How big of a role did kickbacks from Bernie Madoff feeder funds play in creating $12 billion of losses for clients of European banks? This morning we mentioned a Bloomberg story reporting that Credit Suisse had warned some clients away from Madoff. Buried in the story is the news that Farfield Greenwich and others may have been kicking back cash to the bankers who directed client funds to them.
The recommendation eight years ago may have angered some of the lender’s own bankers, who were profiting from rebate fees, known as retrocessions, which were paid to them by groups such as Fairfield that marketed the funds. Sullivan, the Credit Suisse spokeswoman, declined to comment on the rebate fees.
“These retrocessions are an open secret in the private banking world, and in most cases they aren’t passed on to clients,” said Bernhard Bauhofer, founder of Wollerau, Switzerland-based consulting firm Sparring Partners GmbH. “The Swiss private banks depend a lot on these.”
This is the first time we’ve heard of this part of the story, probably because most people’s eyes glaze over when confronted with a boring word like “retrocession.” So, although it might be impolite, we’re going to call them kickbacks.
Our preliminary research into the kickbacks suggest that the practice is quite common in Swiss banking, despite the obvious conflict of interest they represent. What’s worse, the kickbacks are rarely disclosed to clients. A November 2008 letter from the Swiss CFA Society to the Swiss Federal Banking Commission calls for “better disclosure” of these “incentive systems,” a clear indication that there is no hard and fast rule requiring disclosure.
In 2007, Scorpio Partnership, an international wealth management consultancy firm, wrote an extremely critical report on the practice of paying and accepting these kickbacks. It suggests that the practice may violate EU regulations and should be discontinued. It notes, however, that Swiss banks are fighting attempts to curb the kickbacks.
We’re just begining to look into this. But we’re sure some of those victims of Madoff scheme will be very curious about who got kickbacks out of the Ponzi scheme. We’d like to know, for instance, whether this confined to Swiss bankers. Or did other people who directed funds to Madoff also get kickbacks?
If you know anything about these kickbacks, please email me at [email protected]