HSBC and Bernie Madoff
Details emerging from a case against HSBC on behalf of victims of the US giant Ponzi-scheme operator Bernard Madoff give indications of the extent to which the sheer greed of massively overpaid bankers helped this scam merchant get away with a very simple fraud for years.
But for HSBC, at least the case has done nothing to stop their dubious practice of using bank tellers and other staff as commission salesmen rather than as honest service providers for clients.
Madoff, a former stockbroker, investment advisor and non-executive chairman of Nasdaq, pleaded guilty to 11 federal crimes and received 150 years in prison for stealing or losing US$65 billion in what has been called the largest such scam in history. JP Morgan and UBS are also among big name banks being sued by the trustee for Madoff's victims, but HSBC is proving to have been the most deeply involved, collecting hefty fees from Madoff in return for channeling its clients. HSBC is the main target in the US$9 billion suit filed last week in New York.
Even if the victims only ultimately recover a fraction of this amount, the expected many years of litigation by banks with deep pockets should make every client wary of banks such as HSBC which – without much objection from the so-called regulators, find it easier to make money by acting as salesmen for shoddy investment products rather than on their proper banking roles.
Madoff may have been an extreme case of fraud and few of his victims were in HSBC's home territory of Hong Kong. But the culpability of banks in Hong Kong for selling high-risk products dressed up as low risk ones to their unknowing customers was earlier revealed by the collapse of Lehmann Brothers, which left thousands of Hong Kong investors with near-worthless paper sold to them ostensibly as barely any riskier than a deposit with their own banks.
Bank staff are now often being expected on pain of demotion to sell products which they have no business promoting and in many cases do not begin to understand.
In the Madoff case, according to documents presented by the trustee, HSBC also made money by lending to client feeder funds to increase their exposure to what were described as Madoff's "magic" formula for making money and ignoring various warning signs, including the worries of its own executives, in order not to stop the flow of money to Madoff. The bank also allegedly allowed him to keep control of assets which should have been held by a trustee. The relationship with Madoff was multi-faceted and involved HSBC's offices in several locations including Ireland, Switzerland and Bermuda.
Incompetence and the mania for getting bigger at any cost may have been the main reason for HSBC's failings. This was the same HSBC which so misjudged the US market that in 2003 it paid US$15.5 billion for Household Finance, a leading sub-prime lender, at a time when even distant observers thought Household and sub-prime were disasters waiting to happen. banking and the much-proclaimed pledge to Christian values of its then chairman, Stephen Green. Green wasn’t responsible for buying Household as he was appointed CEO just after the purchase but was subsequently involved directly in overseeing its management. He was chairman of HSBC in 2006 until December 3 this year.
Happen they did and Household has since cost more than US$20 billion in write-offs – and much bad publicity for its predatory lending to low-income households, hardly in keeping with HSBC's supposed commitment to sound banking.*
But the Madoff involvement says worse things than incompetence and over-ambition. It denotes a culture of making money at any price and without regard either for its clients or the long-term interests of its own shareholders. It was the direct result of the corrupt cult of the bonus. That cult of personal greed and mega bonuses lives on almost untouched by the global disasters it has caused.
And it lives on in the way HSBC uses its tellers as salespeople without a hint of disapproval from a Hong Kong Monetary Authority staffed by compliant bureaucrats.
In the interests of cleaning up bank behavior, it would be pleasing to see these big banks lose this case and have to ante up every cent lost by clients brought by them to the Madoff trap.