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.
... 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.
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.
> 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.
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.
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.
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:
Agreed. 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.
I worked for JPM for a little over 3 years and this quote is bang on. I was in the custodial bank and we rarely spoke with the IB guys.
Until about 2 years ago they were completely different LOBs, with separate executive teams. Org-chart wise, the only guy tying the businesses together at the top was Dimon.
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.
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.
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.
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.
So, 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.
Revenue 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.
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)
well 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_...
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.
[+] [-] trader|12 years ago|reply
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|12 years ago|reply
[+] [-] RockyMcNuts|12 years ago|reply
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.
[+] [-] spinlock|12 years ago|reply
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.
[+] [-] mathattack|12 years ago|reply
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.
[+] [-] rayiner|12 years ago|reply
"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|12 years ago|reply
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/
[+] [-] twoodfin|12 years ago|reply
[+] [-] hiharryhere|12 years ago|reply
[+] [-] dman|12 years ago|reply
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.
[+] [-] guimarin|12 years ago|reply
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|12 years ago|reply
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|12 years ago|reply
[+] [-] ck2|12 years ago|reply
I think society would happily trade that for actual prison time for a bunch of execs who knew exactly what was going on.
[+] [-] josephlord|12 years ago|reply
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.
[+] [-] colinbartlett|12 years ago|reply
[+] [-] spinlock|12 years ago|reply
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.
[+] [-] refurb|12 years ago|reply
[+] [-] this_user|12 years ago|reply
[+] [-] luckyno13|12 years ago|reply
Can anyone suggest any accessible literature for learning the more complex areas of banking/finance?
[+] [-] ig1|12 years ago|reply
(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)
[+] [-] pacofvf|12 years ago|reply
[+] [-] jgalt212|12 years ago|reply
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.