Madoff investments to a teacher and a street vendor, not just
to wealthy private banking clients in Spain and Latin America.
Branch managers channeled customers with money from
property sales or inheritances to private banking salespeople,
lawyers for the investors said. A retired school teacher put
300,000 euros ($388,000), half her savings, in a structured
product linked to Madoff, said Jordi Ruiz de Villa, an attorney
at the Barcelona law firm Jausas. The vendor invested 325,000
euros of lottery winnings in a similar product and may have to
return to street sales, according to lawyers at Cremades &
Calvo-Sotelo in Madrid.
“The fact that someone has a sum of money in the bank
doesn’t make him a suitable customer for this type of
product,” said Ruiz de Villa, who’s representing about 30
account-holders with potential claims of 10 million euros,
including the teacher. “Some retail clients have suffered true
personal catastrophes because of this.” He wouldn’t provide
the teacher’s name.
Santander, Spain’s biggest lender, may lose customers at
the domestic branch network that accounts for a third of profit
if it is found to have misled people who trusted their
neighborhood bankers, said Peter Hahn, a fellow at Cass
Business School in London. The bank, led by Chairman Emilio
Botin, has said clients have 2.33 billion euros invested with
Madoff, including 320 million euros from private banking
customers in Spain.
“The model in Spain where customers just left it to Big
Daddy Botin to take care of things has been broken,” said
Fernando Zunzunegui, a Madrid-based lawyer. He said he is
taking on Madoff-related claims valued at 8.2 million euros
from 20 clients who are “clearly retail.” He declined to
provide detailed information about his firm’s clients.

‘Qualifying Investors’

Ruiz de Villa and Zunzunegui said they are signing up
clients and reviewing the cases in preparation for filing
possible lawsuits against Santander. Javier Cremades, chairman
of Cremades & Calvo-Sotelo, said he’ll push for a settlement
first.
New York-based Bernard L. Madoff Investment Securities LLC
collapsed last month after Madoff told his sons it was a $50
billion Ponzi scheme, according to a complaint filed by the
U.S. Federal Bureau of Investigation. Worldwide, the victims
include banks, charities and investors such as Madrid-based
billionaire Alicia Koplowitz and film director Steven
Spielberg.
Santander, based in the Spanish city of the same name, on
Dec. 14 said international private banking clients and
institutional investors had 2.01 billion euros of potential
losses in Madoff-related funds. The rest of the money is in
investments sold to “qualifying investors” in Spain.

Legal Protections

Branch customers were sold products linked to Madoff
through Santander’s Geneva-based Optimal Investment Services
hedge-fund arm, said the three lawyers representing the bank’s
customers. Investors were asked to sign statements that they
understood what they were purchasing and met the criteria for
investing.
The bank has said it won’t compensate clients who invested
with Madoff because the losses involve fraud. A spokeswoman for
Santander said the bank had no further comment on the matter.
Selling structured products to wealthy clients has been a
popular strategy in Spain and wasn’t in itself wrong, because
Santander believed it would yield safe and stable returns, said
Fernando Luque, an analyst at Morningstar Inc. in Madrid.
“Many of these institutions like Santander are going to
be protected by the documentation, but the question is how
great is the business damage from all this,” Hahn of Cass
Business School said.

Lottery Winner

Spanish securities law requires anyone offering investment
services to “suitably evaluate” a customer’s experience and
market knowledge and ensure that he or she understands the
risks.
The criteria for being a potential private banking
customer are lower in Spain than other countries, said Manuel
Romera, head of financial industry studies at Instituto de
Empresa, a business school in Madrid.
A 2006 study by the school showed that Spanish banks tend
to start targeting clients with 500,000 euros in assets,
compared with 1.5 million euros for international banks.
The lottery winner invested in a Santander structured
finance product, according to Cremades & Calvo-Sotelo. The firm
is representing some 80 individuals in Spain and Latin America,
mostly Santander customers, who have about 35 million euros of
claims. Cremades declined to provide the investor’s name.

‘Stable’ Fund

The teacher put half the proceeds from an apartment sale
in a “multi-strategy” structured product, 35 percent of which
was in Optimal Strategic U.S. Equity, an Irish-registered fund
whose trades were executed by Madoff, according to Santander’s
description of the investment, which was shown to Bloomberg by
Ruiz de Villa.
The document describes the investment as “conservative”
and “probably the most stable” of all funds run by Optimal.
Structured products have a defined maturity date and include a
mix of assets to meet investor needs in areas such as risk
hedging and diversification.

‘Pending Valuation’

A retired electronics executive said his private banking
account manager told him losses on a 400,000-euro investment he
made three years ago could be 80 percent. His bank statement
now lists the product as “pending valuation,” the executive
said in an interview. He asked not to be identified because he
may have to return to work.
Spain’s anti-corruption prosecutor last week said it had
opened an investigation into Madoff’s alleged fraud.
M&B Capital Advisers, a brokerage founded by Botin’s son
Javier and Guillermo Morenes, husband of his daughter Ana
Patricia Botin, has said its investors put 152 million euros in
funds linked to Madoff.
Santander shares have fallen 18 percent since the bank
released details of potential Madoff-related losses. The
Bloomberg Europe Banks and Financial Services Index dropped 27
percent in the same period.
In a speech at the Euromoney magazine awards last July in
London, Botin urged bankers not to buy products they don’t
understand.

‘Incalculable’ Damage

“The damage to reputation from all this to the Santander
name is incredible, incalculable, the kind that takes years to
repair,” said Bernhard Bauhofer, founder of Wollerau,
Switzerland-based Sparring Partners GmbH, a consulting firm
that specializes in corporate image management.
Santander, which calls itself “the world’s best bank,”
has avoided most of the fallout from the U.S. subprime lending
crisis. Last February, the bank took a 737 million-euro
writedown on its stake in Sovereign Bancorp after the
Philadelphia-based lender plunged in value following charges
for loan losses. That compares with the $49 billion of losses
and writedowns posted by Zurich-based UBS AG, the largest total
among European banks.
In the five years through 2007, Santander’s net income
tripled to more than 9 billion euros as Botin expanded in Latin
America.
Spain has the world’s highest density of banks, with 96
branches per 100,000 people, compared with 18 for the U.K.,
according to a World Bank study. Santander has about 4,840
retail branches in Spain, while Banco Bilbao Vizcaya Argentaria
SA has about 3,484.
In that environment, Santander has been expanding its
private banking business. The division, with almost 110 billion
euros under management, targeted 18 percent growth in managed
assets in 2008 and a 20 percent increase in pretax profit,
according to the bank’s 2007 annual report.

‘Back to Basics’

“Spain is a country of salesmen, but we also need
financial experts to better explain the product to clients,”
said Romera, at Instituto de Empresa.
The Madoff case highlights the need for Spanish banks to
return to good investment practices that should preclude
clients from putting more than 15 percent of their money in a
single security or product, said Jose Miguel Mate, chief
executive officer of Tressis SV, a Madrid-based wealth
management company.
“There will be a way back to the basics and to common
sense,” said Mate, a former commercial director of Banif,
another private bank owned by Santander.

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