DSK…..IMF Old Guard has been broken

How Geithner and Obama got what they wanted at the IMF…..with a little help from their friends.

Christine Lagarde will get the IMF job, chiefly because the US won’t object. The Slog has been doing some sleuthing to nail precisely why, with Christine Lagarde in charge, US influence inside the IMF will be infinitely more decisive. And why it probably was important for Geithner to get Dominic Strauss-Kahn taken out of the game.

The conspiracy theories about Dominic Strauss-Kahn’s arrest have flown back and forth, and from here onwards – in about two weeks time I understand – the focus will change to a more simple question: who will the jury believe – a French banker with a sex-abuse habit, or an Islamic hotel maid the NYPD claims is squeaky clean?

But before that happens – and now that the hypotheses about who stood to gain from DSK’s ‘disgrace’ have been floated – we should clear the decks and look at the motives of those involved. And we should establish some facts. Because only then will we be able to view the Trial Circus in the light of what (as well as who) is in the dock here.

Oddly enough, I’ll start at the end: what’s been achieved with DSK under house arrest and out of a job?

Well, Christine Lagarde is by far the front-runner. If she gets the job, that means Nicolas Sarkozy will have an ally running the IMF, not a Socialist with presidential ambitions. But from Tim Geithner’s viewpoint, that still means a euro-fanatic in the job – and someone over whom the US has little or no control.

Or does it?

Over the last week, another Strauss-Kahn has been photographed by the NewYork Post coming and going from DSK’s new luxury prison. This is the former IMF boss’s younger brother, Marc-Olivier. A half-interested press corps has referred to him coyly as a director of Banque de France and a ‘visiting advisor’ on financial affairs. But he is rather more than this.

Marc-Olivier Strauss-Kahn

Marc-Olivier (I’ll call him MOSK, it’s quicker) is the (not ‘a’) senior adviser to the Federal Reserve board. He has regular access to Tim Geithner, and is virtually an employee.  Marc-Olivier was parachuted into this post in the autumn of 2008 by power-brokers at Banque de France; and the post comes with another equally important role: MOSK is a voting Director of the Inter-American Development Bank (IADB). This Wasington- based bank is responsible mainly for lending to Latin America and the Caribbean. This too is a key point. What’s more, MOSK’s wife works for the US-controlled World Bank in a senior capacity. (The US also has by far the biggest shareholding in the IADB).

MOSK’s job is to look after the mutual interests of the USA and France in the emerging Latin American economic sphere. He is therefore very close to the US’s IADB Director, Gustavo Arnavat. Although his name might suggest Latin American nationality, Arnavat was born in the US. He is also extremely powerful and well connected.

Gustavo Arnavat was personally nominated for the IADB job by President Obama. In the published listings of key handover personnel from the Bush to the Obama White House, he is listed as a full member of the President’s Executive team – the inner circle. Arnavat and Obama go back a long way. Gustavo makes regular contributions to Obama’s election funding, and his been close to the President since graduating as a specialist international financial lawyer. During the 2008 Presidential election, he was a key member of the Obama for America National Leadership Council, advising senior campaign officials on Latin American policy.

Before attending Law School, however, Arnavat worked in ‘Presidential Management’ at the White House. This is something of an inadeqate description of Gustavo’s job: he was actually working for the National Security Council, and the State Department. While he may not be a spook, Gustavo Arnavat certainly has very close contacts with spooks.

Look at the published records at The Federal Treasury, and you will see Arnavat being regularly copied on Geithner’s correspondence. Look at the HR records, and something even more startling appears: he is a Treasury employee. As the US Rep on the IADB Board, he reports directly to Tim Geithner….the Governor of the IADB Board.

So here is DSK’s brother working closely for Franco-American emerging world interests, with specific responsibility for Latin America. His close colleague Arnavat is bosom buddies with President Obama, and reports directly to Tim Geithner…who in turn knows MOSK well.

And now, here is Christine Lagarde pumping the flesh in that very part of the globe – on her way to the top IMF job – with no US officials getting in her way at all. Quite the opposite: in January this year, MOSK hosted a bigshots’ seminar on Latin America sponsored by the IADB. DSK’s younger brother personally invited a close Sarkozy ally to be the main speaker….Christine Lagarde.

“She made some good friends there,” says a Parisian Slog source. “I was puzzled at the time as to why she thought raising her profile there was important. In the light of subsequent events, I am not so puzzled”.

No US Fed Treasury support for a Brazilian (or Mexican) IMF candidate has been forthcoming. In fact, the State Department has been working on the Brazilians since they avoided offering any support for Lagarde early last week. Yesterday, insiders told Reuters that the Brazilian government now favoured Lagarde –  and the country’s local financial newspaper, Valor Economico, reported today that officials will endorse her for the top job.

The truth is that Arnavat and MOSK have been working overtime to get Latin America onside – and they have been hugely successful. The until recently touted Mexican candidate, central banker Agustin Carstens, made a last-ditch appeal to Brazil for support yesterday: but he is out of the race.

As far as one can tell, Timothy Geithner hasn’t been pushing any emerging world leaders to ambush la Christine’s candidacy. I ran a piece last week casting suspicion over the initial coordinated Bric opposition to Lagarde’s candidacy, but since then two reliable sovereign lending sources have insisted to me that there is no evidence at all of that being led by either Geithner or Obama. The same New York lending source who first alterted me to the smell surrounding Strauss-Kahn’s arrest told me yesterday early evening, “Geithner and Obama have exactly what they want now: no fight with Europe, but more say in what goes on….with people they can trust. It’s mission accomplished, and onto the next problem”.

It’s hard to disagree with that. Obama has a pro-Anglo-Saxon French President more likely to survive now, and an IMF boss deeply indebted to one of his closest personal friends. Geithner has that same person, with a background in security, reporting to him regularly –  with a Franco-American (plus wife) who keeps him abreast of World Bank developments. Sarkozy continues to have a very well-placed Frenchman in a senior position with both the Federal Treasury and the IADB, and looks certain to get a political ally into the top IMF job.  And MOSK is now even more powerful than he was two weeks ago.

There’s an interesting piece by Stephen Grenville in the Business Spectator this morning. The top and tail of the article reads like this: (my highlight)

‘I’m not arguing that a European should be the next head of the IMF. Just that realpolitik makes that outcome inevitable. Regardless of fairness, logic, the re-balanced world economy, natural justice, the moral case, past promises, or the competence of the candidates, the chances of an emerging-economy candidate getting the job are effectively zero….Rather than thrash around with futile demands that some unspecified emerging-country candidate should replace Dominique Strauss-Kahn, the immediate goal should be to shift the decision-making out of the old-boys’ coterie of the IMF executive board to the G20. With that achieved as a quid-pro-quo for Lagarde getting the job now, the stage would be set for an Asian emerging-country candidate to get the job next time round.‘

I think that’s as good a summation as you’ll get. The key thing to remember is not so much that person or persons got DSK replaced, but rather that DSK did not get to influence the decision about his successor. On this point, PIMCO boss Mohammed El-Arian – one of the leading names in sovereign lending – put it succinctly in the FT last May 17th:

‘This feudal [IMF] selection approach must be changed; and now is the time to do it. Without a credible and quickly-recovering IMF, Europe will face even more uncertain prospects, progress on structural reforms in advanced economies will recede, and the world will find it more difficult to make room for rapidly growing emerging economies.’

Interestingly, DSK had not resigned when El-Arian wrote the piece. But my understanding is that Christine Lagarde would NOT have been on the DSK clique’s shortlist.

Was there a conspiracy to remove Dominic Strauss-Kahn? I think there’s a reasonable chance there was. Who initiated it and who was involved? That would be very hard to prove one way or another. The Strauss-Kahn brothers are thought to be quite close, having become very Americanised together over the last few years – but Cain and Abel is a story as old as The Bible. Marc-Olivier Strauss Kahn knows his brother’s foibles as well as anyone; but above all, he has a job to do – for which he is being extremely well rewarded. He is close to Geithner, and his closest IADB colleague is an old friend and personal nominee of President Obama.

Who stood to gain? Obama, Geithner, Arnavat, Sarkozy and Lagarde. All of them are directly involved in the pre-history to DSK’s alleged indiscretion. MOSK too is in a stronger position with the IMF boss owing him one – he invited her to a major Latin American conference (and she accepted with alacrity) last January. And Lagarde is of course a close Sarkozy ally….whereas Dominic Strauss-Kahn was the opposite.

Certainly, the way things stand today, everyone’s a winner…..except DSK, and the IMF Old Guard.