IMF's Strauss-Kahn: Maybe He's "Wolfowitz-Palin"

It is disconcerting that just as the IMF looks set to embark on any number of rescue operations in Asia, Europe, and perhaps South America, its managing director is now embroiled in a distracting controversy of the sordid Monicagate/Troopergate variety. I am sure that persons in positions of power abuse their authority from time to time; it's just that some of them have the misfortune of having the spotlight shine brighter on them at inopportune moments. In the article below, the Wall Street Journal reports Strauss-Kahn's married ex-subordinate girlfriend may have received an outsized severance package as the IMF was downsizing. If you will recall, few countries running into balance of payments difficulties in recent years [see chart] meant that the IMF had difficulty sustaining its operations [1, 2, 3]. What is under contestation is whether she was given a large package due to her affair with Strauss-Kahn and/or was fired as retribution:

The International Monetary Fund has launched an investigation into whether its chief, Dominique Strauss-Kahn, abused his position in connection with a sexual relationship with a subordinate, in a case that could roil a key global institution at a crucial moment in the world financial crisis.

The IMF said it has retained the firm of Morgan, Lewis & Bockius LLP to conduct the investigation, which is expected to be completed by the end of the month. The probe was sought by the longest-serving member of the IMF's governing board, A. Shakour Shaalan, who represents Egypt and other Arab countries, with advice from the representatives of Russia and the U.S.

"There was an allegation concerning improper behavior of a personal nature on the part of the managing director," said Masood Ahmed, the IMF's chief spokesman. "All allegations, particularly relating to senior management, need to be investigated."

In a statement, Mr. Strauss-Kahn said: "I have cooperated and am continuing to cooperate with outside counsel to the Fund concerning this matter." He said the "incident which occurred in my private life" took place in January 2008. "At no time did I abuse my position as the Fund's managing director."

Mr. Strauss-Kahn, a 59-year-old former French finance minister, is regarded as one of Europe's most accomplished economic policy makers. In September 2007, he was elected managing director of the IMF, which provides economic advice and sometimes loans to its 185 member countries.

The handling of the investigation of Mr. Strauss-Kahn is provoking sharp criticism within the IMF because not all of the 24 members of the board had been made aware of the allegations and the investigation until Friday, after this newspaper made inquiries. Some internal critics charge that the members who had knowledge of the allegations could have been in the position to use that information as leverage in policy and funding disputes with Mr. Strauss-Kahn. An IMF official said it was necessary to limit the number of people who knew about the investigation in order to protect privacy.

The probe comes 15 months after the president of the World Bank, Paul Wolfowitz, resigned under pressure because of alleged favoritism to a World Bank employee with whom he had a long-standing relationship. The imbroglio deeply split the World Bank staff -- as well as finance ministries around the world -- into Wolfowitz supporters and detractors.

The IMF investigation concerns Mr. Strauss-Kahn's relationship with Hungarian-raised Piroska Nagy, at the time a senior official in the IMF's Africa department. According to several individuals familiar with the matter, Mr. Strauss-Kahn in December 2007 began approaching Ms. Nagy, who is married, for an affair. The two exchanged emails about a possible intimate relationship, which these people said commenced early this year during a conference in Europe.

Shortly afterward, Ms. Nagy's husband, Mario Blejer -- a prominent Argentine-born economist who has worked at the IMF, the Central Bank of Argentina and the Bank of England -- found email evidence of the affair, they said, and the relationship apparently ended. Mr. Blejer and his wife hoped to keep the incident quiet while they worked out their problems, said several individuals with knowledge of the incident. Robert Litt of Arnold & Porter, Ms. Nagy's lawyer, said his client "doesn't comment on her personal life."

After word of the affair became known within the IMF, Aleksei Mozhin, Russia's representative, spoke with Mr. Blejer. Mr. Shaalan, the Egyptian board member, was notified around July, an IMF official said. Mr. Shaalan conferred with Mr. Mozhin, as well as with Meg Lundsager, the U.S. representative on the IMF board, and IMF general counsel Sean Hagan.

In late August, the IMF retained Morgan, Lewis. By mid-September, Mr. Strauss-Kahn had formally informed the law firm that he would cooperate with the investigation and encouraged others at the IMF to do so. Ms. Lundsager and Mr. Mozhin declined to comment. Mr. Hagan was unavailable.

The probe is intensifying as the IMF is trying to focus its energies on helping developing countries withstand the global financial crisis. One issue for investigators is whether Mr. Strauss-Kahn showed favoritism to Ms. Nagy at the IMF, or sought retribution. Ms. Nagy resigned from the IMF in August as the IMF was reducing the size of its work force by nearly 600 slots. She is now working as an economist at the European Bank for Reconstruction and Development in London, a regional development agency.

The investigators are looking at whether Ms. Nagy's severance package was outsized for a person of her position and tenure. Ms. Nagy was an Africa specialist, and in April 2008 led an IMF mission to Ghana to discuss that country's economic policies.

In the World Bank controversy, the question of whether Mr. Wolfowitz's girlfriend received a big bump in salary as a result of their relationship was at the heart of the dispute.

And yes, I was tempted to call this post "Mr. Loverman II". All I have to say is that given the Wolfowitz episode and now this one with Strauss-Kahn, calls for changing the way heads of the World Bank and IMF are selected should be heeded. As you probably know, it's customary that the US selects the World Bank president while Europe chooses the IMF managing director. Not only does this reinforce perceptions of developing countries that these institutions are supposedly there to help them favor the interests of developed countries, but their choices are quite frankly embarrassing. These are supposed to be multilateral financial institutions, not "The Love Boat," dammit [I feign righteous indignation].

10/21 UPDATE: The IMF site has a press release stating the investigation should be completed by month's end. Also, Strauss-Kahn has apologized to IMF staffers for this incident. French President Nicolas Sarkozy is supposed to be dismayed about this distraction as the French are helping draw up a new pact for international financial regulation. The latest rumor is that the WSJ reporting on this incident may be down to transatlantic politics:

A “one-night stand” and an angry husband have endangered the career of the French head of the International Monetary Fund and dismayed President Sarkozy as he seeks to put a French stamp on a new world financial order.

The news that Dominique Strauss-Kahn, 59, is being investigated in Washington over an alleged fling with a former subordinate has unsettled Mr Sarkozy, who has been working with him to form a new Bretton Woods pact on financial regulation.

When he visited President Bush at Camp David on Saturday, Mr Sarkozy presented a vision for this on behalf of the European Union that conflicts with US wishes. Although the romantic troubles of Mr Strauss-Kahn were known in Paris, some politicians suggested that the case had been leaked to the US media to undermine the French effort.

It is ironic that I mentioned Monicagate above because the WSJ has dredged up a past IMF investigation on Strauss-Kahn allegedly exhibiting favoritism to an intern he has ties to. Although the IMF did not find anything untoward, it does make you wonder if the WSJ is on the Strauss-Kahn bashing bandwagon for one reason or another. As in many international organizations, circumspection and prudence seem to be the order of the day:

The International Monetary Fund is looking at whether its chief, Dominique Strauss-Kahn, influenced the appointment of a 26-year-old political protégé to a sought-after internship in the IMF's research department.

The managing director's connection with Emilie Byhet was a focus of discussions this summer among a handful of IMF board members, who were fielding complaints from staffers about arbitrary personnel decisions. At the time, the staff was being reduced by about 500 slots. An IMF spokesman said that "there is no evidence of favoritism in this case," in which Mr. Strauss-Kahn's office recommended Ms. Byhet for the slot...

While research interns are usually Ph.D. candidates in economics, Ms. Byhet had a master's degree in public policy and communications. She listed her first "professional experience" as an "internship with the campaign team of Mr. Dominique Strauss-Kahn."