JPMorgan (JPM) says it will incur virtually $0 in Madoff-related losses, but some European clients did have Madoff exposure, and now they’re pissed. According to the NYT, JPMorgan did at one point have its own bank money with Madoff, but then got out when it started noticing red flags. That’s impressive that they saw and new to act on red flags. What JPM didn’t do is tell its clients about this:
A spokeswoman, Kristin Lemkau, said the bank withdrew from the Madoff-linked funds last fall after “a wide-ranging review of our hedge fund exposure.” Ms. Lemkau acknowledged, however, that the bank also “became concerned about the lack of transparency to some questions we posed as part of our review.”
Investors were not alerted to the move because, under sales agreements, the issues did not meet the threshold necessary to permit the bank to restructure the notes, she said. Under those circumstances, she added, “we did not have the right to disclose our concerns.”
Wow, is that not going to go over well. What kind of client service agreement doesn’t allow the bank to tell clients when they suspect that a given investment is a sham?
It’s worth mentioning, the bank didn’t have their money directly with Bernard Madoff Investment Securities.
The arrangement worked like this: Investors put up cash to buy the notes from the bank. In return, the bank promised to pay them up to three times the future earnings of the Fairfield funds. When the notes matured in five years, assuming the funds did well, these investors would get more than if they had invested in the funds directly. The bank collected just under 2 per cent in fees, investors said.
And because the bank had to hedge its entire risk, it put up to three times the face amount of the notes into the Fairfield funds. Thus, Fairfield Greenwich got more cash to manage than it otherwise would have, increasing its own fee income.
Typical: another mess of layers, fees and leverage.