Wriston: IMF off course

Former Citicorp chief says agency should not bail out bankers' 'bum loans'


September 21, 1998: 10:46 p.m. ET

NEW YORK (CNNfn) - Markets around the globe are in turmoil as Asia's financial crisis spreads to Russia, Latin America, and right on to Wall Street.
Walter Wriston ran financial powerhouse Citicorp for 17 years. Appearing Monday on the "Moneyline News Hour with Lou Dobbs," he said reliance on the International Monetary Fund to fix the problems is the wrong course of action.
DOBBS: Walt, why is in your judgment the IMF the wrong vehicle to begin arresting these problems around the world?
WRISTON: Well, I think the IMF in the old days, when the problem was governments, did quite a respectable job. The problem is not now governments.
The problem is basically private -- private banks, private corporations, and I believe that now their diagnosis of the problem is wrong and that the pills they give create more sickness rather than getting people well.
And the proof of that is they're now running the economy in 80 countries, which is almost half of the free world, and in half of those countries, the economic situation is worse today than it was when they when went in. So on a pragmatic basis, you have to say, "Is it time to make a change?"
DOBBS: And you see a causal relationship between the condition of the countries in the IMF programs that have been instituted?
WRISTON: Yes. In other words, we have a problem that you have to generate growth in an economy. And I think everybody agrees with that. You don't generate growth by raising taxes to prohibitive levels, by raising interest rates. You do it by reforming the systems.
DOBBS: Taking two examples: South Korea, which has made significant progress with IMF; Thailand, which has apparently begun to significantly improve its banking conditions -- do you see those as anomalies rather than beneficiaries of the IMF program?
WRISTON: No. I think that both of them are doing things that are very good. The example used for the success of the IMF is Mexico. And you recall the Mexican bailout and the very able secretary of the Treasury said it was a great success and it was.
It bailed out all the money managers on Wall Street, but it reduced the standard of living of an average Mexican by almost 50 percent, and this is what, in Washington speak, is now called "moral hazard." That means if you make a bum loan, somebody will bail you out.
And I think that that's counterproductive because you have capital flows going in at high interest rates, and the expectation that if there's trouble, the IMF or Uncle Sam will bail you out.
DOBBS: Now Walt, you are one of the world's most prominent bankers, and I remember a banker saying the countries don't go bankrupt.
WRISTON: That's right.
DOBBS: And with that philosophy, how does it coincide?
WRISTON: One of the problems is that there are no bankruptcy laws in most of these countries. In one way, we got out of our S&L problems and all of that. The companies went in the tank. They had bankruptcy. We have procedures from (Chapter) 11 and whatever. There aren't any such things in Indonesia and in Thailand.
DOBBS: Let's talk about the prescription here to resolve this. Latin America, Brazil, Mexico, Argentina under extreme pressure, different kinds of pressure, perhaps. Asia, as we've already talked about, Russia, a smaller market and certainly a smaller economy. But nonetheless and more important on a larger geo-political issue, we have very distinct elements in this crisis, we have a currency crisis, a capital crisis. We have equity issues in those markets. First, let me ask you how do we solve it all?
WRISTON: I guess it depends on who we are. These crises can only be solved by the political entity in the country involved. Outsiders can pour money in, as we did in Russia, which has disappeared. Outsiders can give advice, which we've done in Japan fairly well.
Outsiders can suggest ways in which to reform the system, but at the end of the day, the political process in Indonesia, in Thailand, in Korea, has to get its act together and say we have to get rid of the bum loans in the banks, whether you do it on the American model of the good bank-bad bank that we did with the S&L. Or do it another way is a local problem. But you cannot repair a bad political situation which caused this problem by pouring money in it.
DOBBS: I would assume pleased when the House voted not to (fund the full amount that Clinton had requested to finance the IMF) ...
WRISTON: Yes. I testified against it, and I wrote a piece with George Schultz and Bill Simon against it. And at least we started a debate.