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Hiring the well-connected isn’t always a scandal

Stephen Schwarzman, chairman and chief executive officer of Blackstone Group LP and Bill Clinton, former US President and founder of the Clinton Foundation.
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Stephen Schwarzman, chairman and chief executive officer of Blackstone Group LP and Bill Clinton, former US President and founder of the Clinton Foundation.

When is a new hire on Wall Street scrutinized over possible bribery?

Over the weekend, The New York Times reported that the Securities and Exchange Commission had opened an investigation into whether JPMorgan Chase had hired the children of powerful Chinese officials to help the bank win business.

The investigation is sending shudders through Wall Street. If JPMorgan Chase is found to have violated the Foreign Corrupt Practices Act by hiring the children of the elite, then the entire financial services industry is probably in a heap of trouble. Virtually every firm has sought to hire the best-connected executives in China and, more often than not, they are the "princelings," the offspring of the ruling elite.

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Under the Foreign Corrupt Practices Act, a company is not allowed to provide a personal benefit to a decision maker in return for business. But hiring the sons and daughters of powerful executives and politicians is hardly just the province of banks doing business in China: it has been a time-tested practice here in the United States.

"This has been happening for thousands of years," said Michael J. Driscoll, a former senior trader at Bear Stearns who now teaches at Adelphi University. "I have two sons myself, and one is an intern at a major firm. This goes on all the time."

Several companies have explicit policies against cronyism, with good reason. Hiring a family member simply for a relationship can be troubling and may not necessarily serve a company's interests.

But by and large, financial firms in particular commonly hire people who have certain connections, whether through family or a business relationship. The thinking is that the new hire—and his or her last name—might "help open doors," Mr. Driscoll said. But, like many people I interviewed on this topic, he did not see a legal issue with such hires. "I don't think there is a quid pro quo," such that the hiring of children is explicitly generating business from the parent. At best, he said, "It gets you in the room."

He added: "It's like chicken soup. It can't hurt."

Pick a big-name chief executive, and a quick LinkedIn search will often reveal a relative working for some other company that wants to do business with the parent's company.

When Jeff Kindler was the chairman and chief executive of Pfizer, his son, Joshua, worked at Morgan Stanley. All three sons of Martin Sorrell, the chief executive of the advertising giant WPP, have worked at one time or another at Goldman Sachs, which, yes, has done business with WPP.

Does this make the sons of Mr. Kindler or Mr. Sorrell unqualified? Not at all. They are all quite bright and well educated. One of Mr. Sorrell's sons went on to become a partner at Goldman Sachs. Do these hires constitute bribes? Hardly.

Stephen Schwarzman's son Teddy was an intern at Goldman Sachs and went on to be an analyst at Citigroup. He then became a lawyer at Skadden, Arps, Slate, Meagher & Flom, before leaving to pursue a successful career in the movie industry. Did Goldman, Skadden or Citigroup hire Teddy because of his father? Did they expect to get business from Blackstone? Maybe.

(Read more: Is the government trying to break up JPMorgan?)

But more likely they thought he was a qualified recruit who, given his upbringing, had a golden Rolodex. His résumé certainly fit the mold of the firm's other eager new hires: he earned his bachelor's at the University of Pennsylvania, then graduated, cum laude, from the Duke University School of Law.

The same goes for the prime example of this issue in the United States: Chelsea Clinton. Ms. Clinton worked at the consulting firm McKinsey & Company after college and later at Avenue Capital, a hedge fund founded by a big Clinton fund-raiser, Marc Lasry. But Ms. Clinton, a Stanford graduate who is considered intelligent by virtually everyone who has spent time with her, had as genuine a claim on those jobs as anyone else graduating the year she did.

Did it matter who her parents were? Of course it helped. She's since gone on to become a director of IAC/InterActiveCorp, Barry Diller's Internet company, and a contributor to NBC News, roles that critics have also complained about. (Full disclosure: I host CNBC's "Squawk Box," which is part of NBC News.)

And then there is Robert Rubin's son Jamie, who worked at the Federal Communications Commission and at Allen & Company, the boutique bank, while his father was part of the Clinton administration. I've known Jamie for years and he, too, probably would have landed prominent posts even without his name. In some cases, some of these children will tell you that they try to work harder than others at their jobs, just to prove that they earned the position.

In 1971, Bear Stearns was debating whether to adopt an anti-nepotism policy, and Alan C. Greenberg, now its former chief, was told by one of his colleagues that the firm might lose out on some good hires. He replied: "I'm sure you're right about that. And if we don't do it, we're going to hire 100 percent of the dummies."

(Read more: China Princeling-Backed Firm Eyes $500 Million Buyout Fund)

In Washington, the line between lobbying and bribery is not clear-cut. Until 2008, R. Hunter Biden, son of then-Senator Joseph R. Biden Jr., lobbied Congress regularly. The Washington Post reported last year that "56 relatives of lawmakers have been paid to influence Congress" since 2007.

While the House and Senate passed rules to limit some lobbying, the House left enough wiggle room for parents and children of lawmakers to still lobby.

There is a conversation to be had about how unseemly this might appear. Mr. Driscoll said, "All of this doesn't read well," and he's right. It looks bad.

But, in truth, it is the way of the world. It is a hard to fault a business for hiring someone who has better contacts than someone else.

If the hiring is indeed part of an expected quid pro quo, that's a different story. And if the princeling in China is being put on the payroll to ostensibly do work, but in fact, is spending his days at the beach not working, that's a big problem too—and starts to look much more like a bribe.

But given that many of the children of the elite have some of the best educations and thriving networks of contacts, it is hard to see how businesses are supposed to not seek them out, let alone turn them away. As hard to defend as the phrase may be, it is a reality of life, "It's not what you know, but whom you know."

—By Andrew Ross Sorkin for The New York Times' DealBook

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