[trader]

This is a very misleading article in my opinion. Investment banks provide investors access to risks which they want, in this case investors WANTED access to Madoff structured notes because Madoff had been outperforming, therefore JPM had a find a way to hedge themselves to reduce their risk. After investing a tremendous amount in madoff, JPM probably realized that they could hedge easier by going long the general market on roughly a 1.1 to 1 ratio I would imagine or the structured desk wanted to use their short to hedge another long position they couldn't get out of while retaining some idiosyncratic risk that Madoff was in fact a fraud (this type of tail hedge is very valuable on the st btw). When assessing risks of this size, I am glad that JPM seemed to be asking all the right questions about Madoff (which no one else, not even the SEC, was asking), it is funny JPM is being penalized for this.

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.

[jonknee]

... Did you miss the part about JPM also being Madoff's bank? They sold investments run by their own client (who would not allow due diligence!) to other clients while finding evidence that there was no way the returns could be genuine. Instead of following the law in this situation they ended up trying to make money off the phony securities before they were publicly discovered to be fraudulent.

[trader]

If they really though there was fraud, why wouldnt they have taken a huge short position and reported to the SEC, accelerating the winddown process. This is what saba did with the JPM whale trades, they took a huge CDS position and reported the "whale", making 100mm+.

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.

[bonemachine]

If they really though there was fraud,

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.

[blah32497]

Does anyone else think it's kinda crazy that banks are required by law to act like policemen? Seems like that's the government's job.

[qq66]

Everyone is required to act like police to some extent. If someone comes into your sporting goods store looking to buy a baseball bat to attack his neighbor, you're required not to sell it to him (and in some jurisdictions, you're required to call the police).

[bonemachine]

Whatever, but that's not what the current legislation says.

Which JPM agreed to be in compliance with in order to be granted a license to go out and do this "banking" thing.

[josephlord]

Yes but there should be chinese walls between investment brokers and those managing a companies account. They should have reported to the US authorities (they did report to the UK ones) but revealing to other departments or worse to investment customers information from a customer's bank account would be highly unethical wouldn't it?

I knew nothing about this case before this article and am assuming the article is correct.

[RockyMcNuts]

TFA defends JPM and skeptically deconstructs the accusation, so this comment is forehead-slappingly stupid.

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.

[bd_at_rivenhill]

They didn't tell Madoff's banker probably because they couldn't as a result of Chinese wall requirements between the two businesses. They didn't tell the SEC because they were in London, but they did tell the UK authorities. Why didn't the UK authorities figure it out? Why should JPM, which sort-of has the job of detecting fraud, be expected to do better than the regulators for whom it is their primary purpose?

[RockyMcNuts]

SEC examiner gets duped by fake records and doesn't check the real bank records -> should probably be fired and the agency investigated

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.

[Ntrails]

Out of all of this the failure of the SEC to say "shit guys, we really could have noticed this, sorry" is pretty damned aggravating.

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.

[spinlock]

> When assessing risks of this size, I am glad that JPM seemed to be asking all the right questions about Madoff (which no one else, not even the SEC, was asking), it is funny JPM is being penalized for this.

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.

[bonemachine]

they were basically fined $13B for acquiring WaMu and Bear Sterns in the financial crisis.

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.

[retube]

His point is that the majority of the fine levied (80%) against JPM was in relation to WaMu and Bear Stearns behaviour BEFORE JPM bought them. The real crazy tho is that JPM _knew_ that some potentiually dodgy stuff had been going on at WaMu/BS and sought assurance from the regulators that they would not be held liable if they bought these two firms - which they were basically doing as a favour for the US Gov. Then the regulators fucked them anyway.

[bonemachine]

[They] sought assurance from the regulators that they would not be held liable if they bought these two firms... Then the regulators fucked them anyway.

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.

[spinlock]

The crimes happened at Bear and WaMu. It did not happen on Jamie Diamon's watch.

[bonemachine]

Aw -- you're just being silly when you say that.

You know perfectly well that when companies make acquisitions, that they assume both the liabilities along with all the other assets they're acquiring.

[bronson]

You can't imagine BofA buying Countrywide?

[spinlock]

That happened in 2008.

[bronson]

It all happened in 2008. So what?

- Countrywide: January 2008

- Bear Stearns: March 2008

- WaMu: September 2008

[spinlock]

So, the fines were levied in 2012. Causality's a tricky thing but events in the future can't usually impact those in that happened in the past.

[mathattack]

going long the general market on roughly a 1.1 to 1 ratio

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.