Three takes on JP Morgan and Madoff

By Felix Salmon
February 4, 2011
Diana Henriques, of Irving Picard's lawsuit against JP Morgan Chase.

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I love the NYT’s coverage, by Diana Henriques, of Irving Picard’s lawsuit against JP Morgan Chase. Not only has the NYT put the lawsuit online in full, but it also regularly links to the exact page of the lawsuit that it’s talking about, using the nifty NYT document viewer. As you’d expect from the NYT, the story is clear and accurate, with handy interactive sidebars and audio extras.

Alongside the official NYT coverage, Floyd Norris wrote a blog on the case. He picks up on something quite astonishing: JP Morgan had created products which paid out the return on Madoff’s funds. In order to hedge that exposure, JPM was naturally invested in those funds. But even as it retained its exposure to its investors, JPM took its money out of the funds. “JPMC was still required to pay its investors based on the returns generated by the BLMIS feeder funds, which were generating positive returns when the market was down,” says the complaint drily. “But for JPMC’s suspicions about fraud at BLMIS, this move would have been counterintuitive.”

Norris is evenhanded about what all this means:

Two things stand out. First, JPMorgan Chase no longer had a riskless strategy. If it turned out Madoff’s returns were genuine, it stood to lose a lot of money since it would have to pay the investors in the structured products. Second, the suit refers to the bank’s “suspicions.” That is a very different word from “complicit.”

It seems to me that JPM was making a massive proprietary bet on Madoff being uncovered as a fraud — there’s no other explanation for its actions that I can see. Norris is right that JPM wasn’t necessarily complicit with Madoff in the fraud, but there’s something extremely fishy going on here.

For a much less evenhanded look at the case, one needs only turn to the Huffington Post, where Peter Goodman has recently taken over as business editor after leaving the NYT. His headline is stark — “Bernie Madoff’s Relationship With JPMorgan Should Shock No One” — and, freed from the institutional constraints of the NYT, he lets loose:

Far from shocking, this is really just an appropriate plotline in a story that is finally becoming clear beyond argument: Those lines between criminal fraud and legitimate banking have been blurry for a long time. One can reasonably argue that they pretty much got erased during the Internet bubble and into the real-estate boom.

Goodman goes on to compare JPM unfavorably to Madoff, noting that in Madoff’s fraud, “the amount of money left missing, some $65 billion, amounts to chump change compared to the banking-led larceny committed at the expense of national prosperity.”

Clearly, Goodman is enjoying his newfound freedom at HuffPo — the fact that he can write the kind of material which would be unthankable in the blogs or pages of the NYT. But at the same time, as journalists move back and forth with increasing regularity between mainstream outlets and newer, more vivacious sites, it’s going to be harder for the MSM to hold on to its ability to stay above the fray. Goodman was writing Henriques-style reports only a few months ago, and now that he’s left, it’s pretty clear what he was thinking all along. The same can be said for other NYT departures, like say David Cay Johnston.

The more that this kind of thing happens, the more obvious it becomes that NYT reporters are uncomfortably hiding their opinions, inevitably letting them seep out the edges of their reporting, and at the same time desperately trying to maintain a veneer of impartiality and objectivity. It’s a tough act to maintain, and it shatters completely if and when the NYT’s bylines regularly appear elsewhere expressing strongly-held and even extreme opinions.

The world of journalism is becoming increasingly personality-based, with copper-bottomed institutions being replaced by a multitude of individual voices. The NYT in general is doing a good job of showcasing a wide range of voices on its blogs and in its non-news pages more generally. But it remains to be seen whether and for how long it will try to enforce the wall between news and commentary. That wall has, after all, already been breached by having reporters like Gretchen Morgenson also write columns. And in coming years I expect we’ll see much more voice and opinion in news articles, if only because that’s the best way of getting the best content out of the NYT’s smartest reporters.


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What the hell does “copper-bottomed” mean? I thought that was a pot?

Posted by Bernanke | Report as abusive

Thanks Felix. The Goodman piece, which I had missed, is quite powerful — almost shocking in its frankness. I wonder why I felt that, given that I happen to agree with it. Almost a vindication to see a former NYT reporter go that strongly.

Posted by maynardGkeynes | Report as abusive

I understand from Paul Krugman that the JP Morgan Chase’s CEO has a very, very sensitive ego. So would a family member, golfing employee, or less then gruntled serf be kind enough to pass the headline “Jamie Dimon, hyena” on to him? Thanking you in advance for your consideration… hyena

Posted by lambertstrether | Report as abusive

Do you feel your investments are safe? Do you think your account statement reflects the balance in your account?
Do you know that while Irving Picard is questioning and accusing JPMC and the Wilpons, that he’s also pursing innocent investors?

Do you know that there’s no guarantee that your broker is not a crook?

Read how Congress is helping and how you can support the safety of your own investments.

Posted by MadoffCoalition | Report as abusive

“As you’d expect from the NYT, the story is … accurate” – waaaa haaa haaa. Thanks that beats this as hands down the funniest thing on the internet these days:

One tiny criticism, you know April Fools Day is not for a couple of months. After all if you do it now, people might think you were actually being serious!

Posted by Danny_Black | Report as abusive

Danny_Black, this story by the NYT is a Felix has stated, clear and accurate. It took us to the place within the lawsuit that clearly showed their points that JP Morgan ignored the signals and even emails where it has been labeled a Ponzi scheme.

The article and the evidence show they are culpable. The transactions clearly made them nervous enough to protect their own self-interests and investments, but the banker mentality meant they chose collecting fees over ethical banking/money laundering responsibilties. The new norm…

I am guessing, being you are a former banker, that you are on the side of JP Morgan continuing to collect fees rather then whistle blow as you feel it was ‘within the laws’ to do so?

One tiny criticism. Would you also take the Legion’s poppies and not put in any money if no one is near? That’s legal as well…

Posted by hsvkitty | Report as abusive


“copper-bottomed” is an old slang term from Britain for safe and reliable.

Copper is toxic to aquatic organisms, so they sheathed the bottoms of wooden ships for two purposes:

1) Reduce rot of the timbers by making it inhospitable for marine organisms, like boring worms.

2) Prevent fouling of the bottom with barnacles etc. so that the ship will remain fast and maneouverable without frequent maintenance.

Copper was (and still is) expensive, so this was only used on high-value ships.

Posted by ErnieD | Report as abusive

It seems to me that JPM was making a massive proprietary bet on Madoff being uncovered as a fraud — there’s no other explanation for its actions that I can see.
Not at all. In a flight to quality environment, they might have just made a consideration that market risks were small compared to settlement and credit risks in firms with “known clouds” over their heads.

Is it reported whether Morgan’s structured note investors were made whole after the fraud was reported? (I didn’t read through the whole NYT story).

Besides, what kind of world is it if you can’t sell someone derivatives on what you suspect is a lousy underlying?

Hell, banks have brought companies public, where members of the management or board were suspected to be “associated” with organized crime, for pity’s sake…

Posted by AmicusAlso | Report as abusive

Why is it that JPM is now being pilloried for having hedged against the “clouds” they detected? Isn’t that what they’re supposed to do? Why do we have to redefine risk management as fraud?

Posted by Christofurio | Report as abusive

Christofurio, the banks perpetrate fraud, so I guess it is difficult to see when others are doing it. It surely was easier to take all those fees and include them in the bonuses rather then whistle blow! But I guess turning a blind eye to fraud is ok? Even when you have transactions and accounts that never stood the test from the beginning? Even when people in the organization are CALLING it a Ponzi? years after? Ok…

Since when do the banks bear the brunt of risk. It seems the tax payers bore the brunt!

The banks have redefined most of words pertaining to banking… trust, ethics, fiduciary duty, etc…and heck even God’s work has been redefined.

Bank is a 4 letter word… and pillories should make a comeback!

Posted by hsvkitty | Report as abusive

Plenty of fraud around, hsvkitty, not all perpetrated by banks. Consider this article: ss/06gret.html?ref=gretchenmorgenson

Pulte Homes pre-approves the buyer, then stalls on the actual loan approval, then either approves it at a ridiculous rate or denies the loan — and keeps the deposit because it is now too late to find other financing.

Foolish of people to trust the builder with the financing (best to keep transactions “at arms length” as much as possible), but I can understand why some might be tempted.

Posted by TFF | Report as abusive

JPM did not just sell derivatives on what they suspected was a lousy underlying. They sold derivatives on what they KNEW was a lousy underwriting because they had facilitated and recieved proceeds of the fraud that made it a lousy underwriting.

Posted by chris9059 | Report as abusive


“Since when do the banks bear the brunt of risk. It seems the tax payers bore the brunt!”

Which is congruent with my point. The taxpayers picked up the tab for the banks’ failure to manage risks. So should we insist banks never manage risks hereafter, so we can keep picking up such tabs forever? That seems to be the implication of those who are making an issue of the Madoff/Morgan link.

It seems that JPM did manage its Madoff exposure properly. In that, at least, they seem to have done the right thing. Their job.

Posted by Christofurio | Report as abusive

I truly thought a bank’s job was to manage risk rather then seeking out damaging risk. So banks are supposed to rake in exorbitant fees and place bonuses ahead of mitigating and managing risk?

Not reacting to a Ponzi scheme that had red flags flying is much like a bad pilot who turns off the noisy warning signals telling them they are too close to terrain because it’s aggravating. And doing that in the name of the shareholder interest might surprise a few shareholders.

Being the two desks in JPM were fighting over the risk, what did the risk manager say about that dispute, especially given an email actually naming the scheme a Ponzi had circulated.

Perhaps not caring much about the regulatory and legal risks should affect bonuses and in this case all those involved give back related bonuses. *cough* If I were a shareholder, I would be screaming that the bank took on the worst risk of all… risk of reputation.

Posted by hsvkitty | Report as abusive

“So banks are supposed to rake in exorbitant fees and place bonuses ahead of mitigating and managing risk?”

No, they are supposed to manage risk. And this obligation is NOT limited only to those with the phrase “risk management” in their job titles.

Managing risk can mean, that if an institution has an interest in a party that could turn out to be a ponzi scheme, the former should hedge by going short on the latter — i.,e, arranging to profit in case that is what it turns out to be.

Is that what you are calling for, or what you are complaining about? If you are calling for risk management, and recognize this as an example of that, then we are in accord.

Posted by Christofurio | Report as abusive

If I understand her properly, hsvkitty would like to see greater consumer protections.

I’m wondering if we ought not go the opposite direction? Kill *all* consumer protections (except perhaps the most blatant fraud statutes). Force people to learn to act cautiously and protect themselves.

Weak protections are worse than nothing. People engage in transactions believing they are safe, then lose their shirt when it turns out they are dealing with scammers.

In a “no protections” environment, reputation becomes far more valuable (since that would be the only safety for the consumer). This would strongly encourage companies to invest in their reputations. The present system simply encourages companies to look for ways to bypass regulations.

Posted by TFF | Report as abusive

Christofurio, it is doubtful we can be in accord if you choose to leave off a sentence from my first paragraph to change the meaning.

I also disagree. A bank has obligations other then to itself or shareholders. If you cannot see that it is the lack of ethics I am complaining about, then absolutely, we will not be in accord.

@TFF, banks are supposed to be self regulating. Even Christofurio is admitting that, yet he insists it is for the benefit of the bank over the benefit of the customers, shareholders and ultimately taxpayers.

To some degree I have to agree with you. Regulations with no teeth or policing can do more harm then good. And I have a question…Why SHOULDN’T people feel safe dealing with banks?

Let the banks fail. The ones who are too big to fail are growing. How can that be? They need to lose their protection … Yet, the smaller banks are still dropping like flies. ed/banklist.html

I have moved to a Credit Union and haven’t looked back. All the conveniences of a bank, without all the hidden fees, fees are returned if you carry a certain savings/debit in the bank, lowest mortgage rates in town, free ATM and chequing, and full service and lots of choices and incentives that make sense.

Posted by hsvkitty | Report as abusive

In certain high-altitude circles, the difference between “complicity” and “suspicion” is “plausible deniability”.

Posted by breezinthru | Report as abusive

If bank is a 4 letter word it should be right there with good, nice, and neat.

My bank has served it’s customers for 147 years, has produced a profit for 143 of those years, has never taken goverment money, pays Federal income taxes, State income taxes, local property taxes, and employes 270 people all of which are offered health benifits and none of which make anywhere near 1MM/year.

Now I know we’re not the kind of bank that is now fashionable to hate… we don’t even offer credit cards… but if you look at banks that are hated it’s worthy to point out that TARP will clearly be repaid IN FULL WITH INTEREST EXCEEDING THE GOVERMENTS COST OF FUNDS. In any possible scenerio the U.S. Goverment will turn a profit on saving the world.

If you want to hate on the MEGA banks go right ahead, if you want to hate on credit cards as a product go right ahead. If you want to hate on the whole financial system then move to Yemen… because any country without a modern financial system is going to look alot like that.

Posted by y2kurtus | Report as abusive

“Why SHOULDN’T people feel safe dealing with banks?”

Actually, I feel perfectly safe dealing with my bank. (Apparently a similar institution to what y2kurtus describes.) I don’t feel safe when dealing with larger banks, so I try to avoid it.

From my perspective, the greater problem is that TOO MANY people feel safe when dealing with institutions that are To Big To Give A Damn. They trust in the regulators to protect them, and of course that protection is grossly inadequate.

If people didn’t trust the larger institutions, then the smaller and more responsive banks would own the bulk of the business. They don’t, at least not in my area. (Most of my clients pay me with BoA checks.)

The same can be said of so many businesses… People choose the discounts that come from dealing with a larger institution and ignore the shady business practices that are often responsible for producing those discounts. Then they get burnt and complain about “consumer protections”. HELLO?!?!?

Posted by TFF | Report as abusive

y2kurtus, I know you took that all personally, but the bank you are working for sounds like my kind of bank. I am always happy to give business to any one in my neighbourhood, as long as I get the service. There are few banks like yours left.

TFF is right in that the banks become too big to give a damn. Maybe that is the crux. To big to care about more then the next bonus.

Posted by hsvkitty | Report as abusive

(Too big too)

Posted by hsvkitty | Report as abusive

When you just don’t give a damn (well, about anything but yourself) ourres-seduction-style-self-deprecating- fabulousness-emoticons/#more-35511

Posted by hsvkitty | Report as abusive