The Times reported this weekend that JPMorgan is being investigated for hiring the children of influential Chinese officials in order to win investment banking business, which apparently the SEC’s antibribery unit thinks might be bribery and thus a violation of the Foreign Corrupt Practices Act.1 People are sort of falling over themselves to be unscandalized by this, which seems about right. Here are amusing FT and Reuters articles pointing out that every bank hires children of influential Chinese officials in order to win investment banking business.2 But of course you don’t need to go that far afield; anyone who’s worked in an investment bank for more than twelve minutes, anywhere in the world, can tell you stories of nepotism at least as blood-curdling as these. There are idiots, look around, often they are clients’ kids.
So why are some nepotistic hires okay and others illegal bribery? Here is the Times:
“While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business,” said Michael Koehler, an expert on the corrupt practices act who is an assistant professor at the Southern Illinois University School of Law.
The second of these criteria is a little dicey – one of the two companies in the JPMorgan investigation, China Railway Group, went public in 2007, at around the time that JPMorgan hired the daughter of its deputy chief engineer, so how much business was it doing with anyone before that? – but the first is particularly silly. Qualified! It is pleasant to imagine that investment banking is the sort of business for which only a few people are qualified via innate intelligence and rigorous training, but fundamentally it – like a lot of businesses – is about convincing people to pay you money. Doing that with spreadsheets and PowerPoint is – well, one, it’s not that difficult, lots of people are qualified to do it, probably including the Stanford-educated scions in this Times article – but, two, it’s a distinctly second-best approach. Maybe seventh-best. The best way to convince people to pay you money is to, like, go to them and be all “hey, dad, could we have some money?” But also playing golf with them, or being a former NFL quarterback,3 or just general handshakefulness and bonhomie are probably more effective than spreadsheets. Qualified!
Here is the Justice Department’s guide to the FCPA, which forbids companies from “making corrupt payments to foreign officials to obtain or retain business,” where a “payment” includes the “offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value” and a “corrupt” payment means one “intended to induce the recipient to misuse his official position.” So does giving a deputy chief engineer’s daughter a job with the intent of getting him to give you the nod for an IPO count? The answer seems to be along the lines of:
- If you say all the right things about how qualified she is, and then she occasionally talks to dear old dad about how good JPMorgan is at underwriting IPOs and how nicely they treat her, that might be okay; but
- If instead you explicitly agree on a quid pro quo in which she gets hired to do nothing and dad hires JPMorgan to the exclusion of other more qualified underwriters, then that is a problem.
Though of course “more qualified underwriters” has a certain circularity; the main qualification for an underwriter is the ability to convince the issuer to hire you.
That aside, it’s not especially confidence-inspiring. Nepotism is allowed and inevitable; what is punished is clumsy nepotism. Invoking the proper formulas, observing the proper cooling-off periods between hiring a client’s kid and using him to seek business, keeping the quid pro quo off of email: that’s what counts. Obviously you hire the children of important clients and potential clients, and obviously that helps you at the margin to win business; you just have to do it the right way. There’s a reason it’s the Foreign Corrupt Practices Act; the goal is to make sure that companies conform their foreign corrupt practices to American standards of corrupt practice. When you follow other cultures’ forms of corrupt practice, you get in trouble.
Sometimes! It’s hard to know if JPMorgan is the only bank publicly being investigated for hiring the children of Chinese officials to win business – when every bank pretty much openly hires the children of Chinese officials to win business – because the other investigations are coming, because JPMorgan was particularly clumsy in its nepotism, or because the SEC just feels like going after JPMorgan. All three are possible. JPMorgan, you may have noticed, has been a big target recently, and it’s entirely possible that regulators are more excited to pile on them then to go after, I dunno, Macquarie for its China hiring practices.4 And with the FCPA, “as in all areas of federal law enforcement, DOJ and SEC exercise discretion in deciding which cases promote law enforcement priorities and justify investigation.” That seems a little vague and random, but I guess banks have ways to manage the randomness. They can, for instance, hire former SEC antibribery regulators to advise them. That’s still fine.
1. Though it’s not that much bribery because the amounts involved are so small:
The families of the ruling elite in China see great value in finding work at Wall Street banks. While the jobs often pay token sums, finding such work bolsters the résumés of aspiring financiers and lends credibility in the Chinese business world.
That’s likely the first and last time you’ll ever see the New York Times describe investment banking salaries as “token sums.”
The investigation is likely to cause consternation on Wall Street and in the corridors of power in China, where hiring the sons and daughters of prominent politicians or business leaders is considered de rigueur as part of a system that places heavy emphasis on “guanxi,” or personal connections, as a way of securing new business.
In their rush to capitalise on China’s economic growth, virtually all the big Wall Street and European financial institutions with operations in the country have habitually hired “princelings”, as the children of senior Chinese officials are known.
Goldman Sachs once hired Jiang Zhicheng, grandson of the former Chinese president Jiang Zemin, for its direct private investment arm, for instance.
A senior Chinese official told the Financial Times that the Chinese government had not launched its own investigation into JPMorgan or its hiring practices in the country, but that the revelations are causing concern because the practice of hiring the children of senior officials to work at financial institutions is very common.
Banks around the world commonly hire people with government connections, but this is especially prevalent in China due to the role the ruling Communist Party plays in the country’s business. … Bank of America, Citigroup, Credit Suisse, Goldman Sachs and Macquarie are just a few of the banks to have employed relatives of top Chinese officials in the past five years.
While he was in Arizona “everyone was making money on the stock market” and Brown started reading some books on the subject. Lucky for Brown, his father-in-law was a golf buddy of the president of New York Life Investment Management who agreed to bring Brown in for an interview.
After also interviewing at Lehman Brothers and Merill Lynch, Brown chose to work at New York Life. Brown remembers the president of New York Life telling him “I don’t know what you can do, and quite frankly you don’t know what you can do. So why don’t you come in here, we’ll put you on a rotation, and find out if it works.”
SOUNDS PRETTY QUALIFIED.
4. Cf. Abacus, where Goldman got fined earlier and more than anyone else for CDO practices that were basically universal. The rationale seems to have been some combination of (1) Goldman was the designated bank scapegoat until JPMorgan took over with its whale efforts and (2) Goldman’s emails were just a bit worse than everyone else’s.