World Bank mimics Wall Street as it looks for a new role

The former Goldman Sachs vice chairman has concluded, after two months on the job, that the group must behave more like a Wall Street investment firm to halt a worldwide slide in lending. At stake is the bank's survival in a rising sea of private capital. At Zoellick’s direction, the agency is pushing sophisticated products like loans that hedge against the risk of a commodity-price collapse or a surge in interest rates.

His pitch is emerging as a hard sell against criticism he runs a slow-moving bureaucracy. “Wall Street has pioneered many of the concepts and tools; the World Bank can help apply them as a package of development solutions for problems and clients that are not priorities for Wall Street,” Zoellick said in an e-mail message. “The bank needs to be faster, better and cheaper without compromising standards. I think we can do that.” To lure back customers, Zoellick wants the bank to offer products that countries with poorer credit profiles cannot get in the private market.

He cites as an example hurricane insurance that allowed a group of Caribbean nations to pool risk and cut premiums by 40%. He is trying to revive interest in financial instruments known as swaps, which can protect countries from abrupt shifts in the value of their currencies. The bank is trying to be creative, too, in offering loans that would be activated in the event of a natural disaster. Zoellick also said World Bank officials needed to start acting more like Wall Street bankers. He began holding daily meetings with top managers at 8:30 a.m., a start time that required some support staff to arrive at the office at 7:15 a.m. to prepare briefing papers. Zoellick’s predecessor, Paul Wolfowitz, met with top managers once a week.

The World Bank, which has a $2 billion annual budget and 13,000 employees, was established 63 years ago to offer poor countries low-interest loans and grants. For decades, the bank was the main source of capital for developing nations to build power plants, dams, roads and shipping terminals. Now, demand for these loans is dwindling as countries like China and Mexico burnish their credit ratings and borrow in capital markets. The bank’s biggest borrowers have repaid $26 billion more than they took out in new loans during the past five years. Zoellick has dispatched bank staffers to world capitals to explain the new risk-reducing products to public officials who may not be well versed in complex finance.

The World Bank’s multilingual trading floor, where traders manage a $65 billion portfolio, has been expanded recently and has drawn alumni from banks like Goldman and UBS Securities, as well as from central banks. “There is a potential for this new approach to reinvigorate the bank's financial services business,” the World Bank treasurer, Ken Lay, said in an interview in Washington. “By offering access to the latest risk-management tools to our clients, we can also reduce systemic risk over the next few decades.” One doubt that emerging-market officials have raised with Zoellick’s strategy is the prospect of losing out on gains should markets move sharply in their favor. Bank officials say products that lower risk are worth the price.

The World Bank has a long way to go to revive the appeal of its loans, skeptics say. Its bureaucracy has turned customers away. On average, a borrower must fulfill 38 conditions to get a loan, ranging from privatization of industries to liberalization of trade, according to a study by Eurodad, a Brussels-based aid group. “The problem isn’t usually the lack of whiz-bang products, but rather that there are too many conditions attached to loans,” said Elizabeth Stuart, a World Bank expert in Washington at the aid group Oxfam International.

Only four countries have taken out protection against declines in their currencies - Bulgaria, Colombia, Morocco and Mexico. No country has taken advantage of the bank’s ability to protect against commodity risk. Only protection against rising interest rates has proven popular. “Countries like ours are certainly more likely to make use of the bank if they learn from Wall Street,” Maria Agudelo, a former Colombian vice minister of finance, said in an interview. “They need to adapt and modernize.” Another reason for the scarcity of customers is the loss of its biggest advantage: rock-bottom interest rates, said Adam Lerrick, a professor of economics at Carnegie Mellon University in Pittsburgh. In 1999, the average World Bank rate on a loan was 12 percentage points cheaper than a country could borrow from international investors, Lerrick said. The difference has fallen to less than 2 percentage points, he said, because risk is receding in countries once stigmatized as unworthy of investment. Without a new approach, the indicators are not positive for the World Bank’s survival. Net private flows to developing countries rose to $646 billion in 2006, up from $169 billion in 2002. (iht.com)