The Rubin Rescue
After trying to whistle past the Asian crisis, Washington
has now waded in. Will the bailout work?
By Michael Duffy/Washington
(TIME, Jan.12) -- It tells us something about the new world order when the global
battles America is fighting are less about the balance of power
than about the balance sheet. We gauge our vital interests not
by which boundaries we will defend but by which currencies. And
the meetings that matter most don't always take place in the
soundproof White House Situation Room; some are held in a
private dining room at the Jefferson Hotel.
That's where Treasury Secretary Robert Rubin met on Dec. 18 with
Federal Reserve Chairman Alan Greenspan and their top aides to
craft a new approach to the Korean credit crisis, which they had
long underestimated, at least in public. The three-hour dinner
was a turning point in a months-long U.S. journey from backroom
player to more visible leader in a global effort to solve the
financial crunch. For months, Rubin & Co. had played down the
crisis and balked at committing U.S. taxpayer dollars to a
bailout that would help South Korea and the big financial
institutions around the world that held its debts. But seven
days before Christmas, the U.S. changed course, offering
immediate aid for the first time, pressing banks to roll over
their loans and urging a new Korean leader to seize the moment
and change the way his country does business. Finally, on a
quiet Christmas Eve, while most Americans were happily
distracted, the latest plan was announced. Treasury officials
insist the timing was a coincidence.
South Korea's crisis is far from over. And the U.S., as it feels
its way as the lone superpower, finds that the tools it needs to
lead are not aircraft carriers and armored divisions but
emergency stabilization funds and better accounting practices.
Inside the Clinton Administration, the man working these
delicate new levers is Treasury Secretary Rubin. For the past 50
years, private banks like J.P. Morgan had led the way, picking
over the wreckage of a remote foreign collapse. In a newer
world, where "remote" economies no longer exist and where many
more players make many more investments in many more nations,
the game has been reversed. Only one government, whose currency
is king, can lead. The House of Morgan has given way to the
House of Rubin.
Though the Treasury Secretary is supposed to manage the American
economy, Bob Rubin has discovered that a big part of the job
comes down to managing the economies of nations overseas. After
taking a shellacking from Congress in 1995 for successfully
bailing out Mexico with $20 billion in taxpayer-backed loans,
Rubin was hardly eager to get out front in the Asian economic
crunch. As the liquidity crisis swept across Southeast Asia last
summer, Rubin and other U.S. officials urged the International
Monetary Fund to take the lead. Washington did not regard the
Thai or Malaysian economy as vital to American interests, and in
a year that had seen far too many fund-raising stories about
Jakarta's Mochtar Riady and the Lippo Group, the Administration
could hardly take the lead for anything Indonesian. Despite
prosperity at home, the nation -- and Congress in particular -- was
in no mood to be generous. In November, Congress killed $3.5
billion in new borrowing authority for the IMF as part of an
unrelated dispute over foreign family-planning funds.
But when the Asian contagion reached the Korean peninsula in
September, Rubin could no longer soft-pedal the problem. South
Korea is the world's 11th largest economy, America's fifth
biggest trading partner, and home base for 37,000 U.S. troops
who guard the border with a hostile, if starving, North Korea.
Nearly every nation, from the U.S. to Slovenia, had a piece of
Korea's foreign debt, and none held more than Japanese banks,
which, by the standards of U.S. bank examiners, are themselves
in varying states of insolvency. It didn't take much imagination
to see how the dominoes might fall. A default in Korea would
almost certainly trigger a massive banking crisis in Japan. U.S.
banks would get swept into the mess not just because of their
loan exposure to Asia but also as a result of the trillions of
dollars in interest-rate and currency swaps, hedging contracts
and other derivative deals that link American financial
institutions to the region. For strategic as well as political
reasons, Rubin & Co. believed, the Asian flu had to be contained
before it spread to other markets, including Japan.
That task was made harder by the fact that Korea's economy is
one of the world's most inbred. The vast majority of the
nation's wealth is held by a dozen or so gigantic interlocking
conglomerates called chaebols. The huge firms employ most of the
adult working population and own most of the banks, which during
a decade of superheated growth lent far too much money back to
their parent companies for risky investments all over the world.
As those projects faltered, so did the banks. And as overseas
lenders tried to recoup their investments, Korea's currency and
foreign reserves began to deflate.
Washington was slow to grasp the problem. Clinton had allowed
his embassy in Seoul (as well as in Tokyo) to go without an
ambassador for a year. Not that the Koreans were helping. For
months, they had refused to admit their problems or even provide
credible accounting of their assets and liabilities. By November
the embattled government of Kim Young Sam was refusing to
explain to U.S. officials just how much money was left in its
foreign-currency reserve. Along with negotiators from the IMF,
Deputy Treasury Secretary Lawrence Summers pushed Seoul to
clarify its reserve positions. "If you don't want to tell me,
that's fine," Summers advised his counterpart. "But you have to
tell somebody." On Thanksgiving, Clinton told Kim Young Sam by
telephone that radical surgery was needed to attract foreign
investors. But the White House kept the call secret for weeks,
lest it spook the markets further.
Shortly thereafter, on Dec. 3, the IMF announced a $57 billion
package of loans. In return, South Korea agreed to open its
financial markets, lower trade barriers and revise its banking
structure -- moves demanded by Rubin and transmitted to the IMF.
Mindful of the likely congressional reaction, the U.S. offered
only to provide a small amount in loans -- but not unless
necessary. American officials played down the crisis. Clinton
called the Asian markets a "glitch." Still, the markets kept
glitching. After a brief rise, South Korea's stock market
plunged again. By mid-December more than $1 billion a day was
flowing out of Korea.
Though it had been scheduled earlier, the Dec. 18 dinner was the
turning point for U.S. policymakers. Japanese markets had dipped
nearly 6% overnight, and the Dow Jones industrial average had
dropped more than 100 points. Fears were spreading that an Asian
recession would shrink earnings of American companies and halt
the U.S. economy's remarkable and long-running growth. Just that
morning, South Korea's foreign-exchange reserves had fallen to
less than $10 billion. Default was about 10 days away.
Within a few hours, IMF president Michel Camdessus in a letter
asked the U.S. to be ready to pony up additional funds. By
evening, as the latest news from Seoul and Tokyo hit the
Jefferson dining room in a blizzard of cell-phone calls, there
was a growing sense around the table that the U.S. must, as one
put it later, "intensify the effort." That meant sending to
Seoul $2 billion in direct American loans that had been offered
just a few weeks earlier as "a second line of defense."
U.S. officials had one reason to be optimistic. That same day,
in a defeat for the ruling party, longtime South Korean
dissident Kim Dae Jung was elected President. Rubin and his
guests stayed in contact with the White House through the dinner
to coordinate the exact wording of President Clinton's
congratulatory phone call that night to newly elected President
Kim. Clinton told Kim that he had a brief window of opportunity
with no room for false steps. Just to be sure, one participant
in the dinner, Treasury official David Lipton, was dispatched to
Seoul two days later to measure Kim's intentions and help
negotiate a deal. "To allow the situation to spiral out of
control," Summers said later, "wouldn't be responsible."
Treasury and IMF officials worked through the next day to finish
the aid package. The IMF would lend Seoul $2 billion, while the
U.S., Japan, Germany and other nations kicked in an additional
$8 billion in loans. In exchange, the Koreans would pass new
laws opening their financial markets to foreigners, close
insolvent banks and supervise others. As the deal came together,
Treasury officials discussed the impact of a bailout on the
Korean and American labor unions, fearing some of Labor's
backers in the Democratic Party would balk at bailing out either
Wall Street or the protectionist Korean workers. But the
officials decided that it would be in the best interests of both
Korean and American workers to avoid default. Congressional
leaders were briefed on the plan on Dec. 23.
The next move was to send a clear signal of determination around
the globe. In a conference call on the morning of Dec. 21,
Summers had asked the six other deputy finance ministers of the
G-7 nations to make sure their largest commercial banks gave a
hand by delaying Korea's loan repayments. Three days later in
Manhattan, New York Federal Reserve Bank Chairman William
McDonough met with six large banks to urge them to roll over
loans to Seoul. McDonough also asked the bankers to delay the
"margin calls" on currency swaps and derivative deals, which
might help unravel the deal. The bankers didn't have much
choice: it was go along or go without. Similar meetings took
place in Frankfurt, London, Paris and Tokyo. The holiday
complicated matters: as Christmas approached, Rubin and Summers
spent some time tracking down the nation's "masters of the
universe" at various ski resorts and Caribbean watering holes to
reinforce the message.
Whether the South Koreans can keep their part of the bargain is
unclear. The legislature in Seoul rushed through a host of
reforms last week but balked at a bill that would have made it
easier to implement layoffs and restructuring at the large
chaebols. No wonder: last January, when the parliament tried to
pass a similar measure, Korean workers staged a general strike
that paralyzed the country for more than three weeks.
"We are absolutely against any measures that unilaterally force
Koreans to make the biggest sacrifice here," says Kim Young Dae,
general secretary of the Korean Confederation of Trade Unions,
the country's second largest and most militant labor union. "The
people in charge of the chaebols are responsible for this
crisis, so why should we pay for their mistakes?" The union has
threatened to repeat the strike if the government allows
companies to fire workers at will.
For now, U.S. officials have no choice but to pin their hopes on
Kim, the 73-year- old dissident turned President. In an
exclusive interview with TIME last week, Kim promised to
"resolve Korea's crisis and restore our international
credibility and competitiveness. We have needed these reforms
for quite some time. But because of collusion between politics
and business, nothing happened."
Kim has promised to spread the burden of reform. Last week his
government asked citizens to donate gold jewelry to ease the
currency crisis and said it would put two failing banks up for
sale to foreigners. Almost immediately there were reports that
Chase Manhattan and Citicorp had expressed an interest in taking
positions in the firms, though the banks refused to comment. Kim
told TIME that "if layoff of workers is necessary, then that is
what we will do." And he has warned the chaebols that if they
don't reform, he will do it for them. "It is sure to be a year
on the brink of catastrophe or rejuvenation," he said in his New
Year's message. "The pain of overcoming our difficulties must be
borne by all."
Whether that kind of attitude prevails in the U.S. is another
question, and the House of Rubin will be watching closely in
coming weeks. Some lawmakers will surely attack the new aid
package after the holiday recess. Populist Democrats will object
to any bailout of Wall Street speculators, and conservative
Republicans will see little to praise in a taxpayer subsidy for
a foreign government. The White House will defend its actions,
noting that Korea is strategically more important than other
Asian nations.
What is also true is that the investments and prosperity Rubin
is trying to protect belong not just to the banks but also to
those same little old taxpayers all over the nation.
--Reported by Bernard Baumohl/ New York, Frank Gibney Jr. and
Stella Kim/Seoul and Karen Tumulty, Bruce van Voorst and Adam
Zagorin/Washington
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