DSK: Did the IMF Look the Other Way?

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In July of 2007 two Bear Stearns hedge funds blew up after making disastrous investments in securities tied to the subprime mortgage market. By that fall, cracks in the housing market were becoming apparent, although the global economy wouldn’t crash for several months. In the midst of it, Strauss-Kahn became fixated on an IMF economist named Piroska Nagy. She was in many ways just the sort of woman he was known for going after: an attractive, blond 50-year-old with a Master’s degree in macroeconomics and finance from the University of Budapest who had also done graduate work at Georgetown. She had been with the IMF for 20 years and was an expert on Africa.

According to the person familiar with Nagy’s version of events, she and Strauss-Kahn first met shortly after he arrived at the fund, when he asked all the heads of departments to make presentations about their areas of expertise. One of the presentations was about Ghana, and it was given by Nagy. From that point on, according to the same person, Strauss-Kahn began calling her frequently and summoning her to his office to ask questions about Ghana, even though the country was not a high priority. He gave Nagy a password to communicate by e-mail with him over his secure IMF-issued BlackBerry, and the messages were described as increasingly explicit.

At the World Economic Forum in Davos in January 2008, Strauss-Kahn joined the crowd of experts issuing warnings about the possibility of a global recession. In a speech delivered against a backdrop of plummeting stock markets, he garnered international media attention with his prediction of a “serious slowdown” in the U.S. economy and urged a global fiscal stimulus program to try to prevent the problems from spreading. Nagy attended the Forum with her husband, the Argentine economist Mario Blejer. During the trip she and Strauss-Kahn have since acknowledged that they slept together. According to the person familiar with Nagy’s account, Nagy’s husband, who had grown suspicious, confronted her and she confessed the affair. After Davos ended, Nagy told Strauss-Kahn that her husband had found out about their relationship and that it had to end. The managing director summoned Blejer to his office to apologize. Strauss-Kahn said that he was sorry and acknowledged that his behavior had been “inappropriate,” according to a person familiar with the conversation. “It’s too bad,” Strauss-Kahn said, “because we could have been friends.”

For a time, Strauss-Kahn managed to keep the affair a secret at the fund, where spirits had improved in spite of the layoffs. Strauss-Kahn was known for not necessarily engaging with employees whom he viewed as too far beneath his station, but he compensated in other ways. “He had a big personality. The staff would say the energy he brought to the fund was good,” says Susan Schadler, who spent over 30 years at the IMF and is now a visiting fellow at the Center for International Governance Innovation in Canada. “But no matter who had been there, when Lehman collapsed, it was clear that the fund was going to play a pretty good role.”

There was nothing like catastrophe to restore the IMF’s sense of itself as savior to the world. Suddenly, Strauss-Kahn didn’t have to work very hard to prove the fund’s value, and everyone there was filled with a new feeling of purpose. As the financial crisis continued to worsen, Strauss-Kahn went on making changes. In addition to the staff reductions and cost-cutting, that April the institution’s board of governors agreed to alter the way member countries vote, giving faster-growing emerging economies such as China and India more influence—a position Strauss-Kahn championed.