May 17, 2007

MarketWatch

WASHINGTON (MarketWatch) 7:26 p.m. EST -- Paul Wolfowitz resigned as president of the World Bank on Thursday after being accused of violating the bank's conflict-of-interest rules in approving a large promotion and pay raise for his girlfriend.Wolfowitz will leave effective June 30, he said in a statement.

The bank will begin a search for his replacement immediately. It wasn't immediately clear whether the job will go to another American, as has been the tradition since the bank was founded in 1946, but the White House said President Bush would quickly nominate a candidate, Dow Jones Newswires reported. Administration officials had been negotiating with European members of the board to ensure that Washington's right to name the president of the bank would be retained in exchange for Wolfowitz's resignation.

While the directors accepted Wolfowitz's statement that he had acted ethically, "it is clear from this material that a number of mistakes were made by a number of individuals in handling the matter under consideration, and that the bank's systems did not prove robust to the strain under which they were placed," the directors said. Read their statement.

"I acted ethically and in good faith in what I believed were the best interests of the institution, including protecting the rights of a valued staff member," Wolfowitz said in a statement. "Now it is necessary to find a way to move forward." Wolfowitz, who had been at the bank since June 2005, served as U.S. deputy defense secretary from 2001 to 2005 and was one of the main architects of the Iraq War.

From the beginning, Bush's appointment of Wolfowitz to head the World Bank was a controversial move. The former administration official has been influential in U.S. foreign policy for 20 years and has often been a polarizing figure over his neoconservative views, including his advocacy of "regime change" in Saddam Hussein's Iraq.

Wolfowitz had made the fight against corruption the centerpiece of his two-year term at the bank, which provides development aid and loans for the poorest nations on the planet.

"We are grateful to Mr. Wolfowitz for his service at the bank," the directors said. "Much has been achieved in the last two years."

Critics of the bank were not satisfied with Wolfowitz's departure.

"The Wolfowitz scandal is but a natural consequence of the 'old boys club' way in which the World Bank and IMF have been governed," said Jo Marie Griesgraber, executive director of the New Rules for Global Finance Coalition.

Even before his resignation, the names of possible successors were being floated. According to one list published by Washington Times, the front-runner could be Robert Zoellick, a managing director at Goldman Sachs Group and former U.S. Trade Representative.

Other possible candidates include Deputy Treasury Secretary Robert Kimmit, Goldman Sachs Managing Director Robert Hormats, Bank of Israel Gov. Stanley Fisher, and Kernal Dervis, the former Turkish economics minister and now head of the U.N. Development Program.

Outgoing British Prime Minister Tony Blair would be a great candidate, former U.N. spokesman Edward Mortimer said in an op-ed in the Financial Times.

Since the scandal about the promotion erupted in April in the pages of the Financial Times and the Washington Post, Wolfowitz had fought hard to keep his job, with the strong support of the White House and President Bush.

"A number of mistakes were made by a number of individuals."

--World Bank directors

An internal investigation by the bank found that Wolfowitz had violated ethics rules when he dictated the terms for the new job found for his girlfriend, Shaha Riza, who was paid $193,590 a year, tax-free. Although Riza was moved to the State Department from the World Bank after Wolfowitz took the helm, the World Bank continued to pay her salary.

In recent days, administration officials became convinced that Wolfowitz could no longer lead the bank effectively and sought to negotiate a face-saving resignation that would retain the United States' traditional role in picking the bank president, according to media reports.

The president of the World Bank has traditionally been an American. The United States controls about 20% of the voting power of the bank's board.

Hundreds of the World Bank staff members, never happy about his appointment, publicly demonstrated for his ouster and circulated petitions calling for his departure.

Wolfowitz has said he approved a pay raise and promotion for Riza on advice from an ethics board at the bank. Riza, an expert on the Middle East, had worked at the bank before Wolfowitz was tapped to run the institution. Wolfowitz has described the controversy as a smear campaign.

Under bank's ethics rules, Riza was not allowed to continue working at the bank under Wolfowitz. She was transferred to the U.S. State Department under conditions worked out by Wolfowitz.

While at the State Department, Riza worked in the office of Elizabeth Cheney, daughter of Vice President Dick Cheney.