Investment banking is a business of relationships. Relationships are like quid pro quos but fuzzier: Rather than an exchange of "I give you Thing X, and you give me Thing Y," the deal is more like "oh you like Thing X? Here, have it, it looks great on you. Nonono, no charge, just happy to help." Then you go make a note of it in your spreadsheet, and your spreadsheet has a column for "expected return," and in that column you write, "he will give me Thing Y and Thing Z."
The vagueness about whether and when and how much each gift will be reciprocated allows both parties to the relationship to believe that they are actually friends with each other rather than just arms'-length counterparties trying to rip each others' faces off. It also allows them to believe that they are ripping each others' faces off.
This weekend there was another New York Times story about how JPMorgan Chase hired the children of Chinese officials in order to win business from Chinese state-owned companies. The story is pretty pretty great but the best part may be this:
JPMorgan also briefly kept “historical deal conversion” spreadsheets, according to interviews with people briefed on the investigation. In one column, JPMorgan listed job candidates; in another, the bank recorded its “track record” for winning business from companies tied to those candidates. Other spreadsheets listed well-connected hires and the revenue JPMorgan earned from deals with private and state-owned Chinese companies linked to those hires, documents show.
In discussions with authorities, the people briefed on the investigation said, JPMorgan has explained that it did not connect revenue to the “Sons and Daughters” program. Instead, the bank has said, the spreadsheets were meant to assess whether JPMorgan bankers, in hopes of securing full-time jobs for some interns in the program, had exaggerated the revenue received from state-owned companies.
This was not JPMorgan saying, "we need to win business from Chinese state-owned companies so hire their managers' children." This was JPMorgan bankers saying to themselves, "I want to hire some well-connected but incompetent children, so I'm going to tell my managers that doing so will win us business." And the managers got suspicious and checked up on those claims, because of course bankers will exaggerate the value of their relationships. JPMorgan wasn't hosing Chinese companies through bribery-by-nepotism; JPMorgan bankers were hosing JPMorgan through nepotism-for-(failed)-bribery.
Obviously -- well, probably, who knows -- the managers didn't want to hire the incompetent children because they enjoy the company of incompetent children. They hired the children to make it easier to win business from their parents, but the spreadsheet's rationale suggests that it wasn't as simple as "you give me an IPO mandate and I give your son a lucrative do-nothing job." It was more the old-fashioned, regular-way sort of nepotism: "Your son is a great kid, I am going to give him a job, let's stay in touch," that sort of thing. Y'know, relationships.
None of this makes anything better if you believe that nepotism has no place in investment banking but hahahahahahaha come on why would you believe that, that's nuts. Nepotism has a proud and prominent place in investment banking: In a business of relationships, you might as well hire people who were born with good relationships. The alternative of developing relationships through financial analyses and golf is slow and error-prone.
The law is less clear: JPMorgan, and apparently several other banks, are being investigated for possible violations of the Foreign Corrupt Practices Act, which prohibits explicit quid pro quos but is a bit fuzzier on fuzzy relationships. Actually, even explicit quid pro quos are prohibited only when they're paid to foreign officials; private companies raise less of an issue. The other best part of the Times article is the napping analyst: JPMorgan got a mandate from Fubon Financial Holding but, to keep the mandate, needed to get an executive's relative a job as a JPMorgan analyst in New York. There were um cultural issues:
The problem, another employee in Hong Kong acknowledged, was that the candidate’s “napping habit will be an eye-opening experience for our N.Y. colleagues.”
"Eye-opening," get it? He was terrible at being an investment banking analyst, is what they are trying to say here. But, "while the e-mail appears to suggest a quid pro quo, the message is unlikely to alarm federal authorities, because it involves a private company rather than a state-owned enterprise." You can understand why JPMorgan bankers in China might be less than crisp on that distinction. Hire analysts whose parents can give us business -- but not if they work for state-owned companies. But the state-owned companies can give us the best business!
Anyway, this is all very sordid all around but it ends with the sad story of Zhang Rong, who quit JPMorgan when he realized the bank was just using him for his relationships:
On an overnight flight from Hong Kong to the United States, Mr. Zhang drafted a resignation letter that lamented how “All of my efforts seemed meaningless to you and you tend to judge me solely on the relation part of me.”
Mr. Zhang said he was quitting because he could no longer “live under the shadow of my father.” The father, he indicated, had ties to the China Post Group, which runs the Chinese postal service and other subsidiaries.
I guess we should feel bad for Zhang Rong, who wanted to be valued for his abilities and his efforts rather than for his connections. Which is a reasonable enough desire. But of course he took -- and then left -- a job in an industry that is all about relationships. "Efforts" are not really what investment banks are looking for, except insofar as those efforts lead to relationships, and those relationships lead to money. If you've got the relationships already the efforts are secondary. You might as well just take a nap.
The anthropological literature is rich. The fun irony is that the upper reaches of modern capitalism tend toward non-capitalist interaction. If you're selling companies copiers, you charge them the price of the copiers. If you're selling capital markets and M&A advice, you operate on basically a gift relationship.
By the way are you at all troubled that "Federal authorities have obtained confidential documents" and then, apparently, handed them to the Times? I feel like the regulators' case for the moral importance of careful rule-following is a little undermined when they leak every stage of a confidential investigation to the press.
Also maybe illegal! You can't win.
To contact the author on this story:
Matt Levine at firstname.lastname@example.org