The financiers of FIFA: when and when not to put your good name on the line

One consistent theme of this column is that investment bankers have to deal with the world as it is, not the world as they’d like it to be. And that lesson returned with a vengeance in the brouhaha over JP Morgan’s involvement around FIFA president Gianni Infantino’s proposal to hive off World Cup commercial revenues.

At one level, you’d have thought JP Morgan would have learned its lesson the first time. Five years ago, the bank offered to finance the European Super League. The proposal triggered a huge backlash from fans, politicians, and the general public and was withdrawn with haste and extreme prejudice. The episode cast doubt about the judgement that JP Morgan showed, although the fall-out was short-lived.

So how does a bank as clever and successful as JP Morgan make apparently the same mistake twice? Did no one think to question what the reaction to Infantino’s plan would be?

The whole farrago raises a question that comes up surprisingly often in investment banking and especially in capital markets, where the bank puts its (good?) name on the line to raise financing in the public domain. That question is: what is the bank’s responsibility when a client wants to undertake a perfectly legal, but potentially unpopular or polarising, transaction? Is the bank akin to any number of suppliers on a project? Or does its enabling function entail a greater responsibility?

These aren’t easy questions. Bankers frequently argue that they’re just intermediaries. If a company is doing something objectionable, then it’s up to the government of the day to ban or regulate it. But of course it’s never that simple. Banks overlay judgment, often based on the risk of future litigation or bad publicity. You see this most clearly when a bank shies away from emerging markets deals where the principals have a ropey reputation. The bank doesn’t want to find itself implicated down the road in a money laundering investigation.

But broadly speaking, bankers consider themselves the neutral plumber. The premise is as follows: as long as it complies with the letter and spirit of applicable law, it’s presumptuous to substitute your moral judgment. Under this view, abandoning a client due to public pressure smacks not of sensitivity but of cravenness: it’s untenable (and even cowardly) to say no every time some activist kicks up a fuss. That’s handing an unelected group a veto over what business you can perform when it should be the elected governments who have the final say on what is permissible.

And yet, when the backlash happens, it’s a very uncomfortable experience, and it is felt at the top of the house in a way that few things are. The outside world doesn’t care about the nuances. The media pile on, find their share of conscientious objectors, and caricature the decision-making as heedless greed. The bank is perceived as bankrolling an injustice and is regarded as a lot more responsible than the other enablers, such as the auditors, consultants or lawyers.

It’s this indeterminacy and vagueness that pose so many problems for senior leadership because reputational risk is such a nebulous concept: you can’t price it, but it can inflict financial, legal and regulatory damage even if you’ve done nothing remotely illegal.

Poor judgment costs in ways that can be hard to contain. The CEO suddenly has to answer for a decision that she may not have even been aware of. It’s a kind of risk that is qualitatively different from credit risk or market risk, which you can at least quantify or assign probabilities to.

In addition, turning down business is bad business. I can tell you from firsthand experience that clients deeply resent — and do not forget — when you decline a mandate on reputational grounds. Unless every competitor follows suit, you’re burning a bridge while another institution often takes your place. You end up losing the fee, wrecking a relationship and, in many cases, watching the transaction print without any of the public backlash you feared.

Public sentiment is never settled in stone. Reporters, politicians and other interested parties often have a vested interest in reviewing things through a lens equipped with 20:20 hindsight, applying new standards ex post facto in a way that would be unconstitutional if done in the context of legislation. For senior leaders deciding whether to support a transaction, they have to ask not only whether this is the right thing to do, but how it will look in retrospect, especially if your motives are automatically assumed to be impure (remember, kids: no one gives investment bankers the benefit of the doubt.)

As for JP Morgan, my guess is their senior leaders believed this plan had none of the flaws made so apparent in the European Super League proposal. It had the backing of reputable people and reputable investment firms, and the bankers probably bought into the idea that the FIFA plan would provide grassroots support for football associations all around the world. If I had to guess, I bet they saw this as doing good.

And since they were working on it confidentially, the bankers never had the chance to “trial-balloon” the idea and gauge public reaction. They appear to have also underestimated just how divisive Infantino’s conduct has been as head of FIFA, not to mention the deep-seated tensions between FIFA and such key constituencies as UEFA and CONACAF.

In short, they probably inserted themselves into a situation they did not understand and they were completely out of their depth in a way a bank shouldn’t be. (If the project had a PR advisor, for sure that firm has a lot to answer for).

So how should bankers regard themselves? They can’t just follow orders but what further obligations do they have when (other than applicable law and regulation) there aren’t clear lines?

Nobody expects bankers to act as moral gatekeepers for finance, but the financiers must abandon the fiction that they’re just laying the pipes. Financing and advising involve agency; they are an active choice. You are as a banker, to no small degree, underwriting the client’s reputation with your own, giving their project your bank’s imprimatur as well as balance sheet.

The challenge is to price the full risk before the press release goes out.