
JPMorgan Pays for Shorting Madoff Without Telling Anyone - secretasiandan
http://www.bloomberg.com/news/2014-01-07/jpmorgan-pays-for-shorting-madoff-without-telling-anyone.html
======
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).

------
rayiner
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 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.

~~~
minimax
_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://www.bloomberg.com/view/bios/matthew-s-levine/)

[http://dealbreaker.com/author/mlevine/](http://dealbreaker.com/author/mlevine/)

[http://www.bloomberg.com/view/bios/matthew-
klein/](http://www.bloomberg.com/view/bios/matthew-klein/)

~~~
rayiner
Thanks for the link to Klein!

------
guimarin
That dimon is still being targeted astounds me. This is an example of why even
those in power should not be the nail that sticks out. In case you're
wondering why dimon, why JP Morgan it all traces back to this [1] event.

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.

~~~
spinlock
Congress shouldn't have that much influence over the SEC. I always assumed it
was because Dimon is the only CEO able to admit he's not infallable. I also
think JPM is ahead of the curve on action against them. Again, they'll admit
mistakes and take the fines. The rest of the street is denying everything but
I believe they'll eventually be targetted as well.

~~~
guimarin
I think you're framing the situation incorrectly. Wall Street is at a state of
regulatory capture. Sorry I'm not an SEC apologist, but from what I've seen
they walk a fine line between incompetence and brilliance. Everyone on Wall
Street makes 'mistakes', and that's because individuals make decisions but
there are more rules/laws/best practices than an individual can know. When
everyone is operating under prosecutorial discretion, the law disappears, and
it's cheaper to cut in, see regulatory capture, your oversight than it is to
attempt compliance. Though the litigation industry on wall street might have a
bone to pick here. The problem for Dimon is that capture is industry wide, not
by an individual or company, as in the case of GE or the big three.

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.

------
ck2
What percent of their profit was that and how few months will it take for them
to make it up?

I think society would happily trade that for actual prison time for a bunch of
execs who knew exactly what was going on.

~~~
josephlord
Did you read the full article? I was expecting some evil screwing of their
customers and putting themselves massively short on Madoff and them to have
got off lightly but actually (based solely on this Bloomberg article) got the
impression that the punishment was harsh.

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.

~~~
bobbyi_settv
They were obligated to unwind their customers. They were obligated to report
the crimes to UK authorities. I'm not impressed by the fact that there are
aspects of this where they actually didn't break any laws, and it isn't a
compelling defense for why they shouldn't be fined for the parts where they
did.

~~~
josephlord
I'm not saying that some punishment may have been appropriate but 1.7Bn plus
damages on top seems plenty based on my understanding from the article rather
than that they got off lightly as suggested by the post I was responding to.

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).

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

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

~~~
andr3w321
With the know your customer laws
[http://en.wikipedia.org/wiki/Know_your_customer](http://en.wikipedia.org/wiki/Know_your_customer)
it's increasingly the bank's responsibility to do the job of regulators. This
is not new. It might be dumb, but it's how the system works(or doesn't work)
right now.

~~~
spinlock
KYC is about not doing business with terrorists or other undesirables. Madoff
was not one of those. He was running a ponzi scheme but was otherwise an
upstanding citizen. No bank would have any reason not to do business with him
due to KYC due diligence.

------
luckyno13
Interesting read but my knowledge of what I am going to call "advanced
banking" kind of leaves me wanting to do some sidebar research.

Can anyone suggest any accessible literature for learning the more complex
areas of banking/finance?

~~~
ig1
The Complete Guide to Capital Markets for Quantitative Professionals by Alex
Kuznetsov is what I generally recommend developers entering investment banking
to read.

(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)

------
jgalt212
It's pretty clear, and has been pretty clear for years now, that JPM is not
only too big to fail, but too big to manage.

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.

