-Caveat Lector-
http://www.latimes.com/print/books/20010527/t000044216.html
Sunday, May 27, 2001
Follow the Money
What Lies Behind the Globo-babble in the New World Economy
By CAROL BRIGHTMAN
"Money Makes the World Go Around" is the work of a socialist whom
Business Week aptly calls "the curious capitalist's Baedeker." Where does
money go after it is deposited or invested? Barbara Garson wants to know.
And, more important, what does it do? Money's power to create something
new--to change a community, for better or ill--is an article of faith for
the author, who is also a playwright ("MacBird!") and an investigative
journalist ("All the Livelong Day") whose socialism is the Swedish
variety that holds the productive power of both capital and labor in
higher regard than either is held in the United States.
The book's journey commences in Millbrook, N.Y., in late 1994 at a
one-branch bank embodying "useful and decent banking principles" where
Garson deposits $29,500--half of her publisher's advance. A few years
later she invests a smaller second installment in an aggressive mutual
fund. The idea is to plunge into the streams of cash emanating from
project loans, letters of credit, leveraged buyouts, to go wherever she
can catch a wave and watch her money at work in the world.
The intent is not, at least at the start, to introduce the reader to
the investment patterns, currency trades and capital flight that
triggered first the Mexican and then the Asian crashes, followed in 2000
by the stock market slide at home, which has cost investors $4 trillion
so far. But that is what Garson's reporting does.
When the Bank of Millbrook can't find enough local investment for
its money and is left with more than it needs to meet its reserve
requirement with the Federal Reserve (about 3% of deposits), it loans
(sells) the surplus to a correspondent bank on Wall Street. This happens
the night of Garson's initial deposit, when Millbrook makes an loan of $3
million to Chase Manhattan (today, J.P. Morgan Chase), whose daily
reserve requirement was then running around $420 million.
Cut to the 37th-floor trading room at Chase Manhattan Plaza, the
first of many stops before we reach the playing fields of big and little
money in Thailand, Malaysia and Singapore and in Tennessee and Maine. At
the Ffed-funds desk where Garson has wrangled an invitation, she watches
five people dressed in jeans (it's Friday) monitor $2 billion that flows
in from hundreds of banks and corporate partners before emptying into the
vast "Chase delta."
Chase is "long" on money that day, a senior vice president explains,
but it buys Fed funds from correspondent banks as a service and a
door-opener for selling Chase products. To close its position--to meet
the reserve requirement without surpassing it, for Fed accounts earn no
interest--Chase must shed $3 billion. Garson pulls up a chair to watch as
buy-and-sell orders are scribbled on slips of paper and spiked on metal
spindles that Bartleby the Scrivener might have used.
"Okay. Put it in Chase Nassau," a trader says into a headphone, and
she snaps to attention. Nassau? A small hospital wants to sell (lend)
Chase $1.35 million, he explains; probably a Medicare payment they don't
want sitting idle over the weekend. He points out that it's illegal to
pay interest on corporate checking accounts--a pesky Depression-era
regulation--and thus such deposits are made elsewhere. The federal
government, we're reminded, stops 12 miles offshore. Garson, who has just
watched a trader create a million-odd Eurodollars, then offers a brief
history of the Euromarket.
She is an artful kibitzer. In an exchange with the Chase vice
president on the Ffed-funds desk, we learn how the money Millbrook lends
Chase creates that "benchmark"--a measurement of money available for
investment--that Alan Greenspan tinkers with when he wants to curb or
spur the economy by adjusting the prime lending rate. Why the fiddling
doesn't always work (as, perhaps, now) is another question. But the
book's sharp glimpses of the go-go years offer some clues about the
recessionary undertow that grips today's economy, along with a peek at
democracy at work inside the free trade camp.
It's the mid-'90s, and euphoria about the "Emerging Market Whiz
Kids" runs high. Garson, who's looking for "Senor Good Loan," infiltrates
a conference at the Waldorf Astoria called "Advances in the Americas: Can
the Momentum be Maintained?" Wading through bogs of globo-babble about
privatization, deregulation, trade liberalization and tax reform, she
doesn't find the old-fashioned capital development loan but listens to a
Canadian panelist warn of "a particularly insidious threat to free trade:
'Transformational Coalitions' [that] live in cyberspace." Unlike
traditional lobbies that jockey for pieces of the pie, the speaker
exclaims, "[t]hey want to tell us what should go into the pie, and how it
should be baked."
After Robert Reich, a panelist at the conference, takes credit on
behalf of the Clinton administration for passing the North American Free
Trade Agreement, he is chastised like an errant schoolboy by members of
the audience for introducing labor and environmental items to the agenda
of an upcoming hemispheric trade summit, which has been largely crafted
by industry executives.
The Waldorf conference confirms what Garson has learned from
bankers' tip sheets: The great capital flow to Latin America is mainly
"portfolio investment." Chase leads in "privatizations": lending money to
companies that have won the "mandate" to buy formerly government-owned
utilities. These are M&A (mergers and acquisitions) loans; cash up front
for dams, power projects, telephone companies, which Latin American
governments (shut off from capital since 1981) can no longer run. They
are short-term capital expenditure loans. Long-term "take-outs" done via
the Euromarket, insurance companies or mutual funds buy out the
acquisition costs. For huge fees, banks may help the purchasers, who are
awash with cash, float bonds, issue stock or raise long-term money to
grow the new business.
Instead of traditional capital-development loans, Garson finds
billions of dollars sloshing between banks and investors, changing little
but the ever-rising price of securities. Even telecommunications loans
are used to buy and sell existing facilities. Earlier acquisitions were
about growth, but, like Chase's merger with Chemical Bank in 1996, which
laid off 12,000 of 75,000 employees, these are about contraction. (The
news of 16% fewer workers at Chase-Chem sent the value of Chase stock up
11%, leading a New York Times columnist to note that as the financial
sector grows, the real sector shrinks.)
In her search for working capital, Garson finally finds a
Relationship Manager farther down the Chase food chain who introduces her
to a seafood importer in Brooklyn. With a letter of credit from the bank,
JC Seafoods buys fish and shrimp from a Singapore exporter. Like many
mid-sized firms that lack the resources to confirm a trading partner's
bona fides, they rely on letters of credit to take the risk out of doing
business with one another. Garson happily inspects both operations;
similarly she visits two Caltex oil refineries going up in Thailand and
Singapore with the help of Chase loans launched around the time her money
left Millbrook. The peso has crashed; the Asian tigers--including black
tiger shrimp--are in.
When her Caltex hosts bar access to plant workers, who include women
welders from northeastern Thailand, Garson finds their like in Bangkok.
She surfs the economy of the streets, where building sites are everywhere
and peasant laborers may become foremen, vendors may become merchants. An
ambitious 18-year-old seamstress from the northeast sends money home:
"The farm is supposed to feed the family but in Thailand," the seamstress
explains, "the whole family works to feed the farm." Thai workers, also
Filipinos and Malaysians, are shuttled to work sites throughout Southeast
Asia. They're all racing to music they don't control, but it was musical
chairs played with more chairs than people--until the Thai baht collapsed
in 1997 and the chairs were removed.
To benefit foreign investors, Thailand had tied its currency to the
dollar. When officials in rich countries agreed to let the dollar rise to
fend off financial trouble in Japan and the dollar-linked baht seemed
overvalued, it became a target for a "currency attack." "Big
foreign-exchange traders, like those at the Soros hedge funds," Garson
observes, "committed themselves to future currency trades whereby they
stood to gain fortunes if they could drive the price of baht down by
selling them and getting others to sell." Investors pulled up
stakes--along with banks who passed the costs of bad loans on to the
government, and indirectly, via public service cutbacks, to the
populace--and the crisis spread. A former British finance minister
compared currency traders, some of whom manage more money than the
treasuries of many nations, to wild dogs: "They hunt in packs; they seek
out wounded currencies; they savage their prey."
Substitute companies for "currencies" and you have a bead on the
modus operandi of mutual funds that specialize in "corporate
restructuring." Garson's test case is Mutual Series Funds run by Michael
Price, the Chase stockholder who precipitated the Chase-Chem merger and
enhanced the value of his 11 million bank shares by $275 million. When
she buys in with $5,000, Price is about to convert a $125-million
purchase of the bankrupt Sunbeam Corp. into stockholder profits of more
than a billion dollars.
Visiting former Sunbeam factories in Portland, Tenn. and Biddeford,
Maine, both union towns, Garson follows the path whereby a CEO transforms
an established appliance manufacturer into a cash cow for investors. The
formula starts with outsourcing, "the system which allows you to use
factories without owning them and workers without hiring them ...."
Contracts are renegotiated with suppliers, charitable contributions
cancelled, wages cut, people fired, and, under new owners, presumably the
union is smashed.
Biddeford became an exception when the union local led a consortium
of buyers to present a business plan to Sunbeam's bank (Chase). Under a
stock ownership deal, the employees forfeited some salary and
benefits--"lemon socialism," the British call it: letting the public pay
for what private companies want to get rid of. Garson roots for the
workers but notes: "Keeping the mill open in Biddeford is not a
legitimate use of investors' money, nor is making good blankets."
This ability to understand and describe the interests of contending
parties raises Garson's "Money Makes the World Go Around" far above the
heads of other primers on global finance. Here she is in the ring with
Walter Wriston, the former head of Citibank, who is discoursing on a
favorite theme: how capital disciplines governments by way of the
"information standard." When "bad money or fiscal policies"--food
subsidies in poor countries, say, or health and retirement protections
once common to rich countries--are reported by Reuters to trading rooms
throughout the world, traders act accordingly.
"When a politician says something dumb, trades on 60,000 screens all
over the world can vote yes or no that instant," says Wrinston. "That's
information democracy."
"Do I get a vote?" Garson asks.
"No," he answers.
----------
Carol Brightman Is the Author of "Writing Dangerously: Mary Mccarthy and
Her World."
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