Sex and the Financial Crisis: The Scandal at the IMF

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Bob Edme / AP

Dominique Strauss-Kahn, managing director of the IMF, and his wife Anne Sinclair

With the financial crisis forcing global leaders to rethink the basic framework of the world's financial system, it's probably not the best of times for the International Monetary Fund (IMF) to be mired in internal scandal. Yet even as French President Nicolas Sarkozy got the backing of U.S. President George W. Bush Saturday to organize a summit to reform the international financial rules that the IMF oversees, the world discovered that the organization's French managing director, Dominique Strauss-Kahn, is being investigated for possible abuses of power. The findings of that inquiry — expected later this week — will not only shape the IMF's ability to navigate the world into a new, stable era of international trade, but they will also cast the fate of one of France's brightest political stars.

Those high stakes explain why the scandal has drawn rapt attention in France, where Strauss-Kahn is considered one of the opposition Socialist Party's sharpest minds — and a leading contender for a 2012 presidential bid. For now, however, the besieged IMF chairman finds himself at the center of a storm stemming from an acknowledged extramarital affair with IMF subordinate Piroska Nagy, who oversaw the organization's African department until she resigned in August of this year.

Alerted to the liaison this summer, the IMF's board contracted an independent Washington law firm to investigate whether Strauss-Kahn might have abused his power in one of two ways: by pressuring Nagy to resign once their relationship ended or by intervening to enhance the compensation she would receive when she decided to leave on her own. Findings on both types of potential misbehavior are expected Friday.

For now, no available evidence has surfaced to contradict Strauss-Kahn's assurances that "at no time did I abuse my role as director-general." Lawyers for Nagy, a Hungarian economist who now works in London for the European Bank for Reconstruction and Development, say she left the IMF of her own will and received standard compensation under a cost-cutting plan that eliminated 380 positions via voluntary departures. Caught red-handed after Nagy's husband discovered e-mail sent last January during the monthlong affair, Strauss-Kahn owned up to the tryst, stressing that his transgressions ended there. On Monday, Strauss-Kahn issued an apology to Nagy, the IMF staff and his French TV-personality wife Anne Sinclair for what he called "my error in initiating this relationship."

That quick avowal has led most French commentators and political insiders to believe that Strauss-Kahn will emerge from the scandal intact as long as no abuse of power is substantiated. If they are right, Strauss-Kahn would escape the fate of former Bush Administration official Paul Wolfowitz, who was forced to resign his job as president of the World Bank in May 2007 after it was established that he had intervened to secure unmerited promotions and severance payments for his female companion, who also worked for the organization.

"If, as expected, this shows Strauss-Kahn was personally cavalier rather than guilty of an offense, then we're likely to see people in France and elsewhere file this away as a private matter," says Dominique Moïsi, senior adviser at the French Institute of International Relations. "From there he'll be judged on how he handles the most critical challenge facing the planet: reforming the world's gravely troubled finance system."

Indeed, despite the notoriously rigid rules of conduct enforced at the IMF and other international organizations, the dramatic economic situation appears to be dampening any enthusiasm for seeing any more lofty heads fall. Especially in France, rumors are swirling that the initial press leaks of the Strauss-Kahn investigation stemmed from Russian and American rivals who covet his position and fear the French Socialists would favor an inordinately rigorous approach to regulating the global finance system. Nevertheless, some suggest there is little appetite within the IMF for an extended period of uncertainty over its leadership.

"Though his Bush credentials made him very unpopular, the Wolfowitz ouster wound up traumatizing many international organizations — and that was before general crisis set in," says a high-ranking French civil servant who worked with Strauss-Kahn before he won the IMF position. "Strauss-Kahn is viewed as accomplished, smart and very capable. Because of that, the prevailing view seems to be, 'Let's hope this turns out to be nothing, because the IMF and the world really needs this guy to come through.' "

Should Strauss-Kahn survive the inquiry and oversee a refoundation of the Bretton Woods system that has regulated international finance since 1944, he'd likely come through in an ironic position: strengthened to launch an expected presidential bid in 2012 to unseat Sarkozy — the leader now most energetically advocating what he calls the "moralization" of finance markets. "To say there's a lot at stake on the outcome of this investigation is an understatement," says Moïsi. "But the bigger challenge for Strauss-Kahn — and the world — is what's waiting beyond that."

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