A small number of aggressive businessmen have accumulated huge fortunes in record time-abetted at every stage by influential politicians of the ruling party. Today's powerful bankers and financiers are not the same people who owned Mexico's banks two decades ago. Among the neoliberal policies and programs that have been applied with singular aggressiveness in Mexico, none has created a greater concen- tration of wealth than the restructuring of the financial system. The dramatic changes in Mexican banking have not only contributed to a bigger gap between the poor and the wealthy, but also to a series of major con- flicts and realignments among the very wealthy them- selves. Bankers, industrialists, investors-and their key allies, the politician-entrepreneurs-have changed the way they do business with one another over the past 15 years. The neoliberal process was initiated in Mexico by President Miguel De la Madrid during his term in office from 1982 to 1988. De la Madrid was determined to implement an IMF-inspired program of free trade and state cutbacks to assure payments on the country's huge external debt. Under the guiding assumption that eco- nomic growth would result from an increase in the amount of capital accumulated by the wealthy sectors of society, the process has been carried forward by 27 Carlos Marichal is an economic historian at the Colegio de Mexico, in Mexico City. He is the author of A Century of Debt Crises in Latin America (Princeton University Press, 1989). VOL XXX, No 6 MAY/JUNE 1997REPORT ON WEALTH Mexico's next two presidents, Carlos Salinas de Gortari, who followed De la Madrid, and Ernesto Zedillo, who has ruled since December, 1994. Fifteen years of neoliberalism have provided oppor- tunities for investors to increase their profits on a scale unprecedented in modern Mexican history. A massive program of privatization of state-owned companies and banks which began in 1987, accompanied by the pro- motion of financial schemes aimed at stimulating a high rate of return on investments in the Mexican stock Carlos Slim HelO, worth an estimated $6. 1 billion, is ranked by Forbes as the wealthiest man in Latin America. exchange and in the banking sector, has made wealthy Mexicans much wealthier. At the same time, the radical downsizing of the welfare state-cutbacks in pensions, health plans and other social benefits for salaried employees, as well as the systematic reduction of real wages-has drastically reduced the real income of workers at all levels. To put it simply, the rich few have become richer and the poor multitudes have become poorer. Today the wealthiest 10% of Mexico's population receives 50% of total income-the highest percentage since measure- ment began in 1950-while the poorest 20% receives barely 3%.1 The income gap is even more marked if measured by the available figures on the concentration of profits and capital. Eighty-seven percent of the value of all bank resources and deposits, for example, is held in only 4% of the accounts. And by 1994, according to official reports of the Mexico City stock exchange, a group of 183,000 individuals-0.2% of the popula- tion-held capital equivalent to 51% of total GNP. The profits of these capitalists during the banner year 1993-the year NAFTA was signed-were greater than the sum of expenditures by the Mexican government on education, health, urban programs, ecology and water programs, and all public social investments. Banking, which has become perhaps the most oli- gopolistic sector in the Mexican economy, began the process of concentration before official neoliberal poli- cies became the law of the land. In the 1960s, for exam- ple, there were 248 private and mixed banks. By 1977 there were only 70 banking groups, of which the ten largest controlled 82% of total deposits. The trend accelerated in the 1980s as the number of banking groups declined from 54 in 1980 to 40 in 1982. Then the debt crisis exploded, prompting then-President Jos6 L6pez Portillo to nationalize the banks. The process of concentration nevertheless continued as a result of a series of bank mergers, leaving 29 commercial banks in 1983 and finally only 18 in 1988, when the whole commercial-banking system was re-privatized to a select group of investors. Following the devaluation of the peso in December, 1994 and the banking and finan- cial crisis of 1995 and 1996, only 13 banks remain. 2 Within this oligopolistic banking structure, the three largest banks-Banamex, Bancomer and Serfin--hold over 50% of all deposits nationwide, giving them effec- tive control over the financial system. A study of depositors based on Banco de M6xico data revealed that by late 1993, a mere 26,000 individuals held 60% of the total resources of the Mexican banking system, highlighting the extraordinary concentration of banking resources. But the owners of the banks are a much smaller group than the big depositors. In 1992, shortly after privatization, a mere 234 investors held effective control of the Mexican banks. These investors consti- tute a true elite-a financial oligarchy-within the banking system. This oligarchy controls the fundamen- tal instruments of economic and-indirectly--of polit- ical power in Mexico today. 3 The powerful bankers and financiers of 1996, how- ever, are not the same individuals who owned the banks two decades ago. There has been a dramatic restructur- ing of the Mexican entrepreneurial class in recent years which has led to the rapid rise of a small new nucleus of aggressive businessmen who have accumulated huge fortunes in record time, abetted at every stage by the highest-level technocrats and politicians of the still- dominant Institutional Revolutionary Party (PRI). The privatization of the commercial banks by the Mexican government between 1990 and 1992 was carried out directly under the supervision of then-President Carlos Salinas and coordinated by Guillermo Ortiz, now Minister of Finance in the Zedillo administration. Numerous articles have documented the irregularities observed in the auctions of the banks, but the govern- NACIA REPORT ON THE AMERICASREPORT ON WEALTH ment has systematically refused to provide detailed and credible information on the sales of the leading finan- cial institutions to 18 groups of powerful investors. 4 Several of the wealthiest of the new bank owners fig- ured in the Forbes 1994 ranking of the richest individ- uals in the world-24 of whom were Mexicans. One of the best known is Carlos Slim Held, whose fortune is estimated to be over $6 billion, and who is the principal owner of the Mexican telephone giant, Telmex-a firm he bought in favorable circumstances during the admin- istation of his friend and business associate, Carlos Salinas. Slim is an owner of the financial firm Carso-Inbursa, which obtained the highest profits of any invest- In ment firm in Mexico in 1996, and shortly a is also a stockholder in Banamex, Mexico's largest commercial privatized, bank. His cousin, Alfredo Harp Held, whose fortune was estimat- banks were c ed to surpass $1 billion, took a mere 234 ir much larger chunk of Banamex stock and became one of its oper- new financ ating chiefs jointly with his long- controls the time associate Roberto Hernindez, a new tycoon also worth over $1 instruments billion. According to one report, Herndndez picked up his finan- and politic cial skills through his close asso- Me ciation with Carlos Slim in the 1970s. 5 Another case of family connec- tions in the 1990-1992 privatiza- tion of Mexican banks involves various scions of the Garza-Sada and Garza families, among the wealthiest in the dynamic northern city of Monterrey. The banking leader in this powerful clan of industrialists and financiers is Eugenio Garza Laguera, who ran the financial firm Vamsa, and bought control of Mexico's second-biggest bank, Bancomer, in 1991. His cousin, Adridn Sada Gonzdlez, principal stockholder of the powerful glass emporium, Vitro, simultaneously bought control of the third-largest bank in Mexico, Serfin, thus assuring that major firms all "remain in the family." 6 efore they were bankers, most of these neoban- queros-so known for their fierce adherence to neoliberal ideology-had accumulated large for- tunes during the administration of President De la Madrid. At that time the state owned 66% of all com- mercial-bank capital-an ownership structure which did not make the banks attractive targets for private investment. Ambitious entrepreneurs like Slim, VOL XXX, No 6 MAY/JUNE 1997 f t :I Hernindez and Harp Held found more profitable opportunities in the stock market which until 1986 was dominated by the buying and selling of public-debt obligations. Buying and selling government debt could be extremely lucrative since the real interest rates paid by the Mexican treasury at that time ran at over 50% per year. Because the De la Madrid administration's priority was servicing the country's $100 billion exter- nal debt, it asked investors who held internal public debt to roll over their loans-i.e. to give the govern- ment additional time to pay, and in return collect extremely high interest rates. This mechanism allowed financial speculators to 992, benefit from a huge windfall ter being paid for by the government at least until 1986. By that time, :he Mexican speculation had shifted to the Mexican stock market, which )ntrolled by a speculation itself had made vestors. This quite lucrative. The value of the shares of pri- al oligarchy vate stocks bought at rock- fundamental bottom prices in late 1982 by investors like Carlos Slim sky- of economic rocketed dramatically, and had increased by an average of al power in 4,884% by September, 1987.7 xico. At this point the wealthiest "investors unloaded much of their highly inflated stock to small and medium investors, causing a gradual decline in stock quotes and then a tremendous crash in 1987. Generally speaking, the larger investors who had inside information-or at least advance notice of market developments-from the directors of their brokerage houses managed to remain solvent through the stock- market crash, whereas the small fry were wiped out in large numbers. And after the crash, the big fish moved in again to acquire the stock of many Mexican firms at low prices. Subsequently, as the Mexican government began selling state-owned firms in late 1987, both the older and newer generation of financiers began to bid for the most profitable enterprises put on the block, first by the De la Madrid administration and then, on a larger scale, during the Salinas government. A few examples suffice to illustrate the opportunities for profit that came from privatization. Carlos Abedrop, former owner of the Banco del Atlintico, bid and acquired Mexicana de Aviaci6n, the large state airline. Alberto Bailleres, for- mer owner of Banco Cremi, bought various metallurgi- cal and mining firms which were sold by the govern- 29REPORT ON WEALTH ment. Raymundo G6mez Flores, a new millionaire from Guadalajara, bought the large government-owned bus manufacturing firm, Dina, for $81 million, posi- tioning himself to control the lucrative sales of large vehicles for public transportation. Carlos Slim and two associates, construction magnate Bernardo Quintana and industrial multimillionaire R6mulo O'Farril, bought the bulk of the key blocks of voting shares in the telephone monopoly Telmex, sharing financial control and technical management with two foreign telephone firms, Southwestern Bell and France Cables et Radio. Slim and his partners obtained control of Telmex, Mexico's second-biggest enterprise (after Pemex, the state-owned oil firm), by paying a mere $1.7 billion for properties whose real worth was estimated to be close Marks of distinction: Fur coats at the Jockey Club in Mexico Cii to $12 billion. They paid very little cash, using credits advanced to Slim by a number of banks. After the pur- chase, the price of the company's stock went through the roof. For the Mexican government, the objective behind the privatization of state-owned companies was only secondarily to reap profits from divestment. Rather, the idea was to transfer productive resources to private con- sortia which promised to make large investments in key sectors that needed new technology and more capital. The administration of Carlos Salinas thus sold 160 state-owned enterprises in such industries as steel, tele- phones, mining, airlines, fertilizers and agroprocessing to private investor groups, which snatched them up at bargain prices. The initial objective of the sale of the state-owned commercial banks was quite different. In most cases they were auctioned off at relatively high prices. All told, the government obtained almost $13 billion dol- lars between 1990 and 1992, as many groups of Mexican investors competed actively for these poten- tially lucrative firms and for control of their corre- sponding shares of the national financial market. There was, nonetheless, a tradeoff. The government promised the new commercial bank owners a huge differential between interest to be paid on deposits and the interest charged on loans, thus guaranteeing their initial prof- itability. Not suprisingly, in 1992 and 1993 total bank profits shot up, surpassing $1.5 billion in 1992 and reaching almost $3 billion in 1993.8 This amazing increase in returns, however, was not based on solid or safe banking. The big margins that had been authorized by the head of the Mexican central bank, Miguel Mancera, led many of the new generation of neobanqueros to expand credit instruments at a fast and furious pace, offering literally millions of credit cards to low-income clients and extending loans to thousands of companies with dubious track records. Not surprisingly, problems mounted rapidly, and by the end of 1993 the banks had almost $10 billion of bad loans on their books. 9 Among the more reckless of the financiers was Carlos Cabal Peniche, a high-rolling young entrepreneur who had major fruit-exporting operations in the southern state of Tabasco, and who, with a few associates, acquired the Cremi- Uni6n Bank in 1991 for $300 million.' 0 In 1992 the 38 year-old speculator decided to become a world player and used credit from his own bank to set up a series of dummy corporations which allowed him to purchase the Florida-based fresh-foods division of the international con- glomerate, Del Monte, for more than $500 mil- ty. lion. Cabal lent his dummy corporations $700 billion which he funneled back to himself to finance his acquisition of Del Monte. News of the scandal forced then-Treasury Minister Pedro Aspe to initiate an offi- cial investigation, and Cabal went into hiding, eventu- ally fleeing the country-though his lawyers continued to publish full-page advertisements for months in Mexico City newspapers defending their client's repu- tation. Finally, in 1994 Cabal's bank was formally taken over by the government and later put on the block for sale. Cabal Peniche's fall from grace was only the pro- logue to a series of bank scandals which culminated in the financial crash of 1995. During 1995 and 1996, fac- ing a mountain of bad debt, more than half of all Mexican banks went into technical default, and were rescued by the government which absorbed the bulk of the losses. The Zedillo administration has put in prac- tice a variety of financial schemes to save the banks, including a program for temporary bank capitalization, an accord to support bank debtors and, most important- ly, a government fund called the Banking Fund for the 30 NACIA REPORT ON THE AMERICASREPORT ON WEALTH Protection of Savings (Fobaproa) which is meant to absorb bad debt. The Fobaproa has thus far absorbed the extraordinary sum of $40 billion of bad loans on the books of the banks. According to a recent report, in 1996 this huge bank bailout cost Mexico the equivalent of 8.6% of total GNP." 1 The bailout has ensured that most of the Mexican financial elite will not lose their banks, but it has also made it easier for a number of foreign banks to buy into several large and medium-sized firms, in some cases establishing control over them. The most recent banking crisis has thus spawned a new process of restructuring, and is forcing important changes in the top tier of ownership of the Mexican banking system. At the same time, the concentration and centralization of capital and wealth is being reinforced. The most aggressive of the newcomers are a number of Spanish banks which have staked out Mexico and the rest of Latin America as ideal territory for the spread of their increasingly globalized financial empires. The leading Spanish commercial bank, Banco de Bilbao y Vizcaya (BBV), has recently bought control of the Mexican banking group known as Probursa-Banco Mercantil, acquiring 70% of its stock. BBV has promised to inject new capital into the large but almost bankrupt bank on condition that the government absorb over $1 billion of the firm's bad loans. The aggressive and dynamic Santander Bank paid $166 million for 75% of the capital of Banco Mexicano, and promised to inject money to modernize the company. In exchange, the Fobaproa has taken on an amazing $3 billion dollars of the bank's outstanding bad loans, allowing Santander to clear the books of its new Mexican acquisition.' 2 Canadian banks have also been major actors in the Mexican banking restructuring. The Bank of Nova Scotia has taken over 50% of Grupo Inverlat, a banking group run by Agustin Legoretta, scion of Mexico's old- est banking family. Similarly Bancomer, the second- largest financial institution in the nation, has had to accept a friendly acquisition of 16% of its stock by the Bank of Montreal, which is now probably its largest individual stockholder. U.S. banks and bankers have been more cautious about buying into Mexican banks, although there are exceptions. For instance, Banorte, a rapidly growing enterprise controlled by the king of Mexican corn tortillas, Robert Gonzalez Barrera, has sold large amounts of its stock to 35 U.S. investment funds. Recently, Nicolas Brady, former U.S. Secretary of the Treasury decided to join in and bought 2.5% of the Banorte stock.13 This initial incursion of foreign banks and bankers into Mexico is but a glimpse of things to come, for it is likely that in a few years many other international firms will take a stake in the Mexican banking system. This does not, however, augur the downfall of Mexico's financial plutocracy, which is likely to weather the cri- sis by making alliances with the foreign banks. In fact, in the case of Banamex, the country's biggest bank, we already have an example of a set of global alliances which has left financial control in Mexican hands. Banamex is owned by a powerful group of billionaires and multi-millionaires who have emerged from the financial travails of 1995 and 1996 largely unscathed. The bank is run by financiers Roberto Hernmndez and Alfredo Harp Held. Other major stock- holders include Jer6- In 1995 and 1996, nimo Arango, owner of the Aurreri super- market chain and classified as a bil- lionaire by Forbes, Lorenzo Zambrano, owner of Cemex, the fourth-largest cement company in the world, Lorenzo Servitje, owner of Bimbo, the largest bread and bakery conglomerate in Mexico, and Claudio X. Gonzalez, head of Kimberley Clark in Mexico.14 As a result of Mexico's crisis, the banking system has more than half of Mexican banks went into default. They were rescued by the government, which absorbed $40 billion of bad loans--costing Mexico the equivalent of 8.6% of its GNP. suffered heavily but is being pulled out of the morass thanks to huge government subsidies. The Mexican banks, both national and foreign-owned, are still well- positioned to take advantage of the neoliberal economic policies that continue to be applied by the Zedillo administration and which favor them markedly. These policies guarantee that the bank owners will continue to accumulate larger fortunes month by month, making Mexico's scandalously unequal distribution of income even worse. Recent estimates say that 14 million Mexicans are living in conditions of extreme poverty, three million of them in the southern state of Chiapas. This does not seem, however, to bother the financial technocrats who have spent the last two years bailing out the Mexican banks and their wealthy owners while the government has drastically curtailed social invest- ment. But then again neoliberalism is not a program designed to benefit everyone; its aim is to help out the rich, and as the Mexican case so vividly demonstrates, at that it has proven quite successful. The Rapid Rise of the Neobanqueros 1. Mario Camberos, "La desigualdad y el crecimiento econ6mico de Mexico. Perspectivas en el neoliberalismo," Economia Informa (Mexico City), No. 225, January, 1994. 2. For historical data on the Mexican banking system see the publi- cations of the Center of National Information and Studies (Cien), in particular, No. 19, March, 1983 and No. 154, May 1985. For more recent data see Elvira Concheiro B6rquez, El gran acuerdo: gobierno y empresarios en la modernizaci6n salinista (Mexico City: Era, 1996). 3. Elvira Concheiro B6rquez, El gran acuerdo, chapters 1 and 4. 4.The so-called "white books" on the bank privatization process do not include the most important documents (such as minutes or resumes on meetings) detailing how decisions were finally taken to favor one or another group, nor do they explain how the government evaluated these groups as to their capacity to run the banks. See Carlos Acosta C6rdova, "Banco por banco, de la privatizaci6n es lo que se ignora que Io que se sabe," Proceso (Mexico), September 18, 1995, pp. 6-11. 5.Proceso (Mexico), September 13, 1993, p. 9. 6. See Elvira Concheiro, Elgran acuerdo, chapters 1 and 2, and banking annex, pp. 155-171. 7.The other financiers who benefited most were Carlos Slim Helo and Juan Antonio Perez Simbn of the private investment firm Carso-inbursa; Roberto Hernatndez and Alfredo Harp Helu of the firm Accival; Jose Madariaga Lomei of Probursa; Manuel Somoza Alonso and Eduardo Creel of Invermexico; Agustin Legoretta of Inverlat; Eduardo Legorreta of OBSA and Carlos Abedrop Davil of Fimsa. See Elvira Concheiro, El gran acuerdo, p. 33. 8.This is based on data published by the Comisi6n Nacional Bancaria and reproduced in Roberto Gonzalez Amador, "Creci6 39.1% en un aio la utilidad bancaria," La Jornada (Mexico), January 22, 1994, p. 54. 9. Roberto Gonzalez Amador, "Creci6 39.1% en un ano." 10.For information on the extraordinary wheeling and dealing of Cabal Peniche, see Tim Padgett, "The Man Who Bet the Hacienda," Newsweek, September 19, 1994, p. 38; Armando Guzmin and Ignacio Ramirez, "Alrededor de 20 empresas y un banco, legado de dos sexenios para Cabal Peniche," Proceso (Mexico), March 22, 1993, pp.12-14; and Elvira Concheiro, "De la cOspide facil a la prisi6n dificil," La Jornada (Mexico), September 8, 1994, p. 43. 11.The National Banking Commission made this information public in a meeting with bankers in New York in late January, 1997. Alicia Salgado, "Subi6 a 212 mil millones el costo del rescate bancario," El Financiero, January 28, 1997, p. 3. 12.E1 Financiero (Mexico), November 29, 1996, p. 7. On Santander's Latin American strategy, see Lisa Sedelnik, "Poised to Strike," in Latin Finance, July/August, 1996, pp. 12-20. 13.Carlos Acosta Cordova, "Fracasa el salvataje de los bancos," Proceso (Mexico), May 6, 1996. 14.Also on the board of Banamex is Carlos Hank Rhon, son of one of the wealthiest of Mexican politicians and manager of over two dozen industrial, commercial and financial firms, including a bank in Texas. But Hank Rhon runs most of his financial opera- tions through his own private banking firm. On the stockholders of Banamex, see Felipe Cobiun and Fernando Ortega Pizarro, "Roberto Herndndez," in Proceso (Mexico), September 13, 1993, pp. 6-10
