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JPMorgan Pays for Shorting Madoff Without Telling Anyone
- colinbartlett 13y agoJPMorgan "Pays" but barely. $1.7 billion is nothing out of $100 billion in annual revenue and $2.5 trillion in assets.
- refurb 13y agoDid you read the article? The basically got fined for not doing the SEC's job.
- andr3w321 13y agoWith 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.
- refurb 13y agoI don't disagree that JPM has a responsibility to share any information they may have about financial fraud. I guess my point is that yeah, the $1.7B fine isn't much to JPM, but at the same time, it seems inline with their degree of negligence.
- spinlock 13y agoKYC 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.
- colinbartlett 13y agoYes, I read the article.
- cma 13y agoIn a way SEC delegated that job to NASD (now FINRA); guess who was on the board of NASD? (Madoff)
- jonknee 13y agoThe 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.
- darkarmani 13y agoI 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.
- bonemachine 13y agoThe basically got fined for not doing the SEC's job. 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.
- blah32497 13y ago"They were fined for not doing their job" Which in this case was also the SEC's job... Your statement doesn't contradict refub's
- this_user 13y agoRevenue is not income. $1.7 bn is a non-trivial amount even for them. Add to that the $13 bn they had to pay on fraudulent mortgage-bonds some weeks ago and things are starting to sum up.
- pfraze 13y agoWasn't like 7 bn of that tax-deductible?
- cma 13y agoThey paid taxes on the ill-gotten gains, so when the gains are taken away in a judgement, there is no need to pay whatever weird quasi-reverse taxes you are thinking of. If the judgment isn't enough after a tax deduction, then just up the judgement. 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.)
- awda 13y agoTax deductible doesn't mean they save $7 bn.
- latj 13y ago"them". 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.
- spinlock 13y agoSo, you think the punishment should fit the revenue rather than the crime? JPM reported Madoff to the SEC in the 90's. They also reported him to the British banking authorities much more recently. The "crime" is actually looking at Madoff's activities and divesting themselves from him. 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.
- joosters 13y agoI have no problem with JPM shorting or otherwise taking advantage of this fraud How is that not profiting from crime?
- twoodfin 13y agoIf 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 the company as the current price indicates. 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.
- rayiner 13y agoNice 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.
- twoodfin 13y agoAgreed. All I could think reading this was how much I wish every Matt Taibbi "bankster" screed posted to hn or reddit had been replaced with a link like this.
- retube 13y agoOh Matt Taibbi is a hack of the worst kind. His bullshit and propaganda infuriate me.
- dman 13y agoBloombergs 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.
- mathattack 13y agoThe 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.)
- luckyno13 13y agoInteresting 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?
- pacofvf 13y agowell the whole Madoff thing is quite interesting and informative. You should start with Harry Markopolos "No One Would Listen: A True Financial Thriller", here's the article quoted in this post (which quotes the book itself) : http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a9Aa_FFITv00 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a9Aa_...
- ig1 13y agoThe 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)
- trader 13y agoThis 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.
- mathattack 13y agogoing 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.
- jonknee 13y ago... 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.
- guimarin 13y agoThat 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.
- bonemachine 13y agoThere 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.
- spinlock 13y agoCongress 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 13y agoI 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 13y agoWhat 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 13y agoDid 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 13y agoThey 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 13y agoI'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).
- jgalt212 13y agoIt'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.