Mexico Bank Bailout Stirs Furor Over Dealing, Costs

The papier-mache golden rat that protesters hung on the door of the National Palace is an apt symbol of what’s become a swelling national outrage over Mexico’s disastrously costly banking bailout.

Congress and the executive branch have spent the summer riveting Mexicans with new details of malfeasance and incompetence by corrupt officials, whom Mexicans refer to as “rats,” as they have wrangled over how to pay for the virtually completed bank rescue.

The price tag for taxpayers could be as much as $56 billion, or nearly 15% of this year’s gross domestic product.

But beyond sexy corruption charges and class-warfare rhetoric, analysts agree that the emotional reaction to the bailout has broader importance: It could change the way Mexico is governed.

By refusing to accept a package of legislation that was hurriedly assembled by the executive branch to restructure the bailout, the opposition-controlled Chamber of Deputies has joined with an array of civic organizations to declare: “Not so fast.”

That defiance of the executive branch has injected an unprecedented degree of legislative accountability into the process and has limited the traditionally untrammeled power of the Mexican presidency to dictate policy.

In addition to the potential for improved checks and balances, the banking crisis has peeled back yet another layer from the cozy and often questionable links between Mexico’s business and political elites, observers say. Next time, they will be harder to disguise.

Everybody’s favorite example:

Fugitive banker Carlos Cabal Peniche, who is accused of bilking the banks he controlled out of as much as $700 million, gave $5 million in personal campaign contributions to the ruling Institutional Revolutionary Party, or PRI, in 1994.

The opposition parties allege gleefully that at least $30 million that was donated to the PRI by Cabal Peniche and others came from bad loans that were later absorbed into the bailout--a debt now being dumped on taxpayers. Cabal Peniche remains on the lam.

The final disposition of the bank bailout program, called the Banking Fund for the Protection of Savings and known by its Spanish acronym, Fobaproa, is now trapped in limbo before the Chamber of Deputies banking committee. The parties are slowly moving toward a compromise.

Government Bought Loan Portfolios

Mexico’s banking crisis took root during the re-privatization of the nation’s banks starting in 1991, nearly a decade after they were nationalized. The banks were bought at inflated prices, often by non-bankers, who then lent money heavily--and got caught in the December 1994 peso devaluation and subsequent recession.

To keep the banking system from collapsing, the government bought up the past-due loan portfolios of the banks in return for recapitalizing the banks with long-term bonds.

Those 552 billion pesos ($56 billion at current exchange rates) in overdue loans now sits in Fobaproa, the equivalent of the Resolution Trust Corp. of the U.S. savings and loan debacle, waiting to be sold off or written off as uncollectable. Many are probably worthless; others are worth 20% to 30% of their face value.

The furor over the rescue began in March, when Finance Minister Jose Angel Gurria tried to rush through a package of financial bills that included a restructuring of the costly bank bailout program. Gurria’s team argued that the package would have to be approved by April 30 or Mexico could face market turmoil.

Central to the plan was converting the past-due loans held by Fobaproa into general government debt, as part of a broader program for reforming the financial system.

Opposition parties seized on the easily grasped notion of sticking it to the taxpayers, and they have transformed the dry and technical banking issue into an emotional symbol of government incompetence at the citizenry’s expense.

In years past, the bills would probably have been rubber-stamped without incident. The PRI has ruled Mexico since 1929, controlling Congress as well as the presidency for nearly all of that time. But opposition parties this time demanded real debate.

“They haven’t understood that this is now a different country,” Dolores Padierna, a leading deputy for the Democratic Revolution Party, or PRD, told Milenio magazine. “They are learning it now in spades.”

The executive branch and Congress deadlocked in early August over the Finance Ministry’s refusal to give Congress the names of all borrowers whose loans have been absorbed by the bailout agency. Gurria argued that to do so would violate banking secrecy laws. But opposition legislators said the right to secrecy was lost when the state took over the loans.

Then the PRD disclosed to the media a list of 310 people with some of the biggest past-due loans as of 1996. Among the names were some of Mexico’s major bankers and corporate leaders.

The drama may escalate in coming weeks as opposition parties roll out competing reform proposals and do their best to further embarrass the government. Cabinet-level heads may also roll.

All sides are jockeying for position ahead of the 2000 presidential election, which opposition parties believe they can win for the first time.

Opposition Parties Flexing Their Muscles

The debate is the clearest reflection yet of the declining power of the PRI. Opposition parties, which won a majority in Congress last year for the first time, are flexing their muscles.

Luis Rubio, a political scientist at a Mexico City think tank, declared last week: “The sole fact that the legislators could open up this black box, and could bring to light the existence of whatever improper or fraudulent practice, is in itself a transcendent political advance.”

Federico Estevez, a political scientist at the Autonomous Technical Institute of Mexico, said the Fobaproa debate demonstrates that “elite-based politics in Mexico is being forced to go to a mass-based public debate. This also gives big business the opportunity to de-link from its practically incestuous relationship with the government. It may prompt business to diversify its electoral support from the PRI.”

Citizen debtor organizations have staged street protests, with clever symbols like the golden rat and parades by costumed protesters dressed as suffering, chained debtors held captive by fat-cat bankers and PRI politicians.

“It’s not our debt. It’s a debt that other people accumulated that they now want to impose on the people. This isn’t fair,” said the professional wrestler who calls himself the Warrior of the Future, as he marched with other demonstrators downtown.

“Those who took the money should pay it back, because they’ve got property, they’ve got businesses, they’ve got money in foreign countries.”

Bailout’s Goal Was ‘to Protect Depositors’

Gurria has repeatedly said that the objective of Fobaproa was never to rescue businesspeople or bankers but to protect bank deposits.

The goal “was to ensure that there was no generalized collapse of the banking system of Mexico, to protect depositors and to protect the whole economic system,” he said. “Fobaproa served its purpose [of preventing] the collapse of the financial system; and the banks continue, and Mexico is growing at 4% to 5% a year.”

Indeed, the banking system has been transformed. Only eight of the 18 banks that were privatized in the early 1990s still exist. Others were seized by the government or sold or merged with foreign banks. In nearly all cases, the bank investors lost their capital.

Yet the PRD has openly cashed in on public perceptions, which analysts say are at least partly accurate, that the bailout mainly aids the wealthy, who borrowed money to finance investments that made them richer and who have avoided repaying their loans--at the public’s expense.

Gurria is now negotiating with the left-wing PRD and the right-wing National Action Party, or PAN, to try to reach a face-saving solution. The government has already agreed to compromises on some of the six bills in the restructuring package, but many points remain contentious.

‘Inefficiency and Incompetence’ Cited

The heart of the debate is Fobaproa and the banks’ bailout itself.

The vast majority of the 600,000 accounts held by Fobaproa belong to small debtors. But a few hundred huge corporate and individual debtors account for about half the value of the overdue loans, many of which were made without guarantees or adequate collateral.

“The origin, the gestation and the eruption of [the Fobaproa crisis] are not products of chance,” wrote analyst Rubio. “More than a matter of corruption, they are the products of inefficiency, incompetence and a succession of errors of vision and management by the financial authorities throughout the last two decades.”

One of Fobaproa’s main jobs is to try to collect the overdue loans, but so far it has done a poor job. The package proposes creation of a new government agency to try to collect the loans.

“The government is proposing a classic bureaucratic solution that has never worked,” said Marcelo Ebrard, an independent member of the Chamber of Deputies banking committee. “It is the banks that must be made to collect these loans, not the government, and the banks have to suffer greater losses if they don’t collect the loans.”

Further, Ebrard and others want to strip out any loans that may be illegitimate or outright illegal--such as the alleged Cabal Peniche fraud--rather than let the government simply absorb the entire portfolio. The parties have agreed that a comprehensive outside audit of Fobaproa’s assets will be conducted this fall.

The loudest outcry has surrounded the government proposal to convert the cost of the overdue loans from a separate “contingent” debt pool into the overall public debt. This largely technical change in the nature of the Fobaproa debt would raise the overall public debt from 28% to 42% of GDP.

Opposition parties have painted images of schools and clinics going unbuilt as tax money goes to pay off the Fobaproa debt instead--over the next 60 years.

Ebrard said the debate will at least reduce the dominant role of the president and improve the health of institutions in Mexico.

“We need a new institutional arrangement . . . with controls and limits on presidential power in the economic arena,” he said. “This is going to lead to new constitutional, legislative and legal systems in Mexico.”

Greg Brosnan of The Times’ Mexico City Bureau contributed to this report.