Madoff, JP Morgan, U.S. and Willie Sutton

Chidem Kurdas

Several questions hang over the approximately $2.55 billion JP Morgan Chase agreed to pay the government to put off threatened criminal charges related to the Madoff Ponzi scheme. I will tackle three of them in this post.

The first one is why the bank faces criminal – as well as civil – lawsuits in this matter. The reasons are murky. Here is a quick review of pertinent facts. Madoff appeared on public officials’ radar in an 1992 investigation. In the 16 years from then to 2008, when he turned himself in, a variety of complaints were made about him to the authorities, including detailed reports on the scheme by the famed whistleblower Harry Markopolos.

Regulators repeatedly examined Madoff, some of them recognized that he lied to them, but they did not stop him. For the astounding story of Madoff versus the regulators, see the my new book Ponzi Regulation, chapter titled “Honey Jackpot.”

The complaints were widely known, indeed reported in news stories. In 2000, Madoff’s Ponzi scheme was brought to the attention, among others, of the U.S. attorney for the Southern District of New York—the office that recently cooked up criminal charges against JP Morgan. They did not go after Madoff until he confessed on his own volition.

J.P. Morgan inherited Madoff’s account when it acquired Chase Manhattan, which had in turn inherited the fraudster’s checking account when it acquired Chemical Bank. The nub of the case against the bank is that it should have noticed and reported signs of Madoff’s scheme.

In particular prosecutors point to the bank’s failure to alert U.S. regulators in October 2008 when it alerted U.K. regulators about suspicions regarding Madoff. That was just a couple of months before the end came. If the case went to court, the bank would have a “So what?” defense. For 16 years U.S. regulators resolutely ignored warnings. So what if there was no alert from JP Morgan in October 2008? There would have been no effect anyway.

The case reminds me of the legendary answer Willie Sutton gave when he was asked why he robbed banks. For ambitious Justice Department bureaucrats and lawyers, JP Morgan is no doubt where the money is.

Question two is why JP Morgan chief Jamie Dimon chose to settle instead of going to court. That one is easy. Had the bank not agreed to pay up, the lawsuit could have hobbled its business and stock for as long as a decade, with results that are anyone’s guess. There was no real choice.

Third question: Who is really paying the $2.55 B? Short answer: Your retirement fund. Most costs pass through companies to their shareholders and customers. Almost all pension funds hold stock indexes; JP Morgan is a component of many indexes. The destruction of stock value and the increasing cost of banking will affect millions of people.

The result is similar to a tax imposed on savings and pensions, though it may look different on the surface. The government’s numerous extractions from JP Morgan on diverse grounds, adding up to $22-billion plus in recent years, should be christened the Willie Sutton tax.

The founders of the country designed the U.S. to be limited and subject to strict laws so as to prevent officials from furthering their own interest at the expense of public well being. But now government has burst through all limits and is rampant with arbitrary, destructive actions.

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2 Responses to “Madoff, JP Morgan, U.S. and Willie Sutton”

  1. Willie Sutton Tax as New Policy | HedgeFundSmarts Says:

    […] Top News and Analysis about Non-Traditional Investing « Madoff, JP Morgan, U.S. and Willie Sutton […]

  2. JP Morgan Madoff Payment: Who’s a Victim? | HedgeFundSmarts Says:

    […] This is a Willie Sutton case—-banks are where the money is, so sue the banks. The complaint against JP Morgan is questionable at best, but banks usually settle and then pass the cost on to their customers and shareholders. […]

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