A new book by Barron’s reporter Erin Arvedlund asserts that banking giant JPMorgan Chase became aware of Madoff’s Ponzi scheme months before his arrest, prompting the bank to liquidate its positions in a Madoff-related fund. Yet, the bank continued to accept deposits into Madoff’s main account at the bank from unsuspecting investors who were about to lose everything.
NLPC is a critic of JPMorgan Chase’s support for political and social causes that are contrary to the bank’s interests and hostile to the capitalist system itself, such as ACORN. Although these new revelations are a separate controversy, both reflect an apparent willingness by the firm to work with shady enterprises if it is perceived to be in its own interest.
The book is titled Too Good to be True. Excerpts appeared in Barron’s over the weekend. Arvedlund has a great deal of credibility on anything Madoff-related, having written a story in 2001 suggesting that Madoff’s consistent record of returns was suspect.
The only good thing that can be said about JPMorgan Chase is that, like Arvedlund, it was perceptive enough to smell the Madoff rat. But unlike Arvedlund, who tried to sound the alarm, JPMorgan Chase kept quiet and tried to protect itself.
In 2006, JPMorgan Chase developed a derivative product for its wealthy clients. It was linked to the Fairfield Sentry Fund offered by the Madoff feeder Fairfield Greenwich. The bank offered investors — mostly in Europe — a note that paid three times the earnings, or returns, of the Sentry Fund. The note matured in five years. To hedge its risk on the derivative product, the bank invested in the Sentry Fund itself. This way, if the Sentry Fund did well, the bank’s returns would offset its obligation on the notes.
By the summer of 2008, JPMorgan Chase had deposited $250 million with the Sentry Fund. With the financial meltdown on Wall Street and around the world in full swing, most of the markets were down 30% or more, and yet the Sentry Fund reported gains of 5%. JPMorgan Chase began to grow suspicious.
As a result:
In September 2008, JPMorgan Chase quietly liquidated its entire $250 million position in the Sentry Fund, even though it remained liable on the derivatives it had sold to the wealthy clients. At the time, the Fairfield Sentry investment notes were showing a 5% gain for the year. The bank had concluded Madoff was a phony, and the only way to protect itself was to liquidate anything connected with Madoff.
When JPMorgan Chase bought what was left of Bear Stearns last year, it inherited a relationship with Madoff that is also sure to raise more questions about its ethics. According to Arvedlund:
Brokers who traded at Bear Stearns used the firm’s automated equity order system to buy and sell stocks. A broker would enter the stock symbol and the number of shares he or she wanted to trade. The system was supposed to do the rest: work to find the best counterparty to trade with from among the many market makers that traded with Bear Stearns. However, for Nasdaq stocks, Bear Stearns had an unwritten code: the system automatically defaulted to trade with Madoff.
Madoff reportedly paid Bear Stearns substantial fees for this default setting on their equity order system, and he may have paid other customers to do the same as well. Between 2000 and 2008, Bear Stearns’ 400 or so brokers all used this system, and all their Nasdaq trades defaulted to Madoff. It was a big source of revenue for Madoff, and it vaulted Bear Stearns to a position as the largest counterparty trading with Madoff. The arrangement was in place when Bear Stearns went under in early 2008, and it continued under JPMorgan Chase.
JPMorgan Chase and/or the JPMorgan Chase Foundation are major funders of the Association of Community Organizations for Reform Now (ACORN) and related organizations. ACORN is a network of as many as 360 organizations, structured to escape accountability, a network far more complicated than anything Madoff ever constructed.
ACORN has had its own embezzlement scandal. Dale Rathke, the brother of ACORN founder Wade Rathke, stole nearly $1 million in 1999 and 2000. ACORN treated the crime as an internal matter and did not even notify its board. A whistle-blower made it public. Dale Rathke remained on ACORN’s payroll until June 2008.
According to its 2007 tax return (the most recent available), the JPMorgan Chase Foundation made a million-dollar gift to ACORN Housing, Inc. that year. This donation is likely the tip of the iceberg of the bank’s total support of ACORN. JPMorgan Chase is one of ACORN largest corporate backers, if not the largest. JPMorgan Chase can take a step toward accountability by disclosing the specifics of its support for ACORN.
Last fall, JPMorgan Chase accepted $25 billion in taxpayer TARP funds. In 2008, the top 200 bonus recipients at JPMorgan Chase received $1.12 billion. The firm had 1,144 employees who received a bonus of least $1 million last year, more than any other Wall Street firm.
You would think with all these millionaires walking around the company, there would be at least a passing acknowledgement of the wealth generation potential of a free economy. Not a chance. CEO Jamie Dimon sneers at free market advocates. The firm funds a variety of anti-business activists, ACORN being just the most dramatic example.
Dimon is apparently not self-conscious either about ACORN’s role in the residential mortgage crisis, much of it driven by subprime lending. Starting in the Seventies, ACORN saw the big banks as shakedown targets. The weak-kneed executives at these institutions were pretty easy pickings.
ACORN screamed “racism.” It accused mortgage lenders of “redlining,” or denying credit to borrowers in certain areas. It picketed the homes of bank directors in leafy suburbs.
A way out was offered to the banks. They could make contributions to ACORN and/or they could “invest” in ACORN Housing, which made loans to “underserved” borrowers.
They also could back off from opposition to a law called the Community Reinvestment Act of 1977 that required banks and thrifts to lend more money from areas where they took deposits. It meant more loans to “underserved” communities, and a loosening of lending standards.
Of course, many of ACORN’s “deserving” borrowers were not deserving at all. Increasingly, the banks dumped the loans on Fannie Mae and Freddie Mac, which were under pressure by Congressmen like Barney Frank (D-MA) to make more loans to the “underserved.”
The result was the mortgage meltdown that nearly took down our entire financial system, providing the justification for the massive bailouts of the banks. But Dimon acts like JMorgan Chase has no culpability because of its “solid” balance sheet.
According to Arvedlund, there are already civil suits against JPMorgan Chase by investors whose funds were acccepted into Madoff’s account at the bank after it had concluded that Madoff was a fraud. Of course, this may also be criminal, but there is no word that the bank is the target of a criminal investigation.
During the campaign, Dimon was a vocal supporter of Barack Obama. On July 18, the New York Times called Dimon “Obama’s favorite banker.” Dimon may hope that this relationship will insulate his firm from prosecution in the Madoff case. In any event, JPMorgan Chase’s culture must be questioned, along with Dimon’s credibility and leadership.