Friday, February 4, 2011

"Three takes on JP Morgan and Madoff" (JPM)

Following up on this morning's "J.P. Morgan was “at the very center” of the Bernie Madoff investment fraud" (JPM), here's Felix Salmon at Reuters:
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....MORE