This is a very misleading article in my opinion. Investment banks provide investors access to risks which they want, in this case investors WANTED access to Madoff structured notes because Madoff had been outperforming, therefore JPM had a find a way to hedge themselves to reduce their risk. After investing a tremendous amount in madoff, JPM probably realized that they could hedge easier by going long the general market on roughly a 1.1 to 1 ratio I would imagine or the structured desk wanted to use their short to hedge another long position they couldn't get out of while retaining some idiosyncratic risk that Madoff was in fact a fraud (this type of tail hedge is very valuable on the st btw). When assessing risks of this size, I am glad that JPM seemed to be asking all the right questions about Madoff (which no one else, not even the SEC, was asking), it is funny JPM is being penalized for this.<p>Creating a similar idiosyncratic risk could be to sell a gold ETF and own physical gold, paying maybe 30 bps a year for a real outperformance during a) hyperinflation if real gold is needed or b) some gold bars at the ETF turn out to be fake/not there (some have been found to be tungsten) c) another unforseen event. These options are hard to create and very valuable to a huge investment bank such as JPM which is generally very long the mkt in general and actually allows them to make more loans.<p>Also, most benefiting from rising prices in madoff claims are distressed hedgefunds and investment banks btw. They own probably 90% of the claims now, 'vicitms" selling at roughly 20 cents on the dollar. Anyone really pointing the finger at JPM is very naive about the whole system.
Nice summary of the situation. This is the takeaway for me:<p>"If you think of JPMorgan's businesses as operating more or less independently, but occasionally making each other money by cross-selling, then this mess makes more sense. A London investment bank that considered and rejected a derivative-linked investment in Madoff would have no obligations to report its suspicions to U.S. regulators. A boring custody bank that ran Madoff's checking accounts but had no derivatives traders to get suspicious about him also probably wouldn't be in trouble for missing the Madoff red flags. Combine the two businesses and the same behavior gets you in trouble."<p>Also, quite refreshing to read an article by someone who apparently has some experience with Wall Street. On a related note: I've been really happy with Bloomberg's coverage recently, of Wall Street specifically and the business world generally. Especially now what WSJ has decided to go full-on partisan.
That dimon is still being targeted astounds me. This is an example of why even those in power should not be the nail that sticks out. In case you're wondering why dimon, why JP Morgan it all traces back to this [1] event.<p>1. in 2008/2009, can't find it on Google bc why have a date search anymore. Jamie Dimon was called before the finance committee to explain the financial meltdown. He allegedly stormed out after representatives asked him truly epically stupid questions, and told one of his aides, "Don't ever put me in front of those fucking morons again". There is no reason other than visibility and a personal grudge that this is targeted at JPMorgan v. the other banks.
What percent of their profit was that and how few months will it take for them to make it up?<p>I think society would happily trade that for actual prison time for a bunch of execs who knew exactly what was going on.
Interesting read but my knowledge of what I am going to call "advanced banking" kind of leaves me wanting to do some sidebar research.<p>Can anyone suggest any accessible literature for learning the more complex areas of banking/finance?
It's pretty clear, and has been pretty clear for years now, that JPM is not only too big to fail, but too big to manage.<p>In short, JPM needs to be broken up. Most everyone will benefit--JPM managers, line workers, JPM customers, and shareholders, and the worldwide financial system. The only who does not benefit from a break-up is Jamie Dimon whose primary goal is to manage the largest bank around.