13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (44 page)

106.
Thomas Philippon, “The Evolution of the U.S. Financial Industry from 1860 to 2007: Theory and Evidence” (working paper, New York University, NBER, CEPR, November 2008), available at
http://pages.stern.nyu.edu/~tphilipp/papers/finsize.pdf
.

CHAPTER 2: OTHER PEOPLE’S OLIGARCHS

1.
Republic of Korea, “Korea Letter of Intent to the IMF,” December 3, 1997, available at
http://www.imf.org/external/np/loi/120397.htm
.

2.
Time,
February 15, 1999, available at
http://www.time.com/time/covers/0,16641,19990215,00.html
.

3.
Korea was a leading example of what the World Bank famously and perhaps prematurely termed “The East Asian Miracle.”
The East Asian Miracle: Economic Growth and Public Policy,
World Bank Policy Research Report (Oxford: Oxford University Press, 1993).

4.
Sung Wook Joh, “Corporate Governance and Firm Profitability: Evidence from Korea Before the Economic Crisis,”
Journal of Financial Economics
68 (2003): 287–322, available at
http://ideas.repec.org/a/eee/jfinec/v68y2003i2p287-322.html
.

5.
These ratios are calculated by aggregating total debt and equity up to the chaebol level. Calculated from National Information Credit Evaluation data, as used in Todd Gormley, Simon Johnson, and Changyong Rhee, “ ‘Too Big to Fail’: Government Policy vs. Investor Perceptions” (working paper, November 2009). Figures are for the end of calendar year 1997, and may be affected by currency depreciation if the companies borrowed in foreign currency. But the debt-equity ratios at the end of 1996 were also high: Daewoo’s ratio was 3.3, Samsung’s was 2.6, and Hyundai’s was 4.1.

6.
In 1997, the average debt-equity ratio of Korean firms far exceeded that of other countries (Korea, 396 percent; United States, 154 percent; Japan, 193 percent; and Taiwan, 86 percent). Joh, “Corporate Governance and Firm Profitability,”
supra
note 4. Se-Jik Kim has slightly different data and puts the debt-equity ratio of Korean firms at 350 percent in 1996, with most of the debt being bank loans. Se-Jik Kim, “Bailout and Conglomeration,”
Journal of Financial Economics
71 (2004): 315–47, at 317. There is no disagreement that the Korean corporate sector was one of the most highly indebted in the world.

7.
Anne O. Krueger and Jungho Yoo, “Falling Profitability, Higher Borrowing Costs, and Chaebol Finances During the Korean Crisis,” in David T. Coe and Se-Jik Kim, eds.,
Korean Crisis and Recovery
(Washington: International Monetary Fund and Korea Institute for International Economic Policy, 2002). For more background on chaebol development, see Eun Mee Kim,
Big Business, Strong State: Collusion and Conflict in South Korean Development, 1960–1990
(Albany: State University of New York Press, 1997).

8.
For example, the founder of Hyundai, Chung Ju Yong, formed a political party and ran in the presidential election of 1992.

9.
Joh reports chaebol rankings for each year from 1993 through 1997 from the Korea Fair Trade Commission. Joh, “Corporate Governance and Firm Profitability,”
supra
note 4, at Table 10. Based on total assets belonging to firms in the same chaebol, Hanbo was number 14 in 1995, up from number 28 in 1994.

10.
See Donald Kirk,
Korean Crisis: Unraveling of the Miracle in the IMF Era
(New York: Palgrave, 2001), chapter 8.

11.
See Stephan Haggard,
The Political Economy of the Asian Financial Crisis
(Washington: Peterson Institute for International Economics, 2000), 56–57.

12.
Sung Wook Joh, “Korean Corporate Governance and Firm Performance” (working paper, 12th NBER seminar on East Asian Economics, 2001).

13.
Joh, “Corporate Governance and Firm Profitability,”
supra
note 4. See also Jae-Seung Baek, Jun-Koo Kang, and Kyung Suh Park, “Corporate Governance and Firm Value: Evidence from the Korean Financial Crisis,”
Journal of Financial Economics
71 (2004): 265–313.

14.
Details of Korea’s economic performance immediately prior to the crisis are in “Korea Letter of Intent to the IMF,”
supra
note 1.

15.
For a timeline of events, see Congressional Research Service Report for Congress,
The 1997–98 Asian Financial Crisis,
February 6, 1998, available at
http://www.fas.org/man/crs/crs-asia2.htm
. For more detail on the banking dynamics, see Philippe F. Delhaise,
Asia in Crisis: The Implosion of the Banking and Finance Systems
(Singapore: John Wiley & Sons [Asia], 1998).

16.
“By the end of 1997, 6.7% of all loans were nonperforming loans, totaling 64.7 trillion won (over $45.6 billion) …. By June 1998, over 10% of all loans were nonperforming loans. These nonperforming loans severely weakened many banks and eventually provoked the liquidity crisis.” Joh, “Corporate Governance and Firm Profitability,”
supra
note 4, at 292.

17.
“Korea Letter of Intent to the IMF,”
supra
note 1. Further reforms affecting the financial sector were included in a second Letter of Intent on December 24, 1997, which allowed Korea to access further IMF funding. Republic of Korea, “[Second] Korea Letter of Intent to the IMF,” December 24, 1997, available at
http://www.imf.org/external/np/loi/122497.htm
. See James M. Boughton,
Tearing Down the Walls: The International Monetary Fund, 1990–1999
(Washington: International Monetary Fund, 2010) (forthcoming), chapter 11. Paul Blustein explains the U.S. role in arranging this additional support (which included official loans and an agreement that foreign banks would not demand immediate repayment of their loans to Korea). Paul Blustein,
The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the IMF,
revised edition (New York: PublicAffairs, 2001), chapter 7.

18.
The IMF agreement was negotiated in the run-up to the presidential election, but the incoming president clearly expressed his support at critical moments and his team implemented the reforms. Blustein,
The Chastening, supra
note 17, at chapter 7.

19.
In such situations it is hard to determine where U.S. suggestions leave off and IMF advice begins. The first deputy managing director of the IMF at the time, Stanley Fischer, was appointed at the behest of the Clinton administration. Fischer, a leading academic authority on macroeconomics, was in charge of economic strategy at the IMF and in that capacity consulted on a frequent basis with Larry Summers of the U.S. Treasury Department. On this relationship and other connections between Treasury and the IMF, see ibid.

20.
The IMF program was insufficiently expansionary at first because the depth of the collapse was not initially understood; fiscal conditions set by the IMF were relaxed later as the crisis deepened.

21.
Blustein,
The Chastening, supra
note 17, at chapter 7.

22.
See, e.g., Louis Uchitelle, “Crisis in South Korea: The Lenders; A Bad Side of Bailouts: Some Go Unpenalized,”
The New York Times,
December 4, 1997, available at
http://www.nytimes.com/1997/12/04/business/crisis-in-south-korea-the-lenders-a-bad-side-of-bailouts-some-go-unpenalized.html
.

23.
“Korea Letter of Intent to the IMF,”
supra
note 1.

24.
Jagdish Bhagwati argues that a Wall Street–Treasury complex pushed countries into liberalizing their capital inflows in a way that created excessive risks. Jagdish Bhagwati, “The Capital Myth,”
Foreign Affairs,
May–June 1998. Rawi E. Abdelal argues that leading European politicians and bureaucrats also pushed this line—including Michel Camdessus, managing director of the IMF at the time of the Korean crisis. Rawi E. Abdelal,
Capital Rules: The Construction of Global Finance
(Cambridge: Harvard University Press, 2006). Paul Blustein, based on extensive interviews with the protagonists, concludes that the United States pushed Korea directly and through the IMF to open up to direct investment by foreign investors in financial services. Blustein,
The Chastening, supra
note 17.

25.
Specific ways in which chaebol faced fewer financing constraints are explored in Hyun-Han Shin and Young S. Park, “Financing Constraints and Internal Capital Markets: Evidence from Korean Chaebols,”
Journal of Corporate Finance
5 (1999): 169–91.

26.
The extent to which families run businesses around the world is documented by Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, “Corporate Ownership Around the World,”
Journal of Finance
54 (1999): 471–517. For Asia, see Stijn Claessens, Simeon Djankov, and Larry H. P. Lang, “The Separation of Ownership and Control in East Asian Corporations,”
Journal of Financial Economics
58 (2000): 81–112. For the prevalence of political connections between powerful businesspeople and government, see Mara Faccio, “Politically Connected Firms,”
American Economic Review
96 (2006): 369–86. Specific countries for which we have detailed data on the role of powerful business interests and their political clout include Thailand (Marianne Bertrand, Simon Johnson, Antoinette Schoar, and Krislert Samphantharak, “Mixing Family with Business: A Study of Thai Business Groups,”
Journal of Financial Economics
88 [2008]: 466–98); Malaysia (Simon Johnson and Todd Mitton, “Cronyism and Capital Controls: Evidence from Malaysia,”
Journal of Financial Economics
67 [2003]: 351–82; Edmund Terence Gomez and Jomo K. S.,
Malaysia’s Political Economy: Politics, Patronage, and Profits
[Cambridge: Cambridge University Press, 1997]); and Pakistan (Asim I. Khwaja and Atif Mian, “Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market,”
Quarterly Journal of Economics
120 [2005]: 1371–1411).

27.
Liem headed the Salim Group. Bob Hasan, head of the Numsamba group, was another longtime Suharto friend and business ally. George J. Aditjondro, “Suharto and Sons (And Daughters, In-Laws, and Cronies),”
The Washington Post,
January 25, 1998, C1, available at
http://www.washingtonpost.com/wp-srv/business/longterm/asiaecon/stories/sons012598.htm
.

28.
Marilyn Berger, “Suharto Dies at 86; Indonesian Dictator Brought Order and Bloodshed,”
The New York Times,
January 28, 2008, available at:
http://www.nytimes.com/2008/01/28/world/asia/28suharto.html
.

29.
On the nature and value of political connections in Indonesia, see Ray Fisman, “Estimating the Value of Political Connections,”
American Economic Review
91 (2001): 1095–1102. See also Michael Backman,
Asian Eclipse: Exposing the Dark Side of Business in Asia
(Singapore: John Wiley & Sons [Asia], 2001); chapter 14 has details on how the Suharto regime interacted with the private sector. On how subsidies were provided, see Andrew McIntyre, “Funny Money: Fiscal Policy, Rent-Seeking and Economic Performance in Indonesia,” in Mustaq H. Khan and Jomo Kwame Sundaram, eds.,
Rents, Rent-Seeking and Economic Development
(Cambridge: Cambridge University Press, 2000). See also Adam Schwarz,
A Nation in Waiting: Indonesia in the 1990s
(Boulder, CO: Westview, 1994), chapter 6.

30.
Real GDP per capita (constant prices: chain series), from Alan Heston, Robert Summers, and Bettina Aten,
Penn World Table Version 6.3,
Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, August 2009. This measure adjusts incomes for their purchasing power, a method that has limitations but is reasonably accurate for assessments over long periods of time; see Simon Johnson, William Larson, Chris Papageorgiou, and Arvind Subramanian, “Is Newer Better? Penn World Table Revisions and Their Impact on Growth Estimates” (working paper, NBER, October 2009).

31.
On Russian reform and the oligarchs, see Anders Aslund,
Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed
(Washington: Peterson Institute for International Economics, 2007); Chrystia Freeland,
Sale of the Century: Russia’s Wild Ride from Communism to Capitalism
(New York: Crown Business, 2000); and David Hoffman,
The Oligarchs: Wealth and Power in the New Russia
(New York: PublicAffairs, 2002). For early accounts of privatization and other reforms before the rise of the oligarchs, see Joseph R. Blasi, Maya Kroumova, and Douglas Kruse,
Kremlin Capitalism: Privatizing the Russian Economy
(Ithaca, NY: Cornell University Press, 1997); and Thane Gustafson,
Capitalism Russian-Style
(Cambridge: Cambridge University Press, 1999). For a broader assessment of Russian reform, emphasizing that there were no good alternatives, see Andrei Shleifer and Daniel Treisman,
Without a Map: Political Tactics and Economic Reform in Russia
(Cambridge: MIT Press, 2000). On powerful groups controlling the state in the former Soviet Union, see Joel S. Hellman, Geraint Jones, and Daniel Kaufmann, “Seize the State, Seize the Day: State Capture and Influence in Transition Economies,”
Journal of Comparative Economics
31 (2003): 751–73.