Banking on Change

MEXICO CITY — Jorge Lankenau Rocha was under house arrest in his palatial Monterrey villa, guarded by 18 policemen, when he suddenly vanished. After a four-day nationwide manhunt, he finally surfaced--but only when he chose to turn himself in at a downtown department store.

If the banker appeared to have made a mockery of Mexican justice, things only got worse. He was flown to Mexico City in a government jet, questioned--and then taken back to Monterrey to resume his luxurious house arrest.

Lankenau represents the dark side of the new breed of daring, flamboyant financiers of modern Mexico. He is the prime suspect in a bank scandal that could cost between $1 billion and $2 billion--and the latest in a string of allegedly crooked bank bosses this decade, a sordid legacy of the bank privatization program that once was hailed as a cornerstone of Mexico’s free-market reform.

Many analysts have argued that Mexican banking had turned the competitive corner with its stricter regulatory oversight and the recent heavy investment by foreign banks. Now the Lankenau case has raised new suspicions about the strength of Mexico’s banking reforms after the immensely expensive bank bailout of the mid-1990s.

The landscape is littered with casualties. Only eight of the 18 banks that were privatized in the early 1990s are still in the hands of the original owners. The 10 others were taken back by the government and either sold or closed. The government bailout agency ultimately assumed more than $43 billion in bad bank debts--nearly a third of all bank loans.

The banking industry’s ability to rebuild itself is central to Mexico’s future. Though the economy is rebounding strongly, it needs healthy banks to support renewed consumption, savings and investment. The thirst for credit is now increasing, yet lending virtually stopped during the two-year cleanup. Only recently have banks ventured back into the market.

Some now say the solicitous handling of Lankenau--who is personally charged with defrauding customers of somewhere between $170 million and $370 million as he tried to stave off the collapse of his banking empire--shows that serious weaknesses persist.

With its seeming velvet-glove treatment of the main suspect and its array of tainted investors, lawyers, judges and politicians, the Lankenau case has infuriated the public and has intensified demands for judicial reform.

It took until Nov. 17, two weeks after Lankenau resumed his house arrest, for lawyers to bring formal charges, overturn his arrest waiver and finally get Lankenau out of his $20-million estate and into jail, without bail, pending his trial.

Atty. Gen. Jorge Madrazo Cuellar declared that the delay “shows the justice system is made for the rich,” and he renewed his call for heavier white-collar-crime penalties.

Lankenau is the third major Mexican banking figure to face criminal charges since 1994. All have spent time on the lam.

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The first, Carlos Cabal Peniche, was charged with siphoning as much as $700 million from two major banks, Banco Union and Banca Cremi, within his Grupo Financiero Union, the nation’s fifth-largest. Cabal, a rags-to-riches fairy tale character, fled the country and has never been captured.

The second, Angel Rodriguez Saenz, known in banking circles as “El Divino,” former chairman of the Asemex-Banpais group, was charged in March 1995 with making multimillion-dollar loans to a troubled air transport company, which he himself owned. His bank, with overdue loans worth more than $1.2 billion, was later rescued and restructured. Rodriguez escaped to Spain, but was captured in July 1996 as he was sailing aboard his yacht, Moon Dance. He is awaiting extradition.

While their stories vary, all boasted a risk-taking, entrepreneurial style that ended in huge costs for investors and taxpayers.

Rogelio Ramirez de la O, an independent economist, said most of the winning bidders for the privatized banks had little actual banking experience. “Many of the buyers were the Michael Milkens of the 1980s becoming the bankers of the ‘90s,” Ramirez said.

Jorge Lankenau started the Abaco brokerage house in his native Monterrey, and in 1991 Abaco acquired Confia Bank, the fourth bank to be sold off by the government. Confia became the centerpiece of a diversified Abaco Financial Group, with Lankenau as president.

Lankenau’s advisors and shareholders included many of the old families and politically connected players of Monterrey, such as Fernando Canales Clariond, current governor of Nuevo Leon state, and Sen. Mauricio Fernandez Garza.

Confia and other banks loaned aggressively, with little supervision in the heady free-market atmosphere under then-President Carlos Salinas de Gortari, as they rushed to increase earnings and pay off the cost of the bank purchases.

Then the 1994-95 peso crisis slammed Mexico and brought the newly privatized banks to their knees, forcing the government into a massive bailout program. The government ultimately took over 12 banks and absorbed more than $40 billion in delinquent bank loans. Chastened, banking authorities set strict requirements in return for the help.

When Abaco failed to come up with $250 million required by the government to recapitalize Confia, the government forced the group to seek a foreign partner. New York’s Citibank, a longtime presence in Mexico that was seeking a way into consumer banking, emerged in April as the contender for control of the Abaco group.

The deal took longer than expected to conclude, however, and in the end Citibank bought only the Confia Bank and two small subsidiaries, for $245 million, and not the parent Abaco. The reason soon became apparent: Evidence of alleged fraud and mismanagement was starting to emerge.

In August the government took over Grupo Financiero Abaco and halted trade in its shares.

By some accounts, Lankenau’s problem was less one of greed run amok than overzealousness, bad judgment and, finally, desperation when things started coming apart. He maintains that he never profited personally from the bank’s woes, and complains that the government treated his company much more harshly than it did other banks.

A flamboyant networker who was close to both the ruling Institutional Revolutionary Party (PRI) and the National Action Party (PAN), Lankenau used his influence and Monterrey friendship to attract clients. A soccer fanatic, he bought control of the Monterrey Rayados team, and some say he spent more time running the club than the bank.

When the government threatened to take over the bank, Lankenau sought desperately to recapitalize Confia or lose control of it. To do so he dipped into the offshore deposits of Abaco’s brokerage clients--”covering one hole by digging another,” as a weekly newsmagazine described it.

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Prosecutors are now looking into the legality of up to $370 million of these deposits, so those investors may also face legal action--even as they bring their own lawsuits in Monterrey against Abaco and Confia to try to get their money back. The total cost of the bad loans within Confia being taken over by the government in advance of the Citibank sale is said to be between $1 billion and $2 billion.

Some analysts see the scandal as a final episode of the old crony system, in which stockbrokers and other traders were awarded control of the privatized banks, and then looked for shortcuts. In this view, a leaner and more competitive banking industry has emerged because of much tougher oversight rules and the disciplinary standards imposed by foreign banks now entering Mexico.

Lacey Gallagher of Standard & Poor’s wrote of the reform process recently: “The extensive bank support package now in place, together with major recent improvements in supervision and regulation, as well as foreign investment, has laid the groundwork for the sector’s recovery.”

One significant development is the adoption of Generally Accepted Accounting Practices, or GAAP, by Mexican banks earlier this year.

Yet Gallagher and others remain cautious about the banking sector, in part because of the sheer scale of the bailout cost, which S&P; estimates at 13.5% of Mexico’s gross domestic product in 1995. This total bailout cost is estimated at 387 billion pesos, now about $47.2 billion.

Apart from the role of the justice system, the case has also underlined concerns about weak corporate governance within Mexican financial institutions. Marcelo Canales, the governor’s brother and an Abaco board member, told the weekly magazine Proceso that few members ever spoke during board meetings. “The board was totally dominated by Lankenau in that--like nearly all the boards in this country--the management tells the board what it wants to tell.”

Nor does the Confia episode inspire much confidence.

“If the authorities knew of the problems since late last year, why did it take them so long to intervene?” asks one senior banking industry analyst. “They just wanted to stay out of it, and make it a negotiation between Confia and Citibank. It’s incredible that knowing the situation the bank was in, that they weren’t in there 24 hours a day, looking over Lankenau’s shoulder.”

Finance Minister Guillermo Ortiz has acknowledged that the privatization process he oversaw from 1991 to 1994 was flawed. He has said he would have been more careful in selecting the new bank owners, and would have strengthened the supervisory oversight before the banks were sold off.

Jesus Zamora Nanez, director of corporate information and investor relations for Bancomer, Mexico’s second-largest banking group and regarded as among the most professional, was judicious in discussing the series of past industry scandals.

“In most of these cases, if you look at their track record, most of these people were not involved in banking. These personalities used to run brokerage houses from 1982 on. Their view was very short-term; it was hour-by-hour,” Zamora said. “You shouldn’t take that approach in banking. We want our customers for the long term.”

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Foreign banks

Mexico’s 12 largest banks and their foreign partners, by market share:

Bank: Banamex

Market Share: 19.76%

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Bank: Bancomer

Market Share: 19.25%

(16% held by Bank of Montreal)

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Bank: Serfin

Market Share: 13.76%

(19.9% held by Hong Kong Shanghai)

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Bank: Bancrecer

Market Share: 6.66%

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Bank: Bital

Market Share: 5.49%

(16.6% held by Banco Hispanoamericano and Banco Comercial Portugues)

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Bank: Santander

Market Share: 5.49%

(Spanish bank took over Invermex group and Banco Mexicano)

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Bank: BBV

Market Share: 4.83

(Spanish bank took over Probursa, Banca Cremi and Banoriente)

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Bank: Atlantico

Market Share: 4.60%

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Bank: Promex

Market Share: 3.71%

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Bank: Confia

Market Share: 3.68%

(bought by Citibank)

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Bank: Banorte

Market Share: 2.57%

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Bank: Inbursa

Market Share: 1.39%

Source: Bankers Association of Mexico

Burden of Debt

Despite Mexico’s economic recovery since the December 1994 peso collapse, the nation’s banking system remains heavily burdened by bad loans, most recently estimated at 18.8% of outstanding debt. Total of past-due loans held by the nation’s commercial banks, in billions of U.S. dollars at current exchange rate:

Past-Due Loans

May: $16.4 million

*June ’97 stricter accounting standards were adopted.

Mexican banking assets have been stagnant and declining in inflation-adjusted terms. Total assets in billions of U.S. dollars at current exchange rate:

Banking Assets

June: $125.4 billion

Sources: Banco de Mexico, Bankers Assn. of Mexico