Follow the Money

“Money Makes the World Go Around” is the work of a socialist whom Business Week aptly calls “the curious capitalist’s Baedeker.” Where does money go after it is deposited or invested? Barbara Garson wants to know. And, more important, what does it do? Money’s power to create something new--to change a community, for better or ill--is an article of faith for the author, who is also a playwright (“MacBird!”) and an investigative journalist (“All the Livelong Day”) whose socialism is the Swedish variety that holds the productive power of both capital and labor in higher regard than either is held in the United States.

The book’s journey commences in Millbrook, N.Y., in late 1994 at a one-branch bank embodying “useful and decent banking principles” where Garson deposits $29,500--half of her publisher’s advance. A few years later she invests a smaller second installment in an aggressive mutual fund. The idea is to plunge into the streams of cash emanating from project loans, letters of credit, leveraged buyouts, to go wherever she can catch a wave and watch her money at work in the world.

The intent is not, at least at the start, to introduce the reader to the investment patterns, currency trades and capital flight that triggered first the Mexican and then the Asian crashes, followed in 2000 by the stock market slide at home, which has cost investors $4 trillion so far. But that is what Garson’s reporting does.

When the Bank of Millbrook can’t find enough local investment for its money and is left with more than it needs to meet its reserve requirement with the Federal Reserve (about 3% of deposits), it loans (sells) the surplus to a correspondent bank on Wall Street. This happens the night of Garson’s initial deposit, when Millbrook makes an loan of $3 million to Chase Manhattan (today, J.P. Morgan Chase), whose daily reserve requirement was then running around $420 million.

Cut to the 37th-floor trading room at Chase Manhattan Plaza, the first of many stops before we reach the playing fields of big and little money in Thailand, Malaysia and Singapore and in Tennessee and Maine. At the Ffed-funds desk where Garson has wrangled an invitation, she watches five people dressed in jeans (it’s Friday) monitor $2 billion that flows in from hundreds of banks and corporate partners before emptying into the vast “Chase delta.”

Chase is “long” on money that day, a senior vice president explains, but it buys Fed funds from correspondent banks as a service and a door-opener for selling Chase products. To close its position--to meet the reserve requirement without surpassing it, for Fed accounts earn no interest--Chase must shed $3 billion. Garson pulls up a chair to watch as buy-and-sell orders are scribbled on slips of paper and spiked on metal spindles that Bartleby the Scrivener might have used.

“Okay. Put it in Chase Nassau,” a trader says into a headphone, and she snaps to attention. Nassau? A small hospital wants to sell (lend) Chase $1.35 million, he explains; probably a Medicare payment they don’t want sitting idle over the weekend. He points out that it’s illegal to pay interest on corporate checking accounts--a pesky Depression-era regulation--and thus such deposits are made elsewhere. The federal government, we’re reminded, stops 12 miles offshore. Garson, who has just watched a trader create a million-odd Eurodollars, then offers a brief history of the Euromarket.

She is an artful kibitzer. In an exchange with the Chase vice president on the Ffed-funds desk, we learn how the money Millbrook lends Chase creates that “benchmark”--a measurement of money available for investment--that Alan Greenspan tinkers with when he wants to curb or spur the economy by adjusting the prime lending rate. Why the fiddling doesn’t always work (as, perhaps, now) is another question. But the book’s sharp glimpses of the go-go years offer some clues about the recessionary undertow that grips today’s economy, along with a peek at democracy at work inside the free trade camp.

It’s the mid-’90s, and euphoria about the “Emerging Market Whiz Kids” runs high. Garson, who’s looking for “Senor Good Loan,” infiltrates a conference at the Waldorf Astoria called “Advances in the Americas: Can the Momentum be Maintained?” Wading through bogs of globo-babble about privatization, deregulation, trade liberalization and tax reform, she doesn’t find the old-fashioned capital development loan but listens to a Canadian panelist warn of “a particularly insidious threat to free trade: ‘Transformational Coalitions’ [that] live in cyberspace.” Unlike traditional lobbies that jockey for pieces of the pie, the speaker exclaims, “[t]hey want to tell us what should go into the pie, and how it should be baked.”

After Robert Reich, a panelist at the conference, takes credit on behalf of the Clinton administration for passing the North American Free Trade Agreement, he is chastised like an errant schoolboy by members of the audience for introducing labor and environmental items to the agenda of an upcoming hemispheric trade summit, which has been largely crafted by industry executives.

The Waldorf conference confirms what Garson has learned from bankers’ tip sheets: The great capital flow to Latin America is mainly “portfolio investment.” Chase leads in “privatizations”: lending money to companies that have won the “mandate” to buy formerly government-owned utilities. These are M&A; (mergers and acquisitions) loans; cash up front for dams, power projects, telephone companies, which Latin American governments (shut off from capital since 1981) can no longer run. They are short-term capital expenditure loans. Long-term “take-outs” done via the Euromarket, insurance companies or mutual funds buy out the acquisition costs. For huge fees, banks may help the purchasers, who are awash with cash, float bonds, issue stock or raise long-term money to grow the new business.

Instead of traditional capital-development loans, Garson finds billions of dollars sloshing between banks and investors, changing little but the ever-rising price of securities. Even telecommunications loans are used to buy and sell existing facilities. Earlier acquisitions were about growth, but, like Chase’s merger with Chemical Bank in 1996, which laid off 12,000 of 75,000 employees, these are about contraction. (The news of 16% fewer workers at Chase-Chem sent the value of Chase stock up 11%, leading a New York Times columnist to note that as the financial sector grows, the real sector shrinks.)

In her search for working capital, Garson finally finds a Relationship Manager farther down the Chase food chain who introduces her to a seafood importer in Brooklyn. With a letter of credit from the bank, JC Seafoods buys fish and shrimp from a Singapore exporter. Like many mid-sized firms that lack the resources to confirm a trading partner’s bona fides, they rely on letters of credit to take the risk out of doing business with one another. Garson happily inspects both operations; similarly she visits two Caltex oil refineries going up in Thailand and Singapore with the help of Chase loans launched around the time her money left Millbrook. The peso has crashed; the Asian tigers--including black tiger shrimp--are in.

When her Caltex hosts bar access to plant workers, who include women welders from northeastern Thailand, Garson finds their like in Bangkok. She surfs the economy of the streets, where building sites are everywhere and peasant laborers may become foremen, vendors may become merchants. An ambitious 18-year-old seamstress from the northeast sends money home: “The farm is supposed to feed the family but in Thailand,” the seamstress explains, “the whole family works to feed the farm.” Thai workers, also Filipinos and Malaysians, are shuttled to work sites throughout Southeast Asia. They’re all racing to music they don’t control, but it was musical chairs played with more chairs than people--until the Thai baht collapsed in 1997 and the chairs were removed.

To benefit foreign investors, Thailand had tied its currency to the dollar. When officials in rich countries agreed to let the dollar rise to fend off financial trouble in Japan and the dollar-linked baht seemed overvalued, it became a target for a “currency attack.” “Big foreign-exchange traders, like those at the Soros hedge funds,” Garson observes, “committed themselves to future currency trades whereby they stood to gain fortunes if they could drive the price of baht down by selling them and getting others to sell.” Investors pulled up stakes--along with banks who passed the costs of bad loans on to the government, and indirectly, via public service cutbacks, to the populace--and the crisis spread. A former British finance minister compared currency traders, some of whom manage more money than the treasuries of many nations, to wild dogs: “They hunt in packs; they seek out wounded currencies; they savage their prey.”

Substitute companies for “currencies” and you have a bead on the modus operandi of mutual funds that specialize in “corporate restructuring.” Garson’s test case is Mutual Series Funds run by Michael Price, the Chase stockholder who precipitated the Chase-Chem merger and enhanced the value of his 11 million bank shares by $275 million. When she buys in with $5,000, Price is about to convert a $125-million purchase of the bankrupt Sunbeam Corp. into stockholder profits of more than a billion dollars.

Visiting former Sunbeam factories in Portland, Tenn. and Biddeford, Maine, both union towns, Garson follows the path whereby a CEO transforms an established appliance manufacturer into a cash cow for investors. The formula starts with outsourcing, “the system which allows you to use factories without owning them and workers without hiring them ....” Contracts are renegotiated with suppliers, charitable contributions cancelled, wages cut, people fired, and, under new owners, presumably the union is smashed.

Biddeford became an exception when the union local led a consortium of buyers to present a business plan to Sunbeam’s bank (Chase). Under a stock ownership deal, the employees forfeited some salary and benefits--”lemon socialism,” the British call it: letting the public pay for what private companies want to get rid of. Garson roots for the workers but notes: “Keeping the mill open in Biddeford is not a legitimate use of investors’ money, nor is making good blankets.”

This ability to understand and describe the interests of contending parties raises Garson’s “Money Makes the World Go Around” far above the heads of other primers on global finance. Here she is in the ring with Walter Wriston, the former head of Citibank, who is discoursing on a favorite theme: how capital disciplines governments by way of the “information standard.” When “bad money or fiscal policies”--food subsidies in poor countries, say, or health and retirement protections once common to rich countries--are reported by Reuters to trading rooms throughout the world, traders act accordingly.

“When a politician says something dumb, trades on 60,000 screens all over the world can vote yes or no that instant,” says Wrinston. “That’s information democracy.”

“Do I get a vote?” Garson asks.

“No,.” he answers.