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JPMorgan Pays for Shorting Madoff Without Telling Anyone

bloomberg.com

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Re: JPMorgan Pays for Shorting Madoff Without Telling Anyone

#31

Post by jonknee »

trader wrote: post #23

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 mar…

... 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.

Re: JPMorgan Pays for Shorting Madoff Without Telling Anyone

#32

Post by rhizome »

mathattack wrote: post #30
dman wrote: post #18

Earlier quoted context omitted.

Bloombergs coverage has always been pretty balanced and factual. 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.

The reality on banks like this is that they are very hard to manage. There are specialists in every corner, and somehow the head of the bank has to keep tabs on all of them. Almost always, the money makers outearn the risk managers and compliance folks, so it's a game of catch-up. (Any bank that flipped it would go out of business - like the one honest used car salesman would.)

If I didn't know better I'd think you were saying these banks are too big.

Re: JPMorgan Pays for Shorting Madoff Without Telling Anyone

#33

Post by jonknee »

refurb wrote: post #3
colinbartlett wrote: post #2

JPMorgan "Pays" but barely. $1.7 billion is nothing out of $100 billion in annual revenue and $2.5 trillion in assets.

Did you read the article? The basically got fined for not doing the SEC's job.

The SEC's job would have been a lot easier if Madoff had chosen to keep all of his scam's money in an account with the SEC... JPM got to see both sides of the scam and at least one department figured it out and decided to profit on the knowledge.

Re: JPMorgan Pays for Shorting Madoff Without Telling Anyone

#34

Post by trader »

jonknee wrote: post #31
trader wrote: post #23

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 mar…

... 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.

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.

Re: JPMorgan Pays for Shorting Madoff Without Telling Anyone

#35

Post by darkarmani »

refurb wrote: post #3
colinbartlett wrote: post #2

JPMorgan "Pays" but barely. $1.7 billion is nothing out of $100 billion in annual revenue and $2.5 trillion in assets.

Did you read the article? The basically got fined for not doing the SEC's job.

I thought they settled in order to avoid the felonies they committed by not reporting the suspicious activity? They paid to not go to jail. Obviously, they think $1.7B is cheaper than fighting it with their huge legal team. It's not like the Feds are picking on someone defenseless here.

Re: JPMorgan Pays for Shorting Madoff Without Telling Anyone

#36

Post by spinlock »

joosters wrote: post #26
twoodfin wrote: post #15

Earlier quoted context omitted.

If you believe, say, that Apple has been faking its revenue and profit numbers for the last 10 years, you can go ahead and short them on the expectation that they'll get caught, Tim Cook will go to jail and the stock will tank. In the meantime, the presence of your short will in some small way drive down the price of AAPL, or at least signal to the rest of the market that somebody believes things are not as rosy for…

It's not a very good example, and hardly comparable to the JPM situation, since it was in JPM's power to raise the alarm (and keep raising it when no-one first paid attention). Your crimes aren't magically washed away because the SEC wasn't doing their job well.

No, the Apple example is excellent. I forget what the name of the blog is but there's an investor who investigates firms for fraud, shorts their stock, then publishes his finding. It's not illegal in the slightest and is a public service.

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).

Re: JPMorgan Pays for Shorting Madoff Without Telling Anyone

#37

Post by bonemachine »

trader wrote: post #34
jonknee wrote: post #31

Earlier quoted context omitted.

... 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.

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 el…

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.

Re: JPMorgan Pays for Shorting Madoff Without Telling Anyone

#38

Post by spinlock »

trader wrote: post #23

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 mar…

> 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.

Re: JPMorgan Pays for Shorting Madoff Without Telling Anyone

#39

Post by minimax »

rayiner wrote: post #8

Nice summary of the situation. This is the takeaway for me: "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…

Also, quite refreshing to read an article by someone who apparently has some experience with Wall Street.

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/

http://dealbreaker.com/author/mlevine/

http://www.bloomberg.com/view/bios/matthew-klein/

Re: JPMorgan Pays for Shorting Madoff Without Telling Anyone

#40

Post by RockyMcNuts »

trader wrote: post #23

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 mar…

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.

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