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.