SEC’s JPMorgan China hiring probe misses the point – opinion

The Securities and Exchange Commission’s announced investigation into J.P. Morgan’s hiring in Hong Kong is rubbing market participants the wrong way – and for good reason.

  • 20 Aug 2013
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When news broke over the weekend that the US Securities and Exchange Commission (SEC) is investigating J.P. Morgan for his hiring practices in Hong Kong, financial and legal professionals who spoke to Asiamoney PLUS had just one question: what the hell is the SEC playing at?

To backtrack, on August 17 The New York Times first reported that the SEC opened a bribery investigation into whether J.P. Morgan hired the children of Chinese officials in Hong Kong to win business. More specifically the enquiry relates to whether the son of China Everbright Group’s chairman helped the bank win contracts from the state-backed company, and if the daughter of a Chinese railway official helped J.P. Morgan become an adviser on the China Railway Group’s public listing in 2007.

Given the information at hand, lawyers sketch out two scenarios. The first is understanding to what extent these employees’ relationships impacted the hiring decision: are they otherwise qualified for the job? Do they have a strong academic record and work experience? Do they have all of these qualities, as well as a really important relationship?

But if these bankers fall into the second scenario, where they have none of these qualifications outside a strong relationship, could be grounds for bribery.

Most typically, companies’ employees will fall somewhere in the middle of these two poles. And it’s difficult to charge J.P. Morgan with bribery, especially as banks ABN Amro Rothschild and UBS also managed China Railroad’s deal out of both Hong Kong and Shanghai. The whole exercise has bankers rolling their eyes.

There are key qualities that the children of high-ranking personnel have which make them amply attractive for banking jobs in Asia - they bring prestige, help attract other top job applicants, and bring acceptance into geographies that are difficult for foreigners to crack into. Of course that’s appealing.

Yet there’s frequently more to it than that: in these competitive times, these privileged candidates have to exhibit a real sense of professional worth, not just a rolodex of aunties and uncles looking to publically list their companies. There’s too much at stake for nepotism alone to drive these hires – better to appoint another seasoned banker whose grit can achieve more.

And frankly, most global banks have become far too cost-conscious to splurge big money on well-connected benchwarmers when it’s unclear exactly how much business they can bring in.

So why then is the SEC launching this investigation now, into J.P. Morgan – not another bank - and in China? Cynical banking professionals estimate is that this is another example of easy pickings by US regulators, playing on poor public sentiment on the industry just as the authorities close in on J.P. Morgan’s ‘London Whale’.

What would be more constructive for the SEC is to study up on how business is done in China. Historically, building relationships is a key part of doing business in the Mainland, and bankers are often hired for their cultural knowledge, language skills and personal relationships with high-level contacts in China. Early on, this strategy was central in getting banks’ business off the ground in China. Only recently, as China’s economy has softened and its market matured, have banks begun branching out.

For example in June Morgan Stanley announced it is restructuring its China country coverage so bankers would become part of the bank’s global sector desks. This means that bankers would have to adopt sector-specific knowledge and maintain onshore relationships to keep their jobs. It’s a model that other banks including Credit Suisse have adopted.

What the SEC also has to realise is that the relatives of Communist Party and state-owned enterprise (SOE) honchos are a dime a dozen – literally, there are an estimated 145,000 SOEs in China, and 2,987 deputies in the 12th National People’s Congress. There are a lot of well-connected young professionals out there, and these are exactly the people who have the money, means and drive to leave China, attend top universities and apply for competitive jobs at banks such as J.P. Morgan. Are these banks supposed to ignore this talent?

Actually, they’re not. Citing its past reports, The Wall Street Journal highlights that former premier Wen Jiabao's daughter worked for Credit Suisse in Beijing around 2011, and in 2005 it hired the granddaughter of a senior communist party official to head up its investment banking division in Hong Kong. BoA-Merrill’s China chairwoman is also the daughter-in-law of a former Party chief, while the son of China’s former banking regulator had worked at Macquarie, according to the newspaper.

If the US is so adamant to crack down on nepotism, maybe it should look in its own back yard. It’s been widely reported that Goldman Sachs’ chairman and chief executive Lloyd Blankfein’s two sons have both worked for Goldman Sachs – both are likely qualified for their jobs, but it’s not unreasonable to assume they may have also benefitted from their famous father.

And former UK prime minister Tony Blair became a consultant for J.P. Morgan in 2010. His predecessor, John Major, worked for private equity fund the Carlyle Group, as did former US president George Bush Sr. J.P. Morgan and Carlyle paid big bucks for these former leaders’ time, despite Blair, Major and Bush never having been professional financiers.

Big names and the connections that they bring are meaningful. Hiring high-level employees who can open the door to new and interesting opportunities is savvy business – banks just need to recognise that it’s up to them to win this business with their expertise and do the best they can on behalf of their clients.

The SEC can’t punish banks for walking through a door that’s been open for them – especially when these banks have a far better understanding of the local business landscape than their regulator does.

  • 20 Aug 2013

Panda Bonds Top Arrangers

Rank Arranger Total Volume Rmb (m) No. of Deals Share % by Volume
1 Bank of China (BOC) 7,500 5 22.26
2 Agricultural Bank of China (ABC) 4,000 2 11.87
2 Everbright Securities 4,000 1 11.87
4 Industrial and Commercial Bank of China (ICBC) 3,500 2 10.39
5 HSBC 3,000 2 8.90

Bookrunners of Asia-Pac (ex-Japan) ECM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 26 Oct 2016
1 CITIC Securities 15,417.46 59 6.69%
2 Morgan Stanley 11,809.74 49 5.12%
3 GF Securities Co Ltd 11,402.65 45 4.95%
4 Deutsche Bank 8,930.26 36 3.87%
5 China Securities Co Ltd 8,697.57 46 3.77%

Bookrunners of Asia Pacific (ex-Japan) G3 DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 HSBC 25,655.98 155 9.54%
2 Citi 24,170.03 132 8.99%
3 Bank of America Merrill Lynch 21,409.23 104 7.97%
4 JPMorgan 18,713.00 109 6.96%
5 Goldman Sachs 12,065.00 52 4.49%