February 15, 1999
Who Sank, or Swam, in Choppy Currents of a World Cash Ocean
By NICHOLAS D. KRISTOF with EDWARD WYATT
Mary Jo Paoni stood contentedly in her front yard, as firmly planted in Middle America as any of the cornstalks out back."I wouldn't invest in Asia," she said, shaking her head decisively. A 59-year-old secretary with big, sparkling eyes, a plaid shirt and no pretensions, she added, "Investing in Asia frightens me."
Her husband, George, a retired meat cutter, was standing beside her as the sun set over Cantrall, Ill., a farm town about 130 miles southwest of Chicago. He was equally adamant. "If I'm going to gamble," he said, "I want to sit down with my friends."
Yet Mrs. Paoni, who has never traveled outside the United States, is in fact invested in Asia and all over the world, although she does not know it.
After retiring in April from her job as a secretary with the state government, she will rely on a pension fund that has large investments abroad, giving her indirect ownership of stocks in Indonesia and Russia and Brazil. And the cash she tucked away in an A.G. Edwards money market account was funneled to big banks, which helped build elegant hotels and office towers from Argentina to Vietnam.
Millions of Americans have become, like the Paonis, the unknowing financiers of developing countries, as money swishes around the world today from Cantrall to Russia to Brazil to China, connecting the most unlikely people. Among them are Mrs. Paoni and an Indonesian rickshaw driver named Salamet, a 27-year-old with a drooping mustache, an angry wife and three hungry children.
For Mrs. Paoni and most Americans, these are still good times economically. But elsewhere in the world, hundreds of millions of people like Salamet are still caught in a severe crisis, one that has recast lives and will haunt a generation in the East just as the Great Depression shaped a generation in the West.
It is still not clear that the financial upheavals, which began in Thailand in July 1997, will ever damage the United States. But the collapse of Brazil's currency in January and the jolt it gave markets worldwide underscored the continuing risks of "the most serious financial crisis in half a century," as President Clinton called it in his State of the Union address.
The worldwide financial crisis over the last 20 months has toppled some governments and hobbled others. The crisis has turned Salamet's life upside down without affecting Mrs. Paoni at all -- but it illustrates how globalization increasingly stitches lives all over the world into a single economic quilt.
In the new economic landscape that has emerged in recent years, the pool of international investments has grown to dwarf the sums that governments can muster, and money zips around the globe far faster than ever before. The result is a world more prosperous, but also perhaps more wobbly.
"More and more people are asking whether the international financial system as it has operated for most of the 1990s is basically unstable," Ian McFarlane, governor of Australia's central bank, said at a recent conference in Singapore. "And I think by now the majority of observers have come to the conclusion that it is."
Salamet, the Rickshaw Man
alamet, a burly man with an expression as hard as his biceps, knows nothing of finance, but he understands that his world is falling apart.
As he sat on the porch of his little white house in a remote corner of Indonesia, his thoughts were on his mother. He sat brooding, his stomach tying itself in knots, as his mother's gasps filtered through the curtain from the next room.
She was lying on the floor, dying of cancer, a huge tumor growing inside her breast. What gnawed at Salamet each waking moment was not just her gasps but also his guilt at the knowledge that he could help her but had decided not to.
The doctor had prescribed a painkiller costing $2 a month, a sum that Salamet earns in two days and could afford. But as his wife, Yuti, reminded him sharply, if he were to buy the painkiller, he would get further behind in making payments on his rickshaw, meaning that it might be seized and he would lose his livelihood.
Or he would have to stop paying school fees, meaning that his son Dwi might be forced to leave the second grade and never get an education.
Although Salamet has always been poor, the financial crisis has deepened the desperation in his home and countless others. Indeed, if Dwi drops out, he will have plenty of company: The Asian Development Bank estimates that 6.1 million children have left school in Indonesia in recent months because of the economic crisis.
Salamet contemplated his options as he sat, stony-faced, beneath the mango trees of Mojokerto, a midsized town 400 miles east of the Indonesian capital, Jakarta. He is quiet by nature, and when his wife scolds him for not earning enough money, he does not shout at her or hit her, as other men in the neighborhood might.
"Instead, he just sulks," said Mrs. Yuti, a slim woman with high cheekbones; an embarrassed grin spread across her face and was mimicked by the baby she was carrying in her arms.
Salamet, who like his wife and many other Indonesians uses only one name, pondered the bleak options in a flat voice, weighing what flexibility he might have. Would the school really expel Dwi if he got further behind on the school fees? How long could he delay payments before the rickshaw would be seized? How little pain reliever could he get away with giving his mother to ease the worst of her agony?
Tired of this calculus, he shook his head.
"If it were like before and I had money," he growled, "of course I would buy her more painkillers. But now I can't spare the cash for her."
From Speculation to Crisis
he initial impulse in the United States as the crisis erupted was to see the problems as an outgrowth of Asian corruption and cronyism. These probably made the situation worse, but a growing body of evidence suggests that there was nothing uniquely Asian about these countries' problems, and that the catastrophe was worsened by folly and hubris in the United States and Europe.
It was bankers and investors in Moscow and the Thai capital, Bangkok, who speculated wildly on stocks and real estate and thus built up catastrophic bubble economies. But it was U.S. officials who pushed for the financial liberalization that nurtured the speculation (even if developing nations themselves welcomed it).
And it was U.S. bankers and money managers who poured billions of dollars into those emerging markets. Then, when the crisis hit, U.S. officials insisted on tough measures like budget cuts and high interest rates, which many economists argue made things worse.
The failure in January of the $41.5 billion bailout of Brazil demonstrates that the West still has not found a reliable formula for dealing with these crises. Experts continue to worry about the danger of a global recession or worse, and about the risk that economic woes may tear apart countries like Indonesia and even China.
Resentment at U.S. policies -- and perhaps at the United States' economic success -- has also led to a sense in many countries that the global economy is at an ideological turning point. In particular, there is a growing backlash against what some nations regard as an American model of laissez-faire capitalism, which rescues Connecticut hedge funds but sacrifices Indonesian children.
Particularly in Tokyo and Paris, where markets have always been regarded as something like ornery oxen -- best when firmly yoked and even then prone to leave messes -- there is talk of sturdier harnesses to guide capital flows, speculators and markets themselves.
What does all this portend? And how can it be that, as David Hale, chief economist of the Zurich Group, describes the financial upheaval of the last year and a half, "a real-estate crisis in Bangkok set in motion something that has no parallel in human history"?
Early Gains for Salamet
For countless generations, Salamet's ancestors have been agricultural laborers, owning little or no land, struggling to survive and often not even managing that. When Salamet was 10, his father fell to his death from a palm tree he was pruning.
Salamet's mother remarried, and the boy and his new stepfather labored side by side each day, lugging sacks of sand from riverbanks to sell to cement factories. It was backbreaking work, but it was accompanied by breathtaking progress.
As foreign investments poured into Indonesia, the town of Mojokerto thrived in the general prosperity. Salamet and his stepfather, Pirso, rented rickshaws and began driving them -- a business that boomed as people made a bit more, and as mud paths were paved to make rickshaw travel feasible.
Indonesian families are usually close-knit, and Pirso sent some of the money to help his own mother, Mariyam, in the town of Kediri several hours' drive to the south.
Mrs. Mariyam, a thin and energetic gray-haired woman, was sitting one day recently in her store-bought wooden chair, beside her nicely finished bureau, on which rested a black Deluxe All Transistor Radio that in English pledged INSTANT SUPERB SOUND.
The floor was concrete, the roof was tile, the walls were covered with tattered wallpaper, and a curtain covered the bedroom next door. It had become a genuine house, no longer a hut, and outside was a pump and outhouse-cum-bath built five years ago by Pirso.
"It's a big improvement," she said, "because the river was far away. And it's nice, because I can bathe without everybody seeing. It's supposed to be that if you're bathing in the river, people stay away. But some of the men are naughty."
These gains over the years have been enormous, and so far they have proved reasonably durable. The deprivation and hunger are serious, but as yet there is little evidence that the financial crisis has sent Asia 20 or 30 years backward or that it has destroyed the middle class.
Third World Is Renamed
She wants security above all. Risk is acceptable when confined to her Mary Higgins Clark mysteries and Stephen King horror novels, but she is counting on safe investments and her pension income when she and her husband pull up stakes this year and move, perhaps to Florida.
Income in retirement will come from the Illinois state pension fund, which like most pension funds has the same deeply conservative instincts as Mrs. Paoni.
But even that is slowly changing, as fund managers seek higher returns. In 1980 less than 1 percent of pension-fund assets in the United States was invested abroad, but by 1997 that figure had risen to 17 percent. And so, as part of the process bandied about as "globalization," Mrs. Paoni has tiny financial stakes in dozens of countries around the world.
One reason Americans like her and her pension-fund managers used to be unwilling to invest in places like Indonesia was the description "Third World markets," which had an ominous ring. In the mid-1980s the International Finance Corp. of the World Bank was trying to drum up support for a Third World investment fund, when one listener complained about the terminology.
"No one wants to put money into the Third World investment fund," the man protested. "You'd better come up with something better."
So in just a few days officials dreamed up an alternative -- "emerging markets" -- and it proved a winner. The first emerging-markets fund came out in 1986, and the craze was born.
Emerging markets quickly produced emerging gurus. One of the most prominent is Mark Mobius, 62, who is instantly recognizable at investment conferences with his shaven head and stern, lean look.
Templeton Funds recruited Mobius in 1987 to figure out the small markets of the world, and under him the Templeton Emerging Markets Fund was a success almost immediately. In 1988 the fund gained 37 percent, and then it soared 98 percent in 1989. After a small dip in 1990, it rocketed 112 percent in 1991 and after another dip soared 100 percent in 1993.
"The 1987 crash was very bad for emerging markets," Mobius said. "But in 1988-89 the recovery came, and the ball started rolling as people started waking up to the tremendous returns that were possible."
The bullishness was, in part, self-fulfilling. The stock markets in small countries were tiny, and modest investments by Westerners tended to bid up prices, thus attracting more investors.
The result was that hubris increased more rapidly than the caliber of most investment research. Bright young men and women who could barely read a spreadsheet moved to Asia and ended up getting hired as research analysts by investment banks. They sometimes made hundreds of thousands of dollars a year picking stocks in countries whose languages they could barely speak.
The Capital Starts to Flow
ven more than pension funds and mutual funds and other stock purchasers, banks were piling into emerging markets -- particularly banks from Europe and Japan. Investors bought $50 billion worth of stocks and bonds in emerging markets in 1996, but that year international banks poured $76 billion into those countries.
From Mrs. Paoni's money market account at A.G. Edwards, the American brokerage company, cash flows to major U.S. banks, like J.P. Morgan and Chase Manhattan. There is no risk to Mrs. Paoni, but from the big banks some portion of her savings journeys abroad.
All this capital made a spectacular difference to emerging-market countries.
"When history books are written 200 years from now about the last two decades of the 20th century," Deputy Treasury Secretary Lawrence Summers said recently, "I am convinced that the end of the Cold War will be the second story. The first story will be about the appearance of emerging markets -- about the fact that developing countries where more than 3 billion people live have moved toward the market and seen rapid growth in incomes."
Countries like Chile, Egypt, Russia and Vietnam became enmeshed in the international economy. In Moscow, tycoons dripping with gold and diamonds began to drop hundreds of dollars at trendy new restaurants, and in the early 1990s more Mercedes 600 SEL sedans were selling in Moscow, at $130,000 apiece, than in New York City. In the Russian city of Volgograd, one wealthy citizen plunked down $300,000 to buy two stretch limousines.
In Brazil's biggest city, Sao Paulo, homeless children slept under billboard advertisements for mutual funds, and farther south, in Argentina, cash machines spat out U.S. dollars and televisions offered 50 cable channels.
And in the ancient Chinese lakeside city of Hangzhou, two "dakuan," or fat cats, got into a contest to see who was wealthier. They began burning real currency to show off, and in a blink they had each burned $400.
In one sense, today's crisis fits neatly into a long history of financial manias and panics. Emerging markets have been risky ever since the 1320s, when England, then a developing country, defaulted on loans to banks in the Italian city-state of Genoa. In the 19th century, states like Mississippi defaulted on debts just as Russia did last year.
Yet for all the parallels with the past, new elements are at work to make the global economy very different from that of a century ago, or even a decade ago. Most fundamentally, finance and technology have exploded in importance and now dominate the economic horizon.
In a typical day, the total amount of money changing hands in the world's foreign exchange markets alone is $1.5 trillion -- an eightfold increase since 1986 and an almost incomprehensible sum, equivalent to total world trade for four months.
"It's no longer the real economy driving the financial markets," said Marc Faber, a prominent fund manager in Hong Kong, "but the financial markets driving the real economy."
Already, a 15 percent increase in U.S. stock prices bolsters American wealth by $1.7 trillion, which is considerably more than the value of all the manufacturing that takes place in a year in the entire United States. This capacity for wealth creation has delighted Americans, but there is also a converse: A 15 percent drop in the market erases wealth equivalent to the entire annual output of all U.S. factories.
Economists are still charting this new global economic landscape, but they point out some of its features:
-- The amount of investment capital has exploded. By 1995, mutual funds, pension funds and other institutional investors controlled $20 trillion, 10 times the figure of 1980. The global economy is no longer dominated by trade in cars and steel and wheat, but rather by trade in stocks, bonds and currencies.
-- Far more wealth than ever before is stateless, circulating wherever in the world the owner can find the highest return. Thus spending by investors in industrialized countries on overseas stocks increased 197-fold between 1970 and 1997, and each nation's capital market is beginning to merge into a global capital market.
-- New technologies have vastly reduced the importance of physical distance. In 1930 a three-minute telephone call from New York to London cost $245. Now it runs 36 cents. In cyberspace, every market is next door.
-- Investments are increasingly leveraged, using borrowed money so that a $1 million bet becomes a $5 million bet, or they are channeled through complex financial instruments known as derivatives to multiply the potential profits. Derivatives have grown exponentially, with those traded in 1997 valued at $360 trillion, a figure equivalent to a dozen times the size of the entire global economy, and they bring important benefits but also new risks of turbulence.
-- Public funds are increasingly used to bail out losers, like banks. The latest crisis has forced an international rescue on a scale like nothing before, with roughly $175 billion in public money raised so far for the various international bailouts. At least some of that public money has gone to rescue bankers and politicians from their own mistakes.
For all the dazzling size and complexity of the global financial markets, it is not clear that the markets are operating with an intelligence that matches their scale. There may be computer equipment analyzing blips in exchange rates, but investors are fundamentally prey to emotions and panics and tend to overshoot.
Paul Samuelson, the Nobel laureate in economics, argues that sophisticated analysis has done a marvelous job in achieving "microefficiency" in financial markets. The result is that share prices adjust almost perfectly to specific news like currency movements or changes in dividends.
"But I also believe the evidence is overwhelming that there is no macroefficiency of speculative markets," Samuelson added. "They experience self-fulfilling swings, and they can swing far above and below any kind of sensible fundamental value. There does not exist an efficiency which is self-correcting, except in the case that every bubble will someday burst."
Investment Analysts Predict
ow do these speculative swings come about?
Part of the answer is changes in market sentiment because of pronouncements by people like Barton Biggs. One of the gray-haired elders of Wall Street, Biggs, 65, the chief global investment strategist for Morgan Stanley Dean Witter & Co., commands the attention of pension fund managers in Illinois and around the world.
In an industry that has drifted toward computer models and number crunchers, Biggs is a generalist who is famous for his brilliantly written investment reports, which are often funny and always influential.
In 1993, in typical seat-of-the-pants style, he made a weeklong trip to China and came out starry-eyed. He urged investors to increase their holdings of Hong Kong stocks sixfold, to 7 percent of a global stock portfolio.
"We were all stunned by the enormous size of China," he declared. "Sometimes you have to spend time in a country to get really focused on the investment case. After eight days in China, I'm tuned in, overfed and maximum bullish."
Hong Kong stocks soared at those words, and gained 28 percent over the next seven weeks. Then, in August 1994, Biggs declared that the smaller Asian markets -- Thailand, Indonesia and Hong Kong -- would be "the best place in the world to be for the next five years."
Biggs' comments were representative of Wall Street's euphoria about Asia. When executives of an obscure Indonesian polyester company called Polysindo visited New York in 1996 to discuss issuing bonds, they were squired around and accorded meetings with top executives at Merrill Lynch and Morgan Stanley. No comparable Chicago company could ever have got such a welcome.
American investment banks were so eager to arrange stock offerings for the likes of Polysindo that they often charged Asian companies about 3 percent of the value of the deal, compared with 6 percent that they would charge companies in the United States.
This reflected the ease with which some foreign companies could raise money, and the head of a U.S. corporation plaintively queried a New York investment bank, "Why do I have to pay 6 percent when you charge an Indonesian company only 3 percent?"
At Templeton, Mobius was more careful in his pronouncements than many other analysts, emphasizing that emerging markets can go down as well as up. But his moderation was taken as simply a token of his modesty, and he was rapidly becoming a celebrity.
An investment of $10,000 in the fund at the beginning of 1988 would have turned into $100,000 by the end of 1993, and Templeton began to use his picture in its advertisements. His shaven head smiled out at investors, and he came to symbolize the truly global fund manager.
Mobius speaks at least a bit of six foreign languages -- Chinese, Korean, Japanese, German, Spanish and Thai -- and he comes across as a citizen of the world. In 1992 he dropped his American nationality for German citizenship, for tax reasons, and he spends most of his time in hotels.
Nominally a resident of Singapore, with a second home in the Philippines, he travels 250 days a year, roaming Asia, Latin America and Eastern Europe. In a typical week he might visit four cities and 20 companies.
"My job is to go out and find bargains," he said at an investment conference in Chicago. "You can't find bargains sitting at a desk reading annual reports."
A Hedge Fund Starts Selling
n March 8, 1996, the first shot was fired at the emerging markets. A New York hedge fund sold $400 million worth of the Thai currency, the baht, betting that it would fall.
Hedge funds, famous for secrecy, are large pools of speculative funds that make investments for banks, pension funds or other large investors. The first hedge fund was founded in 1949, but they came into their own only in the 1990s, with their assets soaring twelvefold between 1990 and 1997. Now there are 3,500 hedge funds, managing $200 billion. -- And they are able to leverage that, through borrowing, into a much greater sum.
The baht was pegged to the dollar so that they rose and fell together, and the peg was frequently praised as a source of stability for the Thai economy. But the hedge-fund managers were shrewd enough to see that Thailand's economy was faltering, its exports slowing, its property sector sagging and its banks sinking under bad loans.
The baht should have weakened along with Thailand's economy, but instead the peg kept it as strong as the dollar. The hedge-fund managers sensed that the baht was too strong considering Thailand's weaknesses, and they knew that if Thailand's slowing economy forced the government to float the currency, they could make a quick killing.
In this case, though, that first hedge fund's bet against the baht fizzled, and a few days later the fund gave up.
Most analysts continued to rave about Asia. At Morgan Stanley, Biggs had been wrong when he predicted that stock markets in Thailand would soar in 1996 (instead, Thai stocks fell 36 percent), and so in January 1997 he went on what he called a fact-finding mission, "to clarify my thinking on the Thai stock market."
The facts that Biggs found were, on the whole, positive ones. He said at a Morgan Stanley investment seminar in Tokyo on Jan. 14, 1997, as recorded by Bloomberg News Service: "We tend to think there are a lot of opportunities in Asian emerging markets," and he specifically referred to Thailand, South Korea, India and Singapore.
"When you have a market that is down 50 percent," Biggs told the investors, "you have to be looking for values. We can find values for Thailand."
Others could not. From that date through the end of 1997, Thai stock prices fell 75.3 percent in dollar terms.
Tracking Capital Flight
n judging countries like Thailand, bankers and investors rely partly on expert assessments from credit-rating institutions like Standard & Poors and Moody's Investors Services. So what was S&P saying?
"Standard & Poors does not expect that the likely scale of financial-sector losses will seriously impair the kingdom's credit standing," S&P said about Thailand on March 18, 1997. It added that any crisis in Thailand was "most unlikely" to approach the levels of the problems in Mexico in 1995 or Indonesia or Finland in the early 1990s.
If S&P's prediction was off base, that might not have been so unusual. Scholarly analyses find that the rating agencies usually offer warnings only when it is too late. For example, a study by two American economists, Carmen Reinhart and Morris Goldstein, looked at 72 financial crises around the world since 1979 and concluded that rating agencies tended to react after crises instead of anticipating them.
S&P sees things differently. John Chambers, one of its managing directors, said that his company's analysis had been thorough and had identified potential risks.
For all the scorn heaped on Asians for their cronyism and other foolishness, local people in Thailand, Malaysia, Russia and South Korea were showing the most savvy. They were selling -- usually to the kind of enthusiastic, well-trained foreigners who were making many times their salaries.
Capital flight is hard to track precisely, but it is the main reason for the "errors and omissions" line in the International Monetary Fund data. These data show that there was no significant capital flight from emerging markets between 1990 and 1995.
Capital flight soared to $16 billion in 1996, a full year before the crisis began, and reached $45 billion in 1997. This money then ended up in major banks based in Switzerland, London and New York.
Drenched in a 'Blood Baht'
apan, the dominant economy in Asia and the one that might have been the locomotive to pull countries like Thailand out of their difficulties, instead administered the coup de grace. On April 1, 1997, against the strenuous protests of Summers, who flew to Tokyo to deliver a testy complaint from Washington, Japan raised its sales tax to 5 percent from 3 percent.
Summers had insisted that this would harm Japan's incipient economic recovery by dampening consumer spending, but Japanese officials scoffed at that argument. Eisuke Sakakibara, Japan's deputy minister of finance for international affairs, was particularly emphatic that Japan was doing just fine. He told reporters that those who denied Japan's being on a recovery course were irrational.
"I am an optimist on the Japanese economy," he said in May 1997, adding a month later, "Real growth in Japan's gross domestic product will exceed the government's projection."
But it was Summers who was proved right. In the second quarter of 1997, Japanese economic output was actually plunging at an annual rate of 11 percent. Japan became mired in its worst recession in six decades, and instead of dealing decisively with its troubles, it steadily sank deeper. Japan's imports from Asian countries like Thailand slumped.
With Thai exporters now struggling, along with property developers and hotel companies, the entire country became edgy. The overvalued currency resulted in alarming trade deficits, and speculation grew that the peg would be broken and the baht devalued.
Thailand's own investors and companies began buying dollars, and this attracted the attention of foreign speculators. In May, Tiger Management, based in New York and one of the biggest hedge funds of all, began to bet heavily against the baht, and other banks and hedge funds piled on as well.
It looked as if the speculators would win. Normally baht-dollar trades totaled $200 million a day, but the amounts now soared. On May 13, 1997, the Thai central bank sold $6.3 billion to buy baht that everyone else was selling. A central banker wrote that day in a sober memo to his bosses, "The market was not afraid."
The next day, officials met in the central bank to try to figure out what to do. There was fury at hedge funds, but most of all there was utter desperation.
"Everyone panicked, and some even cried," Rerngchai Marakanond, the head of the central bank, recalled later before a government commission.
If Thailand had decided on that day to give up and devalue the baht, while it still had reserves left, the world might have been able to avoid the worst of the financial crisis.
Thailand would have faced a severe domestic banking crisis and property glut, and other countries would also have faced slumps. But the country would have saved its reserves and perhaps avoided a severe panic, and the fury of the crisis and the impact on nations as far away as Brazil and Russia might have been minimized.
The meeting went the other way, with the central bank now determined to risk everything in a battle against speculators. That day the central bank intervened again, selling more than $10 billion. It was one of the biggest interventions any central bank had ever made, but it had little impact.
The Thai central bankers had one more trick up their sleeves. On May 15, 1997, they sold dollars and simultaneously ordered banks not to lend to foreign speculators. The speculators were unable to unwind their bets as their losses mounted, and they screamed into their phones, threw chairs across the room and watched their computer screens in horror.
In one day, the hedge funds lost around $450 million, according to Callum Henderson, a currency analyst who wrote a book about the crisis. That day became known among traders as the "blood baht."
Thailand's prime minister telephoned the central bank to congratulate officials and promise a celebration party, but it was a Pyrrhic victory. The central bank had supported the baht by selling dollars in forward contracts, committing itself to using its dollars to buy baht in the future.
In practical terms, this meant that its official reserves of $30 billion were mostly already pledged and no longer usable to defend the baht. And speculators continued the attack, carefully but constantly keeping up the pressure.
Who were these speculators? They were mostly American, and the hedge funds were prominent among them. But they also included major U.S. banks, trading for themselves to make a profit. Mrs. Paoni could not have known it, but a tiny fraction of her savings might have been thrown, by a circuitous route, into the attack on the baht.
Some of the funds in Mrs. Paoni's money market account, for example, went to J.P. Morgan, and J.P. Morgan said in a court document that it had traded $1 billion worth of baht in the fall of 1996. The bank did not disclose its trades in the spring of 1997, and bank officials refused to comment.
Thai officials were furious that U.S. hedge funds and banks were investing billions of dollars in a bid to destabilize their country, and they worried about the consequences of such speculative battles on all of Asia. In May 1997 Rerngchai, the central bank chief, sent a secret letter of complaint to Alan Greenspan, the chairman of the Federal Reserve Board, urging him to rein in U.S. hedge funds and other financial institutions.
Rerngchai warned that the attack on Thailand "could have far-reaching implications on the economy both of Thailand and the Asian region" and "threatens to jeopardize the stability of international financial markets."
A similar letter was sent to Hans Tietmeyer, the president of Germany's central bank, noting that one German bank had joined in the attack on the baht. Tietmeyer quickly responded himself, a Thai official recalled, with a question of his own: Which of our banks? That warmed hearts at the Thai central bank, but the response from Washington annoyed them.
The correspondence, made available by a Thai central bank official and confirmed by another government official, shows that the Fed's response came not from Greenspan but from an aide, Edwin Truman. He blandly acknowledged that "large financial firms" can disrupt markets of countries like Thailand but added that these matters were best left to the markets.
Greenspan declined to comment. "All communications with other central banks are private," said Lynn Fox, spokeswoman for the Federal Reserve in Washington.
There was another opportunity for the leading countries to confront the problems before the crisis erupted. In late June, the seven leading industrialized nations held their summit meeting in Denver, and aides say that in the confidential discussion among leaders, the Japanese prime minister at the time, Ryutaro Hashimoto, called for the industrial countries to discuss the financial instability in Thailand.
Japanese officials were expectant, waiting for President Clinton and other leaders to take up the matter. But according to one U.S. official who was there, Hashimoto was typically understated, tentative and vague (as is considered polite in Japan), and did not call for any specific action.
So President Clinton and the other world leaders paid no attention.
The View From Ground Zero
"If you've found no one, I'll do it for you," Thanong agreed.
Later, he recalled thinking, "The situation can't be that serious." So the next day Thanong flew back to Bangkok. And then, on the evening of June 27, 1997, he climbed into a navy blue Mercedes-Benz limousine and zigzagged through throngs of traffic to the central bank headquarters. He wanted to meet Rerngchai, an old friend from the time they had both studied in Japan.
As Thanong's car approached the stately gates to the majestic eight-story central bank building, a guard waved it through. It was about 7 p.m. when they entered a conference room, and Rerngchai gave his friend the shock of his life.
Thailand was out of cash, Rerngchai explained. After subtracting the dollars that had been committed in forward transactions, Thailand had just $2.8 billion in usable foreign-exchange reserves.
Even though he was finance minister and one of his country's most experienced bankers, Thanong was stunned. Rerngchai had brought reams of studies examining the options, but he and Thanong both knew that it was all over.
The foreign banks and hedge funds had won, and Thailand had lost. The two men agreed that since Thailand had run out of money, it would have to drop the peg with the dollar and let the baht float at whatever rate the market set. It was a foreshadowing of what would happen in Brazil 18 months later.
"I said I didn't see any choice in dealing with the situation," Thanong recalled.
A few days later, on July 1, the Thai prime minister, Chavalit Yongchaiyudh, declared that the baht would never be devalued. But that night, if anybody had noticed, the lights burned brightly at the central bank. Officials stayed up all night, first calling major central banks abroad.
Then, at 4:30 a.m., central bankers called the homes of the heads of all Thai banks and major foreign banks in Bangkok, summoning them to an emergency meeting that would begin at 6 a.m.
When the bleary-eyed bank executives had taken their seats, an official grimly announced that Thailand could no longer stand behind the baht. Instead of being pegged to the dollar, it would float freely.
The global crisis had just detonated.