Madoff $50 billion Scandal: Why we Shouldn't Bail out Wall St.

Wall St. financier Bernard Madoff ripped-off investors possibly at cost of $50 billion. Why should we bail out an industry that the government failed to regulate for years? We are in this mess because Congress allowed the profiters to run amok. The government, including Obama, should be working to bail out the economy not the crooks that got us in trouble.

Two major European-based banks said they have exposure worth billions of dollars to a US broker accused of a $50bn (£33bn) Wall Street fraud scheme.

Spain's largest bank, Santander, said one of its funds had $3.1bn invested in the firm run by Bernard Madoff.

France's largest listed bank, BNP Paribas, estimated its exposure to be more than $460m.

Mr Madoff has been charged with fraud, in what is being described as one of the biggest-ever such cases.

Correspondents say the case is likely to fuel uncertainty about the entire hedge fund industry.

Mr Madoff is alleged to have used money from new investors to pay off existing investors in the fund.

Investors are assessing their exposure to the alleged fraud Mr Madoff is said by prosecutors to have confessed to.

US Prosecutors say Mr Madoff, a former head of the Nasdaq stock market, masterminded a fraud of massive proportions through his hedge fund and investment advisory business.

A federal judge has appointed a receiver to oversee Mr Madoff firm's assets and customer accounts, while the 70-year-old banker has been released on $10m bail.

"While BNP Paribas has no investment of its own in the hedge funds managed by Bernard Madoff Investment Services, it does have risk exposure to these funds through its trading business and collateralised lending to funds of hedge funds," BNP said in a statement.

Santander said its exposure to Madoff was through its investment fund Optimal.

UK-based asset management firm Bramdean Alternatives accused US regulators of "systemic failures".

The firm saw its share value drop by over 35% after it revealed that about £21m - nearly 10% of its holding - was exposed to the New York broker.

"It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades, while investors have continued to invest more money into the Madoff funds in good faith," the firm said.

"The allegations made appear to point to a systemic failure of the regulatory and securities markets regime in the US."

Where were the regulators?

Bernard Madoff’s investment advisory business, alleged to be a Ponzi scheme that cost investors $50 billion, was never inspected by U.S. regulators after he subjected it to oversight two years ago, people familiar with the case said.

The Securities and Exchange Commission hasn’t examined Madoff’s books since he registered the unit with the agency in September 2006, two people said, declining to be identified because the reviews aren’t public. The SEC tries to inspect advisers at least every five years and to scrutinize newly registered firms in their first year, former agency officials and securities lawyers said.

Madoff, 70, who had advised the SEC how to regulate markets and donated regularly to politicians, was arrested Dec. 11 and charged with operating what he told his sons was a long-running Ponzi scheme in the New York-based firm’s business advising rich people, hedge funds and institutions. His ability to avoid detection may fuel debate about the SEC’s effectiveness and the adequacy of its resources for policing money managers.

“Given what the SEC claims is the magnitude of the fraud, this is something you would hope an inspection would have uncovered,” said Mercer Bullard, a University of Mississippi law professor and former mutual-fund attorney at the SEC. “It’s hard to imagine a fraud of this alleged size not being accompanied by significant and pervasive compliance problems.”

Madoff is scheduled to appear in federal court in Manhattan on Dec. 19 at noon for a hearing in the SEC case, according to his lawyer, Ira “Ike” Sorkin, of Dickstein Shapiro LLP in New York.

“This is a tragedy,” said Sorkin, a former U.S. prosecutor and SEC enforcement lawyer. “We are going to fight through these events and try to minimize the losses as much as possible.”

[...]More than a decade earlier, in 1992, Madoff faced regulatory scrutiny as part of a lawsuit the SEC brought against two Florida accountants, whom it accused of raising $441 million while selling unregistered securities over three decades, according to SEC statements and a press report at the time.

Madoff told the Wall Street Journal at the time that he had managed the funds unaware they had been raised illegally. The SEC determined that the investors’ money was all accounted for, and didn’t accuse him of wrongdoing, according to the report.