Monday, August 19, 2013

Treat Their Children Well: Wall Street Hiring

Treat Their Children Well:  Wall Street Hiring

Over this past weekend, we learned that the SEC’s anti-bribery unit is investigating JP Morgan Chase’s hiring practices in China.  According to various newspaper reports, the bank hired the children of well-connected Chinese officials and then began doing investment-banking business with their companies.  At this point in its inquiry, the SEC is only collecting information and has not yet alleged that anything illegal took place.  The SEC is operating under the authority of the Foreign Corrupt Practices Act, which prohibits American companies from giving anything of value to a foreign official in order to win business. 
DC Client List (1997)
The articles make for intriguing journalism because the story combines the growing legal problems at JP Morgan with the widespread corruption in China.  The Wall Street Journal regales us with a long list of well-connected Chinese progeny hired by investment banks.[1]  The New York Times reminds us that the US Justice Department just issued arrest warrants for two traders involved in JP Morgan’s “Whale Trade” scandal.[2]

Perhaps the SEC will eventually find that JP Morgan had the requisite bad intent that would convert the hiring of the children of the well connected into a crime.  I’m guessing that this story will amount to nothing more than a story about bright, highly motivated kids getting jobs because their parents are important executives in a key market.  Undoubtedly, these hirings aided JP Morgan in gaining business.  However, there isn’t much real news in this story, and it tells us little about China.

The SEC’s inquiry merely reveals how Wall Street works.  If we were to peer into hiring practices in Brazil, Mexico, France, or Japan, we’d find that Wall Street hires the children of government officials and corporate executives in order to foster relationships and generate business.  I think we’d also discover that the investment banks begin the wooing process well before anyone is actually hired.  I’m sure the admissions offices at America’s elite universities and business schools receive a raft of phone calls and letters urging the admission of well-connected foreign students.

Of course, we need to extend our examination even more broadly.   These kinds of hiring practices and educational recommendations occur all the time in the United States.  Long before JPM Morgan coveted business in China, it was hiring the children of key corporate executives in the United States in order to build better relationships with their domestic clients.   This is how the business works, and it is completely consistent with the practice of hiring former politicians and regulators to help build their businesses.   Relationships matter.

Won’t all these children fill Wall Street’s offices with people who don’t have the technical skills to structure deals and trade securities?  Many of these young folks are highly qualified and bring extra benefits to their employers.  However, there are plenty of roles on Wall Street that don’t require any technical skills or intellectual prowess.  Wall Street is a mix of finance and relationships.  There are plenty of people on Wall Street whose chief asset is playing client golf, ordering expensive wine, or creating a conduit to their parent’s company and its investment banking business.


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