The United States Attorney’s Office for the southern district of New York is part of the US Federal Department of Justice, and it is led by hard charging prosecutor Preet Bharara.
Yesterday Bharara announced that his office had signed a deferred prosecution agreement with giant banking firm JPMorgan Chase over the Bernard Madoff affair, under the terms of which JPMorgan has agreed to pay US$1.7 billion to settle criminal charges which the Justice department had brought against it for failing to observe warning signals that signified their banking client Bernie L Madoff Investment Securities was likely a fraud.
Bernie Madoff/ Getty
JPMorgan performed general and private banking services for Madoff’s securities business for 22 years, right up until his arrest in December 2008. JPMorgan did so including through some of the predecessor banks it later acquired, including Chemical Bank, Manufacturers Hanover Trust and Chase Manhattan Bank.
Indeed even after its own internal suspicions of Madoff grew stronger, in 2008 the bank continued to provide such services, even after it had deliberately withdrawn most of its own financial exposure to his business.
Under the terms of the agreement signed yesterday prosecution for two felony violations of the Bank Secrecy Act in connection with the bank’s relationship with Madoff will be deferred for two years as has JPMorgan admited to its conduct, and now must pay the US$1.7 billion to victims of Madoff’s fraud and must reform internal its anti-money laundering policies. If there are no further lapses during the two year period the Justice Department will then drop all further action against the bank over these specific charges.
No immediate criminal charges are therefore now being laid against the bank or against any of its employees, even though the bank has admitted to the factual charges laid out in great detail against it in the settlement documents themselves. One telling item is the fact the bank never for example filed a single suspicious activity report about Madoff under the Bank Secrecy Act, as they are legally obliged to do, even though they had plenty of doubts internally.
This is just the latest in a series of financial and public relations disasters that have befallen JPMorgan in the last twelve months, starting with the infamous London whale derivatives affair, one that JPMorgan CEO Jamie Dimon initially dismissed as a storm in a teacup. Eventually the bank would have to write off about US$6 billion for that particular cup of tea.
Later in the year allegations of fraudulently cheating holders of collateralized mortgage securities, that played a central role in events leading up to the 2007-2008 financial crisis, cost it as much as US$13 billion to settle, also with the Justice Department, and now this.
Bernard L. Madoff Investment Securities was a ponzi scheme on a galactic scale, ending up in true ponzi fashion having to scour the world for new money to pay out promised returns to earlier investors for money long misappropriated. In total some US$17.5 billion of real money was stolen from people, which is bad enough, but in people’s accounts there were apparently as much as US$60 billion of total assets recorded at their peak, all based simply on fictitious investment returns.
In March 2009 Madoff pleaded guilty to securities fraud and is currently serving a collective 150 year term of imprisonment. Indeed in a way the total prison term is almost as fictitious as his business performance was, given his actuarial probability of serving it out in full is of course zero – and he is already 75 years old.
The court appointed trustee to follow the money has so far done a very good recovery job, and has recovered almost US$10 billion to date to be given back to clients who lost their money to Madoff. More money is also still expected to be recovered too, so the total recovery could end up quite high to almost everybody’s surprise.
Even after settling this current item with the US Justice Department their remain several civil lawsuits pending against JPMorgan over its selling of risky mortgage bonds prior to the financial crisis. For this and all other litigation going on, the bank has already made provisions in its balance sheet of around US$23 billion and currently has told regulators it is not sure if it is quite enough.
While he was on the surface doing very well, reporting stellar investment returns year in and year out, Bernie Madoff was fêted in all the dining rooms of the wealthy in many countries in the world. Handsome, charismatic, smart, with a beautiful family he had it all and people lined up to throw money at him to invest for them.
Investment is about belief and about trust, and once people cross a certain trust threshold, and believe, based on what their friends tell them who went before them, and what they see themselves that looks very plausible, then they can lose all sense of restraint given the promise of good results. This is especially true too of many very rich people, who were embarrassed the most by the affair, with some indeed losing everything.
It is not entirely clear even today precisely where Madoff went wrong. There is no reason after all to suppose it was always a fraudulent business; perhaps it just all went to his head and he refused to accept the limitations imposed by real investing, where perhaps a bad quarter or two intruded on his growing reputation and so he covered them up? In contrast the praise that was forever being showered upon him led to plenty of new cash to cover the mistake? So he then entered into an increasingly elaborate world of deceit and deception?
However it started psychologically this is something that once it took hold may have provided Madoff with another form of cerebral high, otherwise surely he could not have sustained it for so long. Once you do take that fateful step and cross the line from honoured member of society to elusive thief, you become the sole member of your own secret society inhabiting a shadow world in which you are the dominant player.
Well Madoff is certainly paying for it now, and so are we all – both those who fell for his charms and the rest of us as our banking costs have undoubtedly gone up somewhere along the way to help pay for it all.