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For The Record  

FTR #665 Update on the Meltdown, Part 2

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Beginning with a frightening article about an electronic draw-down of money market accounts in the United States, the program notes that the Federal Reserve and Treasury Department pumped money in to avert an unprecedented economic and political catastrophe. Supplementing the “fear factor,” the program relates some astounding numbers about the size of the rescue packages assembled in order to attempt to stanch the economic bleeding.

Much of the broadcast focuses on the Bernard Madoff scandal, covered at length in the first installment of “Update on the Meltdown.” (In that program, Madoff is dubbed “Lee Harvey Madoff” for his insistence that he acted alone–a preposterous claim that belies the certainty that powerful forces were behind this scam.) The fact that the Securities and Exchange Commission won’t be able to compel testimony from key witnesses in the scandal. In that context, the program turns to the subject of one of the others with which “lone nut” Madoff was involved–Frank DiPascali. Note that this “blue collar guy” was represented by the son of former (George W. Bush) Attorney General Michael Mukasey. Mark Mukasey works for Rudolph Giulani’s law firm.

Di Pascali was Madoff’s “Number Two” and will be “Number One” for investigators seeking to unravel the tangled web of the Madoff Ponzi scheme. Not all of the investors in Madoff’s operation got burned. JP Morgan largely escaped the fallout. DiPascali’s wife worked for JPMorgan Chase–a coincidence, no doubt!

Turning to the subject of offshore-entities that exempt themselves from international financial scrutiny and regulation and which thus serve as financial safehavens-the principality of Liechtenstein has served as a tax haven for years. Germany is asking that country’s prince to pay taxes.

Attempting to attenuate the economic devastation wrought by offshore, Barack Obama’s Justice Department is trying to appropriate new powers to prosecute offshore tax evaders, including fraudsters who have conducted their misdeeds in the mortgage industry. In a related development, the U.S. is seeking the identities of thousand of U.S. citizens who have used the Union Bank of Switzerland and Swiss banking laws to evade American tax laws.

It appears that things are not moving in a direction that would favor UBS or any other banks seeking to preserve data about tax cheats. Many of the financial safehavens for “offshore” funds are moving in the direction of regulatory transparency.

As terrifying and devastating as the meltdown has been in America, the prospects for other some other countries appear even worse. Switzerland, Ireland and the United Kingdom may experience Icelandic style financial collapse.

It is against this apocalyptic background that the program concludes with fears long expressed on For The Record. The British education minister has warned of his belief that the severe economic crisis might spark a return to fascism, much as the social dislocation experienced by people suffering in the Great Depression drove many to the ranks of fascist organizations.

Program Highlights Include: An Austrian woman’s role as a Madoff investor for (among others) Russian oligarchs; the existence of a dozen European feeder funds for Madoff’s operation; review of connections between the house of Liechtenstein and the al-Taqwa milieu.

1. Beginning with a frightening article about an electronic draw-down of money market accounts in the United States, the program notes that the Federal Reserve and Treasury Department pumped money in to avert an unprecedented economic and political catastrophe. One wonders if this might have been an Underground Reich operation, similar to its deliberate sabotage of the New York Stock Exchange on 11/22/1963?

“The Capital Markets Subcommittee Chair, Rep. Paul Kanjorski of Pennsylvania, tells C-Span how the world economy almost collapsed in a matter of hours.

At 2 minutes, 20 seconds into this C-Span video clip, Kanjorski reports on a ‘tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars.’ According to Kanjorski, this electronic transfer occured over the period of an hour or two.

Kanjorski: ‘The Treasury opened its window to help. They pumped a hundred and five billion dollars into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn’t be further panic and there. And that’s what actually happened. If they had not done that their estimation was that by two o’clock that afternoon, five-and-a-half trillion dollars would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.’ It would have been the end of our political system and our economic systems as we know it.'”

“Rep. Kanjorski: $550 Billion Disappeared in ‘Electronic Run on the Banks” Posted by Mark Frauenfelder; boingboing.net; 2/9/2009.

2. Next, the program relates some astounding numbers about the size of the rescue packages assembled in order to attempt to stanch the economic bleeding.

“The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.

The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged up to $5.7 trillion more. The Senate is to vote this week on an economic-stimulus measure of at least $780 billion. It would need to be reconciled with an $819 billion plan the House approved last month.

Only the stimulus bill to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates enacted in 2008 have been voted on by lawmakers. The remaining $8 trillion is in lending programs and guarantees, almost all under the Fed and FDIC. Recipients’ names have not been disclosed. . . .”

“U.S. Taxpayers Risk $9.7 Trillion on bailout Programs (Update1)” by Mark Pittman and Bob Ivry; bloomberg.com; 2/9/2009.

3. Much of the broadcast focuses on the Bernard Madoff scandal, covered at length in the first installment of “Update on the Meltdown.” (In that program, Madoff is dubbed “Lee Harvey Madoff” for his insistence that he acted alone–a preposterous claim that belies the certainty that powerful forces were behind this scam.) The fact that the Securities and Exchange Commission won’t be able to compel testimony from key witnesses in the scandal.

“Yesterday we noted that, based on his testimony before Congress, SEC Inspector General David Kotz appears to be conducting an aggressive investigation of the agency’s failures in connection with the Bernard Madoff case.

But on one crucial point, Kotz’s tetimony was much less heartening.

Questioned by lawmakers about his authority to gain access to documents and witness testimony, Kotz admitted that he didn’t have the power to subpoena former SEC employees for their testimony. (We’ll post the video or the relevant portion of the transcript when it becomes available.)

Here’s why that matters. Three SEC enforcement staffers — Assistant Regional Director Doria Bachenheimer, Branch Chief Meaghan Cheung, and Staff Attorney Simona Suh — were listed on the “closing document” for the 2006-07 inquiry into Madoff, which has emerged as exhibit A in the case against the agency. According to an SEC enforcement source, only Suh, the most junior of the three, remains at the agency. (A receptionist at the agency’s New York office, where all three had been based, confirmed to TPMmuckraker that Bachenheimer and Cheung no longer worked at the SEC.)”

“SEC IG Can’t Compel Testimony from Key Madoff Witnesses” by Zachary Roth; TPMMuckraker; 1/6/2009.

4. Next, the program turns to the subject of one of the others with which “lone nut” Madoff was involved–Frank DiPascali. Pascali called himself the Chief Financial Officer of Madoff’s firm. Note that this “blue collar guy” was represented by the son of former (George W. Bush) Attorney General Michael Mukasey, who works for Rudolph Giulani’s law firm.

Frank DiPascali Jr. joined Bernard Madoff’s firm a year after graduating from a Catholic high school in Queens, New York. Over a 33-year career, he rose through the ranks, eventually calling himself chief financial officer.

For investors like Tim Murray of Minnesota, DiPascali was a ‘street-smart New Yorker’ who fielded calls about the millions of dollars he entrusted to the firm.

‘To a Madoff customer with a discretionary account, he is the guy,’ said Murray, 57, a real-estate developer. ‘There is nobody else.’. . . ‘Mr. DiPascali is a blue-collar guy, not a Wall Street master of the universe,’ said his attorney Marc Mukasey, a former federal prosecutor now at Bracewell & Giuliani LLP in New York. ‘He is devastated by the losses to investors.’

“Madoff’s ‘Street-Smart’ Aide DiPascali was Investors’ Go To Guy” by David Voreacos, David Globin and Patricia Hurtado; bloomberg.com; 1/16/2009.

5. Di Pascali was Madoff’s “Number Two” and will be “Number One” for investigators seeking to unravel the tangled web of the Madoff Ponzi scheme.

“As a key lieutenant to money manager Bernard Madoff for more than 30 years, Frank DiPascali Jr. said he headed stock-options trading and was the point man for investment-advisory clients who were told he executed their trades.

Now, he is a potential point man in the investigation of a Ponzi scheme that Mr. Madoff has told prosecutors he carried out over decades, according to a criminal complaint and people familiar with the matter, potentially bilking investors out of $50 billion.

Federal investigators are interested in information Mr. DiPascali, 52 years old, can provide about the inner workings of Mr. Madoff’s operation, who — if anyone else — knew about the alleged fraud, and where the money went, according to people familiar with the matter.

Mr. Madoff was charged with criminal securities fraud and has told prosecutors he acted alone, according to people familiar with the matter.

Mr. DiPascali hasn’t been charged with wrongdoing. His lawyer, Marc Mukasey, declined to comment about Mr. DiPascali’s role with Mr. Madoff except to say that he had frequent contact with investors. . . .”

“Madoff Point Man Cast in Same Role for Prosecutors” by Aaron Lucchetti, Amir Efrati and Tom Lauricella; Wall Street Journal; 1/21/2009.

6. Not all of the investors in Madoff’s operation got burned. JP Morgan largely escaped the fallout.

“Bernard Madoff‘s alleged massive financial fraud has sparked more outrage as news circulates a major U.S. bank may have cashed out early while other investors were left high and dry.

The New York Times reported on Thursday that JPMorgan Chase & Co suddenly began pulling its money out of two hedge funds that invested with Madoff last fall before Madoff was arrested, but did not tell investors.

According to the newspaper, JP Morgan said its potential losses related to Madoff are “pretty close to zero.”

JP Morgan Chase spokeswoman Kristin Lemkau did not return several calls seeking comment.

As lawyers and investors digested the story, they began questioning how big players may have been able to protect themselves from Madoff, while small investors were left exposed. . . .”

“New Talk of Who Escaped Madoff Scheme Sparks Anger” by Svea Herbst-Bayliss; Reuters.com; 1/29/2009.

7. One possible explanation for the fact that JP Morgan escaped the damage done to other Madoff investors is the fact that the above-mentioned Frank DiPascali’s wife worked for JP MorganChase National Association.

“With the public’s attention having been exclusively focused on Bernie, his sons Marc and Andrew, and Bernie’s “three-man accountant company” lead by David Friehling, a question that is intriguing more and more people is who/what/where are Frank DiPascali, the 51 year old CFO of Bernard L Madoff, and Charles Wiener, Bernie’s 50 year old nephew, listed as Director of Administration, who were the only other tenants on floor 17 of 885 Third Avenue. . . . Frank is married to Joanne DiPascali of Howard Beach who is an employee of JP MorganChase National Association, the private banking arm of JPM. As noted here, Joanne works out of JPM’s Iselin NJ office, which is where the firm’s mortgage business is centered. In this March 29, 2006 memo, the Iselin office provided its 2 cents on just how smoothly the Nontraditional Mortgage Product market is operating. As seen in the following representative prospectus from a 2007 mortgage pool offering by that office, of the $473 million mortgage pool peddled probably by Mrs. DiPascali among others, only $181 million of mortgages had verification checks, $440 million are IOs and average outstanding balance is $476,000…So plot thickens – husband is chief financial officer to a ponzi as wife is potentially selling worthless mortgage pools…”

“Breaking Expose: So . . . Where Are Frank and Charlie?” by Tyler Durden; Zero Hedge; 1/14/2009.

8. Among those who helped steer money to Madoff’s operation was one Sonja Kohn. Among those for whom she allegedly invested were Russian “oligarchs.” To no one’s surprise, she appears to be in hiding.

“With an aggressive style that stood out in the staid world of Austrian banking even more than her bouffant red wig, Sonja Kohn made few friends gathering billions for Bernard L. Madoff from wealthy investors in Russia and across Europe.

Now, she has even fewer. Kohn has dropped out of sight, leaving the firm she founded, Bank Medici, in the hands of Austrian regulators, who took it over last week.Embarrassment from investing heavily with Madoff could explain wanting to disappear from public view. But another theory widely repeated by those who know Kohn is that she may be afraid of some particularly displeased investors: Russian oligarchs whose money made up a chunk of the $2.1 billion that Bank Medici invested with Madoff.

“With Russian oligarchs as clients,” said a Viennese banker who knew Kohn and her husband socially, ‘she might have reason to be afraid.’ . . .”

“Madoff Losses and Austria’s ‘Woman on Wall St.'” by Nelson D. Schwartz and Julia Werdigier [New York Times]; Palm Beach Post; 1/11/2009.

9. Other European investors include a dozen ‘feeder funds’ that directed capital to the Madoff operation. Might this have been Bormann capital network money?

” . . . [Harry] Markopolos said he had discovered a dozen additional funds that funneled money to Madoff ‘hiding in the weeds’ in Europe. Managers of investment ‘feeder’ funds that relayed money to Madoff willfully turned a blind eye to his improprieties because they were paid generous fees, Markopolos said. . . .”

“Lawmakers Assail Mute SEC Witnesses -‘Abuse of Authority'” by Marcy Gordon; San Francisco Chronicle; 2/5/2009; p. C2.

10. Turning to the subject of offshore-entities that exempt themselves from international financial scrutiny and regulation and which thus serve as financial safehavens-the principality of Lichtenstein has served as a tax haven for years. Germany is asking that country’s prince to pay taxes. Note that the royal family’s LGT bank was a repository of Bank al-Taqwa funds and that Prince Max returned to Germany as a resident in September of 2001-the month of the 9/11 attacks.

“German tax authorities want Prince Max von und zu Liechtenstein to pay taxes on investment gains of a foundation set up by his family, LGT Group, the bank owned by Liechtenstein’s royal family, said in a statement.

Lawyers for Prince Max, who lived in Germany from January 1999 until January 1999 until January 2000 and again since September 2001, dispute the tax authorities’ view and are working with them on a solution, LGT said in the statement, which was e-mailed to news organizations late Tuesday. . . .”

“Germany Asks Liechtenstein’s Prince Max to Pay Investment Taxes” by Christian Baumgaertel; Bloomberg.com; 2/20/2009.

11. Barack Obama’s Justice Department is trying to appropriate new powers to prosecute offshore tax evaders, including fraudsters who have conducted their misdeeds in the mortgage industry. In addition, the provision would enable the Justice Department to pursue abuse of government bailout funds.

“The Justice Department is seeking expanded powers to prosecute offshore tax evasion and other finaicial crimes, including those related to the mortgage industry and potential misuses of government bailout money, The New York Times‘s Lynnley Browning reports. The efforts, which have gained traction in recent weeks, could give the agency tougher prosecutorial tools to combat fraud amid the economic downturn. As part of the effort, the agency has thrown its weight behind a Senate antifraud bill that, if passed, would make it easier for the agency to apply money-laundering statutes in cases of suspected tax evasion, particularly those involving offshore accounts.

A top Justice Department official laid out the aims on Wednesday in comments at a Senate Judiciary Committee hearing on the bill, known as the Fraud Enforcement and Recovery Act of 2009. . . .”

“New Powers Sought to Fight Financial Fraud” by Andrew Ross Sorkin [accessing article by Lynnley Browning of the New York Times]; Dealbook; 2/13/2009.

12. In a related development, the U.S. is seeking the identities of thousand of U.S. citizens who have used the Union Bank of Switzerland and Swiss banking laws to evade American taxlaws. UBS is cooperating to a certain extent, but not nearly enough to satisfy the Obama administration. In this context, one should not lose sight of the fact that UBS is closely connected to the Bormann capital network.

“A government lawsuit filed Thursday seeks the identities of tens of thousands of people who hid billions of dollars in assets from the IRS at the Swiss-based bank UBS AG. A defiant Swiss president pledged to maintain his country’s bank secrecy laws.

In the suit filed in Miami, the Obama administration wants UBS to turn over information on as many as 52,000 U.S. customers who concealed their accounts from the Internal Revenue Service in violation of tax laws. . . .

A deal announced Wednesday provides access to about 250 to 300 UBS customers who used Swiss bank secrecy laws to hide assets.

To avoid prosecution, UBS agreed to pay $780 million, which Justice Department officials said was the largest ever in a criminal tax case. The bank’s chairman, Peter Kurer, said UBS accepted ‘full responsibility’ for helping its U.S. clients conceal assets from the IRS,

But that does not mean the bank is about to fork over information on thousands of accounts. . . .”

“U.S. Wants More Names in UBS Bank Secrecy Case” by Devlin Barrett [AP]; San Francisco Chronicle; 2/20/2009; p. C2.

13. It appears that things are not moving in a direction that would favor UBS or any other banks seeking to preserve data about tax cheats.

“Switzerland’s days as a safe haven for the world’s tax evaders are numbered. Under pressure from the United States and other troubled economies, the Swiss government said Friday that it will cooperate in international tax investigations, breaking with a long-standing tradition of protecting wealthy foreigners accused of hiding billions of dollars. Ausria and Luxembourg also said they would help.

‘Against the background of the financial crisis, international cooperation has grown stronger particularly against tax crimes,’ Swiss President Hans-Rudolf Merz said. But he insisted that the secrecy of Swiss banks would remain intact except when other countries provide compelling evidence of tax evasion. . . .”

“Swiss Bank Accounts Losing Power to Shield Tax Cheats” by Bradley S. Klapper and Alexander G. Higgins [AP]; San Francisco Chronicle; 3/14/2009; p. A4.

14. Switzerland may be bankrupted by the global financial crisis.

“Economist Arthur Schmidt says Switzerland could go broke because Swiss banks extended billions in credit to Eastern European countries which now can’t pay back the money.

‘Switzerland, like Iceland, is threatened with a potential national bankruptcy,’ Schmidt told the Swiss daily Tagensanzeige.

Loand made in Swiss francs stimulated rapid economic growth in many Eastern European countries, Schmidt says, making Swiss currency very important. . . .Now, Eastern European currencies are falling and more borrowers are having problems repaying their loans. ‘Because of the devaluations of the national currencies, the debt to Switzerland has increased more than one third.” . . .”

“Economist Warns Switzerland Could Go Broke” by Julie Crawshaw; Moneynews.com; 2/23/2009.

15. In addition, the Emerald Isle may be inundated by a sea of red ink.

“Fears are mounting that Ireland could default on its soaring national debt pile, amid continuing worries about its troubled banking sector. The cost of buying insurance against irish government bonds rose to record highs on Friday, having almost tripled in a week. Debt-market investors dnow rank Ireland as the most troubled economy in Europe. . . .Pledges made by Ireland to support its banking sector amount to 220% of the country’s annual economic output. The total loans held in Irish banks are more than 11 times the size of the economy. Following the scandal at Anglo Irish Bank over undisclosed loans, the market fears there are more hidden problems that could ultimately fall to the state to resolve. . . .”

“Ireland ‘Could Default on Debt'” by Iain Dey; The Sunday Times [London]; 2/15/2009.

16. The United Kingdom may default as well.

“The global financial crisis could be entering a ‘new and more treacherous phase’, which could push international countries to the brink of failure and further hinder the global economic recovery, according to Hennessee Group. Charles Gradate, co-founder of the Hennessee Group, points out that Iceland had one of the highest standards of living in the world just a few months ago, but after experiencing the fastest economic collapse in history, it is suffering from soaring unemployment as well as double digit interest rates. . . . Hennessee Group Research believes a primary contributor to the rise nad fall of Iceland’s economy was the vast size the country’s financial sector grew relative to its GDP and fiscal capacity.

Gradate says ‘Iceland’s three main banks (Kaupthing, Landsbanki and Glitnir) built total liabilities of approximately ten times the size of their GDP, up from about two times in 2003. In addition, approximately 80 per cent of the liabilities were in foreign currencies leaving them at risk of a currency collapse.’ . . . Currnetly, the US debt to GDP is approximately 100 percent with the bulk of its external debt mostly in dollars.

The Netherlands currently has a ratio of approximately 328 per cent, while Ireland has built a debt to GDP ratio of 900 per cent.

However, the two countries that appear most susceptible to economic collapse are the UK and Switzerland. The UK’s debt to GDP ratio is currently 456 per cent, while Switzerland’s is 433 Per cent. . . .”

“UK ‘Could Experience a Crash Similar to Iceland'”; Hedge Week; 2/18/2009.

17. Echoing fears long expressed on For The Record, the British education minister has warned of his belief that the severe economic crisis might spark a return to fascism, much as the social dislocation experienced by people suffering in the Great Depression drove many to the ranks of fascist organizations.

Ed Balls, the Children’s and Schools Secretary, said the downturn was likely to be the most serious for 100 years, and his comments appeared to raise the prospect of a return to the Far Right politics of the 1930s and the rise of Facism.

His warning, in a speech to activists at the weekend, came after a trade union baron warned that far right parties were trying to hijack the campaign for ‘British jobs for British workers’.

The row over foreign workers has gathered momentum in recent weeks and Mr Balls seemed to suggest the recession could trigger a return to the Far Right politics that prospered in the Great Depression of the 1930s.

He told Labour’s Yorkshire conference: ‘The economy is going to define our politics in this region and in Britain in the next year, the next five years, the next 10 and even the next 15 years.

‘I think that this is a financial crisis more extreme and more serious than that of the 1930s and we all remember how the politics of that era were shaped by the economy.’

The remarks are significant because Mr Balls was a key adviser to Mr Brown during his decade at the Treasury as Chancellor of the Exchequer.

Mr Balls said that he believed this to be ‘the most serious global recession for over 100 years’. .

.”

“Ed Balls: Minister Fears Rise of Fascism Amid Economic Gloom” by Christopher Hope; Telegraph.co.uk; 2/10/2009.

Discussion

4 comments for “FTR #665 Update on the Meltdown, Part 2”

  1. Oh no, Jamie, say it isn’t so:

    Forbes
    The Madoff Chickens Are Coming Home To Roost At JP Morgan Chase
    Robert Lenzner, Forbes Staff
    10/26/2013 @ 12:11PM

    It looks like JP Morgan Chase will finally have to pay up and maybe confess to its sloppy, maybe slippery relationship with the best known criminal of the 21st century so far, one Bernie Madoff.

    In 2011 I first wrote about highly questionable transactions in the apparent laundering of money between Madoff and another wealthy client of the bank, real estate developer Norman Levy. According to court documents filed at the time between $76 billion and $100 billion (that’s right, “billion” not “million”) were shifted, one might guess laundered from Madoff’s business account to Levy’s account, and then subsequently moved back into the Madoff account without a single inquiry from bank officials so far as we know.

    These highly questionable transactions back and forth between two wealthy JP Morgan Chase clients should have been reported to the US Treasury as suspicious in keeping with the requirements of the Patriot Act, passed subsequent to the 9/11 terrorist attack. No one still has come up with a satisfactory explanation for this multi-year series of money swaps.

    Now that internal documents from the bank show there were some bank executives who questioned the validity of Madoff’s returns, it is an even more mysterious gap in the bank’s operations.

    News reports suggest that JP Morgan Chase is negotiating the size of the fine it will finally have to pay for this massive oversight. Apparently, there is also the possibility of someone being charged with a crime. All in all, a smarmy tale, where once again justice was delayed, but will finally be cause at least some payment, which ought to go into the coffers of the fund to pay off Madoff investors who lost all or most of their savings.

    Given the large network of’respectable’ banks and funds that were involved with the Madoff network for years, you kind of have to wonder just how many unreported $100 billion transfers are happening on regular basis? Still, if stories like that make Wall Street seem hopeless almost hopelessly corrupt, keep in mind that it could be worse…for Wall Street.

    Posted by Pterrafractyl | October 30, 2013, 9:05 am
  2. LOL! JPMorgan lost Madoff’s fraud trail “in a blizzard of paper”. Yep. It was a dangerous blizzard of little green pieces of paper:

    The New York Times
    Madoff’s Trail Lost in a Blizzard of Paper

    JAN. 9, 2014
    High and Low Finance
    By Floyd Norris

    Did JPMorgan Chase deliberately cover up Bernard L. Madoff’s fraud?

    The documents released this week by federal prosecutors do not show it did, and I suspect it did not. JPMorgan was penalized for failing to report “suspicious activity” in Mr. Madoff’s account at the bank — the account that took in money from the Ponzi investors and paid out withdrawals.

    What the documents do show, however, is a huge bureaucracy where employees stuck to their own silos and did not communicate well with others. Suspicions were there, but so were profits, and the profits seem to have outweighed any other concerns. Many people simply filled out and filed forms, oblivious to what those forms might, or might not, indicate.

    And, in a way, that may be more troubling. If clear crimes had been committed, then people could go to jail and a lesson would be taught. But there is no evidence that anyone acted with impure motives — assuming that we accept that making money is a proper motive. A combination of turf wars and incompetence combined to facilitate the biggest Ponzi scheme ever.

    My favorite disclosure in the documents is that JPMorgan had a requirement that a “client relationship manager” certify every year that each client complied with all “legal and regulatory-based policies.” This was no doubt viewed as a tiresome and routine requirement, both by the bankers who did the certifying and by the people in the compliance department who collected the certifications.

    “In March 2009,” we are told in a “statement of facts” agreed to by the bank and prosecutors, the Madoff relationship manager “received a form letter from JPMC’s compliance function asking him to certify the client relationship again.”

    Evidently, whoever sent out that letter did not read it after a computer generated it. Or perhaps that person had somehow missed the report that Mr. Madoff had been arrested on Dec. 11, 2008. That would not have been easy. In the month after the arrest, The New York Times printed 15 front-page articles on the Madoff fraud, and it received exhaustive coverage everywhere else as well.

    Another highlight is that on June 15, 2007, JPMorgan’s chief risk officer refused to increase the bank’s exposure to Mr. Madoff’s fund — more than $100 million at the time — to $1 billion. Mr. Madoff had made it clear that he would not allow JPMorgan to perform due diligence on what he was doing with investors’ money.

    “We don’t do $1 bio trust me deals,” the risk officer wrote in an email, using what was apparently his abbreviation for billion.

    But 12 days later, that risk officer approved going up to $250 million in Madoff exposure. In the meantime, Mr. Madoff had agreed to talk with him but not to allow any new due diligence. Joseph Evangelisti, a JPMorgan spokesman, says the risk officer “relied on the current and past due diligence of our markets and credit risk units, as well as our broker-dealer group” in approving the quarter-billion-dollar exposure.

    So we have no fewer than three parts of JPMorgan voicing confidence in Mr. Madoff. That does not sound good, but Mr. Madoff fooled a lot of other people, too. At least the risk officer did not approve the full $1 billion.

    Soon after his first decision — the one saying the bank did not do billion-dollar “trust me deals” — the risk officer heard from another bank executive that, as he put it in an email message sent afterward to top JPMorgan Chase executives, “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 asked that someone “google the guy” to find a negative article he had been told about.

    Why, you might wonder, was JPMorgan Chase facing any exposure to Mr. Madoff? Its principal relationship with him was that it held the Ponzi scheme’s bank account, into which money from the suckers — er, investors — was deposited and money to repay investors leaving the fund was withdrawn. The statement of facts notes that money from that account never went to buy securities, as Mr. Madoff told investors it would.

    Another part of JPMorgan had the exposure. Based in London, the “equity exotics” desk — you’ve got to love that name — was selling derivatives to investors that promised to duplicate the performance of the Madoff fund. Some of them even promised to pay triple what Mr. Madoff paid. To offset that risk, the bank would put money into hedge funds that in turn invested in the Madoff fund. The bank was to make money off a lot of fees connected to the derivatives.

    In the end, after Lehman Brothers failed in September 2008, JPMorgan decided that was too risky and redeemed most of those investments in October and November. But it could not get out of many of the derivatives it had sold. That fact, notes the statement of facts, left JPMorgan “exposed to substantial risk in the event that Madoff Securities continued to perform successfully.”

    That JPMorgan was, in effect, betting that Madoff would not continue to report good profits aroused suspicion when it was disclosed years ago, but the investigators seem to have found no evidence that those who made the decision knew a fraud was taking place. They just feared it. In October 2008, they filed a “suspicious activity report” with British regulators, saying there might be a Ponzi scheme going on. But they did not bother to mention those fears to the bankers handling the Madoff bank account in the United States, and no similar report was filed with United States regulators.

    As a result of those timely redemptions, JPMorgan Chase was able to book a loss of only $40 million after the Ponzi scheme collapsed, well below the $250 million loss it would have otherwise faced. Of course, the $2.5 billion it will now pay dwarfs those savings. That figure counts a series of settlements announced this week, in addition to the $1.7 billion penalty it is paying to the Justice Department under the deferred prosecution agreement.

    No Ponzi scheme can operate without a bank willing to take the money in and pay it out without noticing that it is not paying for the investments promised by the schemer. It is worth noting that the only time the charges say JPMorgan should have filed a suspicious activity report was in October 2008, two months before the Ponzi scheme collapsed — and many years after it began. The prosecutors also say JPMorgan’s internal controls regarding money laundering were woefully inadequate.

    It is encouraging that JPMorgan Chase is admitting its failures but a bit disappointing that prosecutors did not say it should have noticed that a fraud was going on long before it collapsed. There is little here to inspire other banks to be more vigilant in assuring they are not the bankers to a Ponzi scheme.

    Posted by Pterrafractyl | January 9, 2014, 1:13 pm
  3. A peak into the mind of Madoff…

    Politico
    Bernie Madoff speaks: Politics, remorse and Wall Street
    By: MJ Lee
    March 20, 2014 05:01 AM EDT

    BUTNER, N.C. – From his office on the 17th floor of midtown Manhattan’s red enameled Lipstick Building, Bernard Madoff often handled billions of dollars in a single day.

    These days, at the medium-security prison here, the man convicted of orchestrating the biggest Ponzi scheme in American history is forbidden from possessing even a handful of quarters.

    “Inmates are not allowed to handle money,” reads a sign on a vending machine at the medium-security prison, where visitors — but not inmates — can pay $1.25 for a bottle of water just outside a visitation room.

    This is one of many rules that Madoff, who is 75, lives by in the eight-by-10-foot cell he shares with another inmate at the federal correctional facility where he is serving a 150-year sentence.

    Madoff pleaded guilty in March 2009 to massive investment and securities fraud, admitting to a years-long deception that shattered the lives of thousands of clients — a list that included millionaire investors, middle-class retirees, college endowments and philanthropic organizations.

    In an interview at Butner last week, Madoff weighed in with his latest views on everything from his favorite politicians to the ties between Washington and Wall Street to details about his life in prison and his severed relationships with family members.

    MADOFF THE POLITICAL PUNDIT

    When there were millions of dollars attached to his name, Madoff was constantly hounded by politicians, from local to federal candidates. He insisted that he found it all off-putting — socializing at cocktail parties in the city, attending swanky fundraisers in the Hamptons, and feeling obligated to cut checks.

    Now, he sounds like a campaign finance reformer. “I basically think everybody would be better off… if people weren’t able to exert so much influence on politicians with money,” he said. “Politicians themselves would probably prefer not to deal with them—both begging for and being beholden.”

    Still, Madoff let the campaign money flow. Madoff and his wife Ruth made several hundreds of thousands of dollars in political donations since the 1990s, according to Federal Election Commission records. The recipients were mostly Democrats, and the roster included Sen. Chuck Schumer, ex-New Jersey Gov. Jon Corzine, Rep. Joseph Crowley, Sen. Jeff Merkley and Hillary Clinton during her Senate bid.

    While an endorsement from Madoff is the last thing a politician would want, he keeps up with the news — and even played pundit.

    Even though he’s donated to Clinton, Madoff doesn’t think she would make a good president. “I certainly wasn’t impressed with her as secretary of state,” he says. “Our foreign policy is a mess.”

    Madoff voted for Obama in 2008, but now says he is “terribly disappointed” in the president and would not have voted for him a second time. “His policies are too socialist.” (For his part, Obama has said little about Madoff except a month after he was first elected, when he said, “Charities that invested in Madoff could end up losing savings on which millions depend — a massive fraud.”

    New York Mayor Bill de Blasio? “I’m not a great fan of redistribution of wealth,” Madoff says.

    As for the bridge scandal enveloping Gov. Chris Christie of New Jersey, he said, “It looks like a circus.”

    Hah! The operator of one of the largest pyramid-schemes in history is concerned that the Obama presidency has been “too socialist” and is “not a great fan of redistribution of wealth? There’s something weirdly familiar about this situation.

    Posted by Pterrafractyl | March 20, 2014, 10:05 am
  4. Sorry parent-murdering orphans: Chutzpah has a new spirit animal:

    Think Progress
    JP Morgan ‘Under Assault’ By Unpatriotic Regulators, CEO Says

    by Alan Pyke Posted on January 15, 2015 at 9:18 am

    One of America’s largest banks is facing a regulatory attack so insidious and overbearing that it might even be un-American, according to the head of that bank.

    “Banks are under assault,” JP Morgan CEO Jamie Dimon told reporters on a conference call Wednesday, explaining that his company now faces too much oversight. “In the old days, you dealt with one regulator when you had an issue, maybe two,” he added. “Now it’s five or six. It makes it very difficult and very complicated.”

    “You all should ask the question about how American that is,” Dimon said to the reporters, according to Forbes, which notes that Dimon has a habit of invoking patriotism in his attacks on financial regulation.

    But Dimon’s firm exemplifies the sort of unregulated financial industry abuses that prompted tighter oversight in the first place. In Dimon’s tenure, regulators have exposed JP Morgan’s involvement in numerous scandals. Three of those scandals are particularly instructive.

    The bank joined other financial firms in an elaborate scheme to rig interest rates, an affair commonly known as the LIBOR Scandal, which had negative effects on a huge range of consumer credit products and hurt the financial outlook of many cities who had made bond deals tied to the rates JP Morgan helped manipulate. A rogue JP Morgan trader known colloquially as the London Whale was able to gamble the bank into a multi-billion-dollar loss on complex derivatives trades without any of his managers noticing and putting a stop to the highly risky behavior, which could have triggered a chain reaction within the global financial system. And Dimon’s firm has paid tens of billions of dollars in legal settlements over the bank’s role in mortgage-related financial market activity that helped exacerbate the financial crisis and ensuing recession.

    Since the LIBOR rate-rigging scandal, numerous other markets have been investigated over concerns that insiders in the finance industry are rigging them in ways that harm consumers. The London Whale scandal offers a case study in the utility of a Dodd-Frank reform known as the Volcker Rule, which continues to be disputed by lawmakers and regulators nearly five years after Congress passed the law calling for it to be created. While JP Morgan’s mortgage finance misdeeds have been largely resolved through legal settlements, the broader impact and legacy of the housing-related misconduct that swept the lending and investing industry last decade is still unfolding and similar activity is on the rise in other types of debt markets.

    What’s more, there is reason to believe the regulatory response to JP Morgan’s scandals has been too weak rather than too heavyhanded. While headlines touted the deal Dimon made with Attorney General Eric Holder over mortgage finance abuses, the fine-print reality of that settlement was far less punitive and costly than the $13 billion figure from the headlines made it seem. Dennis Kelleher, president of a financial watchdog called Better Markets that sued to block that mortgage settlement, called it “a secretive backroom deal” that “appears to have been written more to conceal than to reveal” facts about how the bank behaved. (Dimon has called that settlement “unfair” despite the many ways in which it was tailored to be gentle to his company, and the company’s top legal counsel has said the government should have been kinder to the bank.)

    And don’t think you can start resting on our laurels and still keep your spirit animal status, Jamie. There’s no rest for the wicked.

    Ok, you’ve at earned a short vacation. Maybe even a long one.

    Posted by Pterrafractyl | January 15, 2015, 8:57 am

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