13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (45 page)

32.
It is difficult to separate the influence of the IMF and the U.S. Treasury Department. The senior IMF staff member responsible for Russia makes it clear that the G7 (the group of seven large industrial nations, within which the United States has a leading voice) agreed with the IMF’s overall direction; if anything, the G7 preferred a bigger budget deficit and, by implication, more capital inflows to the short-term government debt market. See John Odling-Smee, “The IMF and Russia in the 1990s” (IMF working paper WP/04/155, August 2004), available at
http://www.imf.org/external/pubs/ft/wp/2004/wp04155.pdf
. The general U.S. preference for capital account liberalization is clear in its subsequent free trade agreements with Singapore and with Chile, as well as in its negotiations over China’s accession to the World Trade Organization.

33.
Aslund,
Russia’s Capitalist Revolution, supra
note 31, at chapter 5.

34.
George A. Akerlof, Paul M. Romer, Robert E. Hall, and N. Gregory Mankiw, “Looting: The Economic Underworld of Bankruptcy for Profit,”
Brookings Papers on Economic Activity
24 (1993): 1–73.

35.
The classic techniques involve managers transferring assets (below market price) to, or buying inputs (above market price) from, companies they control. See, for example, the discussion of Gazprom in Vladimir A. Atansov, Bernard S. Black, and Conrad S. Conticello, “Unbundling and Measuring Tunneling” (working paper, January 2008), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1030529
. These phenomena are also seen in high-income countries. Simon Johnson, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, “Tunneling,”
American Economic Review Papers and Proceedings
90 (2000): 22–27.

36.
Peter Boone and Boris Fyodorov, “The Ups and Downs of Russian Economic Reforms,” in Wing Thye Woo, Stephen Parker, and Jeffrey Sachs, eds.,
Economies in Transition: Comparing Asia and Europe
(Cambridge: MIT Press, 1996). There is more evidence of tunneling during the 1997–1998 emerging markets crises in Simon Johnson, Peter Boone, Alasdair Breach, and Eric Friedman, “Corporate Governance in the Asian Financial Crisis,”
Journal of Financial Economics
58 (2000): 141–86.

37.
On the appropriation of state property at the fall of the Soviet Union, see Simon Johnson and Heidi Kroll, “Managerial Strategies for Spontaneous Privatization,”
Soviet Economy
7 (1991): 281–316. There was a great deal more theft under the smoke screen created by very high inflation. Anders Aslund, Peter Boone, Simon Johnson, Stanley Fischer, and Barry W. Ickes, “How to Stabilize: Lessons from Post-Communist Countries,”
Brookings Papers on Economic Activity
1996: 217–313.

38.
Carlos Diaz-Alejandro, “Good-Bye Financial Repression, Hello Financial Crash,”
Journal of Development Economics
19 (1985): 1–24.

39.
The IMF’s voting structure is determined by countries’ quotas (their potential financial commitments to the IMF), which imperfectly reflect their economic and financial power. The G7 and its close allies control a majority of the votes at the IMF and the United States has an effective veto over any major policy decision.

40.
The Indonesia Letter of Intent, dated October 31, 1997, promised to clean up the banking system. Republic of Indonesia, “Indonesia Letter of Intent,” October 31, 1997, available at
http://www.imf.org/external/np/loi/103197.htm
. In its retrospective study, the IMF’s Independent Evaluation Office stressed that closing sixteen banks in November 1997 was supposed to “imply a new way of doing business. However, several factors undermined the credibility of this policy. Most important, the President’s family challenged the closures. His son arranged for the business operations of Bank Andromeda to be shifted to another bank in which he had acquired an interest. The President’s half-brother initiated a legal challenge to the closure of his bank. The public also saw some inconsistency in the closure of the 16 banks when it was widely—and correctly—believed that many other banks were in similar condition.… Under pressure from the President, the Minister of Finance soon reversed his previously announced tough position, saying there would be no more bank closures.” IMF Independent Evaluation Office,
The IMF and Recent Capital Account Crises: Indonesia, Korea, Brazil
(Washington: International Monetary Fund, 2003), 75. See also Haggard,
Asian Financial Crisis, supra
note 11, at 66–67. In January 1998, the Indonesian government was supposed to pass a budget that had a surplus equal to 1 percent of GDP. Instead they proposed a budget that appeared to be balanced (with no surplus), which was interpreted as a further sign that Suharto was not willing to take resources away from his family and associated patronage networks. The initial critical reaction from the IMF and the United States helped trigger a further depreciation of the Indonesian rupiah. Eva Reisenhuber,
The International Monetary Fund Under Constraint: Legitimacy of Its Crisis Management
(New York: Springer, 2001), 207. More companies struggled to pay their debts and had to cut costs, contributing to social unrest.

41.
See International Monetary Fund,
Ukraine: 2005 Article IV Consultation and Ex Post Assessment of Longer-Term Program Engagement,
November 2005, available at
http://imf.org/external/pubs/ft/scr/2005/cr05415.pdf
.

42.
Growth rate of real GDP per capita from Heston, Summers, and Aten,
Penn World Table Version 6.3, supra
note 30.

43.
See David Luhnow, “The Secrets of the World’s Richest Man: Mexico’s Carlos Slim Makes His Money the Old-Fashioned Way: Monopolies,”
The Wall Street Journal,
August 4, 2007, available at
http://online.wsj.com/article/SB118615255900587380.html
.

44.
Daron Acemoglu, “Oligarchic vs. Democratic Societies,”
Journal of the European Economic Association
6 (2008): 1–44. Societies with highly unequal power structures did not industrialize early in the nineteenth century and generally did not catch up to the income levels of the more prosperous countries in the twentieth century. Daron Acemoglu, Simon Johnson, James Robinson, and Pierre Yared, “Income and Democracy,”
American Economic Review
98 (2008): 808–42; Daron Acemoglu, Simon Johnson, and James Robinson, “Institutions as the Fundamental Cause of Long-Run Growth,” in Philippe Aghion and Steve Durlauf, eds.,
Handbook of Economic Growth
(Amsterdam: North-Holland, 2005).

45.
Kim came to power between the first and second IMF programs in December 1997.

46.
See “Jang Ha Sung, Shareholder Activist, South Korea,”
Business Week,
June 14, 1999, available at
http://www.businessweek.com/1999/99_24/b3633089.htm
.

47.
See Ajai Chopra, Kenneth Kang, Meral Karasulu, Hong Liang, Henry Ma, and Anthony Richards, “From Crisis to Recovery in Korea: Strategy, Achievements, and Lessons,” in Coe and Kim, eds.,
Korean Crisis and Recovery, supra
note 7; Haggard,
Asian Financial Crisis, supra
note 11, at chapter 4; Isao Yana-gimachi, “Chaebol Reform and Corporate Governance in Korea” (Policy and Governance Working Paper Series No. 18, Graduate School of Media and Governance, Keio University, Japan), available at
http://coe21-policy.sfc.keio.ac.jp/ja/wp/WP18.pdf
; and Frederic Mishkin,
The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich
(Princeton: Princeton University Press, 2006), 99–103. Mishkin, a governor of the Federal Reserve from 2006 to 2008, argues that further capital market liberalization is the key to growth in emerging markets.

48.
In the 1990s, Argentina tried a version of the Russian strategy—capital inflows that supported a budget deficit and allowed a boom in private sector investment. This was the brainchild of Domingo Cavallo, a distinguished economist with a Ph.D. from Harvard, and received strong support from the IMF (and the United States) even as the approach ran into trouble. Failing to deal with underlying political issues, including the inability to effectively tax powerful business elites, ended in a collapse of the currency, a banking crisis, and defaults on Argentina’s public and private debt in 2001–2002. See Paul Blustein,
And the Money Kept Rolling In (and Out)
(New York: PublicAffairs, 2005); and Michael Mussa,
Argentina and the Fund: From Triumph to Tragedy
(Washington: Peterson Institute for International Economics, 2002).

49.
On the LTCM crisis, see Roger Lowenstein,
When Genius Failed: The Rise and Fall of Long-Term Capital Management
(New York: Random House, 2000).

50.
Ibid. at 159, 179–80.

51.
Larry Summers, “International Financial Crises: Causes, Prevention, and Cures,”
The American Economic Review Papers and Proceedings
90 (2000): 1–16.

52.
Some analysts have long worried about the sustainability of the U.S. current account deficit; see, e.g., C. Fred Bergsten, “The Dollar and the Deficits: How Washington Can Prevent the Next Crisis,”
Foreign Affairs,
November–December 2009, available at
http://www.foreignaffairs.com/articles/65475/c-fred-bergsten/the-dollar-and-the-deficits
. But these worries are more about the growth of U.S. net foreign debt (and government borrowing) than they are about unstable capital inflows. The United States borrows only in U.S. dollars, thus removing the foreign exchange rate risk that contributed to downfall in Korea, Indonesia, and Russia. And the United States remains the ultimate safe haven, at least for now. When the world becomes more unstable, the ensuing “flight to quality” means that investors buy U.S. government debt; no emerging market country has this advantage.

53.
“Korea Letter of Intent to the IMF,”
supra
note 1.

CHAPTER 3: WALL STREET RISING

1.
Ronald Reagan, Inaugural Address, January 20, 1981, available at
http://www.reaganlibrary.com/pdf/Inaugural_Address_012081.pdf
.

2.
Anthony Bianco, “The King of Wall Street,”
Business Week,
December 9, 1985.

3.
“Gutfreund’s Pay Is Cut,”
The New York Times,
December 23, 1987, available at
http://www.nytimes.com/1987/12/23/business/gutfreund-s-pay-is-cut.html
.

4.
Duff McDonald,
Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase
(New York: Simon & Schuster, 2009).

5.
Colin Barr, “JPMorgan Is the New King of Wall Street,”
Fortune,
June 26, 2009, available at
http://money.cnn.com/2009/06/26/news/companies
/jpmorgan.underwriting.fortune/index.htm
.

6.
Quoted in Matthias Rieker, “J.P. Morgan’s Meeting Is Noteworthy for Its Calm,”
The Wall Street Journal,
May 21, 2009, available at
http://online.wsj.com/article/SB124275791780135573.html
.

7.
Jackie Calmes and Louise Story, “In Washington, One Bank Chief Still Holds Sway,”
The New York Times,
July 18, 2009, available at
http://www.nytimes.com/2009/07/19/business/19dimon.html
.

8.
Annualized GDP in Q2 2009 was $14.2 trillion. Bureau of Economic Analysis,
National Income and Product Accounts,
Table 1.1.5, available at
http://www.bea.gov/national/nipaweb/SelectTable.asp
.

9.
Conversion done using GDP price indexes. Ibid. at Table 1.1.4.

10.
JPMorgan Chase and Goldman Sachs financial data are from company annual and quarterly reports.

11.
“JPMorgan CEO Dimon’s 2008 Compensation Falls,” Reuters, March 18, 2009, available at
http://www.reuters.com/article/ousiv/idUSTRE52H7ZL20090318
.

12.
The figure for Dimon comes from ibid.; the others are from “Executive Pay: The Bottom Line for Those at the Top,”
The New York Times,
April 5, 2008, available at
http://www.nytimes.com/interactive/
2008/04/05/business/20080405_EXECCOMP_GRAPHIC.html
.