The Chastening

by Paul Blustein

  Pages 88-89: Information on Widjojo comes from Raphael Pura, “Indonesia Hands Economy to Veteran Trouble-Shooter,” The Asian Wall Street Journal, October 12, 1997.

  Page 89: The quote from the World Bank report comes from Paul Blustein, “Indonesia a Good Provider for All, Including Leader’s Children, Cronies,” The Washington Post, November 14, 1994.

  Page 90: Figures on Indonesia’s development come from the World Bank, Operations Evaluation Department, “Indonesia Country Assistance Note,” February 4, 1999.

  Pages 91-92: Information on the KKN-related holdings of Suharto kin and cronies comes from John McBeth, “Dept. of Connections,” Far Eastern Economic Review, October 16, 1997; John McBeth and Jay Solomon, “First Friend,” Far Eastern Economic Review, February 20, 1997; Jay Solomon, “Cars—The Timor Gap,” Far Eastern Economic Review, February 27, 1997; Philip Shenon, “The Suharto Billions,” The New York Times, January 16, 1998; and Paul Blustein, “Indonesia a Good Provider to All, Including Leader’s Children, Cronies,” The Washington Post, November 14, 1994.

  Page 91: The percentage of Indonesia’s wealth controlled by ethnic Chinese was put at 40 percent in a U.S. Treasury memorandum, and at 70 percent in a number of articles published in Far Eastern Economic Review.

  Page 92: The passage from Wolfensohn’s speech comes from Louise Williams, “Private Sector Gets the Nod,” Sydney Morning Herald, May 14, 1996.

  Page 94: The figures on the increase in the number of Indonesian banks come from Steven Radelet, “Indonesia’s Implosion,” Harvard Asia Pacific Review, September 1998.

  Pages 94-96: In addition to interviews, information about the Chu mission’s findings and results comes from the World Bank, Operations Evaluation Department, “Indonesia Country Assistance Note,” February 4, 1999. This is the report that castigated the World Bank’s management for having downplayed the evidence the mission unearthed.

  Page 96: The optimistic staff report submitted to the World Bank Board is titled “Memorandum of the President of the International Bank for Reconstruction and Development and the International Finance Corporation to the Executive Directors on a Country Assistance Strategy for the Republic of Indonesia,” June 13, 1997.

  Ironically, de Tray’s office in Jakarta had prepared a less optimistic report about Indonesia almost at the same time, titled “Indonesia: Sustaining High Growth with Equity,” May 30, 1997. This report, prepared by a team led by Lloyd Kenward, James Hanson, and Lloyd McKay, included this passage: “Looking ahead, the current account is likely to worsen further next year, and problems in other East Asian economies could spill over into Indonesia. These factors, inter alia, risk a reversal of capital inflows, a risk that is magnified by Indonesia’s large external debt and the increasing sensitivity of global capital flows to changes in indicators.”

  Page 98: Figures on the cost of foreign versus rupiah loans come from Darren McDermott and Richard Borsuk, “Freeing of Rupiah Deals Double Blow to Debt-Burdened Indonesian Firms,” The Asian Wall Street Journal, August 15, 1997.

  The figure on capital flows into Indonesia comes from Steven Radelet, “Indonesia: Long Road to Recovery,” Harvard Institute for International Development, March 1999, www2.cid.harvard.edu/hiidpapers/indonesia. pdf.

  Pages 99-100: The report by SBC Warburg Dillon Read is “Indonesia Equity Review: A Whole New Ball Game,” November 1997.

  Page 102: Sakakibara’s recollections of his “heated discussion” with Aghevli come from an article he authored, “IMF’s Indonesia Reforms Too Severe,” Daily Yomiuri, December 10, 1999.

  Pages 106-107: Key features of the IMF’s program for Indonesia, as well as details about the runs on Indonesian banks, are contained in Kenward, “From the Trenches.” Other details about the panic among depositors come from Cesar Bacani, “Now the Hard Part,” AsiaWeek, November 14, 1997; and John McBeth, “Big Is Best,” Far Eastern Economic Review, November 13, 1997.

  Page 109: The IMF staff report calling the Fund’s approach concerning deposit guarantees “ill-advised” is “IMF-Supported Programs in Indonesia, Korea, and Thailand: A Preliminary Assessment.”

  Pages 109-110: The statements by presidential son Bambang concerning his takeover of Bank Alfa come from Louise Williams, “Soeharto Son Gets New Bank,” Sydney Morning Herald, November 22, 1997.

  Page 111: Paradoxically, the Monetary and Exchange Affairs Department was the department of Carl-John Lindgren, the Finnish economist who had successfully made the case for a blanket deposit guarantee in Thailand. The Thai program had rankled many at the Fund as being too lax on this score, and that may help explain why the Fund took a harder line in Indonesia.

  Pages 112-113: Information about the issuance of plastic souvenir 50,000 rupiah banknotes comes from Kenward, “From the Trenches.”

  Page 114: Data concerning the amount of liquidity that was pumped into Indonesian banks come from Kenward, “From the Trenches”; and from the World Bank, “Indonesia Country Assistance Note.”

  Information about the improper provision of central bank loans to politically connected companies and banks comes from Joe Leahy, “Fears Grow over Indonesia Central Bank Losses,” Financial Times, January 10, 2000; and Tom McCawley, “Indonesia Attorney General’s Office Questions Ex-Central Bank Governor on Fate of Ten Billion Pounds in Emergency Loans,” Financial Times, January 5, 2001.

  Page 115: The U.S. Treasury memo was obtained under a Freedom of Information Act request.

  CHAPTER 5: SLEEPLESS IN SEOUL

  A particularly useful background source on the Korean economy and the origins of its crisis is Marcus Noland, Avoiding the Apocalypse: The Future of the Two Koreas (Institute for International Economics, Washington, June 2000), which I was fortunate to read in draft form. Another is Donald Kirk, Korean Crisis: Unraveling of the Miracle in the IMF Era (St. Martin’s Press, New York, 1999).

  Page 117: President Kim’s words in his address to the nation come from numerous dispatches, including Sang-Hun Choe, “South Koreans Accept IMF Bailout—with Humiliation and Anger,” Associated Press, November 22, 1997.

  Pages 117-118: The October 15, 1997, Article IV report on Korea was, and remains, a confidential document.

  Page 119: Joan Robinson’s prediction is cited in Noland, Avoiding the Apocalypse.

  Pages 119-121: Many of the figures concerning Korea’s development, including the data on policy loans and the rise in spending on new plant and equipment, come from Noland, Avoiding the Apocalypse.

  Pages 121-122: Information concerning the Ssang Yong Group’s M. P. Kim comes from Steven Mufson, “Rebuilding South Korea’s House of Cards,” The Washington Post, December 22, 1997. Information concerning the Halla Group’s shipyard comes from Kirk, Korean Crisis. To the best of my knowledge, a connection has never been proved between the location of Samsung’s plant and presidential approval for its entry into the auto industry; however, the coincidence has been widely noted in the Korean media, and informed Koreans believe a connection exists.

  Page 122: In a separate aide-mémoire about the Korean banking system, the IMF’s Article IV mission fretted that the capital held by the banks as cushions against loan losses had been so eroded that if proper accounting methods were used, the average ratio of capital to total assets would be as low as 4 percent to 6 percent, well below the 8 percent international standard that the banks claimed to have surpassed.

  Pages 124-125: The study by Carmen Reinhart, coauthored by Graciela L. Kaminsky, is “Bank Lending and Contagion: Evidence from the Asian Crisis,” and is on the web at www.puaf.umd.edu/papers/reinhart.htm.

  Page 126: The data on Korea’s liabilities to foreigners come from Bank for International Settlements figures cited in Noland, Avoiding the Apocalypse, p. 196.

  Page 131: Lim’s comment that “it is in [the] interests [of Japan and the United States] to help” comes from Michael Schuman and Namju Cho, “South Korea to Seek Help from U.S. in Bid to Stem Currency Crisis,” Dow Jones News Service, November 20, 1997.

/>   Page 132: The headlines from Korean papers come from Sang-Hun Choe, “South Koreans Accept IMF Bailout—with Humiliation and Anger,” Associated Press, November 22, 1997.

  Pages 132-133: In a letter to me, Lee Keun Yung acknowledged that in his November 26 visit to Siegman, he said “that the Bank of Korea’s reserves were decreasing fast and that we might run out in a fairly short period of time.” But he said that at the breakfast earlier in the week attended by Greenspan, Siegman, Bank of Korea Governor Lee, and himself, “the seriousness of the reserve problem was fully understood among the participants.” It is entirely possible that Bank of Korea officials thought they were adequately conveying the seriousness of the reserve problem at the breakfast, but it also seems clear that the Fed did not feel the situation was nearly so dire until the meeting on November 26.

  Pages 134-136: Information about Rubin’s background comes mainly from Clay Chandler, “Treasury’s High-Stakes Player,” The Washington Post, June 18, 1998; Jacob Weisberg, “Keeping the Boom from Busting,” The New York Times Magazine, July 19, 1998; and Bob Woodward, The Agenda: Inside the Clinton White House (Simon & Schuster, New York, 1994).

  Pages 136-137: Information about Geithner’s background comes from his biography published on the Treasury’s website, www.ustreas.gov; and Dean Foust et al., “The Swat Team from Washington,” Business Week, March 2, 1998.

  Page 146: Lim’s assertion that “the talks are virtually completed” was reported by Dow Jones News Service, December 2, 1997.

  Pages 148-149: Details of the Korean program come from “Korea—Memorandum on the Economic Program,” December 3, 1997, available on the IMF website.

  Page 149: The suspension of the nine insolvent merchant banks was announced the day before Camdessus’s visit and was not negotiated by him.

  The contrast between the visages of Camdessus and Lim comes from Kirk, Korean Crisis. The quotes from Lim at the press conference and the Treasury official at the Washington briefing come from Paul Blustein and Sandra Sugawara, “Seoul Accepts $55 Billion Bailout Terms,” The Washington Post, December 4, 1997.

  CHAPTER 6: THE NAYSAYERS

  Page 152: The passage from Sachs’s op-ed comes from his article “Power unto Itself,” Financial Times, December 12, 1997.

  Page 153: The reference to Sachs’s lack of shyness comes from Leslie Wayne, “A Doctor for Struggling Economies,” The New York Times, October 1, 1989.

  Pages 153-154: Information about Sachs’s background and career and his exploits in Bolivia and Poland comes from Peter Passell, “Dr. Jeffrey Sachs, Shock Therapist,” The New York Times, June 27, 1993; Steven Pearlstein, “Tiff in the Economists’ Temple,” The Washington Post, April 5, 1998; Leslie Wayne, “A Doctor for Struggling Economies,” The New York Times, October 1, 1998; Mac Margolis, “Bolivia Shifts from Hyperinflation to Stability,” The Washington Post, May 17, 1988; William R. Long, “Thousands Fast to Protest Economic Austerity in Bolivia,” Los Angeles Times, May 7, 1988; and Daniel Yergin and Joseph Stanislaw, The Commanding Heights (Touchstone, New York, 1998).

  Page 155: The quote “The crisis is mainly the result of a self-fulfulling panic” is from Steven Radelet and Jeffrey Sachs, “What Have We Learned, So Far, from the Asian Financial Crisis?” Discussion Paper, Consulting Assistance on Economic Reform Project, Harvard Institute for International Development, March 1999, www.hiid.harvard.edu/caer2/htm/content/papers/paper37/paper37.htm.

  Page 158: Stiglitz’s Chicago speech is available on the World Bank website, www.worldbank.org.

  Page 159: The figure on the increase in World Bank structural adjustment loans is compiled from data in its annual report released in September 1998, cited in Paul Blustein, “World Bank’s Role Evolves with Crisis,” The Washington Post, September 25, 1998.

  Pages 159-161: Information on Stiglitz comes from Owen Ullman, “Mad Dog,” The International Economy, March/April 1999; Peter Passell, “From the Ivory Tower, a Tough Economist for the World Bank,” The New York Times, December 12, 1996; Sylvia Nasar, “Stiglitz, Idea Man Among the Economic Advisers,” The New York Times, February 9, 1994; Louis Uchitelle, “The Economics of Intervention,” The New York Times, May 31, 1998; and David Moberg, “Capital Crusader,” Salon.com, September 25, 1999. Stiglitz’s book is Globalization and Its Discontents (W. W. Norton & Co., New York, 2002).

  Page 162: Summers’s quote “I thought you were my friend” comes from Sakakibara’s article, “Thai Crisis Played Part in IMF Idea,” Daily Yomiuri, November 26, 1999.

  Pages 162-163: Information about Sakakibara’s background, career, and views comes from Sachiko Sakamaki, “Mr. Yen Moves Up,” Far Eastern Economic Review, July 17, 1997; Peter Landers, “Outspoken Crusader for Yen Policy, Sakakibara, Is Planning to Step Down,” The Wall Street Journal, June 29, 1999; Peter Hartcher and Andrew Cornell, “Mr. Yen Regrets,” Australian Financial Review, June 25, 1999; and Edmund L. Andrews, “Blunt-Spoken Economist Is Japan’s Mr. Yen,” The New York Times, September 16, 1995.

  Page 164: Sakakibara’s quote “Personally, I like the Japanese system” comes from Paul Blustein, “Japan’s Corporate Connections Create Challenge for U.S. Businesses,” The Washington Post, October 6, 1991.

  Sakakibara’s quote “not an Asian crisis but a crisis of global capitalism” comes from Michael Hirsh, “The Way It Looks to Mr. Yen,” Newsweek, February 2, 1998.

  Page 165: Sakakibara’s quotes about “the unity of Asian countries,” “it was all too hasty,” and “the AMF might act independently of the IMF” come from his article in the Daily Yomiuri, November 26, 1999.

  Pages 167-168: The September 17 Rubin-Greenspan letter, and the September 30 memo from Geithner to administration colleagues, were provided to me by the U.S. Treasury in response to a Freedom of Information Act request.

  Page 168: Sakakibara’s quote about having been “taught a valuable lesson” comes from his Daily Yomiuri article of November 26, 1997.

  Pages 170-171: Information about Tietmeyer’s background, career, and views comes from “Hans Tietmeyer, the D-mark’s Dogged Defender,” The Economist, March 21, 1998; Brendan Glacken, “A Banker of Steely Austerity Bows Out,” The Irish Times, September 2, 1999; John Eisenhammer, “The Mark’s New Minder,” The Independent, October 3, 1993; and Bill Javetski et al., “The Bundesbank—Under Hans Tietmeyer, the Mark Comes First,” Business Week, October 4, 1993.

  Page 172: A thorough account of the Mexican episode can be found in George Graham, Peter Norman, Stephen Fidler, and Ted Bardacke, “Mexican Rescue,” Financial Times, February 16, 1995.

  Although the German and British representatives on the IMF board sought to register abstentions after the meeting approving the Mexican loan had ended, they were told that it was too late.

  Page 173: Tietmeyer’s quote about the “generous involvement in Mexico” comes from a brief story on the AFX wire service on April 26, 1995. Mussa’s quote about the Titanic was delivered at an IMF conference I attended in 1999.

  Page 174: Concerning the German view that the Powell doctrine was a fraud, a particularly trenchant comment can be found in Helmut Schieber, “Moral Hazard and the Role of International Rescue Operations,” in Hunter, Kaufman, and Krueger (eds.), The Asian Financial Crisis: “I do not share the view that extraordinarily large financial packages have automatically calming effects on financial markets,” wrote Schieber, a member of the Bundesbank board. “Neither in Asia nor in Russia did the announcement of large packages stop the capital outflows, either immediately, or later, because ... everyone could see that even these large packages were by far not large enough to finance all possible capital outflows.”

  CHAPTER 7: THE BOSUN’S MATE

  Page 178: Details concerning the Korean package come from an IMF press release, “Camdessus Welcomes Conclusion of Talks with Korea on IMF Program,” available on the IMF website.

  Page 180: The IMF staff report was available for a time on the website of the Korean newspaper Chosun Ilbo (www.chosun.com).

  A tra
nscript of Fischer’s press conference is available on the IMF website.

  Page 181: The quote “It was one of a series of dubious decisions” comes from David E. Sanger, “Talk of Tougher Medicine for Korea’s Ills,” The New York Times, December 12, 1997. Rubin’s statement about Korea having a “strong program” comes from Virginie Montet, “U.S. Investors Still Jittery over South Korea’s Financial Crisis,” Agence France Presse, December 11, 1997.

  Pages 182-183: Lejoindre’s quote “The calculation is simple” comes from Philippe Ries, “South Korea Crisis Threatens World Payments System,” Agence France Presse, December 12, 1997. The action by Thompson Financial Services was reported in Timothy L. O’Brien with Andrew Pollack, “Korea Situation Deteriorates, Raising Specter of a Default,” The New York Times, December 12, 1997.

  Part of the problem contributing to the rundown in the Bank of Korea’s reserves was that the central bank, in its desperation to keep the banking system from collapse, was lending reserves on excessively generous terms—charging commercial banks only about 1 percentage point above the London Interbank Offered Rate (LIBOR), the market rate banks customarily charge each other for short-term loans. Around the time of the December 3 program, the Fund demanded that the Bank of Korea charge a much higher rate in the hope that banks, instead of asking for loans of reserves, would negotiate with their foreign creditors for rollovers. Grudgingly, the central bank complied by charging 4 percentage points above LIBOR, and when that proved to be insufficient, it raised the rate to LIBOR plus 6 points and eventually to LIBOR plus 10 points.

  Page 184: The quote by the unidentified senior Fund official, “We had during the last few days,” comes from my notes of the briefing.

  Page 187: Information about Truman’s background and career comes from John M. Berry, “At the Fed, a Power Struggle over Information,” The Washington Post, July 8, 1996; and Owen Ullman, “Ted Truman Unchained,” The International Economy, September/October 1999.