The risk-arbitrage desk that Rubin headed consistently earned fat returns, which was one of the factors that elevated him to the cochairmanship of Goldman in 1990. But beyond the riches, the arbitrage game instilled a mental calculus by which he came to approach almost all issues. As Rubin himself repeatedly put it, he liked to think “probabilistically.” A decision might produce bad results—for example, a takeover stock might plunge in value, or the bailout of a country might flop—but that doesn’t mean the decision was wrong, as long as the odds of profit and loss, or success and failure, were carefully assessed and weighed at the time, given all the information available. On the other hand, of course, it was crazy to proceed when the probable downside clearly exceeded the probable upside. In risk arbitrage, “You had to stick to your discipline and try to reduce everything in your mind to pluses and minuses and to probabilities,” Rubin once told Clay Chandler of the Washington Post. “If a deal goes through, what do you win? If it doesn’t go through, what do you lose? It was a high-risk business, but I’ll tell you, it did teach you to think of life in terms of probabilities instead of absolutes. You couldn’t be in that business and not internalize that probabilistic approach to life. It was what you were doing all the time.”
As his Wall Street profile rose, Rubin, who was politically much more liberal leaning than most of his peers, became active in Democratic circles, and in 1992 he made a favorable impression on Arkansas Governor Bill Clinton, not least by helping to raise money for Clinton’s presidential campaign. After Rubin moved to Washington in 1993 to chair the White House National Economic Council, he and Clinton quickly developed a tight bond, thanks in part to Rubin’s advocacy of a budget deficit reduction strategy that helped lower interest rates and paved the way for the long U.S. economic expansion of the 1990s. Named to replace the courtly Lloyd Bentsen as Treasury chief in late 1994, Rubin struggled with the public responsibilities of the Job; his speaking style tended to be disjointed, with frequent midsentence interruptions for caveats and modifications and retractions. But given the president’s enormous trust in his Judgment, nobody in the administration could approach his clout on economic matters, and his reputation for thoughtful analysis and imperturbability added to his luster. “In a way, he’s like a Socratic professor,” said Robert Boorstin, who was a senior adviser to the Treasury secretary. “He would listen, endlessly, and he would only interject when he really had something to ask or say. You always knew Rubin had something to say when he would start off with, ‘Well, I don’t know much about this, but ...’ And you knew he really had something to say when he would start off with, ‘Well, I know a thing or two about this’—like when someone would start talking about the markets.”
At the meeting about Korea the day before Thanksgiving, Rubin was in that cautious mode his subordinates had come to know well. Undertaking an all-out effort to rescue Korea looked like a losing proposition, such as buying the stock of a takeover target whose merger was almost certain to fall through. Korea was so close to default, its short-term debt was so large, and its reluctance to change its ways was so deep, that a huge bailout seemed likely to produce nothing but a costly fiasco. The only course of action the meeting participants could agree upon was to think hard about what to do and talk again the next day.
Assistant Secretary Tim Geithner tried to counter the sense of futility. Of all the members of the senior Treasury team, Geithner had by far the most Asia expertise. He had grown up in Thailand, India, and other foreign countries (where his father was a Ford Foundation executive), held degrees in Asian Studies from Dartmouth and the Johns Hopkins School of Advanced International Studies, and had served as assistant Treasury attaché in the U.S. embassy in Tokyo. Only thirty-six years old, he had risen like a shot through the Treasury’s ranks, starting as a career civil servant in 1988 and impressing one superior after another with his rapid-fire analytical capacity and good-humored manner.
Geithner argued that Korea was too important a country, both economically and strategically, to be allowed to default. “But that’s the kind of thing Rubin hates,” he admitted later, “because you can’t let some perceived imperative of action dictate your choices, and you may not have alternatives that are a plausible response to the problem. I don’t think we concluded the meeting thinking that nothing could be done. There was a presumption that Korea would get an IMF program. But I think we concluded the meeting with everyone thinking that it was very dark.”
That night, Summers—who was predisposed to be more activist than Rubin in situations such as these—called Geithner from his parents’ home in Philadelphia, where he had traveled from New York for the holiday. Agreeing that U.S. policy needn’t necessarily be doomed to inaction, the pair concocted a multipart strategy that they thought might be plausible. First, the United States would make a determined effort to persuade the Koreans to adopt a credible set of policy reforms that addressed the problems that had gotten them into this mess. Second, a package on the order of Mexico’s $50 billion bailout would be marshaled—with IMF, World Bank, and Asian Development Bank money backed by a “second line of defense” that would include $5 billion from the United States, $10 billion from Japan, and billions more from other countries. Third, Japan would be pressured to send positive signals about its intentions to shore up its ailing banking system, because the frantic pulling of loans by troubled Japanese banks was compounding Asia’s woes.
On Thanksgiving morning, the Treasury team held a conference call from their homes to discuss the idea. But within hours, the pressure on Rubin would grow even more intense, as the administrationwide conference calls proliferated. “It was the worst Thanksgiving Day of my life,” recalled Sandra Kristoff, the senior director for Asian affairs at the National Security Council. “Not only were we having a traditional dinner, but we were also celebrating a family birthday, and we celebrated at my house. By the time I got off the phone, all the dishes were done, and everyone had gone home.” Other participants on the calls—including Secretary of State Madeleine Albright—bemoaned their ruined dinners, though there were occasional breaks for people to spend time with friends and family.
In the calls, the national security and foreign policy heavyweights pressed the case that the United States could not walk away from Seoul at such an hour of need. “This president is not going to look like Jimmy Carter,” admonished James Steinberg, the deputy national security adviser, referring to an episode in the 1970s when President Carter proposed a major reduction in the U.S. military presence in South Korea, sparking an uproar in Asia about Washington’s commitment to the region. Steinberg worried that by failing to show strong support for Korea, the United States risked stirring an anti-American backlash in Seoul that could lead to pressure for the removal of U.S. troops. His boss, National Security Adviser Samuel “Sandy” Berger, wondered aloud about the danger that North Korea would foment “mischief” should South Korea undergo economic collapse; the reclusive Communists in Pyongyang might seize the opportunity of financial chaos in the South to launch provocative military adventures that could trigger a deadly conflict. The Central Intelligence Agency was tasked to step up monitoring of the North, as was General John Tilelli, the commander of U.S. Forces in Korea, who also participated in the call. Albright was perhaps the most emphatic in favor of a bailout, earning the derision of the Treasury team, who felt she was simplistically assuming that money alone would vanquish the crisis.
Rubin couldn’t dispute Korea’s strategic importance, but he made it clear he wasn’t hearing proposals for resolving the problem that made sense to him. The Treasury chief’s main concern was that the IMF’s credibility should not be squandered. The Fund’s value to the international community, he explained, stemmed from its ability to instill confidence among bankers and investors. A badly botched rescue, he feared, could seriously diminish its capacity to instill that confidence in the future.
In the end, the two sides reached an understanding that appealed at least somewhat to Rubin’s p
robabilistic mentality. As Steinberg recalled:The extreme version of the argument the national security types like me were making was that [a major bailout] was worth trying even if it was certain to fail. That isn’t what we were saying; it’s Just the extreme interpretation. The extreme version of the Treasury argument was, don’t do it unless it’s certain to succeed. What was mutually arrived at was that it was no good to do something if it was absolutely futile. We accepted that there had to be some degree of probability of success, and Treasury accepted that it didn’t have to be Just a high probability. If there was some chance it would succeed—even if it was less than fiftyfifty—there was a political value in having tried.
Sharmini Coorey wasn’t expecting that the IMF would send her to Korea, and certainly not on such short notice. A thirty-nine-year-old native of Sri Lanka, with a Ph.D. from Harvard, Coorey was in the process of moving in autumn 1997 to the Asia and Pacific Department from the Policy Development and Review Department, and she was expecting to work on the Philippines and Indonesia. But in late November, she was assigned to the Seoul-bound mission, to oversee the monetary policy portion of the program, even though she had never been to the country before.
Gary Moser was not expecting to be sent to Seoul either. A member of the Policy Development and Review staff, he had been working on a project to evaluate the Fund’s skill at monitoring economies and detecting crises. But he was told he would be going to Korea (his first time, too) while on a weekend trip in mid-November to New York, where he was watching his daughter perform with a singing group at Carnegie Hall, and he had to rush back to Washington the day after the performance.
The Asia crisis was stretching the IMF thin, especially the Asia and Pacific Department. Hubert Neiss and his department colleagues had to dig deep to find people who were available for the Korea mission, and familiarity with the country and its current economic problems was preferable but not a prerequisite. Wanda Tseng, whom Neiss took as his cochief of mission, had worked on Korea in the late 1980s, and she kept abreast of the country’s developments while working on China in the 1990s, but in 1995 she had left the Asia and Pacific Department to become deputy secretary to the Executive Board. Aside from Neiss and a banking expert who had participated in the Article IV mission in October, only one of the senior members of the mission staff, James Gordon, had spent time recently in Korea.
After arriving in Seoul on November 26, the IMF mission members had barely recovered from Jet lag—and the shock of learning that Korea was nearly out of reserves—when formal negotiations began two nights later. The talks opened with a long statement by Choi Joong Kyung, director of the Finance Ministry’s Financial Cooperation Division, who stood up, bowed deeply, and apologized for what had happened. “We are sorry, for having called [the IMF] in so late, and for having let the situation get so desperate,” he began, according to one of the IMF staffers, who recalled: “I would say he was nearly crying. It was a very emotional point.”
Apologies aside, the Koreans were not rolling over to meet the Fund’s demands. On the contrary, they were ready with backup teams to research and rebut every proposal the IMF made for the program’s conditions. No sooner would exhausted IMF staffers retire to bed than they would be wakened at three or four o’clock in the morning with word that the Korean negotiators were ready to resume talks on one point or another. Starting Sunday, November 30, Neiss and Tseng simply stopped sleeping and stayed up for three and four straight days, respectively.
The main elements of a draft Letter of Intent started to take shape over the weekend, with Washington following the negotiations closely by e-mail and telephone from Seoul. To some on the Fund staff, it seemed clear that Neiss wasn’t getting the Koreans to agree to much. The Koreans made commitments to cure many of the problems in their financial system—improving oversight, openness, and transparency, for example—but the commitments were vague, without specific deadlines, or they repeated commitments the government had already made in other venues. The IMF wanted the government to close a number of merchant banks—firms similar to Thai finance companies, which were essentially unsupervised, and had lent aggressively to chaebol with which they were closely affiliated. But the Korean negotiators said they could consider closing only one. “No finance minister in Korean history has ever closed a financial institution,” Finance Minister Lim Chang Yuel reminded the IMF team. As for interest rates, the initial drafts of the Letter of Intent suggested the central bank would raise the overnight borrowing rate, its chief monetary tool, only a few percentage points. That was a disappointment to many at the Fund who favored using high rates to make the country a more attractive place for investors to keep their money.
It soon became apparent that the deal Neiss was negotiating would fail to satisfy one intensely interested party—the U.S. Treasury. As one IMF economist recalled, “Treasury thought Neiss was giving the shop away.” And though Treasury officials emphatically denied that they were dissatisfied with Neiss, their actions left little doubt about their concern. On Thanksgiving, the administration had taken the extraordinary step of sending a top U.S. official to Seoul to “monitor” the negotiations—Treasury Undersecretary David Lipton.
With a placid, blue-eyed gaze that masked a restless spirit, Lipton was the obvious choice for such a “parachute” Job, though he had never been to Korea himself. He understood how IMF missions worked, having spent eight years at the Fund after getting his Ph.D. in 1981 from Harvard, where he was a frequent study-group colleague and tennis partner of Larry Summers. He also had some expertise in dealing with countries that had fallen into extreme financial distress.
In 1989, he left the IMF to Join Jeffrey Sachs, another friend from Harvard’s economics department, who had formed a small advisory group for economically troubled countries. The pair soon embarked on some lively adventures. In June 1989, for example, they spent all night in a Warsaw hotel drafting a radical economic program that had been urgently requested by Poland’s Solidarity movement, two days after Solidarity had trounced the Communists in the country’s first free parliamentary elections since the advent of the Cold War. Poland’s economic outlook appeared almost beyond hope at that time, and the plan helped convince Solidarity leaders—who weren’t sure they should take the risk of forming a government—that they stood a chance of making a successful transition to market-based capitalism.
At the Treasury, which he Joined in 1993, Lipton was known for advocating “out-of-the-box” ideas. But although he had been associated with Sachs, one of the IMF’s most outspoken critics, he did not share Sachs’s vehement opposition to Fund orthodoxy on matters such as the need for crisis-stricken countries to keep interest rates high. Lipton was “Safe Sachs,” as one IMF staffer Joked when Lipton Joined the Treasury.
Before leaving for Seoul, Lipton called Richard Holbrooke, the veteran American diplomat, for advice on Korea. Holbrooke said the most important point Lipton needed to grasp was how Korea’s tragic history of invasion and subjugation by neighboring powers had shaped its attitude toward the outside world. “You’ve got to understand, for 4,000 years, Koreans have maintained their culture, and their nationality, even when they weren’t a nation,” Holbrooke told him. “They’re hostile to intrusion from foreigners.”
But the marching orders Lipton got from Rubin did not leave much room to avoid offending Korean sensibilities. If the Koreans were willing to take decisive steps to change the way they ran their economy, the United States would help them, Rubin said. But if they weren’t willing, then aid wouldn’t work, and Lipton should make it clear that Washington couldn’t help.
To Rubin, Summers, and their lieutenants, Korea’s crisis was the inevitable result of the country’s stubborn insularity and its slavish attempts to follow the Japanese economic model, with its system of cosseting banks to pump funds into industry. The Treasury’s international staff had long urged Seoul to open up its financial sector—for example, to drop restrictions on competition from foreign banks, and allow Korean
companies to borrow on international bond markets and sell more stock to foreigners. Lobbying by American financial services firms, which wanted to crack the Korean market, was the driving force behind the Treasury’s pressure on Seoul. But the department argued that liberalization would benefit Korea; it would give small and medium-sized firms a chance to compete with the chaebol and make the entire Korean economy less dangerously dependent on bank loans. The Korean Ministry of Finance and Economy, in part to help secure the country’s 1996 entry into the OECD, grudgingly acceded to some of the American demands, but with long phase-in periods. As Treasury saw it, Korea was now paying the price for its decisions and would have to take radical steps to show that the same mistakes wouldn’t be repeated. So as in Indonesia, the United States wanted a program with conditions that surpassed the Fund’s traditional boundaries.
The IMF staff was less enthusiastic about imposing structural change on Seoul. Whatever the merits of a wholesale makeover of the economic system, it wouldn’t necessarily stem the panic besetting Korea, and in some quarters of the Fund, cynicism abounded about the Treasury’s ulterior motives. “The U.S. saw this as an opportunity, as they did in many countries, to crack open all these things that for years have bothered them,” said one member of the IMF’s Asia and Pacific Department.
The Chastening Page 16