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We have already heard about JPMorgan’s travails with Bernie Madoff’s Ponzi scheme. A recent report identified JPMorgan as complicit in the Madoff scheme, and potentially liable in a civil lawsuit. According to emails and documents, JPMorgan apparently knew something was amiss with Madoff’s performance figures but never reported the crime to the SEC. Some lawsuits have already been filed. In addition, JPMorgan sold certain derivatives links to Madoff’s returns, giving them a major financial incentive not to disrupt the scam, off of which they profited.
Now we’re learning about how Citi was connected to the Madoff scheme as well, from a report by the same trustee who busted JPMorgan Chase.
Citigroup Inc tried to pass on its exposure to Bernard Madoff to other banks just months before his epic fraud was revealed, the Madoff trustee said in a lawsuit accusing a second major U.S. bank of unsavory dealings with the financier.
Trustee Irving Picard said red flags about Bernard L. Madoff Investment Securities LLC were apparent to Citi as early as 2005, according to court papers unsealed on Monday. The lawsuit seeks $425 million from the bank [...]
It cited one email by a Citigroup Global Markets Ltd trader in September 2008 reaching out to another bank, which was unidentified.
“We’re needing to terminate our Madoff trade. Do you have appetite for that risk over there?” the email said.
According to the court document, the other bank responded, “don’t think so, madoff is not very popular here either.”
Picard has been extremely aggressive at pursuing money for the victims of the Madoff scheme. But what he’s exposing is the omerta at work on Wall Street during the go-go period of the middle of the last decade. They all knew about the fraud, but they all had a stake in keeping the fraud going. So nobody at a high level blew the whistle. And when the schemes looked to collapse from their own weight, the big money boys tried to get out from under the damage. In this case, Citi tried to pass off all its Madoff deals to let someone else eat them. But it’s not materially different from passing off the downside to the government by taking a bailout.
The Madoff deal is the clearest example of fraud that we’ve seen, and a fairly garden-variety fraud at that. But you can easily extrapolate how the biggest financial firms reacted to that fraud to how they reacted to the fraud they created on their own. The m.o. is simple – do whatever it takes to make money, cut all corners, take on all risk, and socialize the losses when things go sour.
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I wonder if any SARs were filed on Madoff transactions. If JPM or Citi thought he was a fraud, they may have been obligated to file one.
Getting hold of SARs is impossible in the usual course, but eventually someone should ask.
Thank you for simple clarity. Can it stink anymore? Good for Picard.
There would be a certain poetic justice in Citi having to pay off on the Maddoff swindle.
Which means it will probably never happen, but it’s a nice thought.
I’m pretty certain all banks knew madoff was ponzi, nobody wanted to kill the milk cow though and they all knew they would be insulated from prosecution and liability
you know, even when I was growing up my very wise dad told a single digit in age me; “the banks will never lose money, the government will always be certain of that”
that came from a lesson he used to tell me all the time;
“never own your house outright, the government will always make good to a bank but never make good to you”
Citibank is legally required to report the frauds on SARs, and if they suspect more, they can ask FINCen to order a freeze on all funds.
I wonder what a FOIA request to FINCen would accomplish?
Thanks DDay, it was a “secret,” that everyone knew.
Chris Cox, Bush’s SEC Director had to be in on it. Harry Markopolos (No One Would Listen) stumbled over Madoff, but now we know the SEC had even earlier warnings from very credible whistle-blowers. Cox was just too stupid to figure out what he was covering up.
The SEC couldn’t hit water if it fell out of a boat.
But but that would mean they would step into a boat that was actually in the Water… I mean just saying do you think they would be “That” Brave??
Thanks for the update. I heard that Madoff had been dropping some dimes on Wall Street, but I’ve seen *next to no coverage* on it (must admit I haven’t spent a huge amount of time on researching it, though).
Although Oliver Stone’s recent movie Wall Street: Money Never Sleeps mostly was lame, it did highlight some of these issues. Wall St is all about: what’s in it for ME? how much can I milk out of the cash cow? and then how fast can I get out with as much money as possible? and if someone else gets hurt, so what??? Who cares???
The movie did certainly highlight that aspect of Wall St, although Stone still managed to glamorize & weirdly romanticize it and make it seem somehow “ok” to be that way… and the ending was a very sickening & dysfunctional, imo. Kind of ended up endorsing very bad behavior in a stupid way. Movie not so much recommended for that reason.
I agree. Especially since I believe the did know and looked the other way. Always nice to have a scape goat, of sorts.
That’s what happens when you systematically starve a federal agency of apolitical leadership, funds, and talent, and hire instead Monica Goodlings and Kyle Sampsons, while you corral your top drawer talent into empty rooms or shove them out the door. The self-described master bureaucrat himself, Dick Cheney, made that a top priority in the Bush administration’s “stewardship” of federal agencies, particularly those charged with enforcement. We are still reaping the crops so skillfully and intentionally sown by Dick Cheney.
Madoff was reported to be Citi’s biggest depositor for many years. Depositor as in holding a checking account or other forms of near cash equivalent monies at the bank. It has to be understood that even giant corporations want to keep their cash accounts at an absolute minimum in order to have the money at work giving a larger return. In T bills or the commercial paper market etc. etc.
The oddity of having an investment company keeping giant loads of cash in a bank is stunning. With Madoff’s well publicized returns simple common sense dictates that he needed every penny at his disposal at work in the markets, not sitting in a checking account. The very concept of an investment fund is to invest it. Not to have it sitting in a bank.
If it is true that Madoff was the largest or among the largest ‘depositors’ at Citi then this alone is a huge red flag. Hundreds of people at C would have known and every single one of them must have thought it odd.
The advantage for Madoff is it was easy. Make payouts to whoever wanted or needed them and no work in managing the money. Just let it sit there. Probably just have the customers send the money to Madoff’s Citi accounts. No fuss, no muss.
This is totally separate from steering their own money out of Madoff’s fund which is the topic of this post but this issue needs some light thrown on it.
Interesting that the rich folks who were ripped off by Madoff are getting some sort of “justice”… but what about the millions of little people who are hosed by these banksters? No one steps in to make them whole again.
I think Chase was Madoff’s banker, but your point is an important one.
Madoff was rumored to have about $7 billion in assets under management in 2008. But a few years earlier he had $5.5 billion on deposit at Chase. Chase must have known something weird was going on, that he was not investing most of the money.
And indeed, here are some skeptics from 2001, raising the same concerns we’ve heard again and again: http://nakedshorts.typepad.com/files/madoff.pdf
Imagine a thief robbing the register and deposit box at a liquor store. Would he call 911 on the hobo(Madoff) for walking out of the store without paying for his bottle of Mad Dog 20/20?
Anyway, fees and fines on the banks just get passed along to the taxpayer at some later point in time via bailouts. We’re not talking about real punishment until we are talking about punishing individuals. Jail time and/or bans from working in the industry.
Of course the 700 billion dollar question is, ” Why has no one but Madoff been charged, tried, and sent to prison??”
But Madoff insists his family are innocent!
(Read Taibbi’s latest for the rest of the answer to your question.)
Exactly!! Bingo. The very question on my lips, too. Madoff deserves what he gets, but he’s by far not the only one who’s guilty. Where are the others? So tired of the: here’s your scapegoat, no STFU!