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The FBI is investigating, from top to bottom, Wall Street executives who participated in Wall Street’s financial engineering factory, where executives compulsively minted and fraudulently pushed on investors dangerous securities built on bad mortgages, bad credit card payments, bad auto loans, bad student loans, you name it.

All stuffed through Wall Street’s underwriting pipeline, and all magically emerging as Triple-A rated securities, safe as a US Treasury.

Bonds and derivatives that were then sold by companies Wall Street purposely set up offshore in places like the Cayman Islands or Guernsey, away from the prying eyes of  market regulators.

February 6, 2009 10:06AM
Inside Wall Street’s Subprime Bond Factory
By Elizabeth MacDonald


Three U.S. Banks Shut by Regulators as Financial Crisis Deepens

By Margaret Chadbourn and Ari Levy

Feb. 7 (Bloomberg) — Three banks, two in California and one in Georgia, were seized by regulators, bringing this year’s tally of closings to nine as a recession and record foreclosures extend the biggest financial crisis in more than 70 years.

County Bank of Merced, California, with deposits of $1.3 billion and assets of $1.7 billion, was shut yesterday by the state’s Department of Financial Institutions, according to an e-mailed statement from the Federal Deposit Insurance Corp.

The Georgia Department of Banking and Finance closed McDonough-based FirstBank Financial Services Inc., which had $337 million in assets and $279 million in deposits as of Dec. 31, the FDIC said in a statement. The California Department of Financial Institutions shut Culver City-based Alliance Bank, with assets of $1.14 billion and $951 million in deposits.

Regulators seized six banks in January, the largest monthly toll since 1993, including Salt Lake City-based MagnetBank, which the FDIC closed Jan. 30 after being unable to find a buyer. The FDIC shuttered 25 banks last year, matching the total for 2001 through 2007.

Congress also may extend the FDIC’s line of credit with the Treasury to $100 billion from $30 billion to replenish the deposit fund. The FDIC said bank failures through 2013 may cost the fund more than the $40 billion estimated in October.

The FDIC on Dec. 16 doubled premiums it charges banks to replenish its reserves, which totaled $34.6 billion as of the third quarter. The Washington-based agency oversees 8,384 institutions with $13.6 trillion in assets.

The FDIC and the Office of the Comptroller of the Currency have taken steps to stem failures, such as allowing private- equity firms and other bidders to buy assets and deposits of lenders running out of cash. IndyMac Bank, the fourth-largest U.S. lender to fail last year, was sold to a private-equity investor for $1.3 billion on Jan. 2. The sale was led by Steven Mnuchin of Dune Capital Management LP.

Washington Mutual Inc., the biggest savings and loan, was seized on Sept. 25 and its assets were sold to JPMorgan Chase & Co. after customers drained $16.7 billion in deposits in less than two weeks. Wachovia Corp. was near failure before being bought by Wells Fargo & Co. for $12.7 billion.

To contact the reporters on this story: Margaret Chadbourn in Washington at mchadbourn@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net.
Last Updated: February 7, 2009 00:00 EST


World Growth Grinds to Virtual Halt, IMF Urges Decisive Global Policy Response: World growth is forecast to fall to its lowest level since World War II, with financial markets remaining under stress and the global economy taking a sharp turn for the worse, sending both global output and trade plummeting, the IMF said in its latest assessment of the world economy.

Last Updated: February 04, 2009

World Economic Outlook Update
Global Economic Slump Challenges Policies

January 28, 2009
PDF version (533kb)

World growth is projected to fall to ½ percent in 2009, its lowest rate since World War II. Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy. A sustained economic recovery will not be possible until the financial sector’s functionality is restored and credit markets are unclogged. For this purpose, new policy initiatives are needed to produce credible loan loss recognition; sort financial companies according to their medium-run viability; and provide public support to viable institutions by injecting capital and carving out bad assets. Monetary and fiscal policies need to become even more supportive of aggregate demand and sustain this stance over the foreseeable future, while developing strategies to ensure long-term fiscal sustainability. Moreover, international cooperation will be critical in designing and implementing these policies.

The world economy is facing a deep downturn.
Financial markets remain under stress.

Financial market conditions have remained extremely difficult for a longer period than envisaged in the November 2008 WEO Update, despite wide-ranging policy measures to provide additional capital and reduce credit risks.1 Since end-October, in advanced economies, spreads in funding markets have only gradually narrowed despite government guarantees, and those in many credit markets remain close to their peaks. In emerging economies, despite some recent moderation, sovereign and corporate spreads are still elevated. As economic prospects have deteriorated, equity markets in both advanced and emerging economies have made little or no gains. Currency markets have been volatile.

Financial markets are expected to remain strained during 2009. In the advanced economies, market conditions will likely continue to be difficult until forceful policy actions are implemented to restructure the financial sector, resolve the uncertainty about losses, and break the adverse feedback loop with the slowing real economy. In emerging economies, financing conditions will likely remain acute for some time—especially for corporate sectors that have very high rollover requirements.

A pernicious feedback loop between the real and financial sectors is taking its toll.

Global output and trade plummeted in the final months of 2008 (Figure 2, view: Data Figure 2). The continuation of the financial crisis, as policies failed to dispel uncertainty, has caused asset values to fall sharply across advanced and emerging economies, decreasing household wealth and thereby putting downward pressure on consumer demand. In addition, the associated high level of uncertainty has prompted households and businesses to postpone expenditures, reducing demand for consumer and capital goods. At the same time, widespread disruptions in credit are constraining household spending and curtailing production and trade.

Advanced economies are suffering their deepest recession since World War II.

Against this uncertain backdrop, output in the advanced economies is now expected to contract by 2 percent in 2009. This would be the first annual contraction during the postwar period, with a cumulative output loss (relative to potential) comparable to the 1974-75 and 1980-82 periods (Figure 3, view: Data Figure 3). Nevertheless, assuming more comprehensive and coordinated financial policy actions that support a gradual normalization of financial market conditions, as well as sizable fiscal stimulus and large interest rate cuts in many advanced economies, output is expected to start recovering in late 2009 and rise by about 1 percent in 2010. Stabilization in the U.S. housing market should help underpin recovery during this period.

Anemic global growth has reversed the commodity price boom.

The slump in global demand has led to a collapse in commodity prices (Figure 4, view: Data Figure 4). Despite production cutbacks and geopolitical tensions, oil prices have declined by over 60 percent since their peak in July 2008, although they remain higher in real terms than during the 1990s. The IMF’s baseline petroleum price projection has been revised down to $50 a barrel for 2009 and $60 a barrel for 2010 (from $68 and $78, respectively, in the November WEO Update), and risks to this projection are on the downside. Metals and food prices have also been marked down in line with recent developments. These price declines have dampened growth prospects for a number of commodity-exporting economies.

Inflation pressures are subsiding.

Sluggish real activity and lower commodity prices have dampened inflation pressures (Figure 5, view: Data Figure 5). In the advanced economies, headline inflation is expected to decline from 3½ percent in 2008 to a record low ¼ percent in 2009, before edging up to ¾ percent in 2010. Moreover, some advanced economies are expected to experience a period of very low (or even negative) consumer price increases. In emerging and developing economies, inflation is also expected to subside to 5¾ percent in 2009 and 5 percent in 2010, down from 9½ percent in 2008.
Global monetary and fiscal policies are providing substantial support.

Faced with a quickly deteriorating outlook and subsiding inflation pressures, central banks in the advanced economies have taken strong actions to cut policy rates and improve credit provision. Policy interest rates have been brought down substantially in recent months, especially as inflation pressures subsided, although falling inflation expectations are mitigating the impact on real interest rates. Relative to the November WEO Update projections, short-term market interest rates in 2009 are assumed to be about ¾ percentage point lower in the United States, the euro area, and the United Kingdom, in line with market expectations. Central banks in emerging economies are also moving to ease their policy stance and improve market liquidity.

To combat the downturn, many governments have announced fiscal packages to boost their economies. Consequently, unlike the November WEO Update, the new projections incorporate a substantial fiscal expansion. Specifically, fiscal stimulus in G-20 countries in 2009 is projected to be 1.5 percent of GDP. Deficits are also expected to be boosted by the operation of automatic stabilizers and the impact on revenues of sharp asset price declines, as well as the costs of financial sector rescues. As a result, the fiscal balance in advanced economies is projected to deteriorate by 3¼ percentage points to -7 percent of GDP in 2009 (Figure 6, view: Data Figure 6).
The uncertainty surrounding the outlook is unusually large.

Downside risks continue to dominate, as the scale and scope of the current financial crisis have taken the global economy into uncharted waters. The main risk is that unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth. In addition, the risks of deflation are rising in a number of advanced economies, while emerging economies’ corporate sectors could be badly damaged by continued limited access to external financing.2 Furthermore, while fiscal policy is providing important short-term support, the sharp increase in the issuance of public debt could prompt an adverse market reaction, unless governments clarify their strategy to ensure long-term sustainability.

There are also upside risks. In particular, global financial conditions could improve faster than expected due to stronger policy actions. This could boost consumer and business confidence and alleviate the credit crunch, thereby lifting global growth.

Strong and complementary policy efforts are needed to rekindle activity.

Policy efforts so far have addressed the immediate threats to financial stability (through liquidity support, deposit insurance, and recapitalization schemes), but they have done little to resolve the uncertainty about the long-term solvency of financial institutions. The process of loss recognition and restructuring of bad loans is still incomplete. Therefore, financial sector policies should focus on advancing this process by forcing credible and coordinated loan loss recognition and by providing public support to the viable financial institutions. Such policies should be supported by measures to resolve insolvent banks and set up public agencies to dispose of the bad debts, including possibly through a “bad bank” approach, while safeguarding public resources.

Monetary policy remains an important policy lever. The projections incorporate a substantial easing in policy rates, although the effectiveness of interest rate cuts to support activity is likely to be constrained as long as financial conditions remain disrupted. With interest rates approaching zero in several major countries, central banks are exploring alternative policy approaches that rely on using their balance sheets to ease monetary conditions further. The focus should be on unlocking key (high-spread, low-liquidity) credit markets.

In current circumstances, the timely implementation of fiscal stimulus across a broad range of advanced and emerging economies must provide a key support to world growth.3 Given that the current projections are predicated on strong and coordinated policy actions, any delays will likely worsen growth prospects. Countries that have policy room should make a firm commitment to do more if the situation deteriorates further. Fiscal stimulus packages should rely primarily on temporary measures and be formulated within medium-term fiscal frameworks that ensure that the envisaged buildup in fiscal deficits can be reversed as economies recover and that fiscal sustainability can be attained in the face of demographic pressure. Countries that have more limited fiscal space should focus their efforts on supporting the financial sector and credit flows, while ensuring that budgets adjust to less favorable external conditions. However, it will be important to avoid cutbacks in foreign aid in response to tightening budget constraints, lest hard-won economic gains in developing countries are lost.

Table 1.1. Overview of the World Economic Outlook Projections
(Percent change, unless otherwise noted)

Year over Year                             Q4 over Q4

Difference from November
Projections           2008 WEO Projections     Estimates     Projections
2007     2008    2009 2010           2009     2010     2008     2009     2010

World output1
5.2     3.4     0.5     3.0                -1.7     -0.8     1.1     1.2     3.4

Advanced economies
2.7     1.0     -2.0     1.1                -1.7     -0.5     -1.1     -0.5     1.6

United States
2.0     1.1     -1.6     1.6                -0.9     0.1     -0.7     —     2.0

Euro area
2.6     1.0     -2.0     0.2                -1.5     -0.7     -0.7     -1.4     0.9

2.5     1.3     -2.5     0.1                 -1.7     -0.4     -1.2     -1.0     0.4

2.2     0.8     -1.9     0.7                -1.4     -0.8     -0.5     -1.8     2.2

1.5     -0.6     -2.1     -0.1               -1.5     -0.1     -1.5     -1.3     0.8

3.7     1.2     -1.7     -0.1                -1.0     -0.9     -0.4     -1.5     0.5

2.4     -0.3     -2.6     0.6               -2.4     -0.5     -3.0     -0.2     0.8

United Kingdom
3.0     0.7     -2.8     0.2                -1.5     -0.9     -1.8     -1.5     0.8

2.7     0.6     -1.2     1.6                -1.5     -1.4     -0.4     -0.4     2.0

Other advanced economies
4.6     1.9     -2.4     2.2                -3.9     -1.0     -1.6     0.1     2.7

Newly industrialized
Asian economies
5.6     2.1     -3.9     3.1                -6.0     -1.1     -3.4     0.6     3.3

Emerging and developing economies2
8.3     6.3     3.3     5.0                -1.8     -1.2     4.5     3.5     5.8

6.2     5.2     3.4     4.9                 -1.4     -0.5     …     …     …

6.9     5.4     3.5     5.0                 -1.6     -0.7     …     …     …

Central and eastern Europe
5.4     3.2     -0.4     2.5                -2.6     -1.3     …     …     …

Commonwealth of Independent States
8.6     6.0     -0.4     2.2                 -3.6     -2.3     …     …     …

8.1     6.2     -0.7     1.3                 -4.2     -3.2     2.7     -1.3     1.9

Excluding Russia
9.7     5.4     0.3     4.4                  -1.3     -0.3     …     …     …

Developing Asia
10.6     7.8     5.5     6.9                -1.6     -1.1     …     …     …

13.0     9.0     6.7     8.0                -1.8     -1.5     6.8     7.5     8.1

9.3     7.3     5.1     6.5                   -1.2     -0.3     5.1     5.3     7.1

6.3     5.4     2.7     4.1                   -1.5     -1.3     4.1     3.1     4.5

Middle East
6.4     6.1     3.9     4.7                  -1.5     -0.6     …     …     …

Western Hemisphere
5.7     4.6     1.1     3.0                  -1.4     -1.0     …     …     …

5.7     5.8     1.8     3.5                  -1.2     -1.0     4.3     2.2     4.2

3.2     1.8     -0.3     2.1                 -1.2     -1.4     —     0.2     3.3


European Union
3.1     1.3     -1.8     0.5                 -1.6     -0.8     …     …     …

World growth based on market exchange rates
3.8     2.2     -0.6     2.1                -1.7     -0.7     …     …     …

World trade volume (goods and services)
7.2     4.1     -2.8     3.2                -4.8     -2.5     …     …     …


Advanced economies
4.5     1.5     -3.1     1.9                -3.0     -1.8     …     …     …

Emerging and developing economies
14.5     10.4     -2.2     5.8           -7.0     -3.6     …     …     …


Advanced economies
5.9     3.1     -3.7     2.1                 -5.0     -1.8     …     …     …

Emerging and developing economies
9.6     5.6     -0.8     5.4                -5.8     -3.5     …     …     …

Commodity prices (U.S. dollars)

10.7     36.4     -48.5     20.0           -16.7     9.7     …     …     …

Nonfuel (average based on world commodity export weights)
14.1     7.4     -29.1     7.3                  -10.4     6.3     …     …     …

Consumer prices

Advanced economies
2.1     3.5     0.3     0.8                   -1.1     -0.8     2.6     0.3     0.9

Emerging and developing economies2
6.4     9.2     5.8     5.0                  -1.3     -0.5     7.6     4.7     4.2

London interbank offered rate (percent)4

On U.S. dollar deposits
5.3     3.0     1.3     2.9                -0.7     -1.4     …     …     …

On euro deposits
4.3     4.6     2.2     2.7                -0.8     -0.8     …     …     …

On Japanese yen deposits
0.9     1.0     1.0     0.4                  —     -0.3     …     …     …

Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during December 08, 2008-January 05, 2009. Country weights used to construct aggregate growth rates for groups of countries were revised.

1The quarterly estimates and projections account for 90 percent of the world purchasing-power-parity weights.

2The quarterly estimates and projections account for approximately 76 percent of the emerging and developing economies.

3Simple average of prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil. The average price of oil in U.S. dollars a barrel was $97.03 in 2008; the assumed price based on future markets is $50.00 in 2009 and $60.00 in 2010.

4Six-month rate for the United States and Japan. Three-month rate for the euro area.

1 See the January 2009 Global Financial Stability Report—Market Update.

2 See Gauging Risks for Deflation, IMF Staff Position Note (SPN/09/01)

3 See Fiscal Policy for the Crisis, IMF Staff Position Note (SPN/08/01)



IMF Data Mapper – with balance of payments info charted
The current account of the balance of payments covers all transactions (other than those in capital and financial items) that involve economic values and occur between resident and nonresident entities.  Also covered are offsets to current economic values provided or acquired without a quid pro quo.  Included are goods, services, income, and current transfers.
The balance on goods, services, income, and current transfers is commonly referred to as the “current account balance”.

Send comments about the IMF Datamapper to –
StatisticsQuery@imf.org <StatisticsQuery@imf.org>
United States                                  -731.21   Billion dollars
United Kingdom                             -119.16
France                                                -31.25
Russian Federation                           +76.24
Japan                                               + 210.49
China                                               + 371.83

Balance of Payments (Disparities) – 2007 IMF

The word nationalization calls to mind banks owned and run by the government in perpetuity, as with China’s largest banks. In Western economies, however, nationalization more often resembles detox. The government takes control, scrubs away problems and returns the company to private ownership.

Countries including the United States have a long history of temporarily nationalizing large, troubled banks. Smaller banks that get into trouble can be absorbed by healthy companies, but the largest banks often can be absorbed only by the government itself.

The most recent domestic example was the July nationalization of IndyMac Bancorp, a California mortgage lender. The company was seized and run by the Federal Deposit Insurance Corp. for about six months before the government sold the company to private owners last month. John Bovenzi, the FDIC’s chief operating officer, served as chief executive.

But IndyMac is an example of a company that needed to be seized. The nationalization now envisioned by proponents, including lawmakers and economists, would involve companies that could remain private, at least for now.



All governments need to act. Measures to clean up the banks and revive the housing market in the United States are an important part of the solution, and are needed urgently. But they are no longer enough.

This is because the crisis is now much broader, and it is having profound effects on both advanced and emerging economies. Consider what is happening here in Asia. Every day we hear dire news about exports and industrial production—mirroring the remarkable collapse in global trade and industrial activity.

{ . . . }

It is now widely recognized that financial market regulation has to change. Given the globalization of financial markets, we will also need greater international coordination, and all countries—especially those with growing financial centers—must play their part in that.

The IMF has a special role in this process, because of its expertise in assessing the linkages between financial sector and financial market rules and macroeconomic outcomes. This perspective is critical for designing regulatory frameworks and conducting oversight.


Speech By Dominique Strauss-Kahn, Managing Director of the International Monetary Fund
At the 44th SEACEN Governors’ Conference
Kuala Lumpur, Malaysia, February 7, 2009


A Window Into the Wall Street Frauds
February 6, 2009 10:06AM
Inside Wall Street’s Subprime Bond Factory
By Elizabeth MacDonald

Third in the Crackdown on Wall Street series

(Excerpt – )

After an Evanston, Illinois hedge fund called Magnetar pushed Merrill to set up “a tailor-made bet on subprime mortgages,” Merrill cooked up a CDO deal and nicknamed it “Norma,” according to an important but overlooked Wall Street Journal article by Carrick Mollenkamp and Serena Ng on December 27, 2007.

Norma was pushed onto investors as a Triple-A rated, diversified investment with yields of 10% or more, the Journal says. Moody’s, Standard & Poor’s and Fitch Ratings all gave Norma their highest, triple-A rating–implying it had as little risk as Treasury bonds of the U.S. government.

It Was Anything But Safe

Within eight months of selling $1.5 bn in bonds to investors, Norma dropped to a fraction of its original value, the Journal says. Credit-rating firms, “which had signed off approvingly on the CDO, slashed its ratings to junk,” the paper says.



The Collapse of Wall Street Was Just Beginning

After reporting record losses in the fall of 2007, Merrill Lynch ousted its chief executive E. Stanley O’Neal and other top executives.

Norma’s CDO creator Margolis by that time was already gone, the Journal says.

Merrill Lynch, near collapse after more than $45 bn in writedowns and losses in a year’s time, was taken over in a shotgun wedding with Bank of America in September 2008.

A deal made under pressure from the US government–with the help of $20 bn in taxpayer money to get BofA’s CEO Kenneth Lewis to pay for the $20 bn deal price for Merrill.

BofA also got $118 bn in government guarantees on its bad assets, after Lewis threatened to walk away in December of 2008. — with reporting by Cristine Ambrose



The Independent Evaluation Office (IEO) was established in 2001 to conduct independent and objective evaluations of Fund policies and activities. Under its Terms of References, it is fully independent from the Management of the IMF and operates at arm’s length from the Board of Executive Directors.

The IEO’s mission is to

* enhance the learning culture within the Fund,
* strengthen the Fund’s external credibility,
* promote greater understanding of the work of the Fund, and
* support institutional governance and oversight.


Give us your views
Your opinion is important to us.

We are constantly considering topics for future evaluations. We are also very grateful for any comments or suggestions that you might have regarding past or ongoing evaluations. Please
send your feedback to feedback@ieo-imf.org

Learn more about Ongoing Evaluations.


Work with us
Consultants, we want you

We’re always looking for talented consultants who can contribute to our evaluations. There are a variety of options to work for the IEO as a consultant, including long-term and short-term as well as on-site and from your home office. If you are interested, please send your CV and areas of interest to employment@ieo-imf.org

Learn more about Working for IEO.

August 5, 2008

The IEO has posted a menu of Possible Topics for Evaluation over the Medium Term (PDF). In this note, IEO presents a deliberately broad list, which reflects the many suggestions received from outside stakeholders as well as IMF Executive Directors, Management, and staff. Additions to its work program will be finalized in early fall. Any comments and further suggestions would be greatly appreciated and can be sent to feedback@ieo-imf.org by September 12, 2008.

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October 27, 2008

Transcript of IEO Director Tom Bernes’ speech on Evaluation, Learning, and Accountability: The IMF in a Time of Global Crisis

1. Good morning.
It’s a great honor to be here with such a distinguished group of evaluators.
I also would like to sincerely thank the Polish Ministry of Regional Development and the Polish Agency for Enterprise Development for the opportunity to join you today at this important conference on “The Role of Evaluation in the Identification of Opportunities and Threats to Development”.

2. My topic today is evaluation, learning, and accountability at the International Monetary Fund.
On the face of it, a rather dry topic that may seem distant from today’s proceedings.
But one that takes on far greater interest considering the power and influence the institution is often seen to wield, which also magnifies the importance of its carrying out its activities in a professional and fully-accountable manner.
Nothing demonstrates this importance more clearly than the dramatic events of the past few weeks, with the rapid unfolding of the global financial crisis—and I will use the example of the Fund’s role in the crisis to illustrate my main points today.
To be useful, evaluation must result in learning. But to do so, I will argue, there also must be accountability—without accountability there is unlikely to be learning. So the three—evaluation, learning and accountability—are inextricably linked.

3. Last weekend in Washington, the world’s financial and economic leaders gathered for the IMF/World Bank Annual Meetings. As financial markets around the world plunged, they put their heads together to focus on the crisis—and the scope for coordinated action to address it.
These are developments of enormous proportions. Given its scale, the crisis itself and the attendant spread of recession around the world will shape the global landscape and adversely affect the lives of billions of people around the world for years to come.
They provide a compelling test of the effectiveness of evaluation with respect to the adequacy of learning from it (especially as reflected in management follow-up actions), and accountability for any identified lapses.

4. Against this background, I will organize my remarks this afternoon under five broad headings.
First, I will provide background on the IMF.
Second, I also will provide background on the IEO, including some of the IEO’s completed evaluations to date.
Third, I will say a few things about the financial crisis, and the Fund’s role and involvement in crisis management.
Fourth, I will set out what I see as the take-away lessons learned for the effectiveness of evaluation—both for Fund Management and for the IEO.
Fifth, I will draw a few conclusions about the role of evaluation in the identification of opportunities and threats to development, the overarching theme of the conference.

Starting first with some background on the IMF

5. I begin with a few key points about the Fund—its genesis, rationale, and recent evolution—to provide the context for the points I want to make:
As many of you know, the IMF was created at the end of World War II to avoid the beggar-thy-neighbor policies and currency devaluations that had contributed to the Great Depression and its spread around the world. Concerns about international policy spillovers remain the Fund’s central raison d’être.
Of course, the specifics have changed over time—especially since the breakdown of the Bretton Woods system of fixed exchange rates in the early 1970s. Since then, the Fund’s mandate for bilateral and multilateral surveillance has broadened to the wider set of monetary, fiscal, and other policies that determine exchange rate levels.
These changes put the global financial crisis squarely in the Fund’s bailiwick—de jure if not fully de facto—a central theme to which I shall return momentarily.

.}{1    6. But first, a brief look at what was happening (or not) on evaluation during this period. Actually, as the Fund evolved over its first 50 years, there was little discussion of an evaluation function, even after the World Bank launched its evaluation office in the 1970s and subsequently pursued a very ambitious evaluation agenda, as did many national governments.
.}{2    Yes—research on key policy and implementation issues was undertaken. Also, there was some self-evaluation of Fund lending programs, carried out by the Fund’s policy department. Combined with widespread perceptions about the Fund’s effectiveness among major shareholders, these efforts were sufficient to keep at bay suggestions that the Fund follow in others’ footsteps along the evaluation path. So, the answer remained no to independent evaluation, at least on a resident basis.
But confidence in the Fund began to wane in the mid-1990s. Concerns arose about its work with several important member groupings. First was its perceived neglect of institutional issues—especially problematic in the context of conditionality on privatization—for example in the Former Soviet Union. Second were long-simmering worries about its effectiveness in Sub-Saharan African and other low-income countries that were looked at anew as other performance weaknesses surfaced. And third was its handling—or mishandling, as Fund critics would have it—of the East Asian Crisis and its subsequent spread to Brazil, Russia, and elsewhere.

Indeed, it was in these crises that the problems were the most central to the institution’s core mandate on international financial stability—and the most relevant to my remarks today. There, the Fund was criticized for its surveillance work before the crisis in not identifying the problems that ultimately sparked it, particularly in Korea, and later in Indonesia. It was also criticized for its program work during/after the crisis, where its stabilization prescriptions did little to fix what was ailing the economy and some have argued, worsened the situation.
As confidence in the Fund eroded, the Fund’s Executive Board launched a series of high-profile external evaluations, my second topic…

7. The most germane to my remarks today is the External Evaluation of IMF Surveillance, issued some ten years ago. Better known as the Crow Report, its most important recommendations remain highly relevant—and prescient—in light of today’s troubles. Addressing the potential for large adverse spillovers to other countries, the report set out what in today’s parlance might be characterized as a “risk-based surveillance strategy”, urging the Fund to focus its efforts and resources on:
the most systemically important countries;
the international aspects of the systemically important countries’ policies;
and the financial sector/macroeconomic policy interface of the systemically important countries’ policies.

Clearly these are the big-ticket risks. The massive sums we have been hearing about in respect to the costs of the current crisis drive home the wisdom of concentrating resources and Management focus on such risks. Quite frankly, if the Fund doesn’t get these right, it won’t be in a position to help very much with the others.

8. Reflecting the Board’s appreciation of the Crow Report, and the other external evaluations, the Independent Evaluation Office was created in 2001, principally to enhance transparency, contribute to learning, and support institutional oversight and accountability. Fourteen major evaluations have now been completed. I will say a few words on three in

particular that deal quite centrally with systemic risks caused by spillover effects from one economy and financial sector to another.




• Fourth, going forward, we in the IEO need to be even more pointed in challenging Management’s and staff’s evenhandedness in dealing with members and shareholders—as these have proved to be the institution’s Achilles heel in pursuing its mission of global stability. In retrospect, perhaps we should have pushed more on the FSAP issue, when the U.S. declined to “volunteer” for an assessment and the issue was not pursued vigorously. Similarly, on governance, perhaps we should examine more the institution’s ability to “speak truth to power”, and highlight the risks of not doing so, when the members that pose the greatest systemic risk are also the largest shareholders.

• Finally, both the IMF and the IEO must be bolder in identifying and highlighting downside risks. The Fund in the context of surveillance related assessments, such as the FSAP. The IEO in highlighting Management and staff failures to follow-up on evaluation recommendations. In many ways, this was the greater truth of the Crow Report ten years ago. It remains equally valid today.

In conclusion—and stepping back—what (if anything) might we infer from my remarks about the IMF and the IEO for the theme of this conference—the role of evaluation in identifying opportunities and threats to development…?

17. First, my reading of the IMF-IEO experience is that evaluation clearly has an important role in identifying opportunities and threats to the IMF’s ability to carry out of its mission. In the example of the financial crisis that I used, evaluation clearly identified the need for enhancing the Fund’s macro-financial sector links; it clearly identified the FSAP loophole as a major issue; and it clearly identified the need for much greater connectivity

between bilateral and multilateral surveillance. The problem is that little happened after the problems were identified.
18. Second, this is not unusual, as identification alone is almost never enough. Lack of knowledge is seldom the impediment to change. On rare occasions, we may have a eureka moment of discovery, unlocking the door to effective action. But this is not the norm. More often, things are the way they are not out of ignorance, but because someone wants them that way or simply doesn’t have the energy to change. This is why the IEO’s evaluations have increasingly sought to identify the drivers/non-drivers within the Fund—that is, the Board, Management and staff—and to spell out the incentives and other factors that are creating the identified problem(s).
October 27, 2008

Transcript of IEO Director Tom Bernes’ speech on Evaluation, Learning, and Accountability: The IMF in a Time of Global Crisis