BNY Mel­lon had some very spe­cial in­terns

The Pak Banker - - OPINION - Matt Levine

Good lord bank­ing is the worst job: In Fe­bru­ary 2010, at the con­clu­sion of a busi­ness meet­ing, Of­fi­cial X made a per­sonal and dis­creet re­quest that BNY Mel­lon pro­vide in­tern­ships to two of his rel­a­tives: his son, In­tern A, and nephew, In­tern B. As a Mid­dle Eastern Sov­er­eign Wealth Fund depart­ment head, Of­fi­cial X had au­thor­ity over al­lo­ca­tions of new as­sets to ex­ist­ing man­agers such as the Bou­tique, and was viewed within BNY Mel­lon as a "key de­ci­sion maker" at the Mid­dle Eastern Sov­er­eign Wealth Fund. Of­fi­cial X later per­sis­tently in­quired of BNY Mel­lon em­ploy­ees con­cern­ing the sta­tus of his in­tern­ship re­quest, ask­ing whether and when BNY Mel­lon would de­liver the in­tern­ships. At one point, Of­fi­cial X said to his pri­mary con­tact at BNY Mel­lon that the re­quest rep­re­sented an "op­por­tu­nity" for BNY Mel­lon, and that the of­fi­cial could se­cure in­tern­ships for his fam­ily mem­bers from a com­peti­tor of BNY Mel­lon if it did not sat­isfy his per­sonal re­quest. The same BNY Mel­lon em­ployee later wrote to a BNY Mel­lon col­league that Of­fi­cial X had be­come "an­gry" be­cause BNY Mel­lon was ex­pe­ri­enc­ing de­lays in de­liv­er­ing the in­tern­ships, and had openly ques­tioned the em­ployee's job per­for­mance and pro­fes­sion­al­ism be­cause of the de­lays.

Em­pha­sis added. Imag­ine be­ing that BNY Mel­lon banker and hav­ing a huge client, with $55 bil­lion of as­sets in your cus­tody, ac­cuse you of in­com­pe­tence for not get­ting his nephew a job. What can you do? Point­ing to your top-tier MBA and ex­per­tise in ne­go­ti­at­ing se­cu­ri­ties lend­ing agree­ments would not be re­spon­sive. It turns out that those things are not the right mea­sure of com­pe­tence. Just get the kids jobs.

He did: The kids got their in­tern­ships (along with In­tern C, the son of Of­fi­cial Y, another of­fi­cial at the same fund). BNY Mel­lon kept the sov­er­eign wealth fund's busi­ness: $55 bil­lion of as­sets un­der cus­tody, plus $711 mil­lion of as­sets un­der man­age­ment at a BNY as­set man­age­ment bou­tique. And to­day BNY Mel­lon set­tled with the Se­cu­ri­ties and Ex­change Com­mis­sion for $14.8 mil­lion for mak­ing that trade, which is at least ar­guably a vi­o­la­tion of the U.S. For­eign Cor­rupt Prac­tices Act, since viewed in a cer­tain (re­ally, any) light those in­tern­ships look like bribes to the sov­er­eign-wealth fund of­fi­cials to keep their fund's busi­ness. Those are some ex­pen­sive in­tern­ships! That's, like, 592,000 Seam­less din­ner al­lowances.

It is hard not to feel bad for BNY. Who among us has not given our clients' semi-com­pe­tent rel­a­tives jobs in ex­change for busi­ness? Cer­tainly there are omi­nous rum­blings that many global banks did it, and that more FCPA en­force­ment ac­tions are com­ing. And these kids weren't even that bad. Sure "they did not meet the cri­te­ria of BNY Mel­lon's ex­ist­ing in­tern­ship pro­grams," but once on the job they were ... semi-com­pe­tent. The SEC says:

The In­terns were less than ex­em­plary em­ploy­ees. On at least one oc­ca­sion, In­terns A and B were con­fronted by a BNY Mel­lon hu­man re­sources em­ployee con­cern­ing their re­peated ab­sences from work. A Bou­tique port­fo­lio man­ager who worked with In­tern C ob­served that his per­for­mance was "okay" and that "he wasn't ac­tu­ally as hard­work­ing as I would have hoped."

In my ex­pe­ri­ence, the phrase "less than ex­em­plary" is nor­mally used in the con­struc­tion that the Greeks knew as litotes, "iron­i­cal un­der­state­ment in which an af­fir­ma­tive is ex­pressed by the neg­a­tive of its con­trary." So when you say an em­ployee was "less than ex­em­plary," nor­mally you fol­low up with "in that he em­bez­zled mil­lions of dol­lars be­fore mur­der­ing his boss, burn­ing down the cor­po­rate head­quar­ters and flee­ing the coun­try." These guys were "less than ex­em­plary" in that they were, and this is an ex­act quote, "okay." For re­cent col­lege grad­u­ates who couldn't be fired be­cause of fam­ily con­nec­tions, "okay" is pretty good!

I feel for BNY too be­cause in­ter­na­tional fi­nance op­er­ates as a Maus­sian gift econ­omy in which spon­ta­neous fa­vors are be­stowed to cre­ate ill-de­fined obli­ga­tions. I said the other day that "the whole busi­ness of fi­nan­cial ser­vices is about fling­ing free things at clients in the hopes that they will give you some ex­tremely over­priced pay­ing work," and for that sys­tem to work the free stuff and the paid stuff need to be in­com­men­su­rable. You don't do a bond deal for free in the hopes of get­ting paid for the next bond deal. You do a be­low­mar­ket loan in the hopes of get­ting paid for a bond deal. You pro­vide free fi­nan­cial anal­y­sis in the hopes of get­ting paid for a merger. You give out free apps in the hopes of selling struc­tured notes.

It's nice if you do the the free work for your in­sti­tu­tional clients, in the hopes that those same in­sti­tu­tions will give you the busi­ness. But in prac­tice in­sti­tu­tions are made up of peo­ple. You can't treat an in­sti­tu­tion to a round of golf and a steak din­ner. You're in the peo­ple busi­ness. You help the com­pany's trea­surer with anal­y­sis so that he can look smart in front of the chief fi­nan­cial of­fi­cer, hop­ing that he'll give you a bond deal in grat­i­tude. And if the client has an open­ing for a CFO, you rec­om­mend a good can­di­date, hop­ing that the new CFO will owe you one. And, sure, if the CFO has a nephew who's adrift in life af­ter drop­ping out of art school ... sure. Shh. It's all taken care of.

There is of course a point where this tips over from "re­la­tion­ship-build­ing" into "bribery," but, you know, good luck iden­ti­fy­ing it. Even the con­duct in the BNY case has some plau­si­ble in­sti­tu­tional jus­ti­fi­ca­tion. Sov­er­eign wealth fund of­fi­cials are gov­ern­men­tal or quasi-gov­ern­men­tal agents. (That's why brib­ing them is illegal un­der U.S. law! ) And for many coun­tries it is not a ridicu­lous goal to have more young peo­ple train at global fi­nan­cial in­sti­tu­tions. Of­fi­cials X and Y don't seem to have wanted cushy highly-paid sinecures for their sons and nephew ; the bribe, such as it was, was not money or even a re­sume line but rather ac­tu­ally use­ful train­ing. The in­tern­ships were "cus­tom­ized one-of-akind train­ing pro­grams" that of­fered the in­terns "the op­por­tu­nity to work in a num­ber of dif­fer­ent BNY Mel­lon busi­ness units, en­hanc­ing the value of the work ex­pe­ri­ence be­yond that nor­mally pro­vided to BNY Mel­lon in­terns." And "the In­terns were to re­turn to the Mid­dle East at the con­clu­sion of their in­tern­ship and BNY Mel­lon had no plan to hire them as full-time em­ploy­ees." The in­tern­ships were at least in part a way for these gov­ern­men­tal of­fi­cials to im­port U.S. fi­nan­cial knowl­edge into their coun­try. By way of their own sons and nephew, but still.

Most of all, though, I feel for BNY be­cause of e-mail. There's that fa­mous fi­nan­cial-cri­sis mo­ment when Sen­a­tor Carl Levin asked Gold­man Sachs CFO David Viniar about Gold­man Sachs e-mails say­ing rude things about its own deals. Levin asked Viniar if those e-mails made him feel any­thing, and Viniar im­mor­tally re­sponded: "I think that's very un­for­tu­nate to have on e-mail." He quickly back­tracked, but that is clearly what he meant. Sim­i­larly, if you asked a rea­son­able bank ex­ec­u­tive how he feels about hir­ing medi­ocre in­terns who hap­pen to be the chil­dren of pow­er­ful of­fi­cials at ma­jor Mid­dle Eastern sov­er­eign wealth funds, I think he would re­ply: "I think that's very un­for­tu­nate to have on e-mail." It's ob­vi­ously what you do. I mean, you don't sac­ri­fice busi­ness in the Mid­dle East just for an overly fussy in­ter­pre­ta­tion of U.S. anti-bribery rules. You just don't put it in e-mail. I mean, you cer­tainly don't do this:

A Bou­tique ac­count man­ager wrote in a Fe­bru­ary 2010 e-mail con­cern­ing the in­tern­ship re­quest for In­terns A and B that BNY Mel­lon was "not in a po­si­tion to re­ject the re­quest from a com­mer­cial point of view" even though it was a "per­sonal re­quest" from Of­fi­cial X. The em­ployee stated: "by not al­low­ing the in­tern­ships to take place, we po­ten­tially jeop­ar­dize our man­date with [the Mid­dle Eastern Sov­er­eign Wealth Fund]."

Or this: We have to be care­ful about this. This is more of a per­sonal re­quest . . . [Of­fi­cial X] doesn't want [ the Mid­dle Eastern Sov­er­eign Wealth Fund] to know about it." The same em­ployee later di­rected his ad­min­is­tra­tive as­sis­tant to re­frain from send­ing email cor­re­spon­dence con­cern­ing Of­fi­cial X's in­tern­ship re­quest "be­cause it was a per­sonal fa­vor."

I mean, fine, say that last part, but don't make a record of it! Just, shh. Get it done. Show some job per­for­mance and pro­fes­sion­al­ism. Any in­tern­ship can be ex­plained as part of a con­text of re­la­tion­ship build­ing and in­for­ma­tion ex­change. These in­terns were hired be­cause of their unique back­ground and knowl­edge of Mid­dle Eastern busi­ness con­di­tions, not as part of an ex­plicit quid pro quo to win the fund's busi­ness by do­ing per­sonal fa­vors for its ex­ec­u­tives. You could say. If you hadn't al­ready put the ex­plicit quid pro quo in an e-mail. Or many e-mails. If noth­ing else, these en­force­ment cases will teach banks that: A fi­nan­cial sys­tem built on per­sonal re­la­tion­ships main­tained by fa­vors and im­plicit debts works great. Just don't be too tidy-minded about it: If you link the fa­vors and the debts ex­plic­itly, if you make the ex­change too clear, and if you put it in e-mail, that's when you get in trou­ble.

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