Let's talk about the JP Morgan Chase and Bernie Madoff story we mentioned yesterday. If we're following this correctly, it seems that starting in 2006 JP Morgan allowed investors to make bets on the performance of hedge funds that invested with Bernie Madoff. This basically means that JP Morgan was institutionally short Madoff, which is interesting in itself. What made JP Morgan think it could beat the guy who had over forty-years of steady results?Even more interesting is the fact that JP Morgan initially hedged this bet against Madoff by investing $250 million of its own money with Madoff. And then, as late as last fall, it decided to take off this hedge. What happened in the fall of 2008 to make JP Morgan believe that the bets it had made against Madoff were now so safe that they didn't need to be hedged?
Perhaps the most tantalizing idea is that JP Morgan's withdrawal might have triggered the collapse of Madoff's fund. Recall that although Madoff claimed to be managing tens of billions of dollars, he actually had only a tiny fraction of those assets under his control. A seemingly small withdrawal the size of JP Morgan's $250 million could very well have left Madoff without liquidity to keep up his fraud.
We know that JP Morgan began to become very conservative with its assets last fall. It made collateral calls on Lehman Brothers and Merrill Lynch, requiring the investment banks to hand over billions. Those collateral calls more or less consigned those firms to death. So did JP Morgan also doom Madoff? It does look like Jamie Dimon's shop has played the role of the Grim Reaper all through this credit crisis.
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If I understand Megan's earlier comments about legal liability in the Madoff fiasco, JP Morgan may end up having to split that $250 million amongst Madoff's investors.
Only the gains - or at least, that's the most it should be.
What did they know? When did they know it? Follow the money.
Just like the good old days.
This sounds like the plot of a novel, I'm expecting Tom Cruise to star.
There's a legal requirement that people who deal with children -- cop, medical professional, teacher, social worker -- who witness what they believe might be serious abuse are required to report it for investigation. They are mandated reporters.
Perhaps such requirements should also apply to our nation's financial professionals.
Nothing to see here, is there? While it may be nominally true (as a timing-and-sequence issue) that the first guy to turn conservative wrecks the whole thing with his durned shorts and margin calls, he's not to blame in any ethical sense so long as he wasn't privy to inside knowledge that the bubble was more than just a bubble, but a sham.
"So did JP Morgan also doom Madoff? "
What?
A Ponzi Scheme, by it's very nature is doomed to collapse.
By your thinking, perhaps you are to blame for not convincing more people to prop up the old fraud.
I'd have to say whatever bonus is being paid to Mr. Dimon and the guy who figured out what Madoff was up to convinced the team to short him earned every penny!
Nothing to see here, is there? While it may be nominally true (as a timing-and-sequence issue) that the first guy to turn conservative wrecks the whole thing with his durned shorts and margin calls, he's not to blame in any ethical sense so long as he wasn't privy to inside knowledge that the bubble was more than just a bubble, but a sham.
This. For the first week or so after Madoff's scam blew up there were all sorts of quotes in the news from people who knew it couldn't be on the level but kept their money in because they thought he was front-running. Who in his right mind would invest in a hedge fund with a secret management strategy if they knew something wasn't right?
My guess is JP Morgan, because it has fingers in every financial pie, had a pretty good idea the good times were about to end. It's not surprising they'd close out their riskier investments. And yeah,if they didn't the collapse might not have happened for a few more months. So what? To me that just seems like good money management.
TH: "Only the gains - or at least, that's the most it should be."
I don't think it is only the gains. I think JP Morgan may be liable to share in what their losses would have been if the accounting was accurate.
If JPMorgan invests 250M in 2006, and pulled it out in 2008 (lets say for no gain), but forensic auditing showed that Madoff's funds lost 50% of their value in that time period, then I think JPMorgan would owe 125M to be spread out between the other investors who eventually lost 100%.
Megan - isn't that how you described the situation last month?
How do you short an enterprise whose ownership interests are not traded?
So, just so I'm clear -- Megan is taking JP Morgan to task for consistently guessing right? Is that really something we ought to be cracking down on?
Rule 1: Don't panic
Rule 2: If you panic, panic first.
It looks like JP Morgan were following rule 2.
So my question is: What else have they suddenly pulled out of, that hasn't hit the wall... yet?
zic
The sixties De Angelis fraud with the oil tanks (not) full of salad oil resulted in SEC prosecution of the guy who figured out the fraud, pulled out his client's money, and then informed the SEC.
The SEC prosecuted because once he found out about the fraud he was no longer legally able to sell the 'assets' to some other sucker. So you can sell the assets when you get suspicious, not when you know. Because it's too late when you know.
johnF:
How do you short an enterprise whose ownership interests are not traded?
You sell the returns of that enterprise to another party, that's how all derivatives work basically. It is a contract to exchange returns, not necessarily the underlying asset or entity, that people are interested in.
It would be a pity if the Feds (this new gang of thugs in DC) try to screw the banks and Wall Street to make them pay for losses to people like Madoff. From what I see in only a week, it looks like the Obama crew are shakedown artists and Spitzer types.
As both a stockholder in JPM, and a retail customer of JPM, I am delighted that Dimon got out of the Madoff fund while he could. If Wall Street had more Dimons, we wouldn't be in the mess we're in today. The notion that Dimon did anything wrong, and that JPM should be sued for Madoff's crimes, is so ridiculous that it doesn't bear a response.
DBL - The notion isn't that Dimon did anything wrong. Madoff lost JPM's money along with the other shareholder's money, but didn't pass that loss along to JPM because the fraud hadn't been exposed yet.
The issue isn't that JPM behaved criminally, they are a victim in this just like the other shareholders. But the article Megan posted last month argued that just because you got out shortly before the fraud was exposed, that doesn't mean you get to keep all your money while the remaining shareholders lose all theirs.
There's a legal requirement that people who deal with children -- cop, medical professional, teacher, social worker -- who witness what they believe might be serious abuse are required to report it for investigation. They are mandated reporters.
Perhaps such requirements should also apply to our nation's financial professionals.
Posted by zic
The problem is, at least one financial professional did repeatedly report his suspicions about Madoff. The regulators investigated, but not well enough, and finally wrote the complaint off as a sabotage attempt by a rival.
There is nothing wierd about these moves. They were late.
I sold out in 2007 when oil prices started climbing. I started shorting in January when I was certain Obama was unstoppable. I plan to ride the Obama market dowwn to 0.0 on the DJIA. Can Obama do it. Yes, he can!
Starting 2010 I plan to use the Black Obilisque strategy and go from cash to tomb stones and ride out the inflation through barter.
Jaime Dimon purchased $11.5 Million JPM stock 10 days ago. His own funds? Bail-out money bonus? Hmm. Now Mr. Dimon tells JPM shareholders they can expect the same dividend payable in May 2009 even though JPM has lost 75% of its income! Now that is good business? More bail outs funds into HIS OWN pocket! Which is more important-shareholders or the poor folks that had Trusts with (banks that merged into) JPM? JPM sold off, traded individual stocks in favor of their own products. One family trust I know lost $100,000 in the first Q of 2008. $701,000 to now $525,000.
That is less than it started with in 1972.Depositers loose while the Big Boys win!
For all disgruntled and outraged consumers/clients of J.P.MORGAN CHASE, heres your GOLDEN TICKET, compliments of one disgruntled/outraged customer.
JAMIE DIMON, FAX# 1-212-270-1121
Feel free to blow up this machine, compliments of me.
In response to DoctorPat's question of Jan 31st. What else have they (JP Morgan Chase) pulled out of that hasn't hit the wall yet? The Company is exiting the Wholesale Mortgage Channel. The employees were given 60 Notice (WARN ACT applies) on February 3, 2009 with final fundings expected by March 20, 2009. The Company appears to be finding new positions for Senior Management from within this business channel. Senior VP of Credit, Michael Wade, (who has a new position within JP Morgan Chase) is said to be "furious" about employees who have found new jobs and intend to leave prior to the end of the 60 days. His ire stems from the ousted employees not staying through the end of the "Company's Need" for their individual job expertise. Anonymous sources have stated the employees will not be released from the 60 Day Notice Period to accept other job opportunities without forfeiture of previously earned Incentive Pay and Severance Pay.