Dominoes

The extent of the damage caused by gigantic Ponzi scheme revealed yesterday with the arrest of Bernard Madoff is only beginning to be assessed. But it looks bad – very bad.

New potential victims emerged of Wall Street veteran Bernard Madoff’s alleged giant Ponzi scheme, with international banks, hedge funds and wealthy private investors among those sorting out what could amount to tens of billions of dollars in losses.

New York Mets owner Fred Wilpon, GMAC LLC Chairman J. Ezra Merkin and former Philadelphia Eagles owner Norman Braman were among the dozens of seemingly sophisticated investors who placed money on what could prove to be history’s largest financial scam.

Giant French bank BNP Paribas, Tokyo-based Nomura Holdings Inc. and Neue Privat Bank in Zurich are also exposed, according to people familiar with the matter.

And at least three funds of hedge funds — which raise money from investors and farm it out to hedge funds — may have significant losses. Fairfield Greenwich Group and Tremont Capital Management of New York placed hundreds of millions of their investors’ dollars into funds overseen by Mr. Madoff. On Friday, Maxam Capital Management LLC reported a combined loss of $280 million on funds they had invested with Mr. Madoff.

“I’m wiped out,” said Sandra Manzke, Maxam’s founder and chairman. The Darien, Conn., fund of hedge funds will have to close as a result of the losses, she said.

There are a lot of investors that have been badly damaged, or utterly ruined by this fraud. The New York Times tries to draw a distinction between Madoff’s fund and hedge funds:

Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm. The difference, though seemingly minor, is crucial. Hedge funds typically hold their portfolios at banks and brokerage firms like JPMorgan Chase and Goldman Sachs. Outside auditors can check with those banks and brokerage firms to make sure the funds exist.

What they kind of leave out there is that it would appear that a number of hedge funds got burned in this – including at least one that is now going to have to close. The Times report also notes at least one charity that will have to shut down after losing everything to Madoff’s thievery.

If a run begins on legitimate hedge funds, this thing is going to snowball out of control. This one huge fraud could cause enormous damage to the entire financial system. Things were not looking particularly rosy before this. Now it is looking rather more grim.