Estimating JP Morgan Chase's Profits From the Madoff Deposits

• Date: 01 March 2011
• Author: Linus Wilson,Louis R. Davis
• Published date: 01 March 2011
• DOI: http://doi.org/10.1111/j.1540-6296.2011.01196.x

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Risk Management and Insurance Review, 2011, Vol.14, No. 1, 107-119

DOI: 10.1111/j.1540-6296.2011.01196.x

ESTIMATING JP MORGAN CHASE’SPROFITS

FROM THE MADOFF DEPOSITS

Louis R. Davis

Linus Wilson

ABSTRACT

JP Morgan Chase had deposits from Bernard L. Madoff’s investors totaling $5.5

billion at one point in 2008. The Chase account was supposedly where most

of the funds in his Ponzi scheme were deposited. Any large deposit can be a

considerable source of profit to a bank. Assuming that the deposits returned

the bank’s net interest margin and grew at a random geometric rate, this article

estimates that JP Morgan Chase generated $435 million in after-tax profits from

this very large account over the course of 16 years. With JP Morgan Chase the

target of pending lawsuits relating to the Madoff fraud, this article’s method-

ology and results may be of interest to litigants, prosecutors, journalists, and

academics.

INTRODUCTION

Banks are in the primary business of taking deposits and lending out the proceeds of

their deposits at higher interest rates to individuals and businesses. Any long-term large

deposit for a bank can be very profitable. This article estimates, based on court filings,

that JP Morgan Chase earned after-tax profits for their shareholderstotaling $435 million

dollars from 1993 to 2008 from the billions of dollars deposited in the bank as part of

the Madoff Ponzi scheme. Without detailed account records, these estimates should be

treated with some caution. Nevertheless, with suits pending relating to the JP Morgan

Chase account in the name of Bernard Madoff Investment Securities (BMIS), this article

indicates that JP Morgan Chase’s shareholders may have profited in the short run if

Chase’s bankers ignored warning signs about that account. Yet, the authors suspect

that JP Morgan Chase’s shareholders now wish that Madoff had put his deposits in a

competitor’s bank.

Louis R. Davis is an Adjunct Instructor in Business Law, University of Louisiana at

Lafayette, B. I. Moody III College of Business, Department of Marketing and Hospitality,

214 Hebrard Boulevard, Moody Hall 255, Lafayette, LA 70504-3490; phone: 337-482-5762;

e-mail: lrd9575@louisiana.edu. Linus Wilson is an Assistant Professor of Finance, Univer-

sity of Louisiana at Lafayette, B. I. Moody III College of Business, Department of Eco-

nomics and Finance, 214 Hebrard Boulevard, Moody Hall 253, P. O. Box 44570, Lafayette,

LA 70504-4570; phone: 337-482-6209; fax: (337) 482-6675; e-mail: linuswilson@louisiana.edu,

Web: http://www.linuswilson.com. This article was subject to double-blind peer review.

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