Banker, Tailor, Soldier, Spy

PRESIDENT OBAMA recently nominated Jim Yong Kim, the president of Dartmouth, to be the next president of the World Bank — a privilege accorded to the United States since the bank’s founding in 1946. A European, in turn, gets to run the International Monetary Fund.

In the wake of World War II, such a divvying up of the top spots among the great powers was inevitable. But how did the United States, the primary founder and financer of the two institutions, wind up taking the helm of the World Bank, and not the I.M.F., which was of vastly greater importance to its government?

In fact, that was the original goal of Harry Dexter White, the Treasury Department’s key representative at the Bretton Woods conference of July 1944, where the two institutions were created. The I.M.F. was central to White’s vision of a postwar global financial architecture dominated by the American dollar.

White relegated the British delegation head, John Maynard Keynes, to the commission creating the World Bank specifically to keep him away from the main event: creating the I.M.F. White so masterfully outmaneuvered the British that they wound up signing on to a dollar-centric design for the fund, one they thought they had already blocked.

Then, on Jan. 23, 1946, Harry S. Truman nominated White to be the first American executive director of the I.M.F. (such directors representing the major member countries). Truman was also widely expected to nominate White for the fund’s top post of managing director.

But trouble soon arose in the form of J. Edgar Hoover, the F.B.I. director. White had been under surveillance for two months, suspected of being a Soviet spy. Hoover prepared a report for the president, based on information provided by 30 sources, including the confessed spy Elizabeth Bentley, asserting that White was “a valuable adjunct to an underground Soviet espionage organization,” who was placing individuals of high regard to Soviet intelligence inside the government. If word of his activities became public, Hoover stressed, it could jeopardize the survival of the fund.

Oblivious, the Senate Committee on Banking and Currency approved White’s nomination on Feb. 5, the day after Hoover’s report was delivered. Secretary of State James F. Byrnes, having read the report, wanted Truman to withdraw the nomination; Treasury Secretary Fred M. Vinson wanted White out of government entirely. Truman, who did not trust Hoover but who knew he had a major political problem on his hands, decided to quarantine White as the American I.M.F. executive director, a huge step down from managing director.

Nominating another American to sit above White, however, would have raised red flags. Why was the fund’s chief architect being passed over? It was a question the White House wished to avoid.

On March 5, Vinson met with Keynes, now the British governor of both the I.M.F. and the World Bank. He said Truman had decided not to put White’s name forward for the I.M.F. top job, despite his being “ideally suited” for it. The United States would, instead, back an American for the World Bank. Keynes was shocked.

Washington got its way, of course, and a Belgian, Camille Gutt, became the first head of the I.M.F., while an American, Eugene Meyer, became the first head of the World Bank. Though the United States was clearly in a powerful enough position to claim the I.M.F. job after Gutt’s departure in 1951, the fund was for the moment effectively moribund, its role supplanted by the Marshall Plan, and the United States was content keeping the World Bank post.

As for White, he resigned from the I.M.F. in 1947. The next summer Bentley and Whittaker Chambers accused him of spying for the Soviets, a charge he denied before the House Un-American Activities Committee on Aug. 13. He died of a heart attack three days later.

Following Alger Hiss’s perjury conviction in 1950, Representative Richard M. Nixon revealed a handwritten memo of White’s given to him by Chambers, apparently showing that White had passed classified information for transmission to the Soviets. Yet his guilt would only be firmly established after publication of Soviet intelligence cables in the late 1990s. Instead of treating the World Bank presidency as a sacred American birthright, we should remember that it was never more than a consolation prize for an administration trying to dodge a spy scandal.

By BENN STEIL

JPMorgan Trader’s Positions Said to Distort Credit Indexes

Straight from Bloomberg: The London Whale

A JPMorgan Chase & Co. (JPM) trader of derivatives linked to the financial health of corporations has amassed positions so large that he’s driving price moves in the $10 trillion market, traders outside the firm said.
The trader is London-based Bruno Iksil, according to five counterparts at hedge funds and rival banks who requested anonymity because they’re not authorized to discuss the transactions. He specializes in credit-derivative indexes, a market that during the past decade has overtaken corporate bonds to become the biggest forum for investors betting on the likelihood of company defaults.

JPMorgan Tightens Grip on Bonds as Sales Surge

Daniel Acker/Bloomberg

The JPMorgan Chase & Co. in New York.

The JPMorgan Chase & Co. in New York. Photographer: Daniel Acker/Bloomberg

Investors complain that Iksil’s trades may be distorting prices, affecting bondholders who use the instruments to hedge hundreds of billions of dollars of fixed-income holdings. Analysts and economists also use the indexes to help gauge perceptions of risk in credit markets.
Though Iksil reveals little to other traders about his own positions, they say they’ve taken the opposite side of transactions and that his orders are the biggest they’ve encountered. Two hedge-fund traders said they have seen unusually large price swings when they were told by dealers that Iksil was in the market. At least some traders refer to Iksil as “the London whale,” according to one person in the business.
Joe Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on Iksil’s specific transactions. Iksil didn’t respond to phone messages and e-mails seeking comment.

Most-Active Index

The credit indexes are linked to the default risk on a group of at least 100 companies. The newest and most-active index of investment-grade credit rose the most in almost four months yesterday and climbed again today.
The Markit CDX North America Investment Grade Index of credit-default swaps Series 18 (IBOXUMAE) rose 3.3 basis points to 100.2 basis points as of 10:18 a.m. in New York, after jumping 4.4 basis points yesterday, according to Markit Group Ltd. The price of the index is quoted in yield spreads, which rise along with the perceived likelihood of increased corporate defaults.
A credit-default swap is a financial instrument that investors use to hedge against losses on corporate debt or to speculate on a company’s creditworthiness.
Iksil may have “broken” some credit indexes -- Wall Street lingo for creating a disparity between the price of the index and the average price of credit-default swaps on the individual companies, the people said. The persistence of the price differential has frustrated some hedge funds that had bet the gap would close, the people said.

Close Supervision

Some traders have added positions in a bet that Iksil eventually will liquidate some holdings, moving prices in their favor, the people said.
Iksil, unlike JPMorgan traders who buy and sell securities on behalf of customers, works in the chief investment office. The unit is affiliated with the bank’s treasury, helping to control market risks and investing excess funds, according to the lender’s annual report.
“The chief investment office is responsible for managing and hedging the firm’s foreign-exchange, interest-rate and other structural risks,” Evangelisti said. It’s “focused on managing the long-term structural assets and liabilities of the firm and is not focused on short-term profits.”
Iksil probably traded under close supervision at JPMorgan, said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.
“The issue is how much capital they’re putting at risk,” said Miller, a former examiner for the Federal Reserve Bank of Philadelphia.

Volcker Rule

A U.S. curb on proprietary trading at banks, meant to reduce the odds they’ll make risky investments with their own capital, is supposed to take effect in July. Regulators are still determining how the so-called Volcker rule will make exceptions for instances where firms are hedging to curtail risk in their lending and trading businesses.
Wall Street banks including JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley have submitted comment letters and met with regulators to discuss their complaints about the rule.
“Several agencies claiming jurisdiction over the Volcker rule have proposed regulations of mind-numbing complexity,” JPMorgan Chief Executive Officer Jamie Dimon said in his annual letter to shareholders released this week. “Even senior regulators now recognize that the current proposed rules are unworkable and will be impossible to implement.”

Combined Revenue

JPMorgan had $4.14 billion of combined revenue last year from the chief investment office, treasury and private-equity investments, according to the annual report. The treasury and chief investment office held a combined $355.6 billion of investment securities as of December 2011, up 14 percent from a year earlier, according to a year-end earnings statement.
Chief Investment Officer Ina Drew, who runs the unit, was among JPMorgan’s highest-paid executives in 2011, earning $14 million, a 6.8 percent pay cut from 2010, the bank said in a regulatory filing this week. Drew referred a request for comment to Evangelisti.
Iksil has earned about $100 million a year for the chief investment office in recent years, the Wall Street Journal said in an article following Bloomberg News’s initial report, citing people familiar with the matter.
Iksil joined JPMorgan in 2005, according to his career- history record with the U.K. Financial Services Authority. He worked at the French investment bank Natixis (KN) from 1999 to 2003, according to data compiled by Bloomberg.

Trader’s Position

The French-born trader commutes to London each week from Paris and works from home most Fridays, the Journal article said, citing a person who worked with him.
The trader may have built a $100 billion position in contracts on Series 9 (IBOXUG09) of the Markit CDX North America Investment Grade Index, according to the people, who said they based their estimates on the trades and price movements they witnessed as well as their understanding of the size and structure of the markets.
The positions, by the bank’s calculations, amount to tens of billions of dollars and were built with the knowledge of Iksil’s superiors, a person familiar with the firm’s view said.