Documents released by The Department of Justice on Tuesday show that JPMorgan came alarmingly close to putting well-over $1 billion of the firm's own capital into Bernie Madoff's Ponzi scheme, just before its collapse.
JPMorgan, which was the primary banker to Madoff Securities between October 1986 and its collapse on Dec. 11, 2008, sought to create complicated derivative products that would provide its private banking clients exposure to the $65 billion Ponzi scheme, according to documents released on Tuesday.
Beginning in the spring of 2006, JPMorgan invested roughly $343 million of the firm's own money in feeder funds to Madoff as a means to create a business of selling structured equity derivative products mimicking the Ponzi scheme's investment performance.With some money invested in Madoff feeder funds, JPMorgan sought to create products that would mimic the consistent returns of Madoff's investment performance through a synthetic exposure that didn't actually require entry to the Ponzi scheme artist's financial universe.
In June 2007, DoJ documents show that JPMorgan's equity exotics asked for an exception to the $100 million risk limit to meed demand for the structured products it was selling. Specifically, the head of JPMorgan's EMEA equities desk asked that the firm to underwrite approximately $1 billion in Madoff-linked derivatives. In total, JPMorgan could have sunk $1.32 billion of its own capital into Madoff, putting the firm's exposure at $1.14 billion were the value of Madoff feeder funds to fall to zero, according to the DoJ's documents.
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