02/04/2011 09:47 am ET Updated Dec 06, 2017

Bernie Madoff's Relationship With JPMorgan Should Shock No One

So now we learn that senior executives with decision-making authority inside JPMorgan Chase -- the Wall Street behemoth that is supposedly run by the most mature of adults -- apparently suspected that Bernie Madoff was running an enormous Ponzi scheme even as they kept doing business with his firm. They supposedly kept funneling money his way and let him run cash through Chase accounts even as they were sending emails to one another reporting the creepy sense that the whole enterprise didn't look real. This, according to internal documents that came out in a lawsuit on Thursday.

We are presumably supposed to be shocked and horrified by this disclosure. Here is alleged evidence of a blurring of the lines between the legitimate, button-down world of high finance and the nefarious realm of a sprawling con game -- a scam run by a guy whose very name, Madoff, now goes down as a synonym for ripping people off on a grand scale.

But far from shocking, this is really just an appropriate plotline in a story that is finally becoming clear beyond argument: Those lines between criminal fraud and legitimate banking have been blurry for a long time. One can reasonably argue that they pretty much got erased during the Internet bubble and into the real-estate boom, when the regulators all went on vacation and the highest-paid bankers in the land ditched considerations of real value in favor of minting bogus stock issues and radioactive investment schemes. Financial shenanigans became the ultimate American product -- a lucrative enterprise for those up in the suites, and a disaster for everyone else.

Why might JPMorgan Chase have kept sending real money to Madoff even after it began to figure out that he wasn't running a real investment operation? You need not be Sherlock Holmes to crack this case. Other people were sending in gobs of money, too, and that meant there was money enough to pay off the earlier players. Same as in the Internet bubble, same as in the mortgage fiasco, the only real fools were the people who left their money in too long.

The longer the reckoning goes on, the more we learn about the complex derivative deals stitched together by geniuses inside enormous financial institutions, turning simple home loans into trillions of dollars worth of synthetic financial products backed by almost nothing, the clearer this reality becomes. The financial crisis was no natural disaster, as some apologists still claim. It was not the result of risk-management models getting swamped by complexity, or a dreamy belief that home prices could go up forever (though both of those factors certainly played a role). It was, in simplest terms, a hostile takeover of the vital organs of finance by people willing to destroy things of intrinsic value -- people's homes, real businesses, retirement savings -- so they could extract a cut.

The fact that we even call Wall Street a banking center now seems laughable. The real bankers are out in communities, enabling businesses to set up lines of credit so they can order raw materials and make payroll while they wait for their sales revenues to come in. Wall Street views that sort of thing as quaint and beside the point, a distraction from where the real action lies: buying up piles of whatever happens to be moving at any point in time -- subprime loans, complicated bets on the price of heating oil -- and dumping them on some other sucker at a higher price before reality intrudes, laying the economy to waste and then generally sticking taxpayers and working people with the tab.

Madoff has become a national obsession because he actually cheated people he knew, people he was close to, people with whom his family dined, people whose life's work was palpably entrusted to his safekeeping. At a time in which much of the country still strains for someone to blame for how the economy failed, Madoff, an easily-understood villain who apparently made off with all the money, often stands in as the ideal man for the job (even as the amount of money left missing, some $65 billion, amounts to chump change compared to the banking-led larceny committed at the expense of national prosperity).

Wall Street, on the other hand, prefers largely impersonal affairs. It buys up pools of mortgages from far and wide, then slices them into odd-sized bits and scatters them around the globe. The foundation that gave its money to Madoff and now doesn't have it anymore knows who took it. The homeowner in southern California who got tricked into a terrible mortgage written by Washington Mutual -- since taken over by JPMorgan -- and is now putting his stuff in boxes as his house disappears into foreclosure lacks the consolation of a coherent account of what went down.

And yet, on some level, those stories -- now fused -- have been the same all along, a reflection of a financial sector far more interested in investment fantasies than helping sustain a healthy economy. In the end, Madoff was merely running a smaller, clearly-illegal Ponzi inside a financial system that basically functioned like one all along.