This morning we learned that European banks, particularly banks in Switzerland and Liechtenstein sometimes received kickbacks from hedge funds that fed money into Bernie Madoff’s giant Ponzi scheme. This could explain where as much as $300 million of money investors forked over to Madoff funds went.
According to a reader, the payments to bankers, which go under the polite name of “retrocessions” often amount to as much as 2.5% of the principal amount invested with the fund. European banks have disclosed that their clients had as much as $12 billion invested with Madoff. It’s unclear how much of that was make-believe Madoff gains or actual principal invested. For arguments sake, however, let’s assume that it was mostly principal funds invested in Madoff. If all of the bankers placing their clients with Madoff related funds got kickbacks of 2.5%–again, we have no idea whether this is accurate—that means they collected $300 million for putting their clients into Madoff’s hands.
This could be very good news for those clients. While most of Madoff’s money most likely resides in “money heaven,” the banks that collected these kickbacks are still around. Surely clients should be entitled—as a matter of ethics and propriety, if not necessary law—to recover those fees. There’s little reason that we can see for allowing the European bankers who collected the fees to keep the money that was, essentially, simply an early withdrawal from the Greatest Ponzi Scheme Ever.
Of course, the many assumptions in our calculation could be very wrong. Perhaps only a small percentage of the European banking customer money was subject to kickbacks. Perhaps the actual amount invested with Madoff was far smaller than $12 billion, and the higher number represented only the inflated and imaginary gains.
A side note: the terminology here might be confusing to US readers. Swiss banks often act as brokerages for their customers, selling them investment vehicles and collecting the kind of fees associated with brokers in the US. So when you read about Swiss bankers in connection with these investments, keep in mind we’re talking about guys who were acting as brokers rather than US style investment bankers.