I am sorry I have not written for a while. I am not sure what happened, but the idea well went dry for a bit. I had been writing a few pieces for Matt Taibbi’s TK News America This Week every Friday and I guess that always got the creative juices flowing. I am sure many of you know, Matt has been going full tilt on the Twitter Files which put America This Week on pause and mojo was lost. That is my excuse anyway, weak as it is.
The past two evenings my family and I have been watching Netflix’ new documentary on Bernie Madoff and we were thoroughly entertained. My favorite part was when Bernie thinks the jig is up, as the SEC, like a blind squirrel finding a nut, has finally nabbed him in 2005. Bernie marches into the SEC’s NYC headquarters alone and proceeds to hand over a list of phony counterparties and a phony DTC account where all the investments are held. This immediately got me thinking of the great scene in “My Cousin Vinny” where Joe Pesci lies to Fred Gwynne (the judge and one-time Herman Munster) that he practices law under his “stage name”, Jerry Gallo.
Bernie went home and waited for the FBI to show up and put the bracelets on him, but they never came. It turned out the SEC never bothered to check to see if the DTC account existed.
My next favorite part took place in the summary of who may have aided and abetted Bernie in his crazy ventures. I had forgotten about this, but the bank run by “America’s Banker” Jamie Dimon, JP Morgan, was up to their boobs in Bernie for decades. They paid a Deferred Prosecution fine of $1.7 billion for their Madoff activities, and as per usual, the misdeeds were never brought up again. I read the agreement JP Morgan made with the Department of Justice in 2014 and linked it here.
JPM-Madoff Deferrred Prosecution Agreement
The documentary focused on the fact that since 1986 Madoff Securities had a series of accounts at JPM with which Bernie frequently moved billions in and out of. JPM never filed one Suspicious Activities Report (SAR) in all that time, something they are supposed to do with frequent and unexplained transactions over $10,000, let alone a few billion. JPM never even asked Bernie was he was doing, not once. However, the documentary left out that JPM’s relationship with Bernie was actually worse as JPM Private and Investment banks also had relationships with Bernie. Check this out from the Agreement.
Over the years, other parts of the Bank developed their own suspicions about Madoff. In 2006, an entirely different part of the Bank – a derivatives trading desk located in the London branch of JPMorgan’s Investment Bank – became interested in Madoff. The trading desk began receiving requests to issue derivatives tied to the performance of various Madoff “feeder” funds – funds that sent investor money to Madoff Securities. In order to hedge and offset the risk created by these products, JPMorgan invested the Bank’s own capital directly in the feeder funds. The Bank initially issued about $100 million of Madoff-linked products in 2006 and early 2007. Then, because of continued demand for these products, in the summer of 2007, the traders on the London desk sought to write more than $1 billion in Madoff-linked derivatives – a large deviation from normal risk limits, which therefore had to be approved by the Investment Bank’s Chief Risk Officer. In June 2007, the Chief Risk Officer convened a committee to consider authorizing a request for more than $1.3 billion of the Bank’s proprietary capital to be invested directly into Madoff feeder funds to hedge the issuance of additional derivative products tied to the performance of Madoff feeder funds. Ultimately, the Chief Risk Officer – who at one point was told by a senior colleague that there is a “well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme” – rejected the proposal and set the Madoff risk limit at $250 million.
That is fantastic! “Hey, this guy that has been moving billions in and out of his company’s checking and brokerage accounts he keeps with us, the ones we have never investigated or filed even one SAR, the guy who’s fund (unregistered with anyone as far as we know) we’ve started linking structured notes to even though his stated returns defy all logic and reason, the guy who has a well-known cloud over his head that he might be running a gigantic Ponzi scheme? We are going to have to reject the $1.3 billion request to take the bank’s capital and place it into one of his feeder funds…..and only give him $250 million!”
I wonder how much JPM made off of Bernie, especially with their private banking operation. As we know, Bernie had no problem paying whatever he had to pay to keep things running smoothly. The prime example being that he let all the feeder fund managers like Walter Noel at Fairfield Greenwich Group keep ALL the management and performance fees for their trouble of rounding up billions of dollars for him. I bet JPM made near $1.7 billion off Bernie over the years. After all, they may have been criminally negligent, but not stupid!
Anyone who bothered to look closely at Bernie knew he was stealing. I understand that he was a big wheel in the world of equity trading and had a lot of clout with the SEC. However, banks such as JPM and fund of fund managers had to see the multiple red flags being thrown up and the whole thing just didn’t make sense. The money was just too good, until it wasn’t. Besides, it’s not like any of those who should have known better but participated anyway were going to pay the price in the U.S.A. anyway.
Maybe it’s not so funny after all.
Glad you’re back, Eric.
glad you're back! thank you!