Page 303: The figure on the peak spread between on-the-run and off-the-run Treasury bonds comes from the IMF’s 1999 International Capital Markets report, as does the figure about the decline in the amount of high-yield corporate bonds issued in U.S. markets in October 1998.
CHAPTER 11: PLUMBING THE DEPTHS
Although my own reporting forms the basis for much of the material in this chapter concerning the activities of Fed and Treasury policymakers during the Long-Term Capital episode, a source from which I drew repeatedly is Lowenstein, When Genius Failed, a fascinating and exhaustively reported book by an estimable former Wall Street Journal colleague.
Other sources that helped inform this chapter are Carol J. Loomis, “A House Built on Sand,” Fortune, October 26, 1998; Diana B. Henriques, “Billions upon Billions,” The New York Times, September 27, 1998; Michael Siconolfi, Anita Raghavan, and Mitchell Pacelle, “How the Salesmanship and Brainpower Failed at Long-Term Capital,” The Wall Street Journal, November 16, 1998; Timothy L. O’Brien and Laura M. Holson, “A Hedge Fund’s Stars Didn’t Tell, and Savvy Financiers Didn’t Ask,” The New York Times, October 23, 1998; and Diana B. Henriques and Joseph Kahn, “The Fear That Made the Fed Step In,” The New York Times, December 6, 1998.
Page 305: Information about Peter Fisher’s background, career, and the procedure he instituted at the New York Fed’s trading desk comes from John M. Berry, “The New York Fed Opens Up: To Bank Official, Benefits of Change Are No Secret,” The Washington Post, May 13, 1998; and Jacob M. Schlesinger, “Long-Term Capital Bailout Spotlights a Fed ‘Radical,’” The Wall Street Journal, November 2, 1998.
Pages 307-311: The figures concerning Long-Term’s payroll peaking at 190, and its 1996 profits exceeding those of McDonald’s and other major corporations, and its $7 billion in capital exceeding that of Salomon Smith Barney, come from Lowenstein, When Genius Failed. So also does much of the information about Meriwether’s background, as well as the information about Long-Term’s first trade in August 1993 and the returns the firm earned for its investors and its financial position.
Page 313: Information about J. P. Morgan’s role in the panic of 1907 comes from John Steele Gordon, “History Repeats in Finance Company Bailouts,” The Wall Street Journal, October 7, 1998.
Page 314: McDonough’s statement that Long-Term’s demise could have a “serious effect” on world markets comes from his testimony before the House Committee on Banking and Financial Services, October 1, 1998.
Pages 316-317: I am indebted to Roger Lowenstein for the lucid explanation of shorting equity volatility in his When Genius Failed. Information about the document with the notation “USD_Z+D-shift” also comes from Lowenstein’s book.
Page 319: The estimate that Long-Term’s counterparties would suffer a $2.8 billion loss was also reported in Lowenstein, When Genius Failed.
Page 322: McDonough’s statement that “No Federal Reserve official pressured anyone” comes from his testimony before the House Banking and Financial Services Committee, October 1, 1998.
Page 323: The quote “What the fuck are you doing?” comes from Lowenstein, When Genius Failed.
Pages 324-325: The comments by Reps. Vento and Bachus and Chairman Greenspan come from the October 1, 1998, hearing of the House Banking and Financial Services Committee.
Page 328: Information about Greenspan querying the staff about economic minutiae, and his quote “We need to be forward looking,” come from David Wessel, “In Setting Fed’s Policy, Chairman Bets Heavily on His Own Judgment,” The Wall Street Journal, January 27, 1997.
Page 330: The Fed’s directive of September 29, 1998, and the announcement of the FOMC decision to cut the funds rate by 25 basis points, are available on the Fed’s website, www.federalreserve.gov.
Page 331: The story about Philadelphia Fed President Edward Boehne and the clerk at the Pennsylvania hotel comes from David Wessel, “Credit Record: How the Fed Fumbled, and Then Recovered, in Making Policy,” The Wall Street Journal, November 17, 1998.
Details about the investment firm parties at the IMF-World Bank meetings come from Steven Mufson, “Bankers Meet Under Dark Cloud with Silver-Service Lining,” The Washington Post, October 8, 1998; and Leslie Wayne,“A Champagne Evening Awash in Gloom,” The New York Times, October 9, 1998.
Page 333: Clinton’s statements about the Contingent Credit Line, including “We have got a vested interest,” come from Paul Blustein, “U.S. Offers Plan to Aid Global Economy,” The Washington Post, October 3, 1998; and David E. Sanger, “Clinton Proposes IMF Act Earlier to Prevent Crises,” The New York Times, October 3, 1998.
CHAPTER 12: STUMBLING OUT
Page 338: Figures showing the outflow of hard currency come from Brazil’s central bank and are cited in “History of Brazil Dollar Outflows,” Reuters, January 14, 1999.
Page 342: Information about Brazil’s glowing promise and burgeoning middle class in the mid-1990s comes from Diana Jean Schemo, “Brazil’s Economic Samba,” The New York Times, September 7, 1996.
Information about Malan’s background and career comes from Luis Emerson, “Mr. Real,” The Ethnic NewsWatch, News from Brazil, January 31, 1995; and Elliot Blair Smith, “Digging Brazil Out of Trouble,” USA Today, November 16, 1998.
Pages 343-344: An analysis of Brazil’s exploding debt burden is contained in ING Barings’s “Emerging Markets Weekly Report,” October 9, 1998. Information on the seven-month average maturity for government bonds, and the extent to which interest payments on those bonds were linked to the overnight lending rate, comes from an October 14, 1998, research report by Salomon Smith Barney’s emerging-markets analyst Desmond Lachman, titled “Brazil and the IMF: The Road Chosen.”
Page 348: Despite Japan’s objections to the U.S.-IMF position on Brazil, Tokyo nonetheless fell in behind the effort to design a program for the country. Sakakibara attributes this in part to an “understanding” he says he reached with Summers. The episode is worth a brief examination for the light it sheds on the peculiar combination of mutual suspicion and mutual dependence that pervaded relations between the world’s two largest economies during the crisis.
According to Sakakibara’s recollections published in the Daily Yomiuri in late 1999, Tokyo’s concern over the Brazilian rescue was subsumed by its interest in advancing an initiative, the New Miyazawa Plan, that provided $30 billion in financial aid to Asian economies. Although the plan involved Japanese money only rather than a pool of resources from the region, it looked to some extent like an attempt to resurrect the Asian Monetary Fund. Sakakibara gave this accounting:Japan supported the European stance [criticizing the Brazilian rescue], but during several bilateral meetings held in September, Summers and I developed an understanding that Japan would argue for the European position, but would not ultimately oppose the U.S. plan. In return, the U.S. would not oppose Japan’s rescue package for Malaysia and other Asian countries. The Asian rescue package was announced in the form of the $30 billion New Miyazawa Plan during a meeting October 3.
Malaysia had been the target of international criticism after it announced on Sept. 2 unilateral restrictions on the outflow of capital that inflicted huge losses on many U.S. and European financial institutions. Malaysia, however, was important to Japan, and Tokyo was not necessarily opposed to the control on capital outflows to avert a crisis. It was, therefore, unthinkable to exclude Malaysia from the list of recipients of the New Miyazawa Plan.
Summers and I were well aware that we had to compromise as we were representing different national interests.
Summers hotly disputes the suggestion that he and Sakakibara struck such an agreement. Unlike the Asian Monetary Fund, the Miyazawa initiative was a unilateral action by a sovereign nation, and the United States wasn’t in a position to approve or disapprove it. When I pressed Sakakibara about this, he conceded that his accord with Summers “wasn’t an explicit deal. We developed a vague understanding.”
A memo written to Rubin and Summers by Assistant Treasur
y Secretary Tim Geithner on September 25, 1998(which I obtained pursuant to a Freedom of Information Act request), shows that U.S. officials were indeed convinced of their powerlessness to prevent Tokyo from proceeding with the Miyazawa initiative. But it also indicates that they were unhappy to see the initiative materialize, and hoped to use whatever leverage Washington had to extract Japanese concessions in other areas, possibly including the issue of Brazil. The memo stated:We continue to believe that the most important thing Japan could do to help overcome the crisis would be to restore robust growth and a sound financial system in Japan, but the Miyazawa Plan will happen regardless and now is our opportunity to shape it.
Our ability to block this plan from proceeding is extremely limited at this point and would probably be inadvisable in any case given how this would be viewed by other Asian governments.
We may nonetheless be able to encourage the Japanese to move in a productive direction with their plan and possibly provide assistance to Latin America in exchange for at least our neutrality and perhaps public support for their efforts.
Elsewhere in the memo, under a list of proposed changes “that would allow us to express support for the initiative,” Geithner included “Japanese provision of financial assistance to Brazil.”
Pages 349-350: An edited transcript of Greenspan’s speech, “Risk, Liquidity, and the Economic Outlook,” is contained in a January 1999 publication of the National Association for Business Economics that was furnished to me by NABE.
Page 350: Information about J. P. Morgan Securities’ recession forecast comes from John M. Berry, “A Time of Uncertainty,” The Washington Post, October 8, 1998.
Pages 350-351: Information about the meeting among Greenspan, McDonough, and Rivlin, and the attitude of Fed Governor Meyer concerning the intermeeting rate cut, was first reported in Bob Woodward, Maestro (Simon & Schuster, New York, 2000).
Page 352: David Hale’s quote, “We are potentially turning the corner,” comes from Paul Blustein, “Is Worst of Global Crisis Over?” The Washington Post, October 23, 1998.
Pages 354-355: Information about the November 13 IMF program for Brazil, and Fischer’s comments at the news conference, come from an IMF transcript of the news conference, available on the IMF website.
Page 355: Figures on the amounts of hard currency leaving Brazil come from Brazil’s central bank, reported in Reuters, “History of Brazil Dollar Outflows,” January 14, 1999.
Page 358: Lopes’s quote from O Estado de São Paulo, “The bureaucrats in Washington are all excited,” is cited in Peter Fritsch, “Brazil Central Bank Drama Strengthens Malan’s Hand,” The Wall Street Journal, February 5, 1999.
Pages 362-363: Information about the panic that swept Brazil in the final days of January comes from Diana Jean Schemo, “Jitters Anew in Brazil as Currency Plunges Again,” The New York Times, January 29, 1999.
Page 364: Information on Fraga’s background and career comes from Geoff Dyer and Richard Waters, “Brazil Picks Hedge-Fund Poacher as Economic Gamekeeper,” Financial Times, February 3, 1999.
Page 365: Information about Brazil’s grim outlook, including the consensus among forecasters that the economy was heading into recession in 1999, comes from “Tempest-Tossed but Floating,” The Economist, January 23, 1999.
Page 366: Information about the IMF program agreed to on March 5, and Camdessus’s statement of March 8, come from the IMF press release “Camdessus Recommends Approval of Brazil’s Revised Program,” March 8, 1999, available on the IMF website.
Page 368: Information on the Treasury’s postcrisis position concerning bailouts of countries with fixed or crawling exchange rates comes from Paul Blustein, “Rubin: Fix Global System in Small Steps,” The Washington Post, April 22, 1999.
Page 369: Information about the changes in Stan Fischer’s personal schedule in April 1999 comes from Michael M. Phillips, “Apocalypse? No: Around the Globe, Signs Point to Final Days of the Financial Crisis,” The Wall Street Journal, April 14, 1999. Other information about the easing of the crisis during this period comes from Paul Blustein, “World Economy Passes from Crisis to Caution,” The Washington Post, April 17, 1999.
CHAPTER 13: COOLING OFF
Countless reports have been published in recent years on the international financial architecture, but one that I found particularly helpful was the report of a Council on Foreign Relations task force, “Safeguarding Prosperity in a Global Financial System,” 1999. The task force was chaired by Carla A. Hills and Peter G. Peterson, and the project director was Morris Goldstein.
Also helpful is a survey of the main proposals for changing the architecture, in John Williamson, “The Role of the IMF: A Guide to the Reports,” May 2000, a policy brief of the Institute for International Economics, Washington, D.C. On private-sector involvement, international bankruptcy regimes, and standstills, other highly informative sources include Barry Eichengreen, “Can the Moral Hazard Caused by IMF Bailouts Be Reduced?” International Center for Monetary and Banking Studies, Geneva, 2000; “Involving the Private Sector in the Resolution of Financial Crises: Restructuring International Sovereign Bonds,” by the IMF’s Policy Development and Review and Legal Departments, 2001, available on the IMF website; and Jack Boorman, “Sovereign Debt Restructuring: Where Stands the Debate?” speech delivered to a conference cosponsored by the Cato Institute and The Economist, New York, October 17, 2002, also available on the IMF website.
Page 372: O’Neill’s quotes in May 2001 come from a transcript of a hearing of the House Financial Services Committee on the state of the international monetary and financial system on May 22, 2001.
Pages 373-374: The figures on the IMF loans to Turkey, Uruguay, and Brazil, and the normal limits for lending, come from data on the IMF website showing quotas and outstanding borrowings for individual countries. The normal limit for a country’s cumulative borrowing is 300 percent of its quota.
Page 374: Taylor’s quote comes from Paul Blustein, “Tough Talk Aside, the Aid Flows,” The Washington Post, August 6, 2002.
Page 375: A list of actions the IMF and other institutions have taken to strengthen the international financial architecture is available on the IMF website.
Page 379: Friedman’s book is The Lexus and the Olive Tree: Understanding Globalization (Farrar, Straus and Giroux, New York, 1999).
Page 380: Shultz’s advocacy of IMF elimination was made in an op-ed article he coauthored with William E. Simon and Walter B. Wriston, titled “Who Needs the IMF?” The Wall Street Journal, February 3, 1998.
Page 382: The Meltzer Commission recommendations are formally presented in a document titled “Report of the International Financial Institution Advisory Commission,” available on the website of the congressional Joint Economic Committee, www.house.gov/Jec/imf/imfpage.htm.
Pages 382-383: The Meltzer Commission recommendations do allow for loans to be made in exceptional cases where crises pose a danger to the global financial system, but it is questionable whether such exceptions are sufficiently broad as to be realistic. Turkey’s crisis, for example, didn’t pose much of a financial problem for the rest of the world, but Turkey is a U.S. ally of immense strategic importance in the Middle East, with air bases that are used to patrol “no-fly zones” in Iraq. When Turkey requested additional IMF loans in April 2001, the Bush administration went along, having apparently concluded that it would be unwise to get overly dogmatic about financial principles when no-fly zones are at stake.
Page 383: Rubin’s quote “To paraphrase Winston Churchill’s famous statement” is cited in Paul Blustein, “Currencies in Crisis,” The Washington Post, February 7, 1999.
Pages 383-384: The Joint report by the finance ministers of wealthy countries—the so-called Group of Ten—is commonly known as the Rey Report, after the group’s then-chairman, Jean-Jacques Rey of Belgium. The formal title of the report, which was issued in April 1996, is “The Resolution of Sovereign Liquidity Crises: A Report to the Ministers and Governors.”
&nbs
p; Page 385: Krueger’s speech, titled “A New Approach to Sovereign Debt Restructuring,” delivered November 26, 2001, is available on the IMF website, as are modifications she subsequently proposed.
Information about the initial speech and reaction to it is reported in Alan Beattie, “IMF in Support of Bankruptcy Plan,” The Financial Times, November 28, 2001; and Paul Blustein, “IMF Mulls New Protection for Debt-Stricken Countries,” The Washington Post, November 28, 2001.
Page 389: Information about the views of bankers, securities firms, and other financial institutions, including the December 2002 Joint statement of major associations representing financial firms, is available on the website of the Institute of International Finance, www.iif.com.
Page 389: Information about Taylor’s speech and its aftermath is reported in Alan Beattie, “U.S. Call for Limited Reforms Will Deal Blow to IMF Plan,” The Financial Times, April 3, 2002; Alan Beattie and Raymond Collitt, “U.S. Scorns IMF Plan for Bankrupt Governments,” The Financial Times, April 6, 2002; Paul Blustein, “IMF Crisis Plan Torpedoed,” The Washington Post, April 3, 2002; and Paul Blustein, “IMF Reform Plan Makes Comeback,” The Washington Post, April 9, 2002.
Page 390: The 1996 recommendation to include CACs in sovereign bond contracts was made in the Rey Report.
Page 391: Kenen’s proposal is spelled out in his article “The International Financial Architecture: Old Issues and New Initiatives,” International Finance, Spring 2002.
The Chastening Page 47