Wolfowitz Support Crumbles, Putting Onus on Paulson (Update4)

By William McQuillen and Kevin Carmichael

May 9 (Bloomberg) -- Support for World Bank President Paul Wolfowitz is crumbling in Europe and on Capitol Hill, increasing pressure on the Bush administration to negotiate a face-saving exit for the former deputy defense secretary.

Germany's director at the bank is under orders from his government to rally board opinion against Wolfowitz, while France and Britain today sought a swift end to the controversy. Representative Barney Frank, chairman of the U.S. House Financial Services Committee, said funding for the bank is harder with Wolfowitz at the helm.

Treasury Secretary Henry Paulson, who controls the U.S. vote on the bank's board, must decide whether maintaining support for Wolfowitz is worth risking a confrontation that could damage the world's largest poverty-fighting institution. The board may decide as soon as this week whether to reprimand Wolfowitz or demand he resign for his role in giving his partner a pay raise and promotion. Wolfowitz has vowed to keep his job.

``The way he can make the strongest contribution to the bank is by resigning,'' said Michael Mussa, a former chief economist at the International Monetary Fund and now a fellow at the Peterson Institute for International Economics in Washington. ``When you get to that stage, it doesn't matter how you got to that situation.''

Passing to Treasury

President George W. Bush is the only world leader to have publicly said Wolfowitz, whom he nominated in 2005, should stay. White House spokesman Tony Snow yesterday said only that Bush ``has confidence'' in Wolfowitz and referred further questions to the Treasury Department.

``This is not hanging Paul Wolfowitz out to dry,'' Snow said today aboard Air Force One as Bush traveled to view storm damage in Kansas. ``We still support him fully.''

Brookly McLaughlin, Paulson's spokeswoman, signaled sympathy for a request by Wolfowitz for additional time to prepare his defense.

``Secretary Paulson has said that President Wolfowitz is a dedicated public servant and deserves a fair process rather than a rush to judgment,'' McLaughlin said yesterday. ``That includes sufficient time'' to respond to the findings of a bank committee that investigated Wolfowitz.

Germany, the Netherlands, France and the U.K. have been critical of Wolfowitz, saying the controversy had hobbled his ability to lead the bank.

``We need a president with a good reputation and good integrity,'' Finance Minister Wouter Bos of the Netherlands told reporters yesterday in Brussels. ``I have serious doubts.''

Merkel's Desire

The German director, Eckhard Deutscher, has been told to press members of the bank's 24-person board to oust Wolfowitz, a European official said yesterday. Germany wants Wolfowitz out before Chancellor Angela Merkel hosts a Berlin forum on Africa in two weeks, said the official, who spoke on condition of anonymity.

Deutscher, who initially declined to comment, today denied that he was under orders to push for Wolfowitz's ouster.

In Paris today, French Foreign Ministry spokesman Jean- Baptiste Mattei called for the board ``to meet swiftly'' to decide on Wolfowitz's fate.

``It has got to be brought to an end and it has got to be brought to a satisfactory conclusion which maintains the credibility and the reputation of the bank,'' U.K. International Development Secretary Hilary Benn told lawmakers in London today.

A panel of seven directors investigating Wolfowitz stopped short of saying he acted in bad faith and gave him until May 9 to respond. The group also faulted the bank's ethics committee for giving him insufficient guidance on how to avoid a conflict of interest, and it didn't suggest a punishment.

Delay Sought

The findings will next be considered by the bank's full board, which may meet this week. The deadline could be pushed back as Wolfowitz's attorney, Robert Bennett, seeks a delay to prepare his client's response to 600 pages of documents he received from the panel.

``The appearance that people are prejudging the outcome of the process weakens bank governance,'' Bennett said in a statement yesterday.

The panel investigated Wolfowitz's role in arranging the deal under which Shaha Riza, 52, was transferred to the State Department in 2005 to avoid a potential conflict of interest. Riza was given a 36 percent pay raise, to $180,000, with guarantees of future increases of 8 percent a year, while remaining on the bank payroll.

The crisis comes as the agency embarks on a yearlong drive to raise as much as $28 billion from rich-country members to provide grants and low-interest loans to the world's poorest nations. The drive takes place once every three years.

`Less Effective'

``I would rather give money to the World Bank if he leaves,'' Frank, the Massachusetts Democrat who chairs the committee that helps determine U.S. funding for the bank, said in an interview yesterday. ``Money given to the World Bank will be less effective if he stays.''

Among possible candidates to head the bank should Wolfowitz resign are Robert Zoellick, the former U.S. trade representative who is now an executive at Goldman Sachs Group Inc., and Peter McPherson, a former deputy Treasury secretary who now chairs the board of Dow Jones & Co.

Both men were on then-Treasury Secretary John Snow's list to succeed James Wolfensohn as World Bank president when his term expired in 2005, according to a person familiar with the selection process.

Bush might also consider Bank of Israel Governor Stanley Fischer, the No. 2 at the International Monetary Fund from 1994 to 2001, and former Secretary of State Colin Powell, said Colin Bradford, a senior fellow at the Washington-based Brookings Institution who has studied the World Bank for three decades.

``The position demands someone of stature,'' said Daniel Drezner, an associate professor of international politics at Tufts University in Medford, Massachusetts and a former Treasury economist. ``This is a crisis moment.''

To contact the reporters on this story: William McQuillen in Washington at bmcquillen@bloomberg.net ; Kevin Carmichael in Washington at kcarmichael@bloomberg.net

Last Updated: May 9, 2007 11:00 EDT

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