Fraud burns banks lending to feeder funds

NEW YORK, Dec. 19 (UPI) -- Banks in Spain, Britain, France and Japan lent billions of asset-secured dollars to feeder funds that funneled money to a New York trader accused of fraud.

With assets to back them up, the banks, including Japan's Nomura, HSBC, BNP Paribas and others assumed the loans carried low-risk, the Financial Times reported Friday.

Some banks, however, extended loans two and three times the value of the assets, the Times said.

"It became increasingly competitive ... the banks had to lap it up and move quickly," said John Godden at consultancy IGS.

The trader, Bernard Madoff, has been accused of operating a $50 billion Ponzi scheme in which investors are paid with other investors' money, rather than with legitimate earnings.

Nomura of Japan and BBVA of Spain, went so far as to create special notes to allow investors to invest as little as $50,000 in the feeder funds, the Times reported.

Feeder funds are investments in a collection of funds, as opposed to direct investments in stocks or securities.

The scandal "underscores the importance of a solid due diligence function," said one banker.

However, "they didn't go and do the due diligence," Godden said.