JPMorgan's $907 million Madoff bonanza

February 28, 2011: 1:44 PM ET

Running a slush fund for Bernie Madoff was nice work for JPMorgan Chase while it lasted.

A new academic paper estimates the bank reaped nearly $1 billion in pretax profits over two-plus decades by servicing a checking account at the center of the giant Ponzi scheme.

Who looks greedy now?

The paper, by Linus Wilson of the University of Louisiana at Lafayette, says JPMorgan (JPM) earned $907 million on the Madoff account between 1986, when Madoff opened an account at JPMorgan predecessor Chemical Bank, and 2008, when he ran out of money and turned himself in to the authorities.

The account, which held as much as $5.5 billion just before the market crash of September 2008, "was nothing more than a slush fund," the Securities and Exchange Commission said in a 2009 suit against Frank DiPascali, the former Madoff financial chief who pleaded guilty that year to conspiracy, fraud and money laundering.

Irving Picard, the lawyer trying to recover losses for the victims in the Madoff case, last year sued JPMorgan for $6.4 billion. Just $500 million of that was for estimated profits on the so-called slush fund account, which means the trustee may have unwittingly lowballed its demands on Chase. 

The bank responded predictably to Picard's claims, sputtering in absurd, outraged tones that the trustee was "trying to pursue an enormous backdoor class action to recoup damages."

Yet JPMorgan is the one whose actions appear outrageous. Wilson notes that the bank failed to investigate the huge flows in and out of the Madoff account, in spite of its duty to report large, suspicious transactions -- a dereliction one commentator recently labeled contemptible.

Recent reports from the bankruptcy trustee and from the head of the Securities Investor Protection Corp., the federal agency that oversees brokerage accounts, leave Wilson wondering

if there was a material weakness in the anti-money laundering program at JPMorgan Chase. This paper finds that for many years in the 2000s over a billion dollars that was both deposited into the Ponzi scheme and was not used to pay investors cannot be found in the main Ponzi checking account at JPMorgan Chase. This indicates that large amounts of money stolen from Madoff's investors may still be unaccounted for. 

JPMorgan Chase didn't immediately respond to a request for comment.

Wilson estimates that the bank made $398 million before taxes on the account, by using the low-cost deposits to fund higher-yielding loans. He assumes the bank then reaped additional profits by reinvesting the proceeds in itself, at a time when its shares generally were rising briskly. This additional gain on the bank's retained earnings yields his $907 million pretax profit estimate.

The bank was able to reap huge sums from the Madoff account because it held enormous balances in the last years before Madoff was collared. The average closing monthly account balance was $3.99 billion in 2007, for instance, compared with $718 million in 1999.

The profit estimate is substantially higher than one Wilson and another researcher, Louis Davis, made in a paper released last month. That one put JPMorgan's profit at $435 million after taxes over 16 years.

Wilson says the new estimate is higher because of the subsequent release of additional data by the head of the Securities Investor Protection Corp., Stephen Harbeck, in a letter to Rep. Scott Garrett, R-N.J., and a change in methodology to focus on pretax rather than after-tax profits.

So if Madoff's victims are greedy, what are we to call JPMorgan Chase? For now I guess we'll have to stick with "failing upwards."

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