JP Morgan has just been fined $ [heck of a lot] of money for shorting Madoff without telling anyone.

How the heck do you short a guy? I mean, do you buy insurance on him? Do you find out what he’s bought and short that? Yes, I hear you think. But wait, wait. Madoff didn’t buy anything. That was the scam! He just spent the money or used it to pay off exiting investors. So what did JP Morgan short?

Turns out they had an “exotics equity desk”. This is for those people who make too much money and can’t snort enough cocaine, I suppose. This desk sold investors structured notes, linked to Madoff’s performance, and to hedge, bought into the Madoff feeder funds themselves. So JPM had to pay investors whatever returns Madoff made, and they would in turn get those returns from Madoff.

But someone within JPM smelt a rat and they did an internal investigation. The result of what happened after that was: They didn’t buy as much into the Madoff funds as they started out with (exposure went from $349 million to $81 million).

And then when it was time to unwind, they left their “short” positions open – effectively, the notes which the investors had bought – while getting out of Madoff’s funds with what they could. The clients who bought the notes would eventually see zero returns when the fund went bust.

Apart from fidiciary duty (which hasn’t yet figured here), the deal was that suspicious activity was not reported to the US.

The fine is $2.6 billion, which they can rustle out of their left pocket on any given afternoon. They’ve already been fined $13 billion in November.

The bank will pay $1.7 billion to settle the government’s charges, $350 million in a related case by the Office of the Comptroller of the Currency and $543 million to cover private claims, the firm said in a filing.

Side Note: If JP Morgan was fined that much in India, the government would have a lot less problems with its fiscal deficit.

The stock’s up 30% in 2013, but might announced a 20% drop in earnings later this month. But if there’s one thing the story tells you it’s this: Too Big to Fail has become Too Big To Hurt, Too Big to Touch and Too Big to Even Expect To Bother.

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