Dimon's 2008 China Views May Come Back to Haunt Him (Update 1)

Updated from 10 a.m. EST to add decline to comment from JPMorgan.

NEW YORK (TheStreet) -- With JPMorgan Chase (JPM) facing continued scrutiny over hiring practices in China, it seems an opportune time to revisit an intriguing e-mail from 2008 which gave us some insight into the view of CEO and Chairman Jamie Dimon regarding doing business in the world's second-largest economy.

The internal company e-mail from a JPMorgan investment banker, which surfaced in 2010 amid a legal battle between the bank and creditors of Washington Mutual, recounted a wide-ranging conversation between Dimon and Banco Santander (SAN) Chairman Emilio Botin. The two bank bosses spoke so freely about companies around the world they wanted to buy that Ian Ayres, an economics and law professor at Yale University, argued the Justice Department should open an antitrust inquiry.

It seems reasonably safe to assume no such inquiry was ever opened -- possibly because JPMorgan, for whatever reason, wasn't as appealing a target at the time as it appears to be now.

In case the Justice Department -- or the Federal Trade Commission, which may have broader powers, according to another antitrust expert I interviewed at the time -- might still be convinced to take an interest in the email, here was the juicy part:

"It is important to have an open dialogue with them, as Santander would not pursue any of these opportunities if JPMorgan were to do the same (can't compete on price with JPMorgan for an acquisition in the USA). But Santander would probably hire JPMorgan as advisor if we are not going after them."

Also intriguing back in 2010 were all the M&A possibilities being tossed around by the bank chiefs. Both wanted to buy Citigroup's  (C) Mexican operations, but Citi wasn't selling. Which of them would buy Washington Mutual, Wachovia, Suntrust  (STI) or PNC Financial (PNC)? It would have been fascinating if the email had been public when it was originally written in 2008. It was still pretty intriguing in 2010. But now, with nearly all the deals or non-deals to buy beaten-down financial assets from the 2008 crisis having vanished even from the rear-view mirror, the email is no longer of much interest to followers of financial sector M&A.

But the part of the email that describes Dimon's views about doing business in China may be more relevant than ever, since the bank disclosed in August it had received "a request from the SEC Division of Enforcement seeking information and documents relating to, among other matters, the Firm's employment of certain former employees in Hong Kong and its business relationships with certain clients."

JPMorgan disclosures in a Nov. 1 10-Q filing indicated those inquiries had widened considerably. Now it wasn't just China but Asia Pacific. And the Justice Department was now involved, as were "authorities in other jurisdictions." And new practices or new types of relationships also appear to be under scrutiny. Here is the full Nov. 1 disclosure.

The Firm has received subpoenas and requests for documents from the SEC's Division of Enforcement regarding, among other things, hiring practices relating to candidates referred by clients, potential clients and government officials, the Firm's employment of certain former employees in Hong Kong, its business relationships with certain related clients in the Asia Pacific region and its engagement of consultants in the Asia Pacific region. The Firm has also received a request for documents from the U.S. Department of Justice regarding the same referral hiring practices. The Firm is cooperating with these investigations. Separate inquiries on these or similar topics have been made by other authorities, including authorities in other jurisdictions, and the Firm is responding to those inquiries.

The New York Times followed up each disclosure with more details, citing confidential government documents in each instance.

In light of all this, let's take another look at what the Madrid-based JPMorgan investment banker reported Dimon as saying when Botin brought up the subject of Asia:

Like many others they are struggling to do business in Asia. Considering to buy a stake in a bank in China and asked if it makes sense to do so at current prices. Jamie replied that the concept is ok, but not now, too expensive, adding that so far "in China it is a one way street" with them wanting to get all and letting you get nothing, and that there will be more and better opportunities when China has a downturn.

Also, too difficult to know what you are buying: many of them do not yet have integrated systems, possibly a meaningful amount of political loans, etc.

That's it. It's not much to go on, though the part about "political loans," is intriguing.

According to the Times reports in August and November, the U.S. government investigation relates to JPMorgan's hiring of "princelings" -- children of senior Chinese leaders. The reports make no mention of "political loans," which sound like loans a bank wouldn't ordinarily make except that they open doors to other, presumably more lucrative, transactions.

Did JPMorgan make any such loans? The email suggests Dimon was loathe to do so. But that doesn't mean the bank didn't make any. JPMorgan has $26.1 billion in exposure to China, including $14.2 billion in loans, on nearly $2.5 trillion in assets, according to its latest 10-Q, filed Nov. 1. That makes China its fifth-largest exposure outside the U.S. behind the U.K., Germany, the Netherlands and France.

In the quarter ended June 30, 2008, when Dimon complained about the "political loans," JPMorgan's exposure to China was just $5.2 billion on $1.8 trillion in assets. At that time, the bank didn't disclose its top 20 country exposures as it does now. But even among emerging markets, which JPMorgan did disclose, China was only its fourth-largest exposure, behind South Korea, Russia and India.

Do any of these exposures constitute "political loans"? And if they do, can they be proven to be in violation of the Foreign Corrupt Practices Act? Time will tell. A JPMorgan spokeswoman declined to comment.

-- Written by Dan Freed in New York

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