JPMorgan Pays for Shorting Madoff Without Telling Anyone
bloomberg.com
bloomberg.com
Creating a similar idiosyncratic risk could be to sell a gold ETF and own physical gold, paying maybe 30 bps a year for a real outperformance during a) hyperinflation if real gold is needed or b) some gold bars at the ETF turn out to be fake/not there (some have been found to be tungsten) c) another unforseen event. These options are hard to create and very valuable to a huge investment bank such as JPM which is generally very long the mkt in general and actually allows them to make more loans.
Also, most benefiting from rising prices in madoff claims are distressed hedgefunds and investment banks btw. They own probably 90% of the claims now, 'vicitms" selling at roughly 20 cents on the dollar. Anyone really pointing the finger at JPM is very naive about the whole system.
I don't think they could have hedged this way. Madoff's volatility was too low, so there weren't comparable instruments. The only options were investing in Madoff himself, or not hedging on the assumption that it would blow up sooner rather than later.
They didnt do this because a) they didnt know about the fraud, or b) didnt want to hurt their clients.
Everyone likes to point the finger at someone else, but if you were buying madoff structured notes /investing in madoff and knew nothing about the fund and did no research, it is your fault if you lost money.
The issue at hand (and for which JPMorgan was fined) wasn't whether they definitively knew, or "thought" there was a fraud or not. It was for specific violations of the Bank Secrecy Act: failing to report suspicious activity, and failing to create specific controls against money laundering.
All of the recent press articles are really quite clear about this. You may not agree with the SEC's findings of JPM's culpability in these charges; you may not be even particularly fond of the Bank Secrecy Act, for that matter. But you might want to do a little bit of research into what JPM was, you know, actually prosecuted for before engaging in engaging in naked speculation about how what JPM may have "thought" about Madoff's activities based on the extent to which one particular unit may have been shorting his positions.
Which JPM agreed to be in compliance with in order to be granted a license to go out and do this "banking" thing.
I knew nothing about this case before this article and am assuming the article is correct.
It's amazing what JPM is being held liable for. I think it sets a terrible precedent that they were basically fined $13B for acquiring WaMu and Bear Sterns in the financial crisis. I can't imagine another bank cooperating with the government to takeover another failed bank. You would simply need too much time for due diligence to ensure that there was no illegal activity - ever - at the bank to be acquired.
- Countrywide: January 2008
- Bear Stearns: March 2008
- WaMu: September 2008
Ugh. They were fined for selling bad mortgage bonds. Not for acquiring Bear and WaMu.
It also ends up being closer to $5B due to tax breaks and other incentives, BTW.
You know perfectly well that when companies make acquisitions, that they assume both the liabilities along with all the other assets they're acquiring.
Not doubting you, but can you provide more substantiation / detail on that assertion, please? What kind of assurances were given, and when? And more to the point: were they contractual assurances, or were they not? I highly doubt that JPM went into the deal blind, and even more so, that they would have taken on any significant risk of open-ended liabilities on the basis of a handshake.
And they certainly didn't go into the deal as a "favor" to anyone -- they did it to save their tender, pink skins, knowing full well what the future liabilities would likely be.
If someone comes to an investment bank and asks for access to something that the investment bank knows is a fraud, and the bank provides it and takes the fee, while ending up short the fraud... that's a bit of a problem.
As Madoff's banker with billions of dollars on deposit, JPMorgan can see every cash flow. But apparently, they don't notice the disconnect between the business he claims to be doing and the cash, because the banker doesn't even know what the account is for. So much for asking all the right questions.
Late in the game, a different part of JPMorgan does a tiny amount of due diligence, and realizes Madoff is a fraud.
They don't tell the SEC.
They don't talk to Madoff's banker.
They take the money out of Madoff funds, effectively going short.
They don't tell clients it's a fraud, but basically we don't like it and we like either stuff better, try to move them into other investments.
They're in a conflicted position as his banker, to rat him out to clients or authorities.
But basically they should have realized something was amiss sooner, and they should have notified the authorities.
JPMorgan banker, who has all the cash flows, doesn't bother to notice they don't add up and billions are missing -> should probably be fired and JPMorgan should be fined.
One person's incompetence doesn't excuse the other's. Especially when one gets fake records and the other knows the real numbers.
JPM has plenty they could and should have done better doubtless deserve censure, but it would be nice for the regulators to admit that they did a poor job.
"If you think of JPMorgan's businesses as operating more or less independently, but occasionally making each other money by cross-selling, then this mess makes more sense. A London investment bank that considered and rejected a derivative-linked investment in Madoff would have no obligations to report its suspicions to U.S. regulators. A boring custody bank that ran Madoff's checking accounts but had no derivatives traders to get suspicious about him also probably wouldn't be in trouble for missing the Madoff red flags. Combine the two businesses and the same behavior gets you in trouble."
Also, quite refreshing to read an article by someone who apparently has some experience with Wall Street. On a related note: I've been really happy with Bloomberg's coverage recently, of Wall Street specifically and the business world generally. Especially now what WSJ has decided to go full-on partisan.
Disclaimer: I worked for them in a past life but continue using their website as my primary news source long after having left the company.
According to his bio he worked in investment banking at Goldman and was an M&A lawyer before that. When I first found his column I went through and read a bunch of them. They're all all pretty good. If you like that sort of financial journalism from the perspective of former practitioners, another good one is Matthew C Klein who I guess used to work at Bridgewater Associates. If you want to kill the rest of your afternoon:
http://www.bloomberg.com/view/bios/matthew-s-levine/
1. in 2008/2009, can't find it on Google bc why have a date search anymore. Jamie Dimon was called before the finance committee to explain the financial meltdown. He allegedly stormed out after representatives asked him truly epically stupid questions, and told one of his aides, "Don't ever put me in front of those fucking morons again". There is no reason other than visibility and a personal grudge that this is targeted at JPMorgan v. the other banks.
This is, at best, very tenuous speculation.
The charges against JPM were quite specific, related to violations of the Bank Secrecy Act during 2007-2008. And the physical record -- in the form of subpoenaed evidence in support of JPM's culpability in these charges -- were apparently obvious and damning enough that JPM agreed to the penalties to forego criminal prosecution.
Whether Mr. Dimon got huffy after a committee meeting in 2009 has nothing to do with it.
Lets take a real example. Bad things happened in 2008. Congress has to come in and 'clean up'. But Congress is a second order proxy for Wall Street, so clean up means they have to figure out a way to look good to their 'voters' while not putting any of their 'donors' in jail. This is harder than it seems. They tried for a few years to do nothing, because it was 'confusing' and 'complex', people weren't buying it. There was seriously bad mojo for congress, that could possibly threaten a reset on regulation for the entire financial industry. So they needed to find a scapegoat. A few congressmen were pissed at having their hands tied, and Dimon is probably the most visibly brilliant guy on wall street, and he had pissed people off, so he was chosen to be thinned from the heard.
What surprises me is that they haven't stopped. this is probably due to dimon's success, if he had been a little less competent in the intervening years, my bet is he would be less under the gun now. Still this is a valuable lesson to all of us paying attention.
Hate to break this to you, but Congress created the SEC.
You also might want to look into Articles 1 and 8 of the Constitution, BTW.
I think society would happily trade that for actual prison time for a bunch of execs who knew exactly what was going on.
From the TFA they were long but in the process of unwinding their position (albeit slightly faster than they helped their customers to do) and they filed the report of suspicions in London but not in the US (by oversight). The other problem seems to have been that the chinese wall between the speculators and the account managers was respected.
The relevance of the report in the UK is that it suggests not reporting to the US was oversight rather than a decision to take commercial advantage of the knowledge rather than bring in the authorities (unless they were counting on the UK authorities being useless).
No, that's not what they were fined for. They were fined for not doing their job, according to the Bank Secrecy Act. Which they agreed to comply with when they decided to become a bank.
You might want to read a couple of news articles about the case, before pulling "facts" out of the air like this.
Which in this case was also the SEC's job... Your statement doesn't contradict refub's
Don't complicate the tax code even further making it start taxing losses.
(One fair point might be if they paid capital-gains rates or foreign taxes in Ireland or something on the gains from shorting Madoff and yet could deduct the judgment from full US taxes. I don't think that was the case.)
This is the problem. "They" made billions of dollars illegally. Now, "they" are paying back 1.7 billion dollars. The question is- is it still the same "humans" behind the pronoun?
Certainly Madoff is not paying the lifetime of fuck-you money he has blown. At least now he is in jail (or "camp" as he thinks of it).
The rest of "them" wont do a single day in prison.
I have no problem with JPM shorting or otherwise taking advantage of this fraud. Given that the SEC is asleep at the switch, the shorts are the best way to protect the financial system.
How is that not profiting from crime?
That's profiting from crime, in a way, but it's all you can do when it's not within your power to subpoena Apple internal memos or what have you.
As I read this article, this is more or less this is what JPM is being punished for doing, because in theory the small exotics group in the UK could have called the US headquarters and inspired them to contact the SEC, which didn't happen.
Your crimes aren't magically washed away because the SEC wasn't doing their job well.
Now, you seem to think that there should be communication between a trading desk and Madoff's custodian. Any compliance officer would disagree. There is simply too much risk of front running the client's account to allow this (especially when the account is as large as Madoff's).
Err... If you're thinking about the handful of self-proclaimed "activist investors" who frequently end up massively short after "investigating" the stocks they abandon, please spend some time reading http://www.deepcapture.com. You'll find their names in rather dubious company -- including Madoff, incidentally -- and associated with mountains of illegal activity.
I know generally you can just start selling low or whatever, but shorting would make you a huge profit if this worked while selling low potentially a loss?
A good place to start is http://www.deepcapture.com/the-story-of-deep-capture-by-mark... or http://www.deepcapture.com/category/1-the-players/
edit: changed starting suggestions because the website is confusingly laid out and some links don't seem to work.
It should be whatever the law says it should be.
In an ideal world... it should be in proportion to the pain and suffering caused by JPM's "willfully" (as concluded by investigators) failing to adhere to its legal obligations to report on Madoff's activities, once it became aware of them internally. Perhaps then some, given obvious indifference (on the part those responsible at JPM) to the potential for harm caused to unsophisticated investors while they were busy looking covering their... annual bonuses.
Quoting from yesterday's NYT article[1]:
On two occasions, in 2007 and 2008, JPMorgan’s own computer system raised red flags about Mr. Madoff, according to prosecutors. But both times, prosecutors say, JPMorgan employees “closed the alerts.”
“JP Morgan failed to carry out its legal obligations while Bernard Madoff built his massive house of cards,” George Venizelos, a senior F.B.I. official, said in a statement. The F.B.I. and prosecutors traced the problem to JPMorgan “willfully” failing to create sufficient controls against money laundering. “There was no meaningful effort by the Bank to examine or investigate the Madoff Securities banking relationship,” prosecutors said.
The fact that the SEC was also asleep at the switch does not in any way absolve JPM of its own culpability in this disaster.
Even so, in human terms, the worst of the penalties "suffered" by anyone at JPM is unlikely to begin to compare to the losses suffered by Madoff's non-institutional investors as a result of JPM's actions.
[1] http://dealbook.nytimes.com/2014/01/07/jpmorgan-settles-with...
Also: the actions for which JPM was recently fined concern primarily the years 2007 and 2008. JPM may have acted differently in the 1990s, but that's practically irrelevant to what happened ten years later -- especially given the extent to which the size, and the number of unsophisticated investors lured into Madoff's scheme (with JPM's help) increased geometrically.
Similarly, whether they reported him to British banking authorities is also of little relevance. U.S. laws concern JPM's obligations to report suspicious activities to the SEC and other domestic agencies -- not the Brits.
Should firms be required to report any suspicious activity found by any team in any location to every regulator that covers them ?
(generally the rule at most banks is to report it to the legal team who then figures out who should be notified)
Don't know about "any activity, any location", but the SEC's position is that JPM failed to report specific activities to U.S. Treasury's enforcement unit (FinCEN), as per the requirements of its charter.
If you need more clarification as this finding, you might want to look into the court documents.
Can anyone suggest any accessible literature for learning the more complex areas of banking/finance?
(despite "Quantitative Professionals" being in the title it's not math heavy, although you need to be able to think technically - should be fine if your developer)
In short, JPM needs to be broken up. Most everyone will benefit--JPM managers, line workers, JPM customers, and shareholders, and the worldwide financial system. The only who does not benefit from a break-up is Jamie Dimon whose primary goal is to manage the largest bank around.