The $55 Billion Bank-Bailout Scandal

September 25, 2007

"It's nothing special," says the over-fed, weasely cartoon banker, explaining the enormous unpayable debt owed to the Mexican banks. "It's about selfloans, loans between bankers, credits to a host companies, credits to companies of the same bank..." Add ghost-company credits converted into ruling-party campaign contributions-the subject of a ,subsequent comic strip by the sleazy banker's creator, the political cartoonist EI Fisg6n-and we have a rough sketch of the misdeeds that have come to light in the bank bail-out scandal that is shaking Mexican politics.

EI Fisgón's cartoons were drawn for a campaign spearheaded by the left-opposition Party of the Democratic Revolution (PRD) to bring to light-and perhaps even to justice-the corrupt banking and political practices that have created the latest major scandal to appear on the Mexican political landscape.

The scandal is centered on the bank-insurance fund-the Banking Fund to Protect Savings (Fobaproa)-esLablished in 1990 to safeguard the natioti bank deposits. By 1995, the PRD charges, Fobaproa had become a fund to sustain the corrupt practices of certain well-connected bankers and top politicians of the long-ruling institutional Revolutionary Party (PRI). To the political opposition, the name of the hitherto obscure agency has now become shorthand for the financial impunity enjoyed by those at the highest levels of political and economic power.

Fobaproa became a household name this past March, when President Ernesto Zedillo sent Congress a packet of financialreform initiatives that included a proposal to convert all the fund's liabilities into taxpayer-funded public debt. The PRD quickly obtained and released the names of

some of the individuals whose debts had been taken over by Fobaproa and who would have the pressure reduced on their obligations to pay if the Zedillo plan were to go through. A few turn out to be on the Forbes list of Latin American billionaires, and many turn out to be prominent contributors to the PRI. In the face of the secrecy surrounding Fobaproa, the PRD-backed cautiously by the conservative National Action Party (PAN)-has demanded a public reconsideration of the entire bankrescue plan. The government, meanwhile, has invoked the tradition of "banking secrecy" to keep Fobaproa's day-to-day activities from public view.

Fobaproa was created in 1990 by the government of Carlos Salinas in response to the appearance of large amounts of overdue debt in the banking system. The fund, financed by contributions from all the member banks of the still-nationalized banking system, bought "bad debt" from member banks at a discount. The idea was to keep the banks solvent in the face of mounting domestic debt, and to build confidence in the system by guaranteeing the public's 16 million savings accounts. Fobaproa purchased overdue debt with ten-year promissory notes, backed only by its eventual ability to collect from debtors. Between the time it was created and its first major payout in September 1994, the fund had collected 15 billion pesos-about $4.4 billion-from member banks.

Salinas, in his eagerness to bring Mexico into the "First World," had publicly encouraged the growth of a "culture of credit." In the process of privatizing and expanding the banking system, his administration was eager to stimulate private consumption and investment by making credit more available. This eagerness was interpreted by the new owners of banks, many of whom had little banking experience, as a green light to lend as much money in as short a time as possible, and the number of outstanding bank loans doubled between the time the banks were reprivatized in 1991 and the peso collapse of 1994. Even before the collapse, bad debt had begun to mushroom as the rewards of neoliberal -style economic growth flowed mainly to the wealthy, and not to the small borrowers who were encouraged to expand household consumption and small-business ventures in the early 1990s.

Mushrooming debt became a genuine debt crisis when the peso collapsed in December 1994. Investors of all nationalities fled, interest rates skyrocketed, and thousands of small and medium debtors could no longer make regular payments on their debts. In response, the newly inaugurated Zedillo Administration poured money into the fund to shore up the reeling banks. Throughout 1995 and 1996, one bank after another was rescued from the brink of insolvency by the plan that allowed them to sell their hardest-to-collect loans to Fobaproa. It has now become clear that the banks sold so many uncollectable loans to Fobaproa that the fund meant to be the "safeguard" of the nation's savings will not be able to meet its own obligations when they begin coming due in six or seven years. It has also become clear that much if not most of that uncollectable debt had more to do with the planned unwillingness than with the circumstantial inability of debtors to pay, It was this realization that prompted the Zedillo proposal to "socialize" Fobaproa's liabilities-and the opposition's resistance to the plan.

Fobaproa's debt was always in some sense, of course, public, but it was actually backed only by the assets within the fund itself and by the ability of the fund to collect at least a percentage of the debt it had bought. All the ten-year promissory notes Fobaproa signed in 1995 and 1996 were exactly that, promises to pay in ten years. Zedillo's proposal would back Fobaproa's promissory notesnow valued at over 15% of Mexico's gross domestic product-with public revenues, allowing them to be traded in secondary markets and thus quickly converted into liquid assets for the banks. In addition to creating liquidity for the cash-strapped banks, the Zedillo proposal would create a public debt backed by all the resources of the Mexican treasury, one that would have to be serviced over many years. Its supporters say the Zedi I to plan would restore confidence and flexibility to the country's financial system. Opponents say the plan is a con game, shifting large private debts to the hardpressed Mexican public, and leaving wealthy debtors with no incentive to pay what they owe.

The amount guaranteed by Fobaproa has now reached about $55 billion. Curiously, the net worth of all Mexico's banks adds up to only about $8 billion, a juxtaposition of numbers that has given observers pause. The pause is lengthened as new revelations sustain the notion that Mexican banking--to which households, farmers and entrepreneurs of modest means have only modest access-has become, in the words of economist Julio Boltvinik, "a set of loose agreements among fellow millionaires." Indeed, over half the debt currently owned by Fobaproa is acknowledged by all sides to be contained in just 600 accounts, belonging to an even smaller number of financial groups. There are also suspicions that the Zedillo proposal is meant to bail out several bankers who "lent" themselves large sums and cannot pay themselves back or who simply never intended to.

Fobaproa, in fact, had been bankrupted by one of those selfloan specialists-a high-rolling, now fugitive-fromr-justice banker named Carlos Cabal Penicheonly three months before the December 1994 peso devaluation. In September 1994, Cabal Peniche, one of the politically connected owners of Mexico's reprivatized banking system, skipped the country for Monaco, a country with no extradition treaty with Mexico, leaving his two banks, Banco Unión and Banco Cremi, well over $2 billion in debt.

Cabal was a banker whose specialty was setting up dummy corporations to which his banks would lend generous sums of money to be used for his own purposes. One of those purposes was leveraging the acquisitions of transnational companies. He was poised to close a billion- dollar deal for Del Monte Foods, Inc., the one-time parent company of a food-packaging firm he already owned, until his bank failures nixed the deal. Another personal purpose was his strategic support of the PRI. Much of what Cabal lent himself went into the coffers of the 1994 PRI campaign fund, especially in the southern states of Campeche, Chiapas and Tabasco. The fictitious companies he set up to channel money to the PRI eventually collapsed and their bank loans were absorbed by Fobaproa.

One of Cabal Pcmche's closest business associates, a Tabasco businessman and former politician named Aristides Prats, bag revealed that Cabal made a "political investment" in the PRI's presidential and gubernatorial campaigns of 1994. "Yes," he told the local press this past September, "Cabal gave money to the campaigns of [Governor of Tabasco] Madrazo and Zedillo. Nobody knows how much, but at least he informed his advisors about it." "Anonymous" sources have informed the Mexican press that the amount could have been as high as $50 million. The money was presumably part of that defrauded from his banks, now covered by Fobaproa.

At least three other bankers or businessmen currently under indictment for bank fraud-the formet head of the privatized state airline, Gerardo de Prevoisin, the nattily dressed former banker, Angel Isodoro "El Divino" Rodríguez, and the prison-garbed former banker Jorge Lankenau-are also known to have been heavy contributors to the 1994 PRI campaign. De Prevoisin was forced out as head of the merged Aeromexico and Mexicana airlines in 1994 when bank auditors discovered about $72 million of unexplained loans. He subsequently told a U.S. federal judge investigating the involvement of a Texas bank in the mysterious loans that $9 million went to the 1994 presidential campaign of the PRL

Rodríguez fled the country in 1995 when serious irregularities were discovered in his bank, Banpaís. After he fled, Banpaís was taken over by the government and reprivatized to another financial group with the proviso that all its dubious debts be absorbed by Fobaproa. Now that the carefully coiffured EI Divine, has returned to face charges, he has acknowledged that some of his bank's missing money became multimillion-dollar contributions to Zedillo's 1994 presidential campaign. "It wasn't me who lent money to the campaign," Rodríguez told the press. "It was Banpaís. The loan was institutional support for the PRI."

As for Lankenau, one of the few ex-bankers actually in custody, it was his bank, Confia, that served as a conduit for his and Cabal Peniche's 1994 contributions of self loans to the Tabasco PRI. The ,source of the PRI's $72 million campaign fund in the small southeastern state of Tabasco-which comes to $145 per vote-is largely traceable to the Fobaproa-covered "bad loans" of these two indicted ex-bankers.

It is no secret, of course, that for many years the PRI has been the party of big business in Mexico and that wealthy entrepreneurs, therefore, had become major bankrollers of PRI campaigns. It is also no secret that the party regularly overspends campaign-spending limits. The degree of fraud involved in PRI financing, however, much of it connected to the Fobaproa bailout, has come as somewhat of a surprise, even to the jaded Mexican public. It has stimulated demands for a public accounting and punishment, though some demands are more cautious than others.

This past August 30, the PRD carried out a massive unofficial public referendum on the proposal. Three million people cast ballots at tables set up around the country and 96% voted against the Zedillo plan. The government has ignored the PRD-sponsored referendurn, suggesting that since only PRD supporters voted, the results carry no political weight. Grassroots political sentiment, however, even within the PRI, is swinging against the bailout, and the Zedillo Administration has begun to back away from a complete public takeover of the bad loans.

The government has, nonetheless, mounted an intense campaign in favor of Fobaproa, hammering home the point that everyone's well being, noijust the profits of a wealthy and corrupt elite, is being protected by the fund. Ads on radio and television extol the virtue of the rescue program, exhorting viewers and listeners to "inform themselves" because "many lies have been told" about the program. "The mechanism of Fobaproa," explains one of the ads, "was not established to pardon debts, but to speed the recovery of the credits within the banking system, including those authorized to the more than 550 economic groups with major debts." The ads go on to attack those who have violated banking confidentiality. "Those who committed frauds," says another of the government commercials, "should be punished to the full extent of the law, but it is not correct to label all debtors as dishonest. [The PRD's] demogoguery unjustly damages the reputations of honorable people."

The PRI, PAN and PRD publicly agree that the "guilty" must be punished, that small and medium debtors must be helped to remain solvent, and that the "bankirig system" must be saved. The devil is in the details. On the question of guilt, for example, the PRD has called for the resignations of several current and former high officials, including Bank of Mexico Director and former Finance Minister Guillermo Ortiz. Many PRD supporters have even called for indictments against Ortiz and other officials who oversaw the Fobaproa debacle. The party is still trying to overturn the results of the 1994 election in Tabasco. The PRI obviously has a narrower conception of "guilt."

The definitions of big and small are also up for grabs. The PAN and PRD have reached an agreement that no public funds should be used to pay the debts of the ,most powerful." They also agree that treasury funds should be used to alleviate the situation of small debtors, but that the big bankers should chip in, as in the original conception of Fobaproa. The PRI agrees that perhaps a new loan-guarantee fund should be created with the bankers putting in up to half the money. The Mexican Association of Bankers (ABM), on the other hand, says that an agreement is at) agreement, and all Fobaproa's debts to creditor banks must be honored. And as for a new fund, the bankers will contribute, says ABM president Carlos Gómez y Gómez, but they are much too strapped to put in anything close to half.

And who gets to decide all this? The Constitution says that Congress must approve all public debt- Until the combined PAN-PRD opposition assumed majority control of the lower house last year, the distinction between Congress and the Executive was academic. Even this year, Zedillo assumed he would have no trouble adding Fobaproa's loans to the national debt, and he was apparently surprised when Congress balked. The opposition coalition, however, remains shaky. The PRD gets upset whenever the pro-business PAN cozies up to the PRI, with whom they have no major ideological differences, and the PAN regularly accuses the left-inclining PRD of "populist grandstanding." Publishing the list of bailed-out debtors and holding the unofficial referendum both violated the PAN's sense of decorum.

And in the background are the bankers, financiers and investors of transnational reach, indifferent to which particular Mexicans go to jail and which attain high office, but determined that a banking system be in place to mediate their profitable Mexican activities. The neoliberal development model has made the country dependent on continuous inflows of foreign capital. The financiers who oversee those inflows will step in quickly if the system appears on the verge of collapse. Major U.S. and European banks are poised to inherit the spoils, and given Mexico's deep insertion into the global economy, they seem likely to succeed.

In the end, the cartoonists may have the best handle on the situation. Fisgón's over-fed banker, tin cup in hand, is still collecting Fobaproa's money from "you and your children."

ABOUT THE AUTHOR NACLA's co-editor Fred Rosen has reported from Mexico for In These Times, the New Haven Advocate, Mexican Labor News and Analysis and El Finandero International.

Tags: Mexico, bank bailout, debt crisis, Fobaproa, politics

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