How I Know JPMorgan (NYSE: JPM) Was Complicit in the Biggest Ponzi Scheme Ever

I've said it before, and even though I've been threatened, in not so subtle ways, and been warned not to piss off certain people in power, I'm going to keep on saying it:

JPMorgan (NYSE: JPM) is a criminal enterprise.

Yesterday (Monday) the mega enterprising bank began talks to settle civil and criminal charges that it ignored signs its banking client Bernie Madoff was a Ponzi-running, lying, cheating crook. (Which he was.)

It looks like the brazen bank will pay $2 billion to get out of jail free; free, of course being a relative charge. But I call it free because JPM has been posting record profits, and another multi-billion-dollar fine is unlikely to change that.

So what that they've paid about $20 billion in settlement fines in the last 12 months? They're still in business. They're in the business of making insane amounts of money to pay insane fines for insane criminal activity.

I'll say it again... JPMorgan Chase is a criminal enterprise.

For this new payoff, I mean payment, to the government, JPM's criminal ways were nodded to and shunted aside in a deferred prosecution agreement with the feds. The tradeoff will be such that JPM will swear it will do no evil (just the evil they will list, not any of the other evils they do that they don't have to list) and promise to be good while they're being watched. And if they don't do any more Ponzi-schemer aiding and abetting in the probably five years they will be watched, the deferred prosecution agreement dissolves. After that, they have a Whale of a party, probably over in London, where they hide other stuff.

I'm going to keep this short. There's another reason, besides not wanting to repeat myself over and over, and I'll tell you the other reason on Thursday.

So keeping this short, I'm just going to say one thing to explain JPMorgan's role in the biggest Ponzi scheme in history...

JPMorgan's (NYSE: JPM) Ponzi Scheme Role

In my expert opinion, it's just not possible that JPMorgan (and plenty of other intermediaries and feeder funds) didn't know that Madoff was running a scheme.

I didn't know anything about Madoff. No one ever asked me about him or what he might be doing to generate the returns he was generating. But any back-of-the envelope calculation of numbers - based on what he said he was doing - would have come up with a giant "does not compute" answer.

Here's the deal...

Madoff said he was making the money in the options market. All anyone had to do was ask him how much he was managing (which he boasted about), then back into how much he'd have to make on his options strategy to get the steady 10% returns he claimed. And if you had a lick of knowledge about options, you'd ask yourself, "Holy cow, how many options contracts is he trading?"

Then you'd ask yourself, "Gee, I wonder how he's impacting the spreads of the options he's trading and how he manages to not impact his own returns himself!"

You'd be so struck by the whole strategy that you'd look at the options market volume and... your eyes would be wide open.

Based on the amount Madoff was supposed to be managing, he'd have to be trading more than all the options traded on the Chicago Board Options Exchange... everyday... and not impacting any of the spreads.

And no one in the business stopped to figure that out? No one who was a conduit or feeder who fed Madoff billions of dollars to trade - so they could collect their piece of the fee Madoff charged - stopped to figure out what he was doing so they could manage the money they were feeding him themselves... to keep all the fees themselves?

Of course they did. And they figured out it couldn't be done. But they also figured out they were getting paid and had plausible deniability if the scheme ever imploded.

So either JPMorgan Chase is a criminal enterprise... or they are the stupid to the nth degree... and we know that ain't true.

[Editor's Note: This inside look at the role JPMorgan (NYSE: JPM) played in the Bernie Madoff Ponzi scheme was first published Jan. 6 in Shah Gilani's Wall Street Insights & Indictments. To get all of Gilani's insights as soon as they are released, click here.]

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