by Nomi Prins
Copyright
Copyright © 2018 by Nomi Prins.
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First Edition: May 2018
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ISBNs: 978-1-56858-562-8 (hardcover); 978-1-56858-563-5 (e-book)
E3-20180312-JV-NF
CONTENTS
Cover
Title Page
Copyright
Dedication
Characters: The Conjurers of Money
Author’s Note
INTRODUCTION
1 MEXICO: There’s No Wall Against US Financial Crises
2 BRAZIL: National Politics Meets the Federal Reserve Meets China
3 CHINA: Dragon Rising
4 JAPAN: Conjured-Money Incubator
5 EUROPE PART I: The Trichet Files
6 EUROPE PART II: The Draghi Money Machine
CONCLUSION: The End Is Just the Beginning
Acknowledgments
Discover More Nomi Prins
About the Author
Also by Nomi Prins
More Advance Praise for Collusion
Glossary
Notes
Index
Dedicated to the citizens of the world
CHARACTERS: The Conjurers of Money
Shinzo Abe: Japan’s prime minister since December 2012. He had occupied the post in 2006–2007 but resigned because of health issues. After that, Japan was governed by five prime ministers, none of whom stayed in charge for more than sixteen months. Abe’s second term as prime minister was marked by his decision to make economic policy a priority. His economic strategy consisted of three points: monetary expansion, flexible fiscal policy, and structural reform aimed at long-term investments, and is referred to as “Abenomics.”
Tarō Asō: Japan’s deputy prime minister and finance minister from December 2012 to present. He served as Japan’s prime minister from September 2008 to September 2009.
Ben S. Bernanke (“Helicopter Ben”): Succeeded Alan Greenspan as the chairman of the board of governors at the Federal Reserve System for two terms from 2006 to February 2014. He was responsible for leading the monetary policy actions in response to the international financial crisis.
Mark Joseph Carney: Governor of the Bank of England from July 2013 to present. He was governor of the Bank of Canada from February 2008 through June 2013. Earlier in his career, he worked for Goldman Sachs for thirteen years in London, New York, Toronto, and Tokyo.
Agustín Carstens: Governor of Banco de México from 2010 to October 2017. He served as Mexico’s finance minister from December 2006 until December 2009. He was deputy managing director of the International Monetary Fund from 2003 to 2006. He was runner-up for IMF president to Christine Lagarde. He assumed the role of Bank for International Settlements general manager from October 2017 to present.
Vítor Constâncio: Vice president of the ECB from 2010 to present. He was governor of the Bank of Portugal from 1985 to 1986 and from 2000 to 2010.
Mario Draghi (“Super Mario”): President of the European Central Bank from November 2011, when he succeeded Jean-Claude Trichet. Draghi was governor of the Bank of Italy from December 2005 to 2011 and vice chairman and managing director at Goldman Sachs International from 2002 to 2005. Draghi’s ECB presidency has been marked by zero and negative interest rates and major quantitative easing measures. His policies have come under scrutiny in Europe, because Europe has not demonstrated any significant signs of real recovery.
Toshihiko Fukui: Governor of the Bank of Japan from 2003 to 2008, incorporating forty years of service there.
Timothy F. Geithner: US Treasury secretary from January 2009 to January 2013. He was president of the Federal Reserve Bank of New York from 2003 to 2009.
Ilan Goldfajn: Current chairman of the Central Bank of Brazil in the provisional government of Michel Temer. He worked at the IMF from 1996 to 1999 and was director of the Central Bank of Brazil between 2000 and 2003. He was chief economist at Banco Itaú Unibanco, the largest private bank in Brazil.
Hu Jintao: General secretary of the Central Committee of the Communist Party of China from November 2002 to November 2012 and president of the People’s Republic of China from 2003 to 2012, when he retired and was replaced by Xi Jinping. He led China during the 2008 financial crisis, and his team was responsible for maintaining high growth during that period.
Lou Jiwei: Chinese minister of finance from March 2013 until November 7, 2016. He was the chairman and CEO of China Investment Corporation, the sovereign wealth fund responsible for dealing with some of China’s foreign exchange reserves.
Haruhiko Kuroda: The thirty-first governor of the Bank of Japan; he has occupied the post since March 2013. Before that, he was the president of the Asian Development Bank from February 2005 to 2013. Kuroda is a key figure in applying Prime Minister Abe’s economic policy; he was responsible for leading Japan into the negative interest rates zone.
Christine Lagarde: Managing director of the International Monetary Fund (IMF) from July 2011 to present. She won the slot against governor of the Bank of Mexico, Agustín Carstens. Lagarde had worked for the French government since 2005, in the posts of minister of agriculture and fisheries and minister of finance and economy. She was chairwoman of the G20 when France was in charge of its presidency in 2011.
Joaquim Vieira Ferreira Levy: A naval engineer with a PhD in economics from the University of Chicago. He was secretary of Brazil’s National Treasury during the first Lula da Silva government and minister of finance in 2015 in the Rousseff government. He was director of Brazil’s second-largest commercial bank, Bradesco, until appointed minister of finance in late 2014. When he left the Rousseff government, he took a finance director position at the World Bank.
Jacob (Jack) Lew: Replaced Tim Geithner as US secretary of the Treasury for Obama’s second term. He occupied the post between February 2013 and January 2017. Before that, Lew served as White House chief of staff from 2012 to 2013. He is a member of the Democratic Party and served in both the Clinton and Obama administrations.
Li Keqiang: China’s seventh and current premier, in office from March 2013 through the present. Before that, he was the first vice premier in Hu Jintao’s government. Premier Li Keqiang, and his vice premiers, as well as former finance minister Lou Jiwei and People’s Bank of China governor Zhou Xiaochuan, are broadly considered pro-business economic reformers.
Luiz Inácio Lula da Silva: President of Brazil from 2003
until 2011 (reelected in 2006). He was the founder of the leftist Workers Party. In early 2016 he temporarily assumed the position of chief of staff of the presidency of the republic at the end of Rousseff’s government. He was convicted and sentenced for several charges of corruption in the context of Operation Car Wash.
Guido Mantega: Coined the term “currency wars”; he was the most controversial minister of finance of Brazil through the second government of Lula and first government of Rousseff. He is considered responsible for the takeoff of Brazil in international markets of assets, commodities, and investments and the decline of the Brazilian economy.
Guillermo Ortiz Martínez: Former governor of Banco de México from 1998 to 2009. From 1994 to 1997, he served as the secretary of finance and public credit under the Zedillo administration. He was chairman of the board of the Bank for International Settlements from March 2009 to December 2009, and has been on the advisory board for the Globalization and Monetary Policy Institute at the Federal Reserve Bank of Dallas from 2008 to present.
Henrique de Campos Meirelles: Chairman of Brazil’s central bank from 2003 to 2011. Since May 2016 he has been minister of finance of the provisional government of Michel Temer. He holds a degree in civil engineering from the University of São Paulo. Before running the Central Bank of Brazil (BCB), among other things, he was president of FleetBoston’s (formerly BankBoston) Corporate and Global Bank in the United States.
Shoichi Nakagawa: Japan’s minister of finance from September 2008 to February 2009. He died in October 2009.
Enrique Peña Nieto: President of Mexico and member of the Mexican PRI party from December 2012 to present.
Lucas Papademos: Governor of the Bank of Greece from 1994 to 2002, when he assumed the post of European Central Bank vice president, until 2010. In 2011, in the middle of the Greek debt crisis, Papademos assumed the post of Greek prime minister.
Henry (Hank) M. Paulson: The seventy-fourth secretary of the Treasury of the United States, serving from July 2006 to January 2009. Before that, Paulson was Goldman Sachs’s CEO from 1999 to 2006. After leaving the Treasury, Paulson founded the Paulson Institute to promote sustainable growth cooperation initiatives between the United States and China.
Dilma Vana Rousseff: President of Brazil from 2011 until 2016 (reelected in 2014); she was removed after an irregular impeachment process. She worked in the government of President Luiz Inácio Lula da Silva as minister of mines and energy from 2003 to 2005 and chief of staff from 2005 to 2010. During that time, she was chairwoman of the board of directors of Petrobras.
Wolfgang Schäuble: German conservative politician from the Christian Democratic Union, Angela Merkel’s party. Schäuble served as finance minister from 2009 to October 2017. He served as federal minister of the interior from 2005 to 2009. Schäuble was a strident defender of the European Union project inside Germany.
Masaaki Shirakawa: Succeeded Fukui as the governor of the Bank of Japan, a position he occupied from April 2008 to March 2013. During Shirakawa’s term, the BOJ restarted the quantitative easing measures that were created and used by Japan from 2001 to 2006.
Dominique Strauss-Kahn: Former politician from the French Socialist Party. He was the managing director of the IMF from November 2007 to May 2011, when he resigned as a result of sexual assault accusations. He was in charge of the French Ministry of Economy and Finance from 1997 to 1999. During his term, the IMF called for a stronger role for the special drawing rights (SDR) as a possible alternative to the US dollar’s position as a reserve currency.
Michel Miguel Elias Temer Lulia: Acting president of Brazil since May 2016 and confirmed as provisional president after the removal of Rousseff. Previously, he served as vice president of Brazil for Rousseff’s two terms. He is the honorary president of the Brazilian Democratic Movement Party, a party considered center.
Alexandre Antônio Tombini: Former governor of the Central Bank of Brazil (BCB) during Rousseff’s government. He is an economist and had considerable influence as president of the BCB, experiencing some friction with different finance ministers during his tenure.
Jean-Claude Trichet: President of the executive board at the European Central Bank from November 2003 to October 2011. Before that, he ran the French Treasury for six years and was governor of the Banque de France for ten, from 1993 to 2003.
Axel Weber: The president of the German Bundesbank from April 2004 to April 2011, when he resigned one year before the end of his term. He was elected a member of the governing council of the European Central Bank in 2004.
Wen Jiabao: China’s sixth premier, served as the head of the government for ten years, or two terms, from 2003 to 2013. He was the central figure in the establishment of China’s economic policy during that period, especially measures to confront the global financial crisis.
Xi Jinping: General secretary of the Central Committee of the Communist Party of China, president of the People’s Republic of China, and chairman of China’s Central Military Commission from November 2012 to present.
Janet Yellen: The fifteenth chair of the board of the Federal Reserve System, acting since February 2014 for a four-year mandate. Yellen was an economics professor at the University of California, Berkeley. She succeeded Chairman Ben S. Bernanke after being his vice chair from 2010 to 2014. Before that, she served as president and chief executive officer of the Federal Reserve Bank of San Francisco. Wall Street considered Yellen a “dove” who largely maintained the policies of Ben Bernanke. Trump selected Vice Governor Jerome Powell to succeed her in November 2017, for a term starting in February 2018.
Yi Gang: Yi Gang became deputy governor of monetary policy of the People’s Bank of China in 2007. At the PBOC, he served in multiple positions since joining in 1997, including as deputy secretary general of the Monetary Policy Committee from 1997 to 2002. He served as former director of the State Administration of Foreign Exchange from 2009 through January 2016. He earned his PhD from the University of Illinois.
Zhou Xiaochuan: Governor of the People’s Bank of China from 2002. In 2009, at a pivotal moment of financial instability, Zhou gave a speech titled “Reform the International Monetary System” that questioned the role of the dollar as a reserve currency. He pressed for and achieved the yuan’s inclusion in the IMF special drawing rights basket.
AUTHOR’S NOTE
To research this book, I set out on a global expedition. I visited Mexico City, Guadalajara, Monterrey, Rio de Janeiro, São Paulo, Brasília, Porto Alegre, Beijing, Shanghai, Tokyo, London, Berlin, and many cities throughout the United States. I navigated high-speed railways through China’s countryside, witnessed anti-impeachment demonstrations in Brazil, sipped coffee with students, farmers, and small business owners throughout Mexico, and traversed the offices and halls of the US Congress.
The journey included my return to China, where I had first visited as a young banker working for the now-defunct investment bank Lehman Brothers. Financial instruments were less complex in the late 1980s and early 1990s. But it was a time when the role of finance was rapidly changing. So was the nature of the global economy and the risk imposed upon it by bankers. They altered it, trade by trade, bet by bet.
At the time, I was working on the futures and options desk while moving from my master’s to PhD coursework in statistics. I held a purist attitude about analytics (the math behind financial instruments) in contrast with the cocky, salesperson mentality of other colleagues pushing financial products. In my early twenties, I’d argue with the salespeople I worked with, one in particular, about the numbers and who got credit for what new analytical approach. Taking credit, whether or not it was yours to take, was part of the Wall Street survival tool kit. I was never particularly good at that part.
To quell the bickering, management decided to send me and that salesperson on a road trip together—around Asia. If we didn’t kill each other, in the process we’d sell some products or, at least, open accounts. I’d explain the math; the salesperson would sell the products. H
e was a hothead, but in the end, after various near-death experiences, including our driver’s rush against oncoming traffic to get us to the airport in the Philippines, we reached a truce and garnered some business for Lehman in Asia.
I didn’t realize it then, but the “product” we were trying to sell to the Chinese contained both financial and political underpinnings, as so many do. The People’s Bank of China held more reserves in US Treasury bonds than any other central bank. We introduced them to one of our products called “Term TED Spreads.” We would sell them US Treasury bonds and they would short, or sell back, a “strip” of exchange-traded futures and thereby lock in what was called a Treasury Eurodollar (or TED) spread. It was supposed to represent the way the market viewed the integrity of US government credit against that of LIBOR,1 a rate set by a consortium of major banks. LIBOR would later be criminally manipulated by big banks in the lead-up to the financial crisis of 2007–2008.
Lehman profited from selling both the bonds and the futures. Term TED Spreads was a basic product, but its mechanics were similar to the more complex ones to come. The early nineties represented a simple time, from a central bank perspective. The power of central banks over markets and economies was contained. Though I didn’t know it then, I would be working with and analyzing central banks for the better part of the next three decades.
I left Lehman shortly after that trip and took a position at Bear Stearns in London at which I created the financial analytics department. During my time there, the euro premiered as the official currency of the Eurozone. The Asian crisis struck. Bill Clinton was impeached. The Glass-Steagall Act, which had prohibited bank deposits from being used to fuel speculative activities within big banks, was repealed. Increasingly complex derivatives were sold to the portfolios of any entity with enough cash or credit to buy them, even if that credit came from the sellers of those derivatives.
Returning to New York in 2000, I worked as a managing director at Goldman Sachs, where I was responsible for the analytics underlying a rapidly evolving product, credit derivatives. I also ran a swat team that “hunted” for “white elephant” transactions tailored especially for major financial clients and corporations. The internal pressures within the firm regarding that “hunt” were intense. Wall Street had become less focused on client risk as products became more complicated and lucrative. One senior manager advised me that, if I wanted to get ahead at Goldman, I had to make upper management my clients, not the external customers. That was a pivotal moment for me; though a steady stream of internal politics at Goldman, on Wall Street, and in the corporate world at large is a constant presence, to have it so plainly spelled out stopped me cold. It was the kind of moment from which there is no turning back. It was friendly advice as well, but it just didn’t sit well with me.
