US stock market daily report (January 07, 2014, Tuesday)
January 8, 2014, Wednesday, 06:38 GMT | 02:38 EST | 12:08 IST | 14:38 SGT
Beginning in the mid 1990's, within J.P. Morgan and predecessor banks that later became J.P. Morgan, questions were rising over Bernie Madoff and Madoff Securities. A senior executive joked via email that Morgan should visit Madoff’s accounting office to make sure it wasn’t a car wash. For years according to the U.S. government’s charges, the JPMorgan Chase & Co. (JPM-NYSE) banker assigned to assist Madoff Securities, had no clue how much money was in the Madoff account, signing off on compliance reports because he couldn’t see a reason not to.
The $1.7 billion settlement released Tuesday portrays JPMorgan employees who were alternately too incompetent to notice or too calculating to even bother reporting that Madoff was running a gigantic Ponzi scheme.
Employees at a JPM realized that Madoff was shuffling money in various accounts in order to turn bigger interest payments from J.P Morgan. In 1993, a memo reports that the JPM bank officer was “very comfortable” with Madoff and his “conservative, risk-averse investment approach.” At that time bank analyst said it was “quite possible” for top-notch investment advisers to turn in annual returns of 20% to 30%.
Within the investment bank’s broker-dealer banking group, a banker was in charge of certifying Madoff’s business. From the mid 1990s through his retirement in early 2008, the banker, had a “limited and inaccurate understanding” of the account he was in charge of. At one time, the banker believed that a Madoff account that at one time held as much as $5.6 billion, took in client deposits with an average balance of tens of millions of dollars. The same account used for paying rent as well as other supposed, routine expenses.
JPMorgan's equity exotics desk in London during 2006, began selling investment products tied to the performance of “feeder funds,” which were funds invested in Madoff Securities - binding more ties with Madoff. JPM invested its own money in Madoff. Traders on the equity exotics desk wanted to issue more Madoff investment products, they were popular and easy sellers. The main risk traders on the equity exotics desk told other bank officials that there was little market risk other than the possible “systemic fraud at the BLM (Bernie L. Madoff) level. That plan fell through when Madoff wouldn’t cooperate with the bank’s due-diligence efforts to examine Madoff Securities, and plans to expand the investment products were scuttled.
JPMorgan's chief risk officer had lunch with another J.P. Morgan executive in the summer of 2007. The risk officer, following the lunch, emailed other top executives, stating, “I am sitting at lunch with [the executive] who just told me 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 – he said if we Google the guy we can see the articles for ourselves. Please do that and let us know what you find.” The request was in reference to a 2001 Barron’s story called, “Don’t Ask, Don’t Tell: Bernie Madoff is so secretive, he even asks his investors to keep mum.”
In January 2007 and in July 2008, alerts generated by JPMorgan’s computerized anti-money laundering system were essentially ignored.
A JPMorgan later in the summer of 2007 analyzed returns reported by a Madoff feeder fund versus the investments in S&P 500 stocks and Treasury bills that Madoff claimed to invest in. JPM employee determined that the feeder fund performance, was “far away” from the returns that Madoff “allegedly made.”
Less than two months before the arrest of Madoff, on October 16, 2008, an analyst on the equity exotics desk wrote a memo raising a series of red flags. Analysts memo outlined JPMorgan’s inability to validate Madoff’s trading activity or even custody of assets, questioning why Madoff had chosen a small, unknown accounting firm to audit him. He also noted the feeder funds’- “apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.” “It’s almost a cult he seems to have fostered,” the analyst wrote. The head of due diligence at JPM replied that they should visit Madoff’s accountant’s office to make sure it was not a car wash.
JPM put their plan in motion for their equity exotics desk to begin yanking the bank’s money from Madoff-related feeder funds. Certain investment products related to the funds were unwound and or cancelled by JPMorgan. Employees congratulated themselves after Madoff’s arrest on the money they’d saved JPMorgan.
A report was filed with the U.K.’s Serious Organized Crime Agency saying that Madoff’s returns “appear too good to be true – meaning that it probably is,” by JPMorgan. The bank however, failed to file a similar report with the U.S. government, nor did they alert these concerns to other anti-money-laundering personnel in the U.S. All the while, JPM continued processing banking transactions for Madoff, whose money was dwindling as investors – namely, the two feeder funds where J.P. Morgan had invested – pulled out.
Chief risk officer for JPM noted how the bank curbed their losses prior to Madoff's arrest. “We actually look like we have some clue of what we’re doing.” The same banker who joked that Madoff’s accountant’s office might be a car wash sent an email to the analyst who had written the memo questioning the coltishness of Madoff’s feeder funds. “Can’t say I’m surprised,” the banker wrote, “can you?”
The U.S. government charged JPMorgan with failing to have proper controls in place to prevent and detect money laundering. Government also cited the bank for not reporting suspicious activity in the Madoff funds to the U.S. government even though it filed a similar report in the U.K. JPMorgan “admits and stipulates” to the allegations in the government’s case.
By the time Madoff was arrested in December 2008, JPMorgan was Madoff Securities’ main bank, taking in deposits from Madoff’s clients and making loans to Madoff. When Madoff Securities collapsed, it claimed to have about $65 billion but really had just $300 million, most of which was in the was Madoff Securities’ main bank account.