Steve Forbes Interview: Bill Rhodes, Banker To The World? ~ MAKE MONEY BLOG$

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Forbes: Was one of the mistakes of Ireland – and I ask this because before the crisis on paper, their debt was highly reasonable, 25-35% of GDP. They had already started to do some austerity.

They didn’t wait like Greece. Was their mistake not having an international intervention with their banks and unilaterally guaranteeing everything?

Rhodes: Well, I think you’re very correct about the Irish fiscal situation. It was in pretty good shape. I think the mistake was they really did not properly regulate and supervise their banking system. And then rather than decide how they were going to handle the situation in the sense of restructuring the banks, they just went in and guaranteed them.

That really is what caused Ireland to go under. They should have basically said, “Okay, we’ve got to restructure the banks.” Example: Korea, 1997. There was a run on the Korean banks. The reserves had dropped below a billion dollars.

Kim Dae-Jung, who came from the left, was the president. He didn’t like the IMF agreement. But he knew that he had to take action. And Korean women, I’ll never forget this, were lined up around the block for blocks and blocks in front of the central bank, the Bank of Korea, melting their gold jewelry because they did not want to see their country go into default. So I was called on to restructure the banks. The first thing I did is get on an airplane, which I recount in the book, Banker To The World. And I went over and saw Kim Dae-Jung. And he was president elect. And I said, “I can’t do anything unless I know that you will

Forbes: Five days before his inauguration.

Rhodes: Exactly. That you will do everything possible to see the implementation of this IMF agreement, and then you’ll support me in the restructuring. And he said, “I give you my word.” And that’s what made the difference because then I got the Japanese banks, who were the biggest holders, 40 percent, the Europeans and the U.S. banks to agree. And we were able to put this, an agreement together in a month, which was at that point a record time. But I think it was a recognition that the banking system was the key to the whole policy of turning Korea around.

Forbes: Now, is there sort of a doctrine arising in the world that governments, no matter how small, are too big to fail?

Rhodes: Well, I used to kind of joke with Walter Wriston – because when you had the really bad crisis in 1982, they kidded about the deck chairs and the Titanic at the IMF World Bank meetings that were held in Toronto that year.

He was asked by our then secretary if he could come out with something reassuring. And he came out with this op-ed saying, “With all the assets countries have, over the long term, they won’t fail.” Well, that was perceived the wrong way. And the joke became, well, countries don’t fail, just the banks that lend to them. But I think that you can’t beat good fiscal and monetary policy and good risk management. That, at the end of the day, gives you the type of pro-growth strategy that you have. Look where Korea went after that, and then in Brazil, Fernando Enrique Cardoso.

Forbes: Real plan.

Rhodes: Exactly. He was the minister of finance. He and I sat down, we worked out the restructuring, we did a Brady bond deal. Immediately, he announced the Real Plan, which finally after ten years, including a moratorium in Brazil, killed hyper inflation, stabilized the economy and Brazil hasn’t stopped since. The same with Kemal Dervis in Turkey in 2001 when he put in that program, stabilized the economy after ten years of problems in Turkey. And look where the Turks have gone since.

Forbes: How do you avoid, looking back, moral hazard. Take a quick look back at 2008. Was it a mistake to save all the creditors of Bear Stearns, which led everyone to believe, hey, you can buy Lehman paper and that’ll be good even if the stock goes down?

Rhodes: Well, it’s difficult to say. What I guess people question is if you saved Bear Stearns, why didn’t you save Lehman? And I think that at the end of the day, the markets are going to have the final word. And you can only do so much. And you still have this problem we’re carrying around of Fannie Mae and Freddie Mac.

Forbes: Yeah.

Rhodes: That still hasn’t been resolved. Here we have Dodd-Frank and nothing’s been done about Fannie Mae and Freddie Mac.

Forbes: Mark to market accounting, you are not a fan of. You felt that worsened the crisis. Do you think that monster has finally been buried once and for all?

Rhodes: Well, it depends. You have the International Accounting Standards Board which sits in London, and basically they feel if a bank takes a piece of paper and holds to maturity, then it should be treated different than mark to market.

The whole idea of mark to market was tradable securities. Bonds are tradable securities, not loans that you make. And I think that was a big mistake and that exacerbated, I think, the problems of the banks. Because a bond house or a trading asset should be treated that way. But I think if you’re making a loan to a company or to an individual, it should be really held to maturity. I think that did exacerbate it. And FASBE still hasn’t come to grips with the International Accounting Standard. And Axel Weber – who by the way has decided that he wants to teach over University of Chicago because that’s his mentality. He used to always say to me, and we used to give these speeches together, “How are you going to have international regulatory standards if you can’t get international accounting standards? How are you going to be doing the ratios? You’re going to have two columns on every balance sheet? Every public statement?”

Forbes: Obviously one of the key things to a country’s health no matter what size is trade. What’s happening to free trade in the world today? I know the answer, but –

Rhodes: Well, you’ve been a big supporter, and you know how I feel. But basically, I think we have done a miserable job here because I convinced Rob Portman when he was our trade representative in 2005 –

Forbes: Junior Senator from Ohio.

Rhodes: Exactly. And we signed in 2007, with the Koreans, an agreement. Here we are in 2011 and we still haven’t been able to pass that through Congress. And our great ally in Asia – and we have a president who is a big supporter of the United States, Lee Myung-Bak – and the Korean people in general.

And we can’t get that approved. So what has happened? The EU, with all of its problems, took the agreement that we had made with the Koreans – they basically have the same agreement. They passed it and they implemented it the first week of July. This is one of our largest trading partners. The Australians and Canadians are about to do the same. And so where are we going to be creating jobs? The president keeps saying trade is jobs, but they keep changing the rules of the game coming out of the administration on trade adjustment.

And the Republicans and Democrats in the administration, I’ve testified down there, have got to get together. But we also have Colombia and Panama, two great allies of ours. What an example that is to the rest of the world – that we can’t get these trade agreements that we signed three, four years ago approved.

I think it’s a real disaster. The latest bad chapter is, well, because everyone’s tied up with our own debt problem here and deciding how they’re going to meet this August 2nd or whatever the final date is, to move forward on getting a lifting of our deficit limit. They put this aside until afterwards. I mean, it sends a terrible signal. But it’s costing jobs. The administration, the White House, estimates that the trade agreement with Korea alone will create 70,000 jobs. The U.S. Chamber of Commerce estimates that if we don’t do Korea, over time it’ll cost up to 300,000 jobs because with these other – EU, Canada, Australia – we’re going to lose all of this trade. This isn’t even taking into account Colombia and Panama, just Korea.

Forbes: It’s amazing. Bill, I hope they call you out of your semi-retirement and put you back to work. Great book, very readable: Banker to the World. Thank you for being with us.

Rhodes: And you do great things keeping capitalism alive, and I think finally the Greeks ought to look at your suggestion on a flat tax because they certainly have to do something on the taxation.

Forbes: Terrific, thank you, Bill.

Rhodes: Thank you.

Source: forbes.com

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