By Colleen Ryan, August 1998
When Robert Rubin was a junior partner at Goldman Sachs in New York, he made a wrong call on the options market one day in 1979 and almost wiped out the entire capital of his fellow partners.
He recalls now that he was nervous as he scrambled on the markets to recoup the funds. He was making potential enemies of some of the most powerful men on Wall Street.
Eventually he got lucky. The markets turned and his partners were happy once again.
Now, 20 years later, some would argue that Rubin, as US Treasury Secretary, is gambling with the fate of the global economy. It may not have the same level of "in your face" accountability as the management of fellow partners' funds at Goldman Sachs, but there is no doubting Rubin's power and his exercise of it.
When was the last time Rubin's opinion on the US Budget surplus made news? By contrast, his view of the yen, his stance on the Korean debt overhang, his view on Indonesian food subsidies, his approval of Thai banking reform, his assessment of Russia's need for further International Monetary Fund (IMF) support are all well known.
There seems no end to the crisis. The questions this week are: how much pressure can Rubin bring on China to ensure it holds fast on its currency, and will he intervene to support the yen once again? And what happened to his plans for fly-fishing this summer?
It is clearer by the week that the US Treasury has become an important arm of US foreign policy – arguably, more so than ever before.
It seems at times that the urbane Rubin – the former investment banker who is worth well over $US100 million in assets, who has lived in a five-star hotel in Washington during the week for almost six years because his wife refuses to leave New York's Park Avenue, yet who is also highly self-deprecating – is Treasury Secretary to the world.
Assisting him is deputy secretary Larry Summers, one of the most brilliant young economists of his generation, whose relatives include Nobel prize-winners and who was plucked from Harvard via the chief economist's position at the World Bank to take on the role of deputy fireman of the global economy.
As economist David Hale comments, "The current Treasury team is probably the strongest team ever in terms of raw IQ. Not just Rubin and Summers, but [assistant secretaries] Tim Geithner and David Lipton. It is a very, very bright group."
They may have formidable brainpower, but, some ask, should they have so much global influence?
Neither the US Treasury nor the IMF disputes the assertion that Treasury has driven the process of addressing one of the most devastating contagions in world economic history, and that it has done so since its early stages late last year. IMF officials confide that although there have been the ego clashes and tense moments that are inevitable in such a crisis, basically the views of US Treasury and the IMF have dovetailed neatly. "We are all economic rationalists," said one. "We all think alike. And it's largely a matter of judgement about how you can push and how far you can go."
Rubin and his team at Treasury haven't just been forced into a power vacuum to take control in a time of crisis, although there is an element of that. But it is also true that whenever another country has shown any signs of playing a role (such as Japan, when it proposed the launch of an Asia Fund at the beginning of the crisis, or Australia, when Alexander Downer made a trip to Washington to plead for flexibility on Indonesian food subsidies), Treasury has pushed them out of the picture.
A senior Treasury official defended this posture. "We don't seek to control. We feel it is very important to keep the IMF at the centre of efforts to promote and preserve international financial stability."But has the Washington-based Treasury-IMF team been successful or just plain pushy?
The jury is still out – and will be for some time – on whether their approach has worked in Asia. As David Hale points out, "What the US has really done so far is to use the IMF to promote more economic liberalisation, to reduce barriers to trade and investment and to basically promote the Anglo-Saxon American model as opposed to the traditional Asian model of a more closed economy, highly leveraged growth, etc.
"If this thing doesn't recover 12 or 18 months from now and you have counter-revolutions in Korea and Thailand, historians will judge that [Treasury's] approach was too ideological and ineffective."
Both Treasury and the IMF have already confessed to mistakes. The most dramatic was the failure to clear overhanging private-sector debt from the market quickly enough. Korea was almost on its knees before the US and the IMF moved on the debt restructuring on Christmas Eve last year.
And Indonesia's private debt problem was left on hold for far too long. The IMF, according to officials, believed that the banks could be pressured on only one country at a time. The size of the Korean economy and the significance of security issues in the region meant that it took priority over others – including Indonesia. This isn't the only reason that Indonesia's economy is still the biggest basket case in the region, but it was a significant factor.
The reappraisal of IMF programs – loosening up fiscal policy to allow for greater Budget deficits and placing more focus on stimulating internal demand – is effectively an admission that the earlier programs were not sufficiently well tuned.
Rubin's Wall Street background has been apparent in Treasury's approach to the crisis. There are only a handful of people working on it. The Asia team numbers just 11 professionals, and Treasury has only five personnel on the ground in the region (although this is more than a doubling of its earlier presence). So market intelligence is essential.
A senior official explained last week how he uses bankers and traders to keep tabs on the international scene. "If I am interested in knowing whether market sentiment is turning on Malaysia, for example, I would call the people on the capital markets desk of an investment bank. People in the business of underwriting bonds for the issuers [sovereign countries] have a good nexus of information between the customer – the entity that wants to issue bonds – and the customers of the traders – people who want to place them in their portfolio. If I want to get economic judgements or forecasts on the real economy I will call the economist of an investment bank. If I want to get a judgement about flows – who are the buyers of currencies; are they Japanese banks or American hedge funds? – I will ring the traders. If I want some political advice, a judgement on whether policies will change or not change, I will call the hedge funds. Their role is to take a judgement about management, whether it is a company or a country." There have been four main players in the Treasury on the Asian crisis: Rubin, Summers, the under-secretary for international affairs, David Lipton, and assistant secretary Tim Geithner. There is an outside chance that two and possibly three will have left Treasury by the end of the year. This prospect makes some international finance officials very nervous.It depends on whether Rubin steps down. He has wanted to do so for some time, but President Clinton has urged him to stay while the world economy is so fragile. Nevertheless, there are increasing rumours that the Treasury Secretary will announce his departure just before the mid-term elections in November.
Rubin's deputy, Larry Summers, is the favourite to succeed him. But he may not get the nod. Other candidates are James Johnson (the former head of Fannie Mae, a federally chartered home mortgage association) and Franklin Raines (former Budget director and Johnson's successor at Fannie Mae).
Rubin has made his preference clear, telling The New Yorker magazine last month that Summers would make a very good Treasury Secretary. And Summers' stocks have been rising at the White House all year, according to insiders.
Still, he can be brash and a little unpredictable. He is not a shoo-in. If Summers doesn't get the job, he is expected to leave. And if he leaves, it is thought that David Lipton will follow.
The US Treasury is a juggernaut, and it will no doubt push on without its key players. But they have been so strong in their views and so forceful on the world stage that a little trepidation at the prospect of such a large change in leading personnel is inevitable.While the global prominence of the Rubin team may have irked some over the past 12 months, the cold reality is that the US has enough votes on the IMF board to veto policy. What if the US Treasury had taken a very different approach to the Asian crisis? What if they had blocked the IMF from taking an activist rescue approach, stopped it from pumping tens of billions of dollars into the Asian crisis countries and into Russia?
The prospect is not implausible. Look at the isolationist approach of the Republican-led Congress. David Hale points to former Treasury Secretary Donald Regan, also a Wall Street old-boy, as someone who would have taken a very different approach. "If Donald Regan was the US Treasury Secretary in 1997, this could have evolved much more quickly into a global depression," Hale maintains. "He would have been completely confused about what to do and he would have been surrounded by such hard-line ideologues. We would have made a historical gamble that we would never have been able to replay."
Rubin, Summers and the Treasury team are unabashed internationalists. While the Asia crisis has showcased the almost primitive isolationism of Congress, they have pressed on, pushing for a stronger and better-funded IMF, pushing for US activism. Perhaps an activist and interventionist US is far preferable to one that doesn't want to be involved at all.