United States:Wolfowitz left the World Bank embittered and betrayed, writes Denis Stauntonin Washington.

In the weeks before Christmas, the bars and restaurants around Foggy Bottom, the Washington district that houses the World Bank, were doing a roaring trade as many of the bank's departments reinstated their annual holiday parties. The parties had stopped while Paul Wolfowitz, former deputy defence secretary and a key architect of the Iraq war, was World Bank president.

Wolfowitz thought such celebrations were inappropriate for an organisation whose mission was to help the world's poor and he encouraged staff to make a contribution to charity instead.

The return of the Christmas revelry was not the only sign of change following Wolfowitz's resignation earlier in the year. As the office party season got into full swing, the bank announced that donor countries had given a record $25 billion for soft loans to poor countries for the period 2009-12.

The World Bank itself has added another $16 billion, bringing the total to over $41 billion - $9 billion more than the total raised for the previous three-year period. For many bank staff, the donors' munificence was the most concrete sign of the change of tone wrought by Wolfowitz's successor, Robert Zoellick, after months of managerial crisis at the institution.

Wolfowitz's resignation followed an internal investigation of his negotiation of a generous compensation package for his companion, Shaha Riza, who had been at the bank for almost a decade before his appointment.

The story of Wolfowitz's fall is less a Washington morality tale - nor even a clear conflict of interest case - than a lesson about the perils of a bruising management style and the complexity of reforming large, entrenched organisations.

Founded in 1945 as part of the Bretton Woods agreement designed to rebuild Europe's shattered post-war economy, the World Bank later shifted its focus to the developing world, offering low-interest loans to combat poverty, improve infrastructure in poor countries and promote sustainable development.

By convention, the World Bank president is always an American, while a European traditionally heads its sister organisation, the International Monetary Fund. The bank has long acknowledged that up to 20 per cent of the funds it sends to poor countries is siphoned off by corrupt governments and officials but, because the bank is not allowed to interfere in politics, it seldom made any comment about the bribery and corruption rampant in many of the countries that received aid.

Wolfowitz's predecessor, James Wolfensohn, publicly condemned corruption in some African countries, but he stopped short of cutting off aid to corrupt regimes because he feared that the poor would suffer as a result.

Wolfowitz had no such qualms. He doubled the size of the bank unit that investigated fraud, which saw a dramatic increase in corruption complaints against staff - although few were upheld. In January 2006, Wolfowitz suspended $124 million in loans to Chad following a dispute over proposed changes to the loan agreement.

This was a step too far for many bank staff, who already felt demoralised by a new mood of suspicion introduced by Wolfowitz, whom many disliked from the start on account of his role in the Iraq war.

The bank president's relationship with Riza, a Libyan-born international relations expert whose tough approach was widely admired by women but often resented by men, provided the opportunity Wolfowitz's enemies were seeking.

Their relationship was common knowledge in Washington and was reported in the Washington Post in March 2005. Wolfowitz told the bank's board about his romantic entanglement with a senior staff member before his appointment and offered to recuse himself from any personnel issues affecting her.

The World Bank had a history of husband and wife teams in senior management, but its rules said that a "sexual relationship" between a staff member and a direct or indirect reporting manager was a conflict of interest.

Riza didn't want to leave her job and when she was offered a transfer to the state department, she insisted on a compensation package that would effectively guarantee expected promotions in subsequent years.

At first, the bank's ethics committee appeared to approve a compensation deal that saw Riza's salary rise from $130,000 to $180,000, but after the package became public, an inquiry was launched.

Wolfowitz and Riza took a confrontational approach, perhaps expecting that the White House and the state department would fight on their behalf. Instead, Wolfowitz received only lukewarm support from the Bush administration and, with World Bank staff openly calling for him to go, his position became untenable.

Wolfowitz negotiated a face-saving statement from the bank praising his work as president, but he left his post feeling embittered and betrayed. The day he stepped down, staff cheered, sang, embraced one another and toasted his departure with champagne.