Friday, January 30, 2009

John Carney on JPMorgan's Madoff investments

He reports:
If we're following this correctly, it seems that starting in 2006 JP Morgan allowed investors to make bets on the performance of hedge funds that invested with Bernie Madoff. This basically means that JP Morgan was institutionally short Madoff, which is interesting in itself. What made JP Morgan think it could beat the guy who had over forty-years of steady results?

Even more interesting is the fact that JP Morgan initially hedged this bet against Madoff by investing $250 million of its own money with Madoff. And then, as late as last fall, it decided to take off this hedge. What happened in the fall of 2008 to make JP Morgan believe that the bets it had made against Madoff were now so safe that they didn't need to be hedged?

Perhaps the most tantalizing idea is that JP Morgan's withdrawal might have triggered the collapse of Madoff's fund. Recall that although Madoff claimed to be managing tens of billions of dollars, he actually had only a tiny fraction of those assets under his control. A seemingly small withdrawal the size of JP Morgan's $250 million could very well have left Madoff without liquidity to keep up his fraud.

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