If you're going to do naughty stuff I guess there are about two ways to proceed, which are:
- Do the naughty stuff as soon as you think of it, before anyone's had time to figure out that it's naughty and ban it, or
- Wait until a lot of other people are doing the naughty stuff, so you can go around being all "that? That was naughty? Naaah, come on, everyone was doing it."
You might think that approach No. 2 offers the compensating advantage of being a bit safer, but nope! The Times's latest installment in its JPMorgan Chase China hiring story is here and it is so embarrassing and sad. Basically JPMorgan had a program, unfortunately named "Sons and Daughters," that was designed to prevent it from illegally hiring sons and daughters of Chinese officials in order to win business. Then it noticed that all the other banks were illegally hiring sons and daughters of Chinese officials in order to win business.
So after losing a deal to Deutsche Bank because the client's chairman's daughter worked for Deutsche, JPMorgan reconsidered:
JPMorgan’s investment banking business began to lose market share in China, the data from Thomson Reuters shows. By the time JPMorgan lost the 2009 deal to Deutsche Bank, the Hong Kong executives at JPMorgan’s investment bank decided that it needed to step up its hiring.
“A missed opportunity for us this year,” an executive said in an email upon learning of the loss to Deutsche Bank. “Can you guys craft a program that could work for us?”
The answer was "soooooort of," in that those guys crafted a program that worked for JPMorgan -- hiring sons and daughters, winning deals -- until the Times and the Securities and Exchange Commission got involved. And so you'd get e-mails like this:
“We do way, way, way too little of this type of hiring and I have been pounding on it with China team for a year,” a JPMorgan employee wrote to a colleague in a 2010 email. In that same email, the employee added: “confidential, just added son of #2 at SinoTruk to my team,” referring to a company that is part of a state-owned trucking enterprise.
He added: “I got room for a lot more hires like this (Goldman has 25).”
The Times reports that "authorities have expanded the inquiry to include hiring at other big banks," including Goldman, but still you can see why this looks worse for JPMorgan, with its one trucking scion, than for Goldman, with its 25. Because you're allowed to hire trucking scions, or whatever. You're just not allowed to do it to corruptly win business. Who knows what that means, but e-mailing about how it will win you business probably looks more corrupt than not e-mailing about it. "Oh no," Goldman can say, "these 25 kids were just the most qualified bankers in China; the fact that their parents all run state-owned companies is a pure coincidence." JPMorgan can't say that.
It's a little reminiscent of the Justice Department's weird lawsuit against Standard & Poor's for misrating mortgage-backed securities. The thing about S&P is that it was rating MBS too strictly, and was losing business to Moody's. So it quite sensibly decided to rate MBS less strictly to win back some business, and it somewhat less sensibly kept a written record of that decision and the attendant debates. And so the DoJ sued S&P. Moody's, meanwhile, had the bright idea to just have less strict ratings to begin with, so it never had to send around internal memos to the effect of "let's lower our standards to compete with S&P." And so the DoJ left Moody's alone.
If you have a deeply rules-based compliance culture this is sort of what you get: A lot of good, or good-ish, qualities get penalized. JPMorgan was less aggressive about corrupt hiring than some of its competitors, tried harder than them to construct a compliant system, and kept careful and auditable records. And now is in more trouble than its less scrupulous competitors.
The thing that is rewarded is ... well, one of two things. You could be rewarded for pure good. If you have a deeply principled culture of compliance, and are genuinely devoted to staying well away from any gray areas, your e-mails will always be unimpeachable and this sort of thing will never come up.
Or you could be rewarded for pure evil. If your China bankers aren't even aware that hiring sons and daughters to win business might be bad, then they won't create elaborate spreadsheets tracking their misdeeds, or e-mail each other about how much they need to hire princelings to win business. They'll just do it. The most effective compliance program of all might just be "do whatever you want but never say anything in writing." A policy that could have served JPMorgan well in China.
Or something. Per the Times, "The bank created the Sons and Daughters program in 2006 to ensure that the hiring would pass legal and regulatory muster." I don't know what that means and I bet you don't know what it means either, and neither does the Times or JPMorgan or the SEC or anyone else. You can't corruptly hire sons and daughters, is the relevant mustering. You can un-corruptly hire them. Whether your hiring is corrupt or not does not seem to be a function of the memos you wrote about it, though maybe it is, who knows.
Though tell that to Barclays, which last week was fined $3.75 million for not keeping millions of Bloomberg instant messages.
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Matt Levine at email@example.com