This page has been archived and commenting is disabled.

Guest Post: The Financial Reform: A Mayan Prophecy?

Tyler Durden's picture




 

Submitted by J. Luis Martín is director of trumanfactor.com, originally published in El Confidencial

The Financial Reform: A Mayan prophecy?

While the Spanish government feverishly attempts to wrap up the country’s euphemistic financial system reform, the ever-expanding black holes, multiple balance-sheets restructuring with infinite amounts of public funds and reiterated calls for the need to further consolidate financial institutions seem to be setting up the stage for a self-fulfilling prophecy of Mayan proportions

Hopefully, this time around, we can learn from the not-so-ancient Mesoamericans’ hard-learnt lessons of the dangers implied in the state breaking the rules of free market capitalism when bailing out institutions and interest groups at the taxpayers’ expense. If we don’t, at least the endgame should not take anyone by surprise.

A financial debacle revisited

Mexico’s 1994-1995 crisis was seeded in the country´s financial sector reform, which began under President Carlos Salinas de Gortari in 1989; a process which involved the banks’ privatization, as well as deregulation to modernize the country’s financial markets. This was a U.S.-sanctioned process that helped to pave the road to the North American Free Trade Agreement (NAFTA).

A legion of foreign expert consultants and financial institutions were hired to assist in the process of equity valuation, drafting of prospectuses, and effectively selling the banks. The problem was not rooted in the concepts of privatization and free markets, of course, but rather in the perverse strategy the government connived to pick winners from the start.

There were two fundamental criteria applied to the privatization process of Mexican banks. First, foreign buyers were excluded from such a process. Since the mere suggestion of “privatizing strategic national interests” in a country like Mexico was (and still remains) equivalent to invoking the devil, the notion of keeping the nation’s financial decisions at home played well among the most patriotic politicians. Considering how things played out in the end, keeping foreigners out proved to be a populist yet ultimately futile dose of nationalism. 

Mexicans were right to be concerned, however, about the potential dangers of relinquishing control of their banking system to foreign capitals, especially during times of crisis. In fact, if Mexicans raised an eyebrow when the BBVA repatriated a sizeable amount of capital a couple of years ago, they would be right to be even more nervous now that Madrid struggles with its own financial disaster.

The second criterion in the banks’ privatization was not formal, however, but a presidential decision: to prevent former bank owners from participating in the bids. The logic for leaving the old bankers out was that they would be hard to control and that they would know better to not accept the government’s valuation of the banks. 

There was one exception (there always is): Agustín Legorreta, a former banker whose brother had been in charge of Salinas’ campaign fundraising. Legorreta would end up owning Comermex bank. And so, it all started with banks being sold at an average three-time their book value. However, who would accept this? The answer is plain: buyers who would not have to risk their own money.

The scheme led to a rather creative domestic consolidation of the Mexican banking sector in favor of hand-picked industrial groups, which played out like this: bank “A” would lend money to group “X” to buy Bank “B”, which in turn would lend money to group “X” to repay bank “A.” Indeed, just as circular as the Mayan Calendar.

Similar to what later happened in Russia, upon the fall of the Soviet Union, Mexico transferred a large segment of its economy (at least 25% of the country’s GDP) to a group of select local businessmen who, altogether, did not summon the necessary financial resources to afford the entities they came to control. 

Banks were not sold to solvent investors and experienced financiers, but to empresarios close to the political establishment who became investors after the acquisition took place. Therefore, business groups were carefully selected to take over the country’s major financial institutions, such as Roberto Hernández (the owner of a brokerage firm), Grupo Monterrey and Grupo Vitro. All in all, President Salinas carried out the banks’ privatization – a sector of the economy which had been nationalized only 8 years prior – in just 18 months. 

The next phase was the inflation of the financial bubble: the newly-acquired banks went on to take enormous loans from Mexico´s central bank, as well as to float paper in the U.S. under the prestigious brand-new “we are a NAFTA player” umbrella. 

After all, and much like it would later happen in southern European countries, Mexico’s stronger partnership with the world’s most powerful economy and the peso’s stability, albeit artificial, not only raised expectations on the country’s economic performance, but it also granted a greater sense of security among foreign investors. Americans then flocked to invest in the profitable and stable modern economy south of the border.

Allocating money was the plan until the crisis began to surface and the only way to keep those allocations afloat due to inflation and high interest rates was through refinancing - capitalization of interests over and over and over. At first, however, and as the newly-privatized banks’ governing bodies operated according to the inherited political structures, cash flowed with gusto from one bank to another. This led to the heating up of the Mexican economy – later touted the “Mexican Miracle.”

The personnel running the banks still regarded government officials as their bosses, which eased the indiscriminate financing of all sorts of politically-blessed yet unviable projects including the building of housing developments, insolvent buyers signing bad mortgages, property prices soaring, and Mexicans spending beyond their means. In addition, Salinas’ “neo-liberal” government engaged in its own stimulus frenzy: infrastructure galore and heavy social spending such as the huge Solidaridad (“Solidarity”) program. 

Later, in the midst of the crisis, the following imaginary dialogue between a bank’s asset recovery manager and his CEO would become a popular joke in Mexico City’s financial circles: Sir, I have two pieces of news to tell you, one good and one bad: the bad is that today we repossessed 5,000 cars. The good is that we have also foreclosed 5,000 homes so we have plenty of garage space to park the cars.

By the end of 1993 it was difficult not to see that the economy was overheated and that the bubble was about to explode. In addition, the first quarter of 1994 saw matters complicate even more with the Zapatista uprising in Chiapas and the assassination of presidential hopeful Luis Donaldo Colosio. Money was flowing out of the country.

The bust (find the similarities in the pictures)

A substantial devaluation was in order by 1994. However, the government was not willing to allow for such corrective action to take place during an election year. The central bank allowed for a small currency depreciation to maintain the peso’s stability and the government, to finance its 7% deficit, went on to generate more debt in the form of bonds issued in pesos at high interest rates, but indexed in U.S. dollars (Tesobonos).

Salinas planted the bomb, armed it, and ran out at the last minute. Ernesto Zedillo, Salinas’s handpicked successor, arrived at the scene, panicked at the timer reaching zero (dollar reserves were empty), and saw no other option than to set off the bomb by letting the peso float – an event that Salinas, in his defense, would later refer to as the “December Mistake”. 

In retrospect, some argue that Zedillo should have first negotiated a U.S.-backed rescue loan to guarantee liquidity and then initiate a slow process of devaluation. Rather, Zedillo acted as if he had a no choice as to which wire to cut to disable the device. In essence, the peso went into a freefall and interest rates skyrocketed. Banks went into technical default, along with 1,000bps spreads. 

In a matter of weeks, Mexico went cash-dry and U.S. President Bill Clinton was forced to intervene to “save the Mexican economy” with an overnight 20 billion dollar loan, which Mexico would later pay back with interest. Clinton was, of course, making sure Mexico paid its debt to American investors, banks and pension funds.

The crisis would have a profound effect in the nation’s politics. It was the first time that a president would blame his predecessor directly for the country’s woes. The 75-year rule of the PRI over Mexico began its demise when Zedillo actually jailed Salinas’ brother. The corruption scandals involving politicians and their families that began to become public (also a first in the country’s history) were as many as surreal.

The bailout (keep on finding the similarities)

Launched in 1990, the Fondo Bancario de Protección al Ahorro (FOBAPROA or "Banking Fund for the Protection of Savings"), operated as Mexico’s contingency mechanism to insure savings and assist banks in trouble. In 1995, this publicly-funded mechanism became the piggy bank that would selectively rescue the country’s failed banks. 

Essentially, the government picked the winners and losers of the country’s financial disaster, converting FOBAPROA into a sort of tribunal: losers who were later prosecuted (a few small banks with close ties to the Salinas family) and losers who were not prosecuted (all reminding small banks which were later absorbed by the bigger banks). 

The winners, of course, were the big banks, whose balance sheets FOBAPROA diligently restructured at a cost of 40% of the nation’s GDP at the time. Not only that, but FOBAPROA also allowed those close to the big banks’ owners to acquire, at discount prices, the toxic yet most attractive projects and properties that were cleansed from the banks’ balance sheets and transferred to a separate entity (the Instituto de Protección al Ahorro Bancario, or IPAB).

The failed loans portfolios were then sold, at 7% of their nominal value, to select “intermediaries” (another group of winners, though not always indistinguishable from the banks’ owners), who would in turn negotiate with debtors at 70% of the amount owed.

There was, of course, public outcry and social movements sprung up (much like today’s Spanish “Indignants”) in an effort to organize debtors and stop foreclosures. These movements sought to denounce the evident corruption in the entire financial ordeal, and to force banks to renegotiate bad loans on a case-by-case basis instead of passing them onto the “intermediaries.” 

The most visible of these social movements was called “El Barzón” (a name borrowed from a Mexican revolutionary song about economic repression) and their motto was: Debo, no niego, pago lo justo ("I owe, I won't deny it, but I'll pay what is fair"). 

The Barzón road blocks and protests outside banks ended up with some of their members in jail, but managed to accomplish little in advancing the movement’s goals; until the Barzón finally discovered the existence of attorneys, that is, and realized that the best way to hit banks back was by suing. Tens of thousands of lawsuits collapsed the courts since it was easier to put public pressure on judges rather than on remote bankers – and the ethereal FOBAPROA. Then the Barzón met with success.

In the end, the larger banks survived (Bancomer, Banamex, Serfín, Comermex, Banorte), and they all, with the exception of Banorte, ended up in foreign hands. Indeed, the “bankers” who had caused the biggest financial turmoil in the nation’s history made even a bigger fortune from the bailout by selling the banks to foreigners: Banamex went to Citicorp, Bancomer to BBVA, Serfín to Santander, Comermex to HSBC.

Zedillo was forced to impose severe austerity measures to cut the deficit and make up for the tremendous debt the country had acquired. Such austerity measures included sharp tax increases, higher interest rates, large budget cuts, and hikes in electric energy and gas prices. All of which drove Mexico directly into a recession.

Salinas has written a few books since he left office and Zedillo sometimes appears at conferences. Mexican taxpayers are still paying the bill, and so will their children.

Back to the future (there are no similarities, the pictures are the same)

While economists, analysts, gurus and prophets of all sorts eagerly discuss and debate the current Spanish banking crisis amongst them, things are neither so different from other crises in the past, nor so complex.

Certainly, the dynamics have changed over time, and financial markets have become more sophisticated and more interconnected. On the social front, and unlike today’s “Indignants,” the Barzón movement did not have Twitter to advance its cause. 

Also, the political leadership profile is different: the conniving Salinas was an astute economist with a Ph.D. from Harvard. In today’s Spain, there is the prosaic Prime Minister Mariano Rajoy, a former bureaucrat, who succeeded the equally prosaic José Luis Rodríguez Zapatero, also a former bureaucrat. 

Regardless, both crises share striking similarities and no prophet is required to envision the tremendous cost Spain’s financial reform will have, who will foot the bill, and under what conditions and in what hands the non-performing assets and loan portfolios will end.

Ultimately, it is our allowing impunity to reign that turns our woes into self-fulfilling prophecies. It is not only that we are governed by mediocre and unscrupulous politicians who freely commit the same mistakes over and over in their quest for personal gain, but that we, the equally mediocre public, allow for the insanity to go on.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 05/28/2012 - 09:19 | 2468982 Gully Foyle
Gully Foyle's picture

Grasping at analagies are we?

Start using Criswell predictions, at least they are virtually unknown.

Mon, 05/28/2012 - 09:21 | 2468987 Colombian Gringo
Colombian Gringo's picture

My prophecy is that the US government will continue to lie and attack other countries, that Bernanke will steal more, and Corzine will never go to jail.

Mon, 05/28/2012 - 09:42 | 2469043 Gully Foyle
Gully Foyle's picture

Colombian Gringo

Corzine may just pass away peacefully in his sleep.

Happens to a lot of people who don't jog.

Mon, 05/28/2012 - 09:48 | 2469056 Colombian Gringo
Colombian Gringo's picture

Couldn't happen to a less fit guy.

Mon, 05/28/2012 - 12:32 | 2469484 Ahmeexnal
Ahmeexnal's picture

Mexican MSM is hiding the fact that leftist (and banker puppet) Lopez Obrador murdered his own brother when he was a teen.

Put a gun to his little brother's head and emptied the barrel into the poor kid's skull.  Similar to Spain's king Juan Carlos story.

He got off by saying it was an accident. His previous wife also died under mysterious circumstances.

He is being pushed by Soros, Rockefeller and the banking cabal, in order to further ruin the people.

He ran 6 years ago under the "HOPE" banner.  Now he is running under the "CHANGE" banner.

All the candidates are just sock puppets, none of them worth 20 cents.

Only option is...R E V O L U T I O N.

 

Mon, 05/28/2012 - 09:53 | 2469070 knukles
knukles's picture

(voice of California dimwit Val girl)

 

Waaaait.
Like you mean that the Mayans all died because they ended capitalism?
No wuuuunder.
Like you couldn't getchur extensions done without yer MasterCard.

Du uh.

Mon, 05/28/2012 - 09:26 | 2469005 Manthong
Manthong's picture

http://i44.tinypic.com/nvpjeo.jpg

Mon, 05/28/2012 - 09:37 | 2469034 francis_sawyer
francis_sawyer's picture

 Quetzalcoatl was a feathered snake... These ones are vampire squids... The analogies start there...

Mon, 05/28/2012 - 10:03 | 2469098 williambanzai7
williambanzai7's picture

KEYNESIAN PRIEST

Mon, 05/28/2012 - 10:35 | 2469189 Amish Hacker
Amish Hacker's picture

Please, William, not before breakfast.

Mon, 05/28/2012 - 10:50 | 2469227 falak pema
falak pema's picture

come find the mayan king at Bugarach, the only place in the world where survival is possible. 

Mayan Predictions for 2012, German Analysis and a Little Village in France | PRI's The World

The G8 summit will be held here and Mutti Merkel will cook breakfast for all. Frankfurters and french fries! With scrambled ostrich eggs from Good Old Mexico courtesy of Mayan colony in New Mexico.

Greek feta salad served free, as too cheap to carry a charge for G8 attendees.

Mon, 05/28/2012 - 10:51 | 2469231 Hulk
Hulk's picture

Thats just wrong on so many levels...

Mon, 05/28/2012 - 13:30 | 2469636 TrainWreck1
TrainWreck1's picture

Call it "Barney Frank stimulus"

Mon, 05/28/2012 - 12:33 | 2469492 Ahmeexnal
Ahmeexnal's picture

Great work Banzai.

However, a Dolly Parton rack would go well with that Dolly Madison medal.

Mon, 05/28/2012 - 10:04 | 2469100 ITrustMyGut
ITrustMyGut's picture

Grasping? I think Not..

the world, the behaviour of its people, the behaviour of folks with power.. it is clearly repetitive, circular... SSDD

the perticulars dont even matter anymore.. while it runs the risk of numbing the minds of folks that hunger for truth.. it is wise to learn from these tremendously circular repetivie events.. and understand what is the expecatation of "next"

I only wish the drakes and wilcock's had real info... not smoke up the arse of people depserate for any real change... unfortunately.. the evidence suggests.. we'll never have it...

Mon, 05/28/2012 - 09:33 | 2469024 TrainWreck1
TrainWreck1's picture

I could see JPM & Goldman enjoying a good old-fashioned Mayan-style Holiday sacrifice.

http://www.crystalinks.com/maya1206c.jpg

 

 

Mon, 05/28/2012 - 09:35 | 2469029 AUD
AUD's picture

profitable and stable modern economy south of the border.

I recently saw a photo of at least a dozen people, some who had evidently been shot or tortured, strung up - by the neck - on an overpass in some Mexican city.

That's got to be only slightly less fucked up as someone eating someone else's face, whilst stark naked, on a highway off ramp.

Mon, 05/28/2012 - 09:39 | 2469039 TrainWreck1
TrainWreck1's picture

Mexican drug gangs routinely behead rivals. The spirit of competition is alive and well south of the border. Perhaps not as cut-throat as Wall Street, but they are trying...

Mon, 05/28/2012 - 09:53 | 2469075 Gazooks
Gazooks's picture

...as in evidential clip from JPM's last shareholder conference, note use of the blue muppets

http://www.youtube.com/watch?v=O_99mcINufQ

Mon, 05/28/2012 - 09:50 | 2469063 Oh regional Indian
Oh regional Indian's picture

For bitter or verse AUD, these are signs of global societal breakdown.

The face chewing story is so far out.... freaky.

ori

Mon, 05/28/2012 - 12:12 | 2469426 headless blogger
headless blogger's picture

Somebody will quickly use this latest cannibalism act victim as poster child for MORE food stamp programs.

Mon, 05/28/2012 - 09:47 | 2469053 bank guy in Brussels
bank guy in Brussels's picture

The Mexican people have certainly been great victims of evil politicians and manipulators, and it's good to know the details above of the Mexican mauling and struggle. That kind of privatisation-rape happened in Russia and Eastern Europe after the fall of Soviet communism.

But what doesn't quite carry in the analogy to Europe now, is the greater populist revolutionary potential in these smaller countries here in Western Europe, due to a combination of historical circumstances, close quarters, more education and resources and popular awareness, and more ability to bring down our governments.

People are in the European streets, and in the end people can and will act here.

Mon, 05/28/2012 - 10:09 | 2469118 ITrustMyGut
ITrustMyGut's picture

true.. there is a few-points-in-their-favour level of greater understanding, greater willingness to act for EUR peoples... vs. redneck prozack lard asses

BUT, and thats a BIG but... the tech of consent manufacturing, crowd control, etc... so significantly alters the odds of power... salad days of pitch fork change... likely long gone.. 

Mon, 05/28/2012 - 15:52 | 2469990 reddog
reddog's picture

One CAN hope; but, this is  not 1968 which failed as did the Paris coomune).

Why did the U.K. give us Margeret Blair and Tony Thatcher?

Why did Spain elect rajoy?

Why did Greece elect pasok (pausck)?

Why is Merkel so respected?

why Holland (=blair)?

Why is Jerry Adams not P.M.?

Why are Scotland and Wales still colonies of a German king (queen)?  (not to mention canada, n.z. & OZ)

 

 

 

 

Mon, 05/28/2012 - 10:19 | 2469149 DanielHall4Freedom
DanielHall4Freedom's picture

RE-DOUBLE FREEDOM MOVEMENT R3VOLUTION
Make the right (US) strong for... NO ONE BUT PAUL
We have all the "working capital" we each individually need... and we have it in great abundance!

Create our own New Economy.
PEOPLE BASED ECONOMY | TO LIFE
www.OurName4Freedom.ws/Ron_Paul www.danielhall4freedom.ws/
two-step 4Freedom + fb = Fame & Fortune + VICTORY
1. www.bit.ly/TDP-DanielHall4Freedom DailyPaul
2. Use your .WS 4Freedom URL as Signature in each "status update/share."
Freedom is not free. True free market yields peace & prosperty 4All.
Oppose unjust war!!! MLKJr.: www.youtube.com/watch?v=b80Bsw0UG-U
WWW.DANIELHALL4FREEDOM.WS

Mon, 05/28/2012 - 15:52 | 2469988 Olympia
Olympia's picture

The end of the world is near... The ten plagues of Pharaoh “have been brought upon” the USA.

From the Wall Street Crash of 1929 to the Global Financial Crisis of 2007

http://eamb-ydrohoos.blogspot.com/2010/02/ten-plagues-of-pharaoh.html

.

It is the absolute tragedy for the USA. The former illegal immigrants had become the masters of their land; the ultimate masters. The people who wanted to collaborate with the Jews to become “Pharaohs” had the same bad luck. The greedy “locust” of the Asiatic desert swapped the USA and left absolutely nothing standing. The formerly rich people of the New World have been drained of their money to such a degree that they have passed the point of poverty and are headed towards starvation. The Americans now experience desperation and trust in God. Poor and hungry people gather around the fire to warm and cast their eyes up to heaven as their last hope. These are the former planet leaders...

Authored by Panagiotis Traianou

Wed, 05/30/2012 - 07:56 | 2474745 boa74520
boa74520's picture

Meeting the basic demand of the functioning of the outside, this series the highlight of cheap air max 2012 shoes of the head of special braiding technology, and at the same time in the color is also the main and pure and fresh. As professional nike air max shoes, the Air Flow Summer in the insole, particularly after the insole with very good thickening designed to ensure that its good abrasion resistance, shoes to bring design grain perfect prevent slippery performance.

Do NOT follow this link or you will be banned from the site!