The Chastening Read online

  Table of Contents

  Title Page

  Dedication

  AUTHOR’S NOTE AND ACKNOWLEDGMENTS

  Chapter 1 - THE COMMITTEE TO SAVE THE WORLD

  Chapter 2 - OPENING THE SPIGOT

  Chapter 3 - WINNIE THE POOH AND THE BIG SECRET

  Chapter 4 - MALIGNANCY

  Chapter 5 - SLEEPLESS IN SEOUL

  Chapter 6 - THE NAYSAYERS

  Chapter 7 - THE BOSUN’S MATE

  Chapter 8 - DOWN THE TUBES

  Chapter 9 - GETTING TO NYET

  Chapter 10 - THE BALANCE OF RISKS

  Chapter 11 - PLUMBING THE DEPTHS

  Chapter 12 - STUMBLING OUT

  Chapter 13 - COOLING OFF

  NOTES

  INDEX

  Copyright Page

  To Yoshie, Nina, Nathan, and Dan

  And in case I never get a chance to write another book,

  To my mother, too

  And to the memory of my father

  AUTHOR’S NOTE AND ACKNOWLEDGMENTS

  In all my years as an economics Journalist, I have never covered a story as dramatic as the global financial crisis of the late 1990s. And I have never covered an institution more sorely in need of thorough Journalistic dissection than the International Monetary Fund. As I was writing for The Washington Post about the crisis and the IMF’s often vain efforts to quell it, I realized I had the makings of a good yarn about economic phenomena of great significance. In spring 1999, once the crisis had abated, I began arranging the time and resources to research and write this book, which entailed a leave from the Post lasting from mid-September 1999 to mid-January 2001.

  My research consisted mainly of interviews with approximately 180 people, many of whom were interviewed a number of times in person, on the phone, and by e-mail. They included more than fifty current and former IMF officials, staffers, and board members. Other important interviewees included top officials at the U.S. Treasury, the Federal Reserve Board, the Federal Reserve Bank of New York, the White House National Economic Council, the National Security Council, and the State Department; senior economic policymakers and staffers in the Group of Seven maJor industrial nations, the World Bank, and the five maJor crisis-countries that had IMF programs (Thailand, Indonesia, South Korea, Russia, and Brazil); and bankers, hedge-fund managers, and bond traders as well as academic economists. The maJority of the interviews took place in Washington, D.C., but I also traveled to Bangkok, Jakarta, Seoul, Tokyo, Moscow, London, Paris, Frankfurt, and New York. The only maJor crisis country I did not visit was Brazil, because I was able to interview most of the key players in the Brazilian government during their visits to the United States.

  I am grateful to everyone who took time to speak with me, particularly those whom I contacted for repeated follow-up interviews. Several people underwent at least ten bouts of questioning at various times, and I greatly appreciate the good humor with which they endured my endless queries.

  The vast majority of my interviews were conducted on a deepbackground basis, which meant I could use the information but could not quote interviewees or cite them as sources unless granted permission to do so. Much of the information conveyed was obviously of a sensitive nature, especially at the time the interviews were conducted and during the period the book was being written; the Clinton administration was still in office then, and many of the key players were still in their Jobs. (In quite a few cases, this remains true in early 2003.) So although I have tried as much as possible to attribute quotes by name, I must ask readers’ indulgence and understanding that obtaining permission for attribution often proved impossible; I can only offer assurances that unattributed material in the book has been carefully researched and checked. In cases of conversations or meetings where a number of people were present, I tried as much as possible to confirm the information with multiple participants. In numerous important instances, sources checked their notes or produced contemporaneous documents that helped illuminate the events in question.

  A list of interviewees appears in the notes section. It includes those who spoke on the record, plus those who were interviewed on deep background and later granted permission to be named as sources for the book. It thus excludes a substantial number of people who chose to remain entirely anonymous. In many cases, the source of unattributed information may be fairly obvious, but in a number of instances, appearances will be deceiving. This is particularly true in episodes where I identify one policymaker or another as having correctly analyzed a problem or situation before others did. I obviously had to be wary of policymakers eager to revise history about themselves, but in quite a few cases, people would inform me of the positions taken during the crisis by certain of their colleagues who, in retrospect, had “gotten it right,” or at least more right than others—Mike Mussa, the IMF’s chief economist, is one example; another is Joshua Felman, a senior staffer on the Fund’s mission to Indonesia in late 1997. When further investigation showed these tips to be accurate and noteworthy, I wrote about them, and although it may look as if certain policymakers or staffers were tooting their own horns, the facts are otherwise.

  Some people refused to grant interviews. I don’t want to be too specific about who did and who didn’t, but I feel obliged to mention that Michel Camdessus, the managing director of the IMF during the crisis, was among those who declined my request even after he had retired from the Fund. With that exception, I generally found IMF officials to be extraordinarily accommodating and helpful. My hat is off to Thomas Dawson and the rest of the IMF’s able External Relations Department for having given free rein to Fund staffers to accept my interview requests and meet me privately to the extent they felt comfortable doing so. A few years ago, the Fund would not have been nearly so open to this sort of inquiry. My thanks also go to the Treasury’s public affairs office, and particularly Michelle Smith, who was assistant secretary for public affairs, for having arranged meetings with the department’s busy policymakers.

  Aside from those who provided information, a large cast of characters and institutions supported me in the process of transforming this book from a gleam in my eye to a finished volume.

  My first call went to Peter Osnos, the publisher of PublicAffairs, whom I knew to be an enthusiastic and nurturing supporter of many book projects by friends and colleagues in Journalism. Peter’s warm reaction and sound counsel confirmed that I had made a wise choice. A book concerning the IMF and financial crises, he told me, wouldn’t command a large advance from him or any other publisher, but I could obtain supplementary financing from foundations. This proved to be sagacious advice, and although Peter urged me to shop my book around to other publishers if I wanted to, I have never regretted sticking with him and PublicAffairs. (On a personal note, I was gratified to be writing for a publisher who had inherited the name and legacy of Public Affairs Press, which was founded by the late Morris Schnapper, a dear friend of my family.)

  My next move was to seek permission from my editors at The Washington Post for a leave from my reporting duties. Jill Dutt, the assistant managing editor for business news, not only consented to my request but also went to bat for me with Leonard Downie and Steve Coll, the Post’s executive editor and managing editor respectively; Len not only approved but granted me a partially paid sabbatical as well under the terms of a provision in the Post’s union contract. I am deeply grateful to Jill, Len, and Steve in particular, and to the Post in general, for this opportunity and generous support. I owe profound thanks also to several of my Post colleagues who made sure that my beat, international economics, was covered during my absence. John Burgess performed so ably in the Job that he was soon promoted to an editing Job on the foreign desk; he was followed by Steve Pearlstein, whose reporting preferences lay else
where but who covered the beat in the only way he knows how—with tenaciousness and a passion for making sense of difficult subJect matter. All this was made possible because of the skill and cheer with which Nell Henderson, the Post’s economics editor and my immediate supervisor, Juggled story assignments and elicited the best from her charges. To top all this off, Jill and Nell acceded to my request in autumn 2000 for an additional four months of leave beyond the year that I was originally granted. To Jill, Nell, and Steve, I am in everlasting debt.

  The Institute for International Economics offered me an office to work from, as well as a fancy title—Visiting Fellow. But I got much more than that from Fred Bergsten, IIE’s director, and his colleagues. I had wanted to do my research at a place where I could pick brains, and IIE has the best pickings around, certainly in my field of interest. The institute’s fellows held a luncheon session early in my leave to discuss my outline, and later they convened for two other sessions to discuss drafts of my manuscript. (Names of sources were excised from the drafts that were distributed in advance of those sessions.) The comments I received, both in verbal form during the sessions and in written form afterward, helped me enormously both in conceptualizing the book and in avoiding the sort of doltish errors we Journalists are all too prone to make. I am particularly obliged to John Williamson and Morris Goldstein for their extensive and wise counsel; others to whom special thanks are owed include Catherine Mann, Gary Hufbauer, Marcus Noland, Adam Posen, Randall Henning, Choi Inbom, Marcus Miller, Kim In Joon, Cho Hyun Koo—and, of course, Fred Bergsten and his deputy, Todd Stewart. By the time my leave was over, I had come to appreciate that IIE’s fellows and staff are not only tops at what they do but a very pleasant bunch of people as well.

  Financial support came first as the result of a call to the Pew Charitable Trusts, whose Venture Fund director, Donald Kimelman, kindly put me in touch with John Schidlovsky, director of the Pew Fellowships in International Journalism. In an inspired act of entrepreneurship for which I am immensely thankful, John arranged for me to become the first “Journalist in Residence” at the program, which is based at the Paul H. Nitze School of Advanced International Studies of The Johns Hopkins University. In exchange for a stipend, John and his deputy, Louise Lief, asked that I conduct two seminars about the IMF for the Pew fellows—a task that proved more pleasurable than burdensome. As the “guinea pig” for this position, I was gratified to learn in early 2001 that Pew had decided to institutionalize it.

  I still needed funding to cover my expenses—especially for travel—and I had the good fortune to obtain a generous grant from the Smith Richardson Foundation. I would like to express my gratitude to Smith Richardson and especially to Marin Strmecki, vice president and director of programs, and Allan Song, one of the foundation’s program officers, for their help and encouragement.

  When I realized that I would need more than a year to finish the book, financial salvation came from the United States-Japan Foundation, which provided me with another grant that enabled me to take four extra months of leave at the end of 2000. My deep thanks go to James Schoff, a program officer for the foundation, for helping me convey to the foundation’s management that my proJect, although not specifically focused on U.S.-Japan relations, would shed light on issues that had caused sharp divisions between Washington and Tokyo. I also thank George Packard, the foundation’s president, for perceiving the potential value of my book to informing the policy dialogue across the Pacific.

  I would be remiss in omitting several colleagues and friends who assisted me both at home and abroad with advice and contacts. They include David Hoffman, the Post’s former Moscow bureau chief (and now the paper’s foreign editor), whose book The Oligarchs was published in February 2002, by PublicAffairs; John M. Berry, the Post’s famous Fed-watcher; Paulo Sotero, Washington correspondent for O Estado de São Paulo; Thanong Khanthong of The Nation newspaper in Bangkok; Atika Shubert, a Post stringer in Jakarta; Cho Joohee, a Post stringer in Seoul; Manley Johnson and David Smick of Johnson Smick International; and Richard Medley and Nicholas Checa of Medley Global Advisors in New York.

  When it came time to edit the manuscript, Paul Golob managed to engineer massive and sensible organizational revisions without inflicting damage on my ego. The book is immeasurably better thanks to Paul’s many interventions. Ida May B. Norton, who copyedited the book, also improved the manuscript in numerous ways. I owe an appreciative nod also to others at PublicAffairs, including Managing Editor Robert Kimzey, his assistant Melanie Peirson Johnstone, and Assistant Editor David Patterson, for ably handling many production and administrative tasks.

  I would have loved to send copies of the manuscript—or even individual chapters—to my sources to obtain their comments and suggestions. But the press of time made that impossible, especially since I returned to the Post in January 2001, before the book was finished. The one exception was Stan Fischer, the IMF’s first deputy managing director, who asked me in August 2000 to send him what I had written to help him prepare for a series of lectures he was giving. With considerable trepidation, I sent Stan a draft of the material that would later become Chapters 1 through 8 (again, with source names excised). As I had hoped, I was eventually repaid with extraordinarily thoughtful feedback, much of which I incorporated into the manuscript—although in the case of the Indonesian crisis, I’m afraid Stan and I continue to see the story rather differently. I hasten to add the usual caveats that he bears no responsibility for errors or omissions that remain in the text (nor do the scholars at IIE who read the manuscript) ; blame for all goofs and shortcomings rests entirely with me.

  My children Nina and Nathan enJoyed teasing me about writing a book on such an arcane subject, yet they helped sustain me by conceding that it would be cool to have a published author as a dad. I thank them for accepting the demands the book put on my time, for ignoring the files piled in the living room, and for enduring such unspeakable inconveniences as being forced to log off of the Internet so that I could send urgent e-mails and conduct research. I also thank my son Dan, whose entry into the world six weeks prematurely in May 2001 added a dash of, um, excitement to the final, frantic couple of months of quote-clearing, fact-checking, and footnote-writing. His good health—and that of his sister and brother—helped me keep my perspective about what is truly important in my life.

  Finally, I could never have survived this undertaking without the love and support of my wife Yoshie, who despite her own heavy work responsibilities made many sacrifices for the sake of my comfort at home during long, mentally draining days of writing. Yoshie heroically kept our newborn son from waking me on nights when I had to get a decent rest so that I could plow through the final versions of the manuscript the next morning. Most important, she let me know she is with me all the way.

  A note on Asian names: In keeping with common usage and local custom, Southeast Asian names will appear in this book with the first (given) name used in second reference; Chinese and Korean names, in which the family name customarily appears first, will likewise appear with the first name on second reference; and Japanese names are rendered in the Western style, with given name first and family name second, with the family name used on second reference.

  1

  THE COMMITTEE TO SAVE THE WORLD

  Hubert Neiss spent most of his career as an economic disciplinarian for troubled countries, and with his flattop haircut and sober demeanor, he looked every bit the part. A native of Austria, Neiss was a veteran of three decades at the International Monetary Fund, which he had Joined in 1967 after finishing his Ph.D. in economics at the Hochschule für Welthandel in Vienna. He was short but remarkably barrel-chested, the result of an enthusiasm for fitness that evoked both admiration and amusement among colleagues and friends. He often limited himself to eating, say, a banana at midday so he could spend lunchtime at a gym lifting weights.

  Among Neiss’s strengths was an ability to remain serene and businesslike amid turbulent circumstances. His steeliness
had helped him rise through the IMF’s ranks, culminating in his appointment in early 1997 at age sixty-one to one of the institution’s highest staff positions, director of the Asia and Pacific Department. But nothing in Neiss’s career prepared him for the series of events that began the morning of Wednesday, November 26, 1997, when he landed in Seoul, the capital of South Korea, following a sixteen-and-a-half-hour plane trip from Washington.

  After a brief stop at his hotel, Neiss and a couple of other IMF staffers were driven past glass and granite skyscrapers and the openair Nam Dae Mun market, where digital watches and handheld computer games are on sale alongside dried squid, boars’ heads, and vats of kimchi. The car passed through the iron gate of the Renaissancestyle headquarters of the Bank of Korea, the nation’s central bank, and Neiss was ushered into its international department for a briefing on Korea’s latest financial data. He expected the news to be grim; he didn’t know the meeting would thrust him into a frenzy of activity aimed at staving off global economic disaster.

  Neiss had come to Seoul to launch a process at which he was well practiced—negotiating an IMF “program.” In simple quid pro quo terms, the Fund would make a loan to the South Korean government in exchange for Seoul’s agreement to undertake a specific list of steps to put the nation’s economy on a sound footing. Normally, IMF programs take two or three months to negotiate. But the Korean situation was shaping up as unusually urgent.

  Korea’s financial markets were undergoing a bout of turmoil similar to the crisis that had devastated another of Asia’s dynamos, Thailand, about five months earlier, during summer 1997. In late October, the Hong Kong stock market had crashed, followed by a 554-point drop in the Dow Jones industrial average on October 27, and once-thriving Indonesia had turned to the IMF for help in shoring up the value of its currency. Now many big international investors and lenders were betting that Korea would be the next domino to fall; the Korean currency, the won, had fallen 17 percent against the dollar in the past four weeks. The “Electronic Herd” (a term popularized by Journalist Thomas Friedman), whose ranks included mutual funds, pension funds, commercial banks, insurance companies, and other professional money managers, was spooked by revelations about Korea’s financial problems, such as the increasing amount of unrecoverable loans held by Korean banks.