Audit of Mexico’s Banking Finds More Incompetence Than Fraud

In the end, there was disappointment for those who had hoped that the first independent audit into the messy breakdown of Mexico’s banking system would pin the blame on white-collar and government plunderers. The report, formally released Friday, found more systemic incompetence than systematic fraud.

Throughout the week, since the first English-language copies of the audit were leaked, government officials and opposition legislators raced to win favor for their interpretations of the 240-page study.

Finally, though, even opponents of the banking rescue muted their predictions that the probe by Canadian auditor Michael Mackey would uncover widespread corruption. Of the total $68-billion bailout cost, Mackey found that about 10% represented questionable loans, and of those, about $645 million, or 1% of the total rescue cost, appears to have been outright illegal loans.

Foes settled for an acknowledgment that the banking system has been mishandled ever since the banks were nationalized in 1982 and re-privatized in the early 1990s, leaving them fragile and undercapitalized.

Both the government and its critics are starting to look forward to tracking down those who still owe debts they can repay and improving the weak banking system oversight mechanisms that allowed the crisis to occur in the first place. Even these reforms, however, are caught up in congressional haggling, with an election year looming.

Mackey, a senior executive with Deloitte & Touche, spent six months sifting through the banks’ demise in the wake of the December 1994 peso crisis, and the subsequent bailout of bank depositors, a program known by its Spanish acronym as Fobaproa.

His conclusion: “While the structure of Fobaproa and the programs in which it was engaged are not free from criticism, Fobaproa, at considerable cost, provided protection for depositors and a partial (and perhaps temporary) resolution to the problems created by a weak and undercapitalized banking system.”

He noted that an underlying cause of the crisis was the privatization process itself, which was designed to maximize income for the government rather than put the 18 privatized banks in the hands of capable managers. The sale of the banks earned the government $12.5 billion--a fraction of the subsequent bailout cost.

Of the 18 privatized banks, just four are still operating and in the hands of the original shareholders: Banamex, Bancomer, Banorte and Bital. The rest either were sold or seized by the government and then either closed or sold--and Fobaproa absorbed the bad loans.

The report criticized the government policy, saying it would have been cheaper to shut down some of the weakest banks.

In response, finance ministry officials have insisted that a fundamental goal was to avoid a collapse of confidence in the entire system. The bailout ultimately achieved that goal even if imperfectly, said government economic spokesman Marco Provencio, evidenced by Mexico’s broad-based economic recovery over the last three years.

Carlos Elizondo Mayer-Serra, head of the influential Center for Economic Research, wrote Friday that Mexicans were necessarily denied what they most wanted from the report: “to identify the group that was to blame for this monumental bill we taxpayers will pay over the next 20 years.”

The reason, he said, is because the bailout was not the result of a concerted fraud but rather “the result of a series of decisions of public policy over many years that simply ended up destroying value. The 1982 nationalization of the banks destroyed the culture of credit in Mexico, as well as the institutional fabric needed to supervise these activities. This social capital will not be rebuilt easily.”

The Mackey report noted that a number of institutions remain sickly, including the third-largest bank, Serfin, which is expected to be sold off in a few months.

“Many of the banks continue to be significantly undercapitalized and subject to the pressures and risks that attend poor loan portfolios, concentrated ownership, inexperienced management and a regulatory and supervisory environment that is not prepared to allow insolvent or heavily subsidized banks to fail,” Mackey wrote.