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Ties that bind

19 August 2013 By John Foley

Investment bankers are only as good as their contacts. In China, that may present Wall Street with a problem. The Securities and Exchange Commission is investigating whether JPMorgan hired relatives of powerful people to win business, according to the New York Times. If it decides the answer is “yes”, foreign banks will find it even harder to get a foot in the door.

Strategic nepotism, such as giving an internship to the offspring of a would-be client, isn’t limited to China. But in the People’s Republic, where institutions are weak and corporate governance poor, “guanxi” is what gets deals done. Most banks have a princeling or two on the payroll. In China’s socialist market economy many company bosses are also ministers, which makes any special treatment a potential violation of the U.S. Foreign Corrupt Practices Act.

Proving wrongdoing is not easy. True, it’s possible to envisage a case where nepotism and corruption come together. Daimler, the German carmaker, settled with the SEC in 2010 after the watchdog accused it of paying commissions to relatives of officials, including in China, without them actually doing any work, in return for contracts.

But it’s likely that in most cases no explicit quid pro quo exists. Consider a bank that hires the progeny of an official with the hope, but not the promise, of winning business. There’s no guarantee that strategy will pay off. In many cases, it may just create a management headache. Powerful people come with powerful personalities, as Morgan Stanley discovered when it tied up with CICC, the investment bank run by ex premier Zhu Rongji’s son Levin.

In most cases, it shouldn’t be difficult to argue that most princelings are qualified for the job, given the elite’s better access to education and opportunity. But if the SEC nonetheless deems JPMorgan’s hiring amounts to bribery, the rest of Wall Street will have a problem. With so many financial professionals in China touting their guanxi, it may be hard to know when a line has really been crossed. As for the truly connected, if foreign banks can’t hire them, it’s a fair bet that local rivals will.

 

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