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Full text of "The Mexican peso bailout : joint hearing before the Subcommittee on International Economic Policy and Trade and the Western Hemisphere of the Committee on International Relations, House of Representatives, One Hundred Fourth Congress, first session, February 22, 1995"

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The llexican PESD Bailouts lOfl-1 Joi... 












FEBRUARY 22, 1995 

Printed for the use of the Committee on International Relations 

JUL 2 6 




For sale by the U.S. Government Printing Office 
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ISBN 0-16-047157-5 


Y 4. IN 8/16: H 57/4 

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FEBRUARY 22, 1995 

Printed for the use of the Committee on International Relations 


JUL 2 6 133S 


For sale by the U.S. Government Printing Office 
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-047157-5 

BENJAMIN A. OILMAN, New York, Chairman 

WILLIAM F. GOODLING, Pennsylvania 


TOBY ROTH, Wisconsin 

HENRY J. HYDE, Illinois 



DAN BURTON, Indiana 




CASS BALLENGER, North Carolina 



EDWARD R, ROYCE, California 

PETER T. KING, New York 

JAY KIM, California 







SAM GEJDENSON, Connecticut 

TOM LANTOS, California 


HOWARD L. BERMAN, California 





DONALD M. PAYNE, New Jersey 
JAMES P. MORAN, Virginia 
VICTOR O. FRAZER, Virgin Islands (Ind. 

Richard J. Garon, Chief of Staff 
Michael H. Van Dusen, Minority Chief of Staff 

Subcommittee on International Economic Policy and Trade 

TOBY ROTH, Wisconsin, Chairman 

CASS BALLENGER, North Carolina 

Edmund B. Rice, Subcommittee Staff Director 

John Scheibel, Democratic Professional Staff Member 

Christopher Hankin, Professional Staff Member 

SAM GEJDENSON, Connecticut 

Subcommittee on the Western Hemisphere 

DAN BURTON, Indiana, Chairman 

TOM LANTOS, California 

CASS BALLENGER, Ndrth Carolina 
PETER T. KING, New York 

GiLEAD Kapen, Subcommittee Staff Director 

Scott Wilson, Democratic Professional Staff Member 

Scott Feeney, Professional Staff Member 

Anita Winsor, Staff Associate 





Hon. Marcy Kaptur, a Representative in Congress from the State of Ohio 6 

Pat Buchanan, syndicated columnist 9 

Jeffrey R. Shafer, Assistant Secretary, International Affairs, Department of 

the Treasury 25 

Fred Bergsten, director, The Institute for International Economics 35 

John Sweeney, policy analyst, Trade and Inter-American Affairs, The Herit- 
age Foundation 38 

Christopher Whalen, chief financial officer. Legal Research International, Inc 40 


Prepared statements: 

Hon. Marcy Kaptur 52 

Jeffrey R. Shafer 62 

John Sweeney 69 

Christopher Wheden 74 

Material Submitted for the Record 

Excerpt from transcript of House Foreign Affairs Committee hearing, October 
4, 1989 81 

"How Fund Categories Fared," list from USA Today, January 23, 1995 85 

"Prospects Dim for Bank Loan to Mexico," article from the Wall Street Jour- 
nal, February 13, 1995, by Timothy L. O'Brien 86 

"Bailing Out the Creditor Class," article from The Nation, February 13, 

1995, by Walker F. Todd 87 

Letter from Christopher Whalen to Hon. Dan Burton, dated March 1, 1995 .... 89 

"Mexico: The Narco System," article translated into English from Dinero 

magazine, November 1994, by Christopher Whalen 93 

Column from The Mexico Report, April 10, 1995, by Christopher Whalen 107 




House of Representatives, Subcommittee on the 
Western Hemisphere, and Subcommittee on Inter- 
national Economic Policy and Trade, Committee 
ON International Relations, 

Washington, DC. 

The subcommittees met jointly, pursuant to call, at 1:07 p.m., in 
room 2172, Rayburn House Office Building, Hon. Dan Burton and 
Hon. Toby Roth (chairmen of the subcommittees) presiding. 

Mr. Burton. We will call this hearing together. This is a joint 
hearing between the Western Hemisphere Subcommittee and the 
International Economic Policy and Trade Subcommittee chaired by 
my good colleague and friend, Mr. Toby Roth. 

We will start off today with Representative Kaptur and Mr. Bu- 
chanan. Before that we will have our opening remarks. We will 
then have questions for those two, and then we will have as the 
next panel, Jeffrey R. Shafer, Assistant Secretary for International 
Affairs for the Department of Treasury, Fred Bergsten, Director of 
the Institute for International Economics, and John Sweeney, the 
policy analyst for the Trade and Inter-American Affairs, at the 
Heritage Foundation and Christopher Whalen, chief financial offi- 
cer of Legal Research International, Inc. at the same time. That 
way we can get to them with our questions at the same time. 

Marcy, after you finish your testimony and answer questions, if 
you would like to join us up here on the panel because I know of 
your interest in this, we would love to have you, but we will leave 
that up to you. 

On January 31, 1995, President Bill Clinton announced that he 
was abandoning his proposal to provide Mexico $40 billion in loan 
guarantees to stabilize the peso. 

Faced with unwavering public and congressional opposition to 
this plan, the President announced his intention to bypass Con- 
gress and instead, loan $20 billion directly to Mexico. 

The money to provide these new loans would come from the 
Treasury Department's 60-year-old exchange stabilization fund 
which was established under the Gold Reserve Act of 1934 and was 
intended to protect and defend the U.S. dollar against international 
currency fluctuations. 

Many people question whether stabilizing the peso with this 
money will not eventually destabilize the dollar, or at least cause 
some severe problems. 

While the President's new loan package was welcomed by most 
in the international community, it, like the previous loan guaran- 


tee package, seems to have little support here in the United States 
of America. 

In the case of the loan guarantee package, the American public 
and Congress were provided an opportunity to review the specifics 
of his proposal. Unfortunately, no similar opportunity was provided 
to review the loans agreed to just yesterday between the United 
States and Mexico. 

And I might add at this point that I was one of the five people 
who worked on the original legislation, and we had provisions in 
there that dealt with not allowing Mexico to give assistance di- 
rectly or indirectly to Cuba. That was not in the package yesterday. 

We also dealt with the drug problem and illegal immigration 
problems, and those were not illuminated or addressed in the 
agreement yesterday. 

Regrettably, the President's loan package now appears to be a 
done deal. Nevertheless, myself, and the chairman of the sub- 
committee on international economic policy, Mr. Roth, believe that 
our subcommittees still have an obligation to the American people 
to carefully review every detail of this package. 

We also want to provide concerned Americans and Members of 
Congress with an opportunity to express their concerns. The sad 
fact is that Americans have many unanswered questions about the 
loan package. 

What did the Clinton administration know about the impending 
Mexican economic crisis? Why did President Clinton praise Mexico 
at the Summit of the Americas as a case study of successful eco- 
nomic development 10 days before its economy collapsed? 

How will the United States replenish our exchange stabilization 
fund after our loans are granted? What happens if the price of oil, 
which is being used to guarantee our loans, goes down? 

These are just a few of the many legitimate questions which my 
office is receiving every single day. It is my hope that the adminis- 
tration can provide the answers to some of these questions today. 

I yield to Representative Roth, the chairman of the Subcommit- 
tee on International Economic Policy and Trade, for his opening re- 

Mr. Lantos. Mr. Chairman? 

Mr. Burton. Yes, sir. 

Mr. Lantos. Will you give the courtesy to the minority to make 
an opening statement? 

Mr. Burton. I will, I will. 

Mr. Lantos. I want to thank the Chair. Mr. Chairman, I was 

Mr. Burton. Well, we are not finished yet. 

Mr. Lantos. I am very sorry. 

Mr. Burton. Let me finish my comment. Today we will hear tes- 
timony, as I said, from Marcy Kaptur, the Congresswoman from 
the Ninth District of Ohio, Jeffrey Shafer, the Assistant Secretary 
for International Affairs with the Department of the Treasury, Pat- 
rick Buchanan, syndicated columnist, Mr. John Sweeney, a political 
analyst with the Heritage Foundation, Mr. Christopher Whalen, 
the chief financial officer with Legal Research International, and 
Dr. Fred Bergsten, the director of the Institute for International 

And I want to thank all of you for being here. I hope that you 
will as much as possible confine your remarks to a 5-minute open- 
ing statement, because we do have a lot of questions we would like 
to ask. 

And with that, I will yield to my distinguished colleague for his 
opening comments, and then I will yield to Mr. Roth. 

Mr. Lantos. I want to thank you, Mr. Chairman, for giving me 
an opportunity to make an opening comment, and with all due re- 
spect, some aspects of your opening statement I will take the lib- 
erty of correcting for the record. 

I think it is important to realize, and I believe I am quoting you, 
Mr. Chairman, that you are referring to this package as the Presi- 
dent's package which has faced unwavering congressional opposi- 

Nothing could be further from the truth. The distinguished lead- 
er of the U.S. Senate on the Republican side, Mr. Dole, and the dis- 
tinguished Speaker of the House, Mr. Gingrich, when this proposal 
was initially floated, expressed strong support for bailing out Mex- 

I think it does not serve historical truth, Mr. Chairman, one iota, 
to cast this as a partisan issue, so let me review in the brief mo- 
ment I have what, in fact, is the history of this bailout. 

The history of this bailout goes back to NAFTA, during the 
course of which, the administration and the majority of Repub- 
licans in both Houses, mistakenly supported NAFTA, which was 
predicated on phoney euphoria concerning Mexico's economic condi- 

With respect to this particular bailout, in its initial congressional 
form, and now in its administration form, it was opposed by many 
Democrats, including myself, and I think it is very important to set 
the record straight, and not try in an inaccurate and historically 
false manner, to draw this issue as a Republican/Democratic issue. 

It is not. There were Democrats who supported NAFTA, but the 
majority of Republicans supported NAFTA. There are Democrats 
who are supporting this bailout, both in its congressional and ad- 
ministration version, but there are other Democrats like our distin- 
guished visitor, my good friend, Congresswoman Kaptur and my- 
self, who are opposed to this. 

So I think it is important as we begin this very important hear- 
ing to stick to the historical record. This is not a Democratic pro- 
posal opposed by, as you put it, our unwavering congressional pha- 
lanx. That is not true. 

The majority of people on your side of the aisle voted for NAFTA. 
The Speaker of this House, Mr. Gingrich, supported the proposal. 
Bob Dole supported the proposal, and there were plenty of us on 
this side, and I am glad to include my friend, Pat Buchanan on this 
side, who opposed it. 

So I think it is a bipartisan issue, and it is important the hearing 
begin on that note. I want to thank the Chair. 

Mr. Burton. I thank the gentleman for his comments. Before I 
yield to Mr. Roth, let me just say briefly that it is obvious there 
is bipartisan opposition to the Mexican bailout agreement; and 
there was bipartisan opposition to the NAFTA agreement. 

My statement did not say anything about Democrats and Repub- 
licans in the Congress. What we did say was that the President 
unilaterally made this decision because he did not get the votes in 
Congress, and could not get the votes in Congress. 

The problem is, and you know it and I know it, and everybody 
in the Congress knows it, the President and some of our leadership 
was twisting arms and doing everything they could to get the votes 
for the Mexican bailout proposal. Even though there were com- 
promises made, and I alluded to some of those in my opening re- 
marks, they could not get the votes. 

And so when they couldn't, they gave up and unilaterally they 
took the action that they did. So I am not blaming Democrats and 
Republicans in the Congress, but I am saying the responsibility for 
this program now rests with the President because he did it unilat- 
erally without any action of Congress. 

I now yield to my colleague, Mr. Roth. 

Mr. Roth. Thank you. As chairman of the Economic Policy and 
Trade Subcommittee, I am delighted that we are having this hear- 
ing today. 

With yesterday's agreement, the champagne corks are popping 
all over Wall Street, but most Americans think that the United 
States has been taken for a $20 billion bungie jump with Mexico. 

Mr. Roth. That is what concerns me, and that is what worries 
most Americans. I doubt if any Member of Congress has had any 
citizen come up to them in their town hall meeting, saying boy, am 
I glad we bailed out Mexico. 

This deal is not popular with Mexico either. This is not helping 
the people of Mexico. Take a look at what's happening in this 
morning's newspaper. This deal that we just signed, it is bailing 
out the Mexican banks, and look what the Mexican banks are 
charging their people. 

Mexico lifts key rates to 50 percent. We used to have usury laws 
in our country. Fifty percent? The loan sharks are jealous of this 
deal. We cannot ignore the rising chorus of criticism in Mexico that 
their government has compromised their sovereignty. 

The people of Mexico and the American taxpayers are going to 
be paying huge amounts of money for this bailout, and is it going 
to turn Mexico against us? That is what concerns me. 

The people in Mexico, how are they going to respond? What are 
they going to say? Are they going to hold their government respon- 
sible, or are they going to hold our Government responsible? 

And what infuriates me is that they did not come up before Con- 
gress. Congress did not put its fingerprints on this bailout, the 
President of the United States did it, but not Congress. 

It is precisely because he could not get it through Congress, that 
it did not come before Congress. 

Now, the financial experts keep saying this is only a liquidity 
problem, that Mexico has assets that cover the debts, but not 
enough cash in hand. 

Do you think for 1 minute that if things really get bad in Mexico, 
that we could go down and get our billions back? No way. This 
money is gone, and it is gone for good. 

What I think the American people, what they said on November 
8 and what they are still saying today is that they want some truth 
out of our Government, and they want the politicians to square 
with them. 

Look, this is the agreement. We just got it. I got it in the last 
2 minutes. This is the agreement. Let me just quote you how it 
starts out. 

"Whereas Mexico has achieved a remarkable economic trans- 
formation over the last several years on the basis of an effective 
stabilization program and far-reaching structural reforms" — noth- 
ing could be further from the truth. 

That is precisely why they are in this pickle, and this is how this 
agreement starts out. No wonder the American people are upset. 
No wonder the American people have lost their trust and con- 

No, we want to have this hearing because we want the American 
people to hear both sides, all sides, because we owe that to our peo- 
ple, and we owe it to the people of Mexico. This is a bad deal for 
our people and for their people. 

Thank you, Mr. Chairman. 

Mr. Burton. Thank you, Mr. Chairman. We want to keep our 
opening remarks short, if we could, so let me yield to the gen- 
tleman from California. 

Mr. ROHRABACHER. Well, this will only be one minute. We are 
watching a betrayal of the American people, a rip-off of billions of 
dollars that were set aside for the security of our currency. Presi- 
dent Clinton is putting our peoples' financial security at risk in 
order to enrich a corrupt Mexican elite, and Wall Street specu- 

The President has bypassed the Congress when it was clear that 
there was no support in the Congress for this action, thus the 
President is not only betraying the interests of our people, but he 
is betraying democracy by bypassing Congress as well. 

That is all I have to say. I am mad as hell. There are a lot of 
people in Congress who are mad as hell about this. We are not 
going to see our people ripped off. We are trying to be diligent up 
here. We are trying to cut down the budget deficit because that is 
the way we ensure a better future for our children, and then we 
give away billions of dollars to Wall Street speculators and foreign- 
ers? No way. 

Mr. Burton. I thank the gentleman for his comments. Let me 
just say to my colleagues that some of the panelists are under se- 
vere time constraints, so if we can keep our comments short. 

The gentleman from Ohio, do you have comment? 

Mr. Chabot. Yes, but I will be even briefer. The Mexican bailout 
stinks, it is a bad deal for Americans, and it is a bad deal for Mexi- 
cans, and in my opinion, it rewards bad behavior. We should not 
reward bad behavior. 

Mr. Burton. I thank the gentleman. The gentlelady from Flor- 

Ms. Ros-Lehtinen. Thank you so much, Mr. Chairman. Many of 
us in Congress, not the party leaders but us, the rabble, the rank 
and file, wanted to at the very least condition the aid to Mexico on 
true market reforms, on real political openness which has been one 

party control for so many decades, and many other conditions that 
we wanted to at least place on this bailout package. 

Some of us worked on this package to get Mexico to stop financ- 
ing the Cuban regime through investments in Cuba's infrastnic- 
ture at the expense of the Cuban people, and to use a special fund 
which was established to help stabilize the United States dollar, 
not the Mexican peso, is unforgivable, so shame on the President 
and shame on both of our parties' leaders for letting this happen. 
We wanted to vote on this. 

Mr. Burton. Any others that have a compelling desire to have 
an opening remark? 

If not, we wish you would submit them for the record, and we 
will now recognize our lovely friend from Ohio, Representative 


Ms. Kaptur. I thank you. Chairman Burton and Chairman Roth, 
for the opportunity to testify at this joint hearing. I feel privileged 
to be here, and I would like to say to my friends and colleagues, 
Mr. Lantos, Mr. Torricelli, and Mr. Menendez, and Mr. 
Rohrabacher, I will be quoting many of you I guess in the testi- 
mony I give, so thank you so very much for allowing us to spend 
some time with you today. 

Let me just summarize for the record, maybe ask unanimous 
consent that my full statement be placed in the record. 

Mr. Lantos. Mr. Chairman, we can not hear the witness. If she 
would be kind enough 

Mr. Burton. Oh, fine. Would you pull the microphone a little 

Ms. Kaptur. All right. I hope this is on. 

Mr. Burton. And without objection, we will. It is. We will put 
your remarks in the record. 

Ms. Kaptur. Thank you. What I would like to do is just summa- 
rize three recommendations first which are listed on pages 8 and 
9 of the testimony, and then walk through the earlier parts with 
you, pointing out some of the key features so that we use the time 

If I were to ofier the committee recommendations, it would be 
that No. 1, the subcommittee and full committees of jurisdiction 
pass an authorizing bill strictly defining the use of the exchange 
stabilization fund, and narrowly prescribing the authority of the 
executive branch over the fund so that it will no longer be able to 
use the fund as a form of backdoor foreign aid, and perhaps that 
vehicle should be the main vehicle on the floor when we consider 
this issue in the days ahead. 

Second, my recommendation would be that when the use of the 
fund goes beyond the strict principles of foreign exchange, an ap- 
propriation by Congress should be required. It is amazing that we 
have to appropriate dollars for emergency disaster relief in the 
United States, but we do not have to appropriate dollars when this 
sort of guarantee program is put in place, and there is not an offset 
in the budget. 

And finally, we all know that Mexico's problem is not merely a 
crisis of currency. It is in the middle of a full-blown social, eco- 
nomic and political crisis, and their future defies a simple banking 

Over the weekend, Robert Novak observed in a column in the 
Washington Post, and I quote, "If all sides in Washington view this 
as essentially a financial crisis, there is nobody in Mexico City who 
views it that way. After years of denial by Mexico's rulers and their 
U.S. counterparts, this country's political system is sick unto 

The well-informed patriotic Mexicans Mr. Novak met while 
there, feel the United States Government has done them no favors 
by turning its back on continued corruption, the tightened link be- 
tween drug cartels and the government, and the absence of real po- 
litical dialogue. 

And so my third recommendation would be, and I hope the exec- 
utive branch is listening as well, that in order to reach a long-term 
stabilization plan for Mexico, I recommend that the committee au- 
thorize the United States to initiate and participate in a hemi- 
sphere commission, and appoint a special Ambassador to this pur- 

The most basic function of that commission, in addition to the 
long-term stabilization of Mexico would be the creation of a com- 
mon rule of law, sustainable economic growth policies, and the fos- 
tering of multiparty functioning democracies among our trading 
partners in this hemisphere as conditions of market entry. 

And as Mr. Rohrabacher has often said, after all, free trade can 
only exist among free people. 

Now, if I might just, those would be in the form of recommenda- 
tions, and if I might just go back and explain some of the materials 
we have supplied for the record. 

The use of the exchange stabilization fund by the U.S. Treasury 
is absolutely unprecedented, in both magnitude and duration, and 
in my judgment, is illegal. 

When I questioned Secretary Rubin a week ago at one of our ap- 
propriations hearings, he reluctantly confirmed to me that there is 
no precedent for this administration's action. The United States 
has never extended loans to a foreign country on a medium- or 
long-term basis on such a huge scale, and we have attached a table 
1 to the formal submission that was done by CRS which essentially 
documents back to 1982 how the stabilization fund was used, by 
which countries, and in which amounts. 

The recent action by the executive branch is 20 times as large 
as any previous use of the fund, and has been structured for dif- 
ferent purposes which I will outline in just a second. 

But I think it is also important to state for the record, if you look 
at the report by CRS in the last column where they talk about cer- 
tain bills being repaid to the Treasury, I think there will be those 
economic experts that will disagree regarding Mexico's repayment. 

They will say it was not a repayment, it was a refinancing. In 
other words, the principal is not paid back, the debt just gets big- 
ger, and that is part of the overall problem. 

I do not believe it has ever been the will of Congress to provide 
the executive branch with unlimited authority of this sort as a 


function of the fund. This situation goes well beyond a short-term 
liquidity crisis, or a need to defend the dollar, our dollar, in foreign 

This is an aggressive, foreign aid authorization to Mexico to prop 
up a failing economy that has its roots in deep-seated political cor- 
ruption, the lack of a rule of law, and a mismanaged economic pro- 
gram built on debt. 

Now, I would like to call your attention, and we have provided 
the full record as a part of the testimony, hearings that were held 
before your very committee on October 10, 1989, and it is ex- 
tremely applicable to what we are discussing today, and the testi- 
mony came from officials at the Treasury Department, and the 
State Department who were being questioned by Congressman Gil- 
man in a proposed economic aid package for Poland. 

And, Mr. Chairman, if you could just bear with me for a second 
here, some of these statements are incredible. Mr. Oilman asked, 
"there has been a great deal of discussion about the possible utili- 
zation of a loan from the Treasury's exchange stabilization fund to 
help stabilize the zloty as Poland tries to attack its inflationary 

And he asked, "Does the Treasury Department have the author- 
ity to loan to Poland under this program?" Mr. Barreda, the deputy 
assistant secretary for trade and investment policy at Treasury re- 
plies, "We think the appropriate way to do that is through an ap- 
propriation by Congress. We think the exchange stabilization 
funds' purpose and use quite different. We have used the fund for 
intervention exchange markets and for very short-term loans, usu- 
ally bridged to guaranteed repa3anent in a hard currency. The pro- 
posal to provide exchange stabilization funds to Poland on a longer 
term basis is a totally different use of the funds. That is much clos- 
er to foreign aid, Mr. Congressman. We think, therefore, it should 
be appropriated." 

Representative Hamilton then asked, "Let me ask some ques- 
tions about the fund. You said it was used only for short-term 
loans. Is that correct?" 

Mr. Barreda from Treasury replies, "That is right, sir." 

And Representative Hamilton asks, "By which you meant what?" 

And Mr. Barreda says, "We have two uses of the exchange sta- 
bilization fund now, Mr. Chairman. One, we use it for activity in 
the foreign exchange markets where we are exchanging dollars for 
yen or deutschmarks or vice versa. We also do it for some short- 
term bridging. In that case, we make available the dollars for ex- 
change for an assured repayment in hard currency, and we lock in 
the exchange rate." 

And Representative Hamilton says, "And short-term, in that con- 
text, means what?" 

Mr. Barreda says, "It is less than 6 months, according to the 
statute, unless approved by the President to be longer." 

And Representative Hamilton says, "You have made longer loans 
than 6 months, have you not?" 

And Mr. Barreda says, "I am not aware of any, sir. I have been 
discussing with your staff a Mexico loan, and I would like to look 
into that and get back to you." 

And Representative Hamilton, referring to the CRS chart, says, 
"Six hundred milHon dollars for 12 months to Mexico in 1982." 

And Mr. Barreda says, "That is the one I want to — " and Rep- 
resentative Hamilton says, "Are you not aware of that?" 

Mr. Barreda says, "I was not until now and I am going to look 
into it and get back to you" 

And Representative Hamilton says, "Now, of course, you could 
use this money as a bridging loan to Poland, could you not? That 
is, you could extend a loan to Poland under the exchange stabiliza- 
tion fund and then when the IMF loan kicks in, it could take over 
the loan, I mean, that is a possibility, isn't it?" 

And Mr. Barreda says, "If there's an assurance of an IMF agree- 
ment and it is short-term, we would certainly consider that, as I 
said in my testimony. What we want to be sure of is repayment in 
a hard currency being short-term." 

And Representative Solarz says, "You are saying, I gather, that 
we cannot — that if we were to use the exchange stabilization fund 
without an assured mechanism of repayment that that would be an 
illegal use of the fund, given the criteria that have been built into 
it, or would it be a breach of the fiduciary responsibility of the Sec- 
retary of the Treasury." 

Mr. Kamman from the Department of State says, "We think it 
would be an improper use of the fund, Mr. Congressman." 

Representative Solarz, and I will end here, says, "Would it be an 
illegal use of the fund?" 

And Mr. Barreda says, "It is an improper use of the fund. If 
there is going to be a chance of loss, we think it should be an ap- 

Mr. Burton. Representative Kaptur, for the benefit of the com- 
mittee, I wish you would give us copies of that, in addition to sub- 
mitting it for the record, because, and I am sure Toby as well, 
would like to have our staffs look into that, and check that out. 

Ms. Kaptur. All right, to our testimony, Mr. Chairman, we have 
attached the respective pages from that hearing held before the 
committee, and we have the full report. 

Mr. Burton. We would like to duplicate those in addition to put- 
ting them in the record. I would like to have copies of them. 

Ms. Kaptur. All right. 

[The prepared statement and attached information of Ms. Kaptur 
appear in the appendix.] 

Mr. Burton. Mr. Buchanan. 


Mr. Buchanan. Thank you very much, Mr. Chairman. It is good 
to see you up there. Many, many — several guests I should say on 
Crossfire, most of whom have been sitting on my side, but a couple 
who were on the other side, it is good to see you, gentlemen. 
Thanks for the invitation. 

You know, when I read about this agreement, a phrase from Or- 
well's 1984 came to mind. In the early pages, he described an indi- 
vidual that worked in the ministry of truth as a man of "almost 
paralyzing stupidity." 

Mr. Chairman, I cannot believe that the Government of the Unit- 
ed States is proceeding with this decision which is going to return 


not to the benefit of this country, but to the damage of her national 

First, we are violating Mexican sovereignty. We are interfering 
in the internal affairs of a neighboring country. If we remember the 
reaction of Americans to the Stamp Act some 200 years ago, you 
can imagine the reaction of Mexican patriots to what we are doing 
to them. 

I will talk about that in a minute. First, who benefits? Cui bono? 
The Wall Street banks who made the loans, the bad loans that 
have gone sour get 100 cents on the dollar. They benefit. 

The Mexican regime which devalued the peso, swindled Amer- 
ican investors, and depleted the income of Mexican workers to the 
point where it is now down below, in real terms, what it was in 
1980, the Mexican regime benefits. 

Now we hear that the Mexican banks and their depositors, espe- 
cially wealthy Mexicans and Americans will benefit. 

Who pays? The U.S. taxpayers, $20 billion. That will be gone. We 
can kiss these loans goodbye. The Mexican people will pay in an- 
other way. We are imposing, or the Mexican regime at our behest 
is imposing a regime of austerity which will induce a recession and 
possibly a depression in Mexico. 

Who do we think the Mexican people are going to blame for this? 
Let me suggest that the Zedillo government, within a matter of 
months, will be urging- the Mexican people to blame the United 
States for their hardship, for their misery, for their problems which 
are certain to occur. 

As a consequence of this, I think we are going to earn decades 
of enmity and hostility from the Mexican people who are our 
friends and neighbors. I do not think an enemy could have 
dreamed up an arrangement that is going to be more damaging to 
America's interests. 

Finally, this is not going to work. You do not help a bankrupt 
government which is drowning in debt by placing it $53 billion 
deeper in debt. 

Mr. Lincoln said they have a right to criticize who have a heart 
to help. Now, what should, in my judgment, this Congress do? I do 
not believe this is necessarily a done deal. 

First, I think there really ought to be a congressional investiga- 
tion. We have been told our country was on the edge of an abyss, 
and this bailout is vital, but if we are on the edge of an abyss, who 
exactly brought us here? Who lead us here? 

The Secretary of the Treasury, Mr. Rubin, was at Goldman Sachs 
when they lead the investors into these Third World investments. 
He was the chairman of the Economic Security Council which was 
supposed to watch over NAFTA, and watch over the capacity of the 
Mexican Government to repay its debts, and to live up to NAFTA. 

He is also the individual who has put together the great bailout. 

Second, I would recommend a congressional resolution which 
condemns this usurpation of congressional power. The founding fa- 
thers and the constitution gave to Congress the power of the purse, 
not to the President of the United States. This bailout, the $20 bil- 
lion aspect of it alone, is almost 50 percent more than the entire 
foreign aid bill, annual bill for 1 year, and it is being done by Exec- 
utive order. 


I do not believe this was authorized by the Congress, and we 
know that before the bailout was announced, it was against the 
will of the American people, 80 percent of whom opposed it. 

So there is a secondary issue that may even be primary here, 
and that is — Is this Congress relevant? We are fighting in the 
House under the leadership of Mr. Gingrich over funding for PBS 
and NPR and CPB. I believe that funding is about $350 million 
which means this bailout, if my arithmetic is correct, is 150 times 
as large as the NPR, CPB, PBS funding, and there is no resistance 
here, although there is a tremendous battle over public broadcast- 

I have spent 8 years working in the White House under Presi- 
dents Nixon, Ford, and Ronald Reagan, and I believe had they done 
something like this on their own authority, the charges of an impe- 
rial presidency would have been made and there would have indeed 
have been occasional impeachment resolutions put into the House 

Now, what should be done? I still believe that Wall Street has 
got to be required to take the hit for its mistakes. They made the 
loans, they got the benefits, and they ought to take the losses. 

Second, Mr. Zedillo should face the music of what he and his 
predecessor have done, but third, we ought to stand by to help our 
friends, and our friends are not the Government of Mexico, or Mr. 
Salinas or Mr. Zedillo. They are the people of Mexico who work as 
hard as Americans do, and who have now seen their real income 
reduced to something like one-tenth of what Americans earn, and 
below what it was in 1980. 

Finally, because of what I think is going to happen in the next 
several months, and what has happened already out in Negales 
and in California, I do believe the United States ought to consider 
moving immediately to build a security fence along its border and 
to move some National Guard troops there if necessary, because I 
think what you are going to see, as spring and summer comes, is 
a great invasion of America by people who have been robbed of 
their earnings and income, and are seeking a chance to earn just 
a minimum wage in the United States. 

Mr. Chairman, NAFTA was a swindle. The giant sucking sound 
is not only jobs heading south, but $50 billion heading south. In re- 
turn, we are going to earn the enmity, resentment and even the ha- 
tred of our friends, the Mexican people. 

Thank you. 

Mr. Burton. Thank you, Mr. Buchanan. We will now have a few 
questions from the members of the committee. I will ask this of 
both of you, and Marcy. Representative Kaptur, I know you have 
been working on this area for a long time. 

One of the big arguments that has been made, and I think you 
both alluded to it, was that if there is a complete economic collapse 
in Mexico, we are going to have a flood of illegal aliens. We are al- 
ready getting 1 to 2 million a year, but it will be increased dra- 
matically, and it will have a tremendous adverse impact on the 
economy of the United States. 

In your opinions, how real is this threat, and is this approach 
that President Clinton has decided to use, the right approach in 
dealing with that problem? 



Ms. Kaptur. Well, let me say, first of all, I think that already 
at our borders it has been proven that hungry people run to aid, 
and we are seeing a greater flow across our borders at different 
checkpoints. This has already occurred. 

The President has dispatched some additional border security 
down there, and I think we are going to see that continue because 
I think the situation in Mexico with interest rates being what they 
are, and with wages what they are, the situation will exacerbate. 

One of my big concerns coming from the Midwest, and we are far 
from southern California, Arizona, New Mexico, but I will tell you, 
the largest drug transit route to Toledo, OH is from Mexico. 

We have literally had kidnappings in our community related to 
that drug trade, and I serve on the Agriculture Committee, so I 
know this, we only check 1 of every 600 trucks that is coming over 
that border legally, legal crossings of the border points that are 

I am very, very worried that we are not securing our borders 
properly, and taking a look at what is coming into this country, so 
I would urge the committee, and I know the Chairman has been 
a real leader on this, on this drug situation. 

I had one person say to me, Marcy, when you need quick money, 
what do you do? You sell assets. Well, what could they possibly sell 
in Mexico? They could sell airports and ports, and who's got the 
money to buy it in the Mexican situation? You do not have to be 
a mathematical giant to figure out who's got ready cash down 

So I guess I would just say I agree with Mr. Buchanan in terms 
of border security, but not just in terms of people. I think we have 
to look at goods, and we have to check those vehicles coming over 
the border. 

Mr. Burton. I want to make this question very clear. Do you 
think that the action taken by the President will, in a positive or 
a negative way, or in no way, affect the mass of illegal aliens com- 
ing across that border? 

Ms. Kaptur. In my own judgment, it is very small compared to 
the need, but I will let Mr. Buchanan comment. 

Mr. Burton. Well, the illegal aliens have already doubled, I un- 
derstand then since I was in Mexico at Nogales a year ago. I think 
much of the damage has already been done in Mexico. 

I think you are going to get a dramatic increase in California and 
Arizona and Texas. Americans, our first obligation is to protect our 
own borders. As Ronald Reagan said, a country that can not protect 
its own borders is not really a country anymore. 

But I think, Mr. Chairman, that the bailout is not going to help 
this situation. If we did not do the bailout, what would happen is 
the Wall Street banks would have to roll over the loans themselves. 

The Mexican Government to find funds to even repay that, would 
have to behave in a way that would be conducive to the Mexican 
economy. They would have to start selling off their own assets, 
Pemex and all the rest, to get funds. 

That would rebound to their benefit. By getting the United 
States in there, we are simply enabling the Mexican Government 


to continue doing what it has been doing, and relieving them of the 
pressure to do the right thing. 

Thank you. I am not going to use all my time because we do have 
time constraints. Let me yield to Mr. Lantos for his question. 

Mr. Lantos. I want to thank both witnesses, and I would like to 
ask each of them the same basic question. NAFTA was sold to the 
American people by a bipartisan coalition basically on the strength 
of the notion that with some reductions in Mexican tariff barriers, 
the United States would be able to sell vast quantities of goods to 

Now the peso has been devalued by over 40 percent. Is it not 
true that this makes American products in Mexico dramatically 
more expensive, and whatever minor benefits could have accrued 
as a result of tariff reductions, are swamped by the devaluation of 
the Mexican peso, so the underlying assumption of NAFTA that 
lower tariff barriers, this would be a tremendous boost to American 
exports has been completely wiped out? 

I would like first, Congresswoman Kaptur, to comment. 

Ms. Kaptur. Congressman Lantos, you are absolutely correct, 
and what is interesting, if you check the trade figures with Mexico 
for the past 15 years, and you look at each Presidential election in 
Mexico — 1982, 1988, 1994 — you will see that there is a false manip- 
ulation of the market that occurs around the value of the peso that 
effects our trade policy. 

If you look at last year, right after NAFTA passed, and you see 
right before the Presidential election in August what is happening 
with two-way trade with Mexico, it was about one-fifth of what it 
used to be 5 years ago. We had over a $5 billion surplus. It was 
cut down to about a $1.8 billion, and then it began moving down, 
but they pumped it up just a little bit before the August election, 
and then the minute the election happened, the numbers head 
south like this. 

Until October, we moved into deficit with Mexico. In November, 
we had accrued over $370 million deficit. In December it was even 
larger, and then with the peso devaluation, we are now going to be 
facing continuing and enlarging trade deficits with Mexico. 

I might say that the only goods that are going, largely the goods 
that are going down there are U-turn goods that are going from 
companies that used to manufacture in Ohio and Indiana and our 
parts of the country, going down there, they are put in an Escort, 
let us say, and then that is sent back over the line to be sold in 
the United States. 

So even the trade that is going down, there is a false export mar- 

Mr. Lantos. Thank you. Mr. Buchanan? 

Mr. Buchanan. Congressman, I believe you are exactly right. 
The NAFTA deal was sold at a peso to the dollar ratio of about 3-i- 
to 1. It is now much closer to 6 to 1. 

I believe the devaluation was deliberate, and it was an effort to, 
in effect, adopt a beggar thy neighbor policy at the expense of the 
United States, and to the benefit of the Mexican Government. 

There is no doubt that the $5 billion surplus that was talked 
about in 1992 had been cut by two-thirds to over $1 billion I be- 
lieve in 1993, and 1994. That surplus is going to vanish, if it has 


not already vanished this month. We are going to face a horren- 
dous trade deficit with Mexico. I think it is undeniable. 

I think the anecdotal evidence from the stores and shops and 
things along the border, the Mexican folks are not coming across, 
and I think the inducement of American corporations, now that 
they have suddenly seen the Mexican workers get a 40-percent pay 
cut in real terms, to move their plants and expand their plants 
down to Mexico is going to be obvious. We are going to face a large 
and growing trade deficit with Mexico this year. 

Mr. Lantos. If I may pursue one more item, last year when 
NAFTA was under discussion, the subcommittee I chaired, the 
Subcommittee on Human Rights revealed in testimony appalling 
violations of human rights, civic rights, labor rights, and child 
rights throughout Mexico. 

The "Country Reports on Human Rights Practices" just published 
by our own Department of State a few weeks ago says the following 
things about Mexico. 

"Major human rights abuses in Mexico included the violence and 
killings in Chiapas, as well as extrajudicial killings by the police, 
torture, and illegal arrests. Other abuses included glaring prison 
deficiencies, discrimination and violence against women, and exten- 
sive illegal child labor." 

Now, this is not the kind of a government that we should be bail- 
ing out to a tune which is literally astronomical. I think we are fac- 
ing an horrendous foreign policy mistake, supported by the Repub- 
lican leader in the Senate, supported by the Republican Speaker of 
this House, and unfortunately, supported by the administration. 

Thank you, Mr. Chairman. 

Mr. Buchanan. Mr. Chairman, if I could comment on that very 
briefly, I agree with you, and I said at the time of the NAFTA de- 
bate that this Government was not a worthy partner for the United 
States of America. Its record did not indicate it was a worthy part- 
ner, and we are now not only facing a $53 billion bailout, I think 
the situation is going to be a good deal worse than that. 

I will tell you, when my old friend Henry Kissinger testified or 
wrote just before NAFTA, he said "I know of no more competent 
Government anywhere than the Mexican Government," I think it 
was part of an establishment of both parties which badly mislead 
the Congress, and badly mislead the American people. 

Ms. Kaptur. Mr. Chairman, if I might just say 15 seconds here, 
for the record, we have attached a memo paid for by Chase Man- 
hattan Bank released January 13 of this year that indicates it is 
not just the Government of Mexico that has trouble understanding 
the meaning of human rights, but some of their creditors that in- 
clude major United States institutions like the Chase Manhattan 

And if you read the memo carefully, you will see statements in 
there such as Chase Manhattan Bank basically says that the 
Zedillo administration will need to consider carefully whether or 
not to allow opposition victories, even if fairly won, at the ballot 
box, and they also encourage suppression of popular uprisings in 
Mexico where people are basically demonstrating so they can eat 
something, and hold on to the little plot of land that they have. 

We have submitted that for the record. 


Mr. Burton. Thank you, Ms. Kaptur. I want to apologize to my 
colleague, cochairman of this meeting, Mr. Roth. I should have rec- 
ognized him earlier. Mr. Roth. 

Mr. Roth. I just wanted to say that we have heard excellent tes- 
timony here this morning from these two witnesses. Congress- 
woman Kaptur, you have done an excellent job. I must say I am 
very impressed with your detailed presentation here this morning, 

Ms. Kaptur. Thank you. 

Mr. Burton. And Mr. Buchanan, that was a powerful statement. 

Mr. Buchanan. Well, thank you. 

Mr. Burton. But before I ask a question, I want to say some- 
thing here. 

Mr. Buchanan. Sure. 

Mr. Roth. That concerns me. Pat Buchanan, a man I admire 
very much, you have this love-in with Mr. Lantos. I would not see 
a Buchanan/Lantos 


Mr. Buchanan. I will get you some tapes from Crossfire which 
show some differences of opinion. 

Mr. Roth. Mr. Buchanan, let me ask you this question, because 
you made a powerful statement here. If I interpret you correctly, 
you said that, you made the point that we are causing a recession 
in Mexico, and just so that we can bail out Wall Street and the 
Mexican ruling class. 

I note that they have 37 billionaires in Mexico, the highest per 
capita of billionaires an3rwhere in the world are in Mexico, but they 
have all their money up here. 

Mr. Buchanan. Uh-huh. 

Mr. Roth. Now, is that the essence of your statement basically? 

Mr. Buchanan. That is certainly a part of it, Congressman. His- 
torically, the IMF comes in and imposes conditionality upon gov- 
ernments in exchange for the funds it gives, and in many cases, 
they impose tax increases and devaluations, and in many countries, 
the IMF has become a despised and hated institution because it en- 
ables the host country to blame the IMF, and those who are outside 
for all the pain and suffering and hardship through which the peo- 
ple have to go. 

In this arrangement, the United States is playing the role of the 
IMF, and all that resentment and anger and rage is going to be di- 
rected, and partly by the Government of Mexico itself, right at the 
United States of America. 

The Mexican regime will say do not blame us, they made us do 
it, and this is why it is a disaster for America. 

Now, let me add one point. There is no doubt, however, that 
given the blunders and failings of the Mexican regime, the devalu- 
ation, the loss of income and of wealth by the Mexican people, they 
are going to go through hard times anyhow, but it is vitally impor- 
tant that the United States not be blamed for this, that we stand 
aside and let the full responsibility fall upon the Mexican regime, 
the Salinas/Zedillo regime which is responsible. 

And then if the Mexican people need help because they are our 
friends, and they are good people who have gone through a hard 
time because of their Government, we ought to be there to help 


We ought not to be playing the miserly banker which tells them 
what they ought to do, and puts them through this kind of hard- 

Mr. Roth. I want to ask two quick questions. The other one deals 
with Congress. We respect your opinions here, but did you say that 
Congress, that this is an executive order, but if Congress lets this 
Executive order stand, Congress will be derelict in its duty? 

Mr. Buchanan. Mr. Congressman, I do not mean — if I were you, 
I would take the issue to court, but I would certainly pass a resolu- 
tion condemning this, saying that the Congress does not support 
what is being done, and get the whole Congress on record. 

If you read the Constitution, the first branch of Government is 
sitting right up here. It is not down the street where Congressman 
Rohrabacher and I used to work. Congress is the first branch of 
Government. You have the power of the purse, and you are arguing 
over, and I think you ought to, PBS, CPB, and NPR, as I men- 
tioned, $350 million. This is a $53 billion bailout over which you 
have no say whatsoever. 

I think you really ought to re-assert your authority, sir. 

Mr. Roth. One of the things that we were told here is that this 
thing in Mexico was dragged out and got worse because Salinas 
had to keep a strong economy so he could be appointed as head of 
the World Trade Organization. 

Mr. Buchanan. Right. 

Mr. Roth. Now Mr. Clinton is very much in Salinas' corner to 
have him have that position. How do you feel about that? 

Mr. Buchanan. I do not think that is the candidacy that is going 
to make it. I think Mr. Salinas is not going to make it at all, but 
I agree with you in terms of what he did. 

I understand, and I may be mistaken, but I believe I heard he 
is now a board member of Dow Jones, which owns and operates the 
Wall Street Journal, but I do not think anyone is going to advance 
Mr. Salinas' candidacy for the World Trade Organization. 

Mr. Roth. Just one or two more questions. 

Ms. Kaptur. Mr. Chairman, if I might just inject there. A seat 
on the Dow Jones board pays a minimum of $1 million, and I might 
also mention that the Prime Minister, former Prime Minister of 
Canada, Mr. Mulroney, shortly after NAFTA was signed, was ap- 
pointed to the board of Archer, Daniel, Midland and Co., where a 
board seat, minimal payment for that is over $100,000 a year. 

Mr. Roth. Let me just ask one more question because I think 
this is a thing that we really have to be concerned about. 

The Russians have now come and said to us hey, you bailed out 
Mexico, we want some help from you other countries. I see in the 
New York Times this morning, or the Wall Street Journal, I am 
sorry, the Wall Street Journal, the very paper you mentioned, said 
that Italy is in a chaos, that the lira is going down like a rock. 

It talks about what is taking place in that country, what the peo- 
ple are going through. Pat Buchanan, you are President, 1997, the 
Italians come to us and say hey, you have got to bail us out. What 
is your response? 

Mr. Buchanan. Arreviderci. [Laughter.] 

Mr. Roth. Thank you very much. 


Mr. Burton. My good friend, Mr. Torricelli, the ranking Demo- 
crat on the Western Hemisphere Subcommittee. 

Mr. Torricelli. Thank you very much after that unfortunate se- 
ries of comments. [Laughter.] 

Mr. Torricelli. I will remind my colleagues that the Italians 
have a higher savings rate than the United States, and a faster 
growing economy. 

I would like to compliment you both on your statements. Marcy, 
as usual, it was a very thoughtful statement, and Pat as well, you 
have made a real contribution to the committee. 

Mr. Buchanan. Thank you. 

Mr. Torricelli. Political theorists have always argued that 
there is a point at which left meets right on the political spectrum. 
We may have found it on this occasion. 

I remember 2 days before the NAFTA vote when I announced my 
own decision to vote against NAFTA, the next day in the Washing- 
ton Post, there was an editorial that in a bizarre twist of the 
NAFTA vote, a member raised foreign policy concerns for being 
against NAFTA. 

It does not look so bizarre anymore. A nation ties itself to the 
economic future of another people at great peril. It is to be done 
extremely carefully. Combining the economic futures of the United 
States and Mexico, absent similar political systems, economic deci- 
sions, was always a questionable proposition. What no one would 
have predicted is that it would have been clear quite so fast. 

Pat, I strongly agree with several of your comments in that in 
the natural course of the political life of Mexico, when the current 
situation worsens, and there is pain to be shared, there is only one 
appropriate people to be blamed for their circumstances, and the 
Mexican political leadership is going to blame the United States for 
whatever prescriptions there must be to change their economic cir- 

It is an unfortunate and a cruel irony that the world's oldest rev- 
olutionary government, the United States of America, becomes the 
defender of the status quo. If this means anything, these loan guar- 
antees, it is ultimately the United States defending the economic 
elite, and the one-party Government of Mexico. We have become 
the ultimate defenders of the status quo, postponing the inevitable 
political change away from one-party government, and the com- 
plete modernization of their economy away from a oligarchy. 

We are the defenders of that old order, and that is only the be- 
ginning of my fears. I also fear that what is happening in Chiapas, 
the loss of life, the potential spread of that rebellion, the Mexican 
Government is going to argue that the human rights abuses and 
the internal strife of its people is under the commands of the U.S. 
Government, and necessary because of conditions that were made 
for these loan guarantees. 

We are potentially at a point where generations of Mexicans are 
going to look to this date, and these circumstances, and hold us in- 
appropriately responsible for what has happened in their own coun- 
try. We have interfered with the natural political process of mod- 
ernization, and the change of leadership, and we do so at consider- 
able, considerable peril. 


Finally, I want to say as well, that in the natural process of our 
own Government, this Congress was guaranteeing the security of 
the U.S. Government funds by asking for legitimate conditions. 

I do not believe that the Pemex assurances on oil revenues are 
real guarantees. There is no one who can argue that if there is a 
Mexican Government default, and the Mexican people are headed 
for political chaos and economic crisis, that the United States is 
going to actually divert and hold the entire export earnings of Mex- 

Everyone here knows, the administration will return to Capitol 
Hill and argue we have the legal right to hold the revenues, but 
it would be against our political interests and the economic inter- 
ests of Mexico, therefore we are not going to do so. 

No one can believe that that would not happen. Therefore we are 
extending these billions of dollars worth of guarantees, and in fact, 
holding no real guarantees. 

Second, I want to argue that however unfortunate this crisis may 
be for the Mexican people, the administration has argued that it 
was necessary to prevent financial disorder from spreading to the 
United States, but in fact, this program may guarantee that that 
financial chaos spreads to the United States. 

After the guarantees were signed, a run began on the dollar be- 
cause now we have tied the fate of the dollar to that of the peso, 
and the markets know that there is no real guarantee for these 
loan guarantees. They can see through the Pemex guarantees. 

The United States in this fund has $25 billion to defend the dol- 
lar, and $20 billion of it was just used to defend the peso. By some 
grade school mathematics, that would lead one to conclude that 
there is precious little left for the dollar. 

Finally, I want to argue that this Congress had a right to ask 
the Mexican Government that if they were going to receive U.S. 
Government guarantees, that they cease subsidized investments in 
Cuba. The end of a totalitarian government in Cuba is a legitimate 
foreign policy objective of the United States. 

We have placed conditions of political pluralism and foreign pol- 
icy on Russia to receive United States assistance, but we are told 
that it would be inappropriate to do so with Mexico. 

I would like somebody to explain to me the difference. If the 
United States wants to see a foreign aid program go to Cuba, it is 
much more efficient to do so directly. We do not have to run the 
money through Mexico City, and in fact, that is exactly, exactly 
what has happened. 

And Ms. Kaptur, if you want to add to your repertoire of the 
former President of Mexico's activities, I would remind you that he 
personally negotiated the Mexican investments in Cuba of the 
Mexican phone company, and he was also an investor and sits on 
the board which is now, of course, which indirectly get guarantees. 

You may not have seen a question in there. I can come up with 
many, but in my enthusiasm to respond to your comments, I think 
I have consumed my time. 

Ms. Kaptur. If the gentleman would give me 5 seconds to re- 
spond to you, Mr. Chairman, I just wanted to point out after those 
eloquent remarks, on page 7 of our testimony, as well as in the at- 
tachments, we have tried to tell you who the fellow travelers are 


with Mexico in the deal that was just struck, and we Hst mutual 
funds such as Scutter, Merrill Lynch, Fidelity, Solomon Brothers. 

We certainly mentioned Goldman Sachs, Chemical Bank, Chase 
Manhattan, Morgan — these are all from news articles that have 
been published in the United States. 

And if I could just say, Mr. Chairman, I have this dream, maybe 
not as big as Martin Luther King had, but I would love to take the 
CEO's of all these companies, dress them in fatigues, put them on 
an airplane, take them down to Chiapas, and we are going to spend 
2 weeks, and we are going to live like the people there live, and 
they are going to eat tortillas and they are going to understand, 
and especially the head of Chase Manhattan who did that memo, 
and have them understand what those people are facing down 

Wouldn't that be a diplomatic mission? 

Mr. Burton. I thank the gentlelady for her comments. Pat, do 
you have a brief comment? 

Mr. Buchanan. Yes, I would. There is no doubt through NAFTA, 
it was something of a shotgun marriage to an unpopular, corrupt, 
deceitful regime that is undemocratic, and now we are aligned with 
that regime in Mexico, I think against the interests of the Mexican 

What is going to happen, if I can make a prediction, is that you 
are going to see anti-American demonstrations as conditions get 
worse. There may even be anti-American riots down there as a con- 
sequence of which. Congressman Torricelli is correct, we are not 
going to grab the revenues from Pemex, the Mexican Government 
is going to come to us, and we are going to take a look at this situ- 
ation down there, and we are going to agree to let the Mexican 
Government relieve the austerity rules and all the rest of it that 
has been imposed because they are doing so much damage to 
America's national interest. 

I also agree with Congressman Torricelli, Cuba is a valid foreign 
policy interest of this country, and that is a legitimate demand to 
make upon the Mexican Government. 

Mr. Burton. I thank the gentleman for his remarks, and I would 
just like to say to Congressman Torricelli, he is right on the money 
once again. We had in the legislation that was going to be pro- 
posed, three things that were not in the agreement the President 
signed yesterday. 

First, there were not going to be any funds directly or indirectly 
going from Mexico to Cuba. 

Second, there was going to be money placed in an escrow ac- 
count, or negotiable securities from the Mexican Government, 
placed in an escrow account to guarantee $3 billion or $4 billion of 
the first tranche of the loan, which meant that the U.S. taxpayer 
probably would not lose any money if that deal had gone through 
with that in there. 

Third, we were going to do something about the illegal alien 
problem on the border. 

None of those things were in the agreement that was signed yes- 
terday, and I thank the gentleman for pointing those things out. 

I would be happy to yield now to my colleague from California, 
a former colleague of yours at the White House. 


Mr. ROHRABACHER. Well, it seems I am always the skunk at the 
lawn party, so I might as well continue being the skunk at the 
lawn party in terms of NAFTA discussion today. 

I do not believe that it is intellectually defensible to suggest that 
what we are facing now is a direct result of anjrthing to do with 
NAFTA whatsoever, and I would like you to tie that together for 
me, because my feeling is that if NAFTA never would have passed, 
and Mexico would still be in the same spot that it is today, would 
we be bailing out Mexico? Would this administration be proposing 
the same bailout? 

The answer is yes, and if this is a response to the Mexican elite 
in a too close relationship with decisionmakers in Washington who 
think of themselves as part of the world's elite, rather than as part 
of the American people, whether or not this is the Washington 
decisionmakers too close to speculators in other countries, there is 
nothing to do with NAFTA at all. 

I supported NAFTA and I continue to support NAFTA because 
a way that people can improve their lot by trading with the United 
States is the way to go. You know, telling people, whether it is in 
Mexico or anywhere else, that if you want to improve yourself, you 
have got to have an economy that works, and you have got to be 
able to ship goods to the United States and sell back and forth to 
us, that is something far different than suggesting we should be 
giving tens of billions of dollars in a loan that will never, in a loan 
guarantee that will never be repaid, two totally different issues. 

One is a betrayal of the American people. The other one is simply 
trying to promote trade, and perhaps giving them an option on cor- 
recting their situation. 

I will, through hard work, I will let you answer that one, and 
then I have got one other question to go through. Would you like 
to take a shot at that, both of you? 

Ms. Kaptur. Well, in terms of two-way trade, the gentleman is 
right, the debt pyramid in Mexico preceding NAFTA, but was exac- 
erbated by NAFTA, simply because the Mexican Government and 
some of our own United States interests encouraged people to pur- 
chase consumer goods. 

There was a pile-up of more consumer debt, and part of Mexico's 
difficulty was actually monetizing those purchases where they were 
getting goods from Asia and every place else. 

Mr. ROHRABACHER. We have actually done this before. This is not 
the first bailout, and we never had NAFTA before. 

Ms. Kaptur. Right. 

Mr. ROHRABACHER. The other bailouts happened 

Ms. Kaptur. But by any geometric measurement 

Mr. ROHRABACHER. This is the largest. 

Ms. Kaptur. It is much larger than any 

Mr. ROHRABACHER. It is about three times larger than the last 
bailout proposal. 

Ms. Kaptur. Correct, correct, so I think in that sense there is a 

Mr. ROHRABACHER. Right. And in terms of the corrupt PRI, we 
know that the PRI is a corrupt institution, and certainly those of 
us in California know that, and we know that is probably at the 


heart of most of Mexico's problems which is what your testimony 
was all about. 

But there is also, at the time that we did pass NAFTA, there 
were signs that this PRI control was in some way beginning to 
crumble, and that good people in Mexico were stepping forward, 
out of their anti-American stance for the first time in my lifetime, 
and reaching for it to have a better relation with the United States. 

The Pan party, the Pan party who had just won its elections in 
Jalisco, that is a wonderful sign for the future in Mexico. The Pan 
party is probably going to be the one saving grace for that country, 
and while I agree with you about the corruption of the PRI, I do 
not think that we can write off Mexico. 

The idea of writing Mexico off and saying we are not going to 
deal and have any business relationships with Mexico, we are not 
going to give them a trading relationship with the United States, 
that is the wrong approach. 

Bailing them out is also the wrong approach. Trying to treat peo- 
ple as adults and responsible neighbors, that is the right approach, 
and putting our own country at risk because of the irresponsibility 
of our neighbors is also not only the wrong approach, but is a be- 
trayal of our own people which is, I believe, a great sin that is 
being committed as we speak against our own people. 

And Pat? 

Mr. Buchanan. You know, we could go back and do the NAFTA 
debate again, but let me say. Congressman, my opposition to 
NAFTA was for a variety of reasons. One was the surrender of 
American sovereignty when you had these tri-national commissions 
brought into the United States and put on American soil, I did not 
like to see that, and I even more did not like to see what happened 
in GATT. 

Second, I do not think the government with which we became a 
partner, the Mexican Government, was a worthy partner of the 
United States in any way, not only economically, but along the 
lines suggested by Congressman Lantos. 

But third, Congressman 

Mr. ROHRABACHER. But that is the government. 

Mr. Buchanan. One economic point, if I may. American corpora- 
tions have, by virtue of decisions taken in this Congress, they paid 
Social Security taxes 7V2 percent of payroll, they are under EPA, 
they are under OSHA, they have to contribute to their local com- 

There are all manner of laws, rules and regulations you put upon 
American companies, that many have argued about them and dis- 
agreed about them, but when they are passed into law, you put 
them on American companies, and then when you tell that com- 
pany, listen, if you simply take your plan across the border, you 
can pay the workers there 10 percent of what you pay them in the 
United States, do not worry about any other rules and regulations, 
and now bring your products into the United States, I think what 
you are doing, Congressman, is first you are creating an enterprise 
zone in Mexico where American companies are going. They are 
building hundreds of thousands of cars. 


Second, when those products come back into the United States, 
they undercut the American companies and their workers who re- 
main here, but that is the economic 

Mr. ROHRABACHER. You are taking out the risk factor there, Pat, 
and the bottom hne is if we bail out, one of the reasons why this 
bailout proposal is a sin against our own people and does not make 
any economic sense is because we have eliminated the risk factor 
for people who invest in a foreign country. 

Mr. Buchanan. Right. 

Mr. RoHRABACHER. To the degree that if people in our country 
have capital and want to invest in another country, and are willing 
to take the chance, that is an appropriate way for other countries 
to buildup their standard of living. 

But eliminating the risk by bailing out speculators who say hey, 
I can make 20 percent down there, and then there is no risk be- 
cause our Government will bail them out, that is what throws the 
economic equation haywire. 

So while I agree with you on some things, I certainly do not 
agree that trying to cut Mexico off from trade 

Mr. Buchanan. I would not cut them off. I have got a plan. 

Mr. ROHRABACHER. Is not the appropriate way. 

Mr. Buchanan. I agree with you. You cannot cutoff Mexico. They 
are — I mean, our destinies are going to be intertwined, but I do 
think that at a border like you have between the United States 
with its wage levels, and with all the social legislation imposed 
upon American companies, and you cannot — I mean, if you took 
Missouri, Congressman, and said that any company that moved 
into Missouri did not have to pay the minimum wage, did not have 
to follow EPA or OSHA, did not have to follow any rules and regu- 
lations and could pay its workers 10 percent of what they make in 
the United States, all the plants in America would move into Mis- 

Mr. Rohrabacher. Not if they find out that there is a major eco- 
nomic upheaval right around the comer that they will have to risk 
being part of. 

Thank you very much. We agree on most things, so thank you. 

Mr. Burton. All right. Congressman Menendez. 

Mr. Menendez. Thank you, Mr. Chairman. I want to also com- 
mend the panel. I have three questions that I would like to lay out 
and then listen to your responses. 

One is for those of us who did oppose NAFTA, and who believe 
that we had an opportunity to enter a new generation of treatises 
instead of an old generation of treatises, I recently was on a pro- 
gram with the counsel general of Mexico, and based upon ques- 
tions, he said that in fact, Mexico could not foresee its liquidity cri- 
sis, and that in fact, it could not foresee the current state of events 
that it has, which of course, I strongly doubt. 

I would like to hear your views of that. I do not know how you 
take down the amount of reserve, the Mexican reserve from I think 
it was $20-some odd billion down to $6 billion, and not foresee 
what you are doing. 

Mr. Buchanan. Right. 

Mr. Menendez. And the consequences thereof. I know that was 
part of the NAFTA debate. 


Second, with reference — so I would like to hear your view of the 
foreseeability and also our foreseeability of that — second, I agree 
with much of what you have said, and I am also concerned, and 
would like to hear your views about an aspect that does not often 
get talked about, and that is that we are creating a speculative en- 
vironment which has a consequence to middle class investors, mom 
and pop investors who get their investments through mutual funds 
and pension funds, who have been going to places like Mexico, 
emerging markets which have high yield, but also have high risk. 

And what is our obligation to middle America in the context of 
creating the speculative environment, participating in the specula- 
tive environment that puts a good deal of their investments at risk. 

And last, based upon Mr. Torricelli's comments and your re- 
sponse thereof, about Pemex, the United States not looking to 
Pemex, and not looking to ensure the austerity efforts because of 
the consequences they may derive in Mexico, do you foresee a re- 
quest for debt forgiveness at some point of the amount that the 
United States has offered? 

Mr. Buchanan. Let me start from the reverse. Look, the Mexican 
government, depending on which way you look at the debt, some 
have put it at $160 billion foreign debt. I think they owe $28 billion 
in Tesobonos this year. 

As you indicated their reserves I think were down to $2 or $3 
billion. We are putting them $53 billion deeper in debt now. Look, 
we are never going to see this money again. What is going to hap- 
pen is the loans are going to come due, and they are going to be 
rolled over and over and over and one day they are going to be slid 
over on to the national debt of the United States. 

We are never going to see the money again. 

On the liquidity crisis, Congressman, I have got to agree with 
you. In Mexico, when they see the reserves go from $30 billion, al- 
most $30 billion down to about $15 billion I believe around Decem- 
ber 20, and then go down to $6 billion, they know what is coming, 
and I believe that we ought to investigate what the American Gov- 
ernment knew. 

We have an economic security council, and they are supposed to 
watch this. If suddenly we woke up and found that there were two 
divisions of Russian troops in Canada, someone would say where 
is the National Security Council. 

I think we have got to ask exactly what was the economic Secu- 
rity Council doing, if not watching this. 

Also you have a gentleman on the panel here, Chris Whalen, and 
you also have Ross Perot, both of whom said publicly, and Chris 
Whalen said it on my program several times, the peso is over- 
valued. This was during the NAFTA debate. 

And they said it is overvalued by 25 percent. They told the coun- 
try the truth, but folks were not listening, so that would be my 

With regard to regulations, I go back on my conservative creden- 
tials there. I am not a great believer in regulation, but I do think 
that there is no question that many of these Third World invest- 
ments are far higher risk than many of the investors were told. 


As someone said, the newly emerging markets have become the 
newly submerging markets, but I do not know about regulation in 
that regard. I would leave that up to you folks. 

Ms. Kaptur. Let me just say, Mr. Menendez, that the whole 
question of Pemex and its ability to repay, based on the informa- 
tion that we have, at best, they can generate revenues of about $7 
billion a year, and it is an open question as to how much that en- 
tire operation is really worth, and how many barrels of oil are real- 
ly in the ground. 

They have been producing less and less because of capital dif- 
ficulties, labor difficulties. In fact. Oil and Gas Magazine antici- 
pates that they will be a net importer by the end of this decade, 
and those Pemex revenues constitute a minimum of one-third of 
their Treasury revenues. 

They also owe, according to Moody's Manual, those Pemex reve- 
nues are pledged to other debts that are owed in the Eurobond 
market, and some of that is a matter of public record, so I very 
much doubt the ability of our Government to call first using those 
Pemex revenues. 

Let me also say that I agree with Mr. Buchanan on the need for 
this Congress to investigate openly who is benefiting from this. We 
have not been able to get from the administration a list of the 

You asked about individual Americans who have money in unin- 
sured mutual funds. What portion of what was lent down in Mexico 
actually are those kinds of people? I do not really feel we should 
bail them out. Those are speculative investments, but we have a 
right to know. 

We have submitted in our testimony some of the firms that we 
believe did very unwise investment in Mexico, but let me just end 
with this, because I served on the banking committee for 8 years, 
and I am really disgusted with the private financial system of this 

Who loves debt the most? Who benefits from debt the most? Who 
benefits from creating money the most? It is not you and me, it is 
the largest financial institutions in this country, and we have a 
multitrillion dollar debt that is now owed cumulative by the people 
of the United States. 

Wall Street could not be happier. They could not be happier. The 
Fed works the 20 bond houses up there. You try to buy a savings 
bond. Go over there. They have taken the floor out from under- 
neath it. They do not want ordinary people to be involved in the 
financial affairs of this country. 

Consumer loans up to the hilt with debt, right? Credit cards — 
when do your kids ever get an application in the mail to open a 
savings account. All you get are 300 applications for $3,000 worth 
of credit, and you are not even graduated from college yet. 

Who benefits from that? When I served on the banking commit- 
tee, you cannot even define what a bank is anymore, and I am real- 
ly resentful, and now we have moved into the foreign realm, again 
with the largest multinational lending institutions in this country 
wanting the taxpayers to bail them out. 


There is something fundamentally wrong with the heart and the 
values of the banking system of this country, and they've got us all 
on the edge and the abyss that you talked about. 

Mr. Burton. Thank you, Mr. Menendez. Pat, thank you very 

Mr. Buchanan. Thank you. 

Mr. Burton. Thank you for coming. 

Mr. Buchanan. Thank you, Congressman. 

Mr. Burton. It is good seeing you again. Marcy, if you would like 
to join the panel up here for further questioning. 

Mr. ROHRABACHER. Mr. Chairman, can I add one amendment to 
what Marcy just said, and just 1 second, and that is every time the 
Government guarantees a loan, all they are doing is guaranteeing 
a profit to the people in the financial industry. That is all we are 
doing, and if we are going to help somebody, we might as well just 
allocate the money from the Federal treasury, because you guaran- 
tee loans, no matter what they are, no matter who they are to, we 
are just making the guy in-between, we are giving him a guaran- 
teed profit. 

Your comments were right on target, thank you. 

Ms. Kaptur. They have too much call on the U.S. Treasury, and 
they are not operating in the way that I view private sector should 
operate. I think they have forgotten who they are. They have lost 
the theology of what it means to be a bank. 

Mr. Burton. We are going to put some of your questions to the 
U.S. Treasury in just a minute, and thank you both for being here. 
We really appreciate it. 

Our next panel is from the Department of Treasury, Assistant 
Secretary for International Affairs, Jeffrey Shafer; Dr. Fred 
Bergsten, director for the Institute for International Economics; 
Mr. John Sweeney, policy analyst for the Trade and Inter-American 
Affairs at the Heritage Foundation; and Christopher Whalen, late 
of Crossfire, chief financial officer for Legal Research International, 

So could we get you all up there together with the Secretary. I 
hope he does not mind the company. That way we can speed things 
up here a little bit, and we apologize for the delay. 

We would like all four of you up there. Can we bring one more 
chair in? You can scoot in there together. 


Mr. Shafer. Forgive me, Mr. Secretary, for the inconvenience. I 
was just doing this for the economy of time. I know that tradition 
is that the executive branch testifies alone. 

We will let you testify alone, if you like, but in the spirit of time, 
we thought we would try this. 

Mr. Shafer. Whatever you wish, Mr. Chairman. 

Mr. Burton. Mr. Secretary. 


Mr. Shafer. But if I may, I will go first. I will ask if my — I will 
abbreviate my remarks and ask that my full remarks be inserted 
in the record. 

Mr. Burton. Without objection. 


Mr. Shafer. Mr. Chairman, members of the subcommittee, I ap- 
preciate this opportunity to discuss the United States response to 
Mexico's financial situation. 

It was on January 31 that President Clinton, with support from 
the four congressional leaders, announced his decision to proceed 
with a $20 billion U.S. support program for Mexico. 

It was yesterday that my boss. Secretary of the Treasury, Robert 
Rubin, and his Mexican counterpart, Guillermo Ortiz, and other of- 
ficials, signed four agreements, all carefully negotiated, to imple- 
ment this program. 

In doing so, they set in place a package to avert the threat to 
the United States jobs, standards of living, immigration concerns, 
and our security interests that are posed by Mexico's economic dif- 

I want to take this opportunity to review briefly the events that 
lead up to our adoption of these agreements. I also want to go over 
some of the details of the package which I understand that you 
chairmen have received recently. The ink is finally dry, and we 
were able to get it to you just before this meeting. 

And I would like to explain how it will work to protect American 
interests in the short-term, and in the long-term. 

It has been nearly 2 months since Mexico first encountered a li- 
quidity crisis. It was brought on by a loss of investor confidence. 
Almost immediately, the President and the congressional leader- 
ship realized that Mexico's problems were not that country's alone, 
and a Mexican economic collapse would have severe consequences 
for the United States. 

The President emphasized the strong economic stake that we 
have in Mexico. Right now, we have more than 700,000 jobs in the 
United States that depend on sales to Mexico. Mexico is our third 
largest export market. 

The President recognized the important effects that a Mexican 
economic collapse could have on illegal immigration to this country, 
as it did when Mexico collapsed in 1982-83. At that time, illegal 
immigration increased by a third as measured by apprehensions. 

The President further recognized that Mexico's collapse could set 
us back years, if not more, in our efforts to promote reform not only 
in Mexico, not only in Latin America, but around the world. 

These important interests called for the United States to be a 
leader in the effort, to restore market confidence, to help America 
avert an economic disaster. The President and the congressional 
leadership saw this. Together they announced the original proposal 
to offer up to $40 billion in financial guarantees. 

We at the Treasury as well as other members of the administra- 
tion worked hard with congressional leadership, and especially 
with banking committee chairman Leach, and also with other 
Members of Congress, seeking to ensure passage of legislation that 
would implement financial guarantees. 

Unfortunately, the international financial markets did not stand 
still. By the end of January, it became apparent that Mexico was 
approaching the brink of a financial precipice, and it is for this rea- 
son that on January 31, President Clinton, and again the congres- 
sional leadership, announced a new approach. 


He said that we would move forward with a $20 billion support 
package for Mexico which would draw on the Department of the 
Treasury's exchange stabilization fund, ESF, and with the partici- 
pation of the Federal Reserve. 

The leadership all joined in a statement that day declaring their 
full support for their program, and recognizing the President's and 
Secretary of the Treasury's full legal authority to implement this 
using ESF resources. 

And Mr. Chairman, taking an aside from my prepared text here, 
to answer a question that I know will come up after listening to 
Congresswoman Kaptur's testimony, we do believe we have the full 
legal authority for this program, and you should have received an 
opinion of our general counsel setting forth the arguments for this. 

We have also had an oral opinion from the Justice Department 
which we expect to be confirmed soon in writing endorsing that 

Congresswoman Kaptur read from the transcript of testimony by 
a Treasury official in 1989 with respect to a program in Poland. As 
I listened to your reading of that transcript, DAS Barreda who is 
a career Treasury official, and is still at Treasury, although he was 
asked on several occasions, he never said that it was illegal to use 
ESF in the way that Members of the Congress at that time were 
proposing, for an exchange stabilization package for Poland that 
would have been medium term. 

And in fact, he made the point that clearly it was a policy call 
at that time, that that was not something that they felt was proper 
for that case, and later in the Congressional Record, a full tran- 
script of that hearing, additional information was inserted in which 
Mr. Barreda said it would not be improper or illegal to extend a 
bridge loan if the Secretary of the Treasury concluded that such a 
loan would be consistent with U.S. obligations in the IMF, and was 

He went on to say that in the case of Poland, it is highly unlikely 
that such a conclusion could be justified. There had been much dis- 
cussion about the adequacy of an assured means of repayment in 
that case, but nonetheless, that is a policy call about that specific 
case, and it is quite clear from the transcript that they were talk- 
ing about this on a case-by-case basis. 

With that clarification, I would like to pick up again, and say 
that the specifics of any large financial agreement need to be 
worked out with care. We were, I think, painstaking in drawing up 
the agreements with the Mexicans. The agreements that we signed 
satisfy all our concerns. 

Throughout the negotiations, we remained confident that swap- 
ping short-term debt for medium to long-term obligations is an in- 
dispensable part of the solution for Mexico's problems. 

Looking beyond the current crisis, Mexico's prospects are good, 
and Mexico is well up to meeting all of its debt obligations. There 
are many indicators that point to fundamental improvements over 
the next 6 years, over the past 6 years, excuse me. 

The underpinning of market-based reforms coupled with new 
commitments embodied in the agreement should help put Mexico 
firmly back on the road to economic growth. 


Now let me turn and talk about the agreements and how the 
package will work. 

There were four agreements signed. First, a framework agree- 
ment that covers the entire support package. Two, an annex to that 
agreement that sets out how Mexico's obligations to us will be 
backed through oil proceeds. 

Third, an agreement covering medium-term swaps, and fourth, 
an agreement setting out the terms under which we will guarantee 
Mexican security issues. 

Through these agreements, we will make available up to $20 bil- 
lion of support over the next year, or at most, 18 months. 

Mexico has agreed to follow a financial plan showing how it will 
use this support to restructure or refinance short-term obligations 
that fall due over that period. The plan actually calls for using 
about half of the $20 billion in resources, holding the other half as 
a contingency. 

This will make Mexico less vulnerable to swings in investor con- 
fidence, avert the present liquidity crisis, restore financial stability, 
and facilitate the return to financial health. 

The support will come in short-term swaps which we now have 
in place, borrow dollars for up to 1 year, medium-term swaps, up 
to 5 years, and guarantees of up to 10 years. 

Let me be very clear on one point. The package does not provide 
Mexico with cheap support. We will charge an interest rate for any 
swaps, and a fee for any securities that we guarantee that is suffi- 
cient to cover the risk that we bear, and to induce Mexico to repay 
this as soon as they have good access to markets again. 

I want to emphasize two other points, and in fact, they were our 
guiding principles during the negotiations. One is that Mexico's re- 
turn to economic stability depends first and foremost on Mexico's 
pursuing the right economic policies. 

And second, that we were unwilling to extend any support to 
Mexico without assurances that we would be repaid. 

As to the financial, economic issues, our agreements with Mexico 
take as their basis the economic stabilization program that Mexico 
has already agreed with the IMF. Under that program, Mexico will 
pursue restrictive fiscal and monetary policies in order to strength- 
en the peso, to bring inflation down to low levels. 

This is the top objective because it is the only sure way to bring 
about a resumption of normal capital flows and a sustained period 
of growth. There is just no other way. 

There are strict conditionality in the form of performance targets. 
These oblige Mexico to cut government spending, generate a budget 
surplus, restrict credit to a degree that would bring about a large 
decline in the real stock of money, base money, and cut back on de- 
velopment bank lending. 

They are going to accelerate structural reforms in transportation, 
telecommunications, and continue privatization reforms. 

And to back this up, we have the financial plan which I referred 
to earlier which will govern how Mexico uses the resources. For ex- 
ample, it intends to retire up to $16 billion of tesobonos. These are 
the short-term dollar index obligations that are falling due. They 
intend to do that over the next year, in part drawing on our re- 
sources, but also on other forms of support. 


How are we going to assure performance to these commitments? 
The agreements are very strong on this. We made provision of sup- 
port contingent on their living up to important transparency and 
reporting requirements. This will help not only us, but the markets 
to judge more clearly what Mexico's actual financial and economic 
situation is. 

In addition, they will provide us with any additional information 
that we need to do our job here. 

Second, we are disbursing our support in stages, or tranches, 
showing the French influence on international financial lingo. Each 
disbursement will be contingent on our being satisfied that Mexico 
is making progress, that it is meeting the terms of the agreements. 

They will have to provide a complete explanation of how it plans 
to use any disbursement before we agree to that. If we are not sat- 
isfied, we can veto it. 

Other controls are built in. For example, in a number of cases, 
we can accelerate Mexico's obligations to us if they do not comply 
with key terms and conditions. 

All of these safeguards help ensure that Mexico will use the re- 
sources as agreed, they will stabilize the economy, and that our in- 
terests will be protected. The agreements were carefully con- 
structed and meticulously negotiated. 

Before concluding, I would like to emphasize that the administra- 
tion intends to keep Congress fully informed of our progress as we 
implement these agreements. We plan to update Congress on a reg- 
ular basis about the details of disbursements to Mexico, how the 
proceeds are being used, and any developments related to compli- 
ance with our agreed terms and conditions. 

Finally, Mr. Chairman, let me reiterate what President Clinton 
and the congressional leadership stated on January 31. They said 
we must act now in order to protect American jobs, prevent an in- 
creased flow of illegal immigrants across our borders, ensure stabil- 
ity in this hemisphere, and encourage reform in emerging markets 
around the world. 

We are fully confident that the agreements that have just been 
signed with Mexico will accomplish these objectives by setting the 
stage for Mexico's rapid return to stability. 

Thank you. 

[The prepared statement of Mr. Shafer appears in the appendix.] 

Mr. Burton. Thank you, Mr. Secretary. Before we turn to Dr. 
Bergsten, let me say that one of the things that concerned me, and 
I think the majority of the members of both the House and the 
Senate was that we were involved at the take-off, but we were not 
involved in the landing. 

I served with a number of others on a committee to try to come 
up with a piece of legislation that could pass the Congress and that 
met a lot of our concerns like Cuba, as Mr. Torricelli talked about, 
and like putting money in a reserve fund up here to guarantee 
against loss. 

And when it became apparent and the White House did not work 
as hard as they could have to try to hammer out an agreement, 
that you did not have the votes, unilaterally, you went around Con- 
gress. I think that has not set well, even though we do know that 

90-345 0-95-2 


on the 31st, Speaker Gingrich and Majority Leader Dole did sign 
on to this. 

I think that they have met with a bit of criticism from some of 
their colleagues because they did that without consultation with 
the rest of the Congress. 

Mr. Bergsten. 

Mr. TORRICELLI. Mr. Chairman, could you 3deld to me for a mo- 

Mr. Burton. I would be happy to yield. 

Mr. TORRICELLI. Mr. Chairman, I just want to inquire of my 
friend just a concern that Secretary Shafer is here representing the 
executive branch. 

My concern simply is I know the pressure of time, and I know 
you are concerned in getting everyone to testify. It would just be 
the precedent of having the executive branch both testify and an- 
swer questions with people outside of the Government not rep- 
resentative of the administration. 

If the Secretary is going to do that, that is fine. I just, it is so 
unusual I just think, giving the precedent of it, I wanted to put 
something on the record that I hope we were not establishing 
something for the committee since 

Mr. Burton. I certainly do not want to break precedence. I do 
not want to take advantage of the other members of the panel. If 
you would like to question 

Mr. Roth. Mr. Chairman, if I could — why don't we just ask Sec- 
retary Shafer the questions first, and then we will question the 
other panel members. 

Mr. Burton. Well, why don't we do this? Why don't we limit the 
questions to 3 minutes for each member? Then we can 

Mr. TORRICELLI. I think that is fine, and I did not want to inter- 
fere with the running of the committee, Mr. Chairman. 

Mr. Burton. That is all right. 

Mr. TORRICELLI. I just think that it is enough of a break. I am 
just concerned about what it signals. 

Mr. Burton. Well, with the understanding of the other panelists, 
we will proceed in that manner; and I will yield to my colleague, 
Mr. Roth, for three minutes. 

Mr. Roth. Mr. Chairman, before we brought up this issue of who 
is going to benefit, Secretary Shafer, why don't you tell us who is 
going to benefit from this bailout? 

Mr. Shafer. I think both the Mexican and American people, 
workers, people who earn incomes are going to be the beneficiaries 
of a program that precludes a financial crisis from turning into a 
deep recession. This is an income-destroying risk. It is not a zero- 
sum gain for us to provide financial support, financial backing to 
restore confidence, and it is financial backing that I am completely 
confident will be fully repaid, and at the same time. 

Mr. Roth. OK. 

Mr. Shafer. I do not want to claim that there won't be any 
strains in Mexico this year. They have been through enough, and 
they will be through it in time, but it would be a lot worse, and 
is to avert that damage to Mexicans and Americans. 

Mr. Roth. Seeing that we have only 3 minutes, it is interesting 
this morning that people were just baffled that this money is going 


to go to bailout the banks in Mexico. When the people in the Sen- 
ate were told about it, they said they were baffled. They had no 
idea this was going to happen so 

Mr. Shafer. It is not going to go to bail out the banks in Mexico. 
Some of it may as a part of resolving the liquidity problems in 
Mexico, be used to meet dollar liquidity needs of some banks in 
particular circumstances. We will be very careful about that, and 
it is certainly not going to support the claims of the bank stock- 

Mr. Roth. Well, my dear Mr. Secretary, if this is only a liquidity 
problem, like you said, what is going to happen when Mexico goes 
into this deep recession, because they are going to, because yester- 
day Secretary Rubin said that Mexico must take tougher steps, ba- 
sically slow down their growth rate. 

Now, if that does not mean a recession, I do not know what does. 

Mr. Shafer. I do not believe he said to slow down their economic 
growth rate, although their economic prospects have been hurt by 
this event already, but certainly they have to slow down their 
money growth rate, and that is a part of mastering the inflation 
problem that they have. 

Mr. Roth. Well, thank you, Mr. Chairman. 

Mr. Burton. Mr. Torricelli. 

Mr. Torricelli. Thank you, Mr. Chairman. 

Mr. Burton. I will reserve my questions to the end. Mr. 

Mr. Torricelli. Mr. Secretary, who declares that a default has 
occurred and therefore the agreements on the collateral have come 

Mr. Shafer. If we are not paid, we can make that declaration. 

Mr. Torricelli. Who makes that judgment in the U.S. Govern- 

Mr. Shafer. The U.S. Treasury announces that that fact exists, 
that we have not been paid, and I should say that under this ar- 
rangement that we put in place, beginning before the disburse- 
ments of this money, the Mexican petroleum proceeds will flow 
through the Federal Reserve Bank of New York. 

Mr. Torricelli. I understand the agreement. Since the Secretary 
of the Treasury will be reaching this judgment, are you prepared 
to say on behalf of the Secretary of the Treasury that there are not, 
that there are no circumstances due to the economic situations in 
Mexico, or political difficulties in Mexico, in which you will an- 
nounce to the American people, return to this Congress and claim 
that we are not exercising our rights to collateral? 

Are you prepared to claim that we will exercise our rights re- 
gardless of those circumstances, and therefore the Government of 
the United States is protected? 

Mr. Shafer. I believe the Secretary has said in testimony in 
front of another committee that the money is ours, and we would 
exercise our rights to take that, and what we do then is specifi- 

Mr. Torricelli. Without reservation, unequivocally, we are 
going to exercise our rights. 

Mr. Shafer. That is his statement. 


Mr. TORRICELLI. Would you share my judgment that if during 
these circumstances under which the United States is providing 
these guarantees, if the Mexican Government through a corpora- 
tion in which there is pubhc involvement, make an investment, 
loan, or other purchase in Cuba, that it would be disingenuous and 
contrary to Mexican interests and the security interests of the 
United States? 

Mr. Shafer. I would have to look at a specific set of facts, if 
there sounded like facts that would give me some concern. 

Mr. TORRICELLI. If it is Pemex, or the Mexican phone company, 
any corporation in Mexico in which there is public involvement 
making an investment in Cuba, which given Cuban economic cir- 
cumstances, certainly would not be of an economic nature or they 
would not be made, wouldn't you consider that disingenuous? 

Mr. Shafer. That would be something that we would have to 
look at very carefully. 

Mr. TORRICELLI. Finally, Mr. Chairman, were you surprised by 
the fact that the international markets began to lose some con- 
fidence in the dollar, and the dollar lost value after this, and could 
you describe the resources available to defend the dollar, given the 
use of this fund for Mexican guarantees? 

Mr. Shafer. Yes. I do want to make clear that the issuance of 
these guarantees, or the extension of swap loans in no way reduces 
our capacity to use our foreign exchange reserves to defend the dol- 

We have, I think, something in excess of $20 billion worth of 
marks and yen in the exchange stabilization fund now. We can 
through an arrangement with the Federal Reserve, place those 
with the Federal Reserve and receive dollars, if we need to have 
them to carry out our obligations under our agreements with Mex- 

At any time we need those dollars, we can get them back from 
the Fed and make the Fed whole from the proceeds of selling — ex- 
cuse me, get back those marks and yen, not the dollars, and re- 
cover the dollars by selling the marks and yen in the market, and 
make the fed whole. 

So those reserves remain fully available, and fully usable to us 
throughout the period in which we have this agreement with Mex- 
ico in force. 

Mr. Burton. Mr. Rohrabacher. 

Mr. Rohrabacher. It seems to me that you are trying to tell us 
that we are getting something for nothing there. We can provide 
this stability for Mexican currency, but this in no way is going to 
reduce our ability to defend our own currency in case there is some 
attack on it. How is that possible? 

Mr. Shafer. That is correct, and the reason is because what we 
do in defending our currency is not to use up money. We often say 
we are spending money in the market. We are not. We are chang- 
ing. We are changing marks and yen for dollars, and when we do 
that, we still have the same amount of wealth there. 

All we have done is shifted its composition, and we can, through 
the assistance of the Federal Reserve, have them hold our marks 
and yen for us when we do not need them, get them back from 


them when we do need them, and make them whole in terms of 
the dollars that we get when we sell them. 

So in fact our intervention support operations do not use up our 

Mr. ROHRABACHER. There is no cost at all. Everything is cool. 
Why is everybody upset? We are not at risk at all. In fact, it has 
not cost us a cent. It is going to work out just fine. 

I do not believe a word that you just said. [Laughter.] 

Mr. Bergsten. In fact, we will even make money. 

Mr. Shafer. We will make money. 

Mr. ROHRABACHER. In fact, we are even going to make money. 

Mr. Bergsten. It is better than you just said. 

Mr. ROHRABACHER. It is even better than that. I am going to be 
anxious for your testimony, Doctor. I just do not believe it. I mean, 
I just do not believe it, and if somebody does believe it, I hope they 
will come to California. We have got some good business deals in 
Orange County bonds for them. 

It seems to me that what we have done, and although the sce- 
nario that you have just put forward to me is that I am wrong in 
that our currency is somewhat more at risk in our attempt to less- 
en the risk on the Mexican currency, I do not believe you can get 
something for nothing in this world, and I believe what you just 
outlined for us, with all the money flying in the air and going be- 
tween accounts, I do not believe that works. 

You are the expert, and the Doctor over here is the expert. It 
does not make any sense to this Congressman, and my personal 
feeling is that what we have here is a snow job, and I am trying 
to make my way through this snow, and I will have to admit to 
you, I do not understand all the details, but I do not think the 
American people, if they could, would voluntarily sign the check. 

That is the bottom line. The President of the United States did 
not come to us, and have us, the representatives of the American 
people, sign the check, and we are very upset about it. 

Thank you very much, Mr. Secretary. 

Mr. Burton. Mr. Secretary, I will save the very best for last. You 
said in your testimony that this agreement met all our concerns. 
I do not know who all is, but it certainly was not the Congress. 

It might have met all the concerns of that small circle of people 
that hammered out this agreement down at the White House, but 
it certainly did not meet all the concerns of the Congress of the 
United States. It just did not. Otherwise, you would have been able 
to get the votes necessary to pass it, and you would not have had 
to do this unilaterally. 

So I think you ought to rephrase that, the next time you give tes- 
timony, because it did not meet all the concerns of the people who 
represent the people. 

And you said that there was going to be an interest rate charged 
that was going to make this beneficial to the United States of 
America, and that we were going to make money. I do not under- 
stand that. 

They are giving 50 percent interest rates down there now for 
money. Maybe you can explain that a little bit. I would also like 
to follow up on the issue of Cuba and other issues that we talked 
about earlier. Representative Torricelli and I. 


When we worked on this agreement, and a number of us worked 
on it for quite a period of time, we had in there provisions that we 
thought were going to be palatable to the American people and to 

What we got back from the administration was that this would 
not fly with the Mexican Government, and that it might cause 
them some political heartburn. I just do not understand that. It is 
our money, and we are the one that is coming to the rescue like 
the 7th Cavalry, and yet we have to be concerned about their feel- 
ings when we loan them our money. 

You know, we did not want them to give any more direct or indi- 
rect support to Castro's Cuba. That was not in the agreement that 
was signed yesterday. 

We wanted some money in escrow or some negotiable securities 
in escrow besides just a promise from the oil company down there, 
so that if there was a default, that at least the taxpayers would get 
a large part of their money back. 

We wanted some agreements on prisoners in our prisons. We 
have got 250,000 prisoners, many of them are from Mexico, that 
are costing $30,000 to $35,000 a year to taxpayers. We wanted to 
have them go back for execution of sentence, or at least some kind 
of an agreement. 

We wanted to patrol our borders on both sides, and have the 
Mexican Government work with us on that. There was nothing in 
the agreement about that that I know of. 

And we wanted to talk about the drug issues. 

Those were all legitimate concerns of the Congress, and if we 
were going to negotiate this kind of an agreement, and put Amer- 
ican taxpayers' money at risk, we felt they were legitimate issues 
to be incorporated into this agreement. 

None of these things were put in there that I know of, and yet 
you say it met all our concerns. 

Now, in the brief time that you have left, would you explain that 
to me? 

Mr. Shafer. Mr. Chairman, it has met our concerns for a com- 
mercial financial agreement. 

Mr. Burton. Whose concerns? 

Mr. Shafer. The concerns of the administration, I think the con- 
cerns of Congress about the commercial and financial agreement 
that in fact 

Mr. Burton. I do not think you can speak for the Congress. 

Mr. Shafer. Would benefit the American people. 

Mr. Burton. You can not speak for the Congress. Pardon me, 
Mr. Secretary. You can not speak for the Congress because it did 
not mean the concerns of the majority, and I think you know that, 
but go ahead. 

Mr. Shafer. May I go on? That we have, that we realize the ben- 
efits to America from the stabilization of Mexico, and that means 
that Mexico, in fact, takes the kinds of actions that they have to 
do to make this work, and that we have an assured means of re- 

This is a commercial agreement that was undertaken very quick- 
ly when it was clear we ran out of time with the market to work 
our legislative solution to this. It has been taken in the context of 


our broader bilateral relationship with Mexico which we believe 
will be furthered by this kind of support. 

The efforts continue with the State Department, with the law en- 
forcement agencies to engage intensively with the Mexican Govern- 
ment on discussions of improving cooperation and getting responses 
in the areas that we did discuss in the legislative area. 

I know that there was a meeting last week, for example, of law 
enforcement officials on both sides. I am told that there was sub- 
stantial and useful progress made in that meeting, but I am not 
somebody whose expertise is in immigration and drugs and so 
forth, and I think it would be useful to hear from those who are 
about the details of that, but we do feel in the administration that 
this broader agenda is being pursued, and that we are meeting 
with success. 

Mr. Burton. Well, I want to thank you very much on behalf of 
the committee for coming and testifying. You have had a tough job 
to do, to defend this to the Congress; but I think you have done 
it about as well as could be done. We want to thank you very much 
for your participation. 

I understand, Dr. Bergsten, you have an associate with you. Dr. 
Cline, I did not recognize you earlier so I apologize for that. I as- 
sume you are going to work together. Is that correct? 

OK, we will now recognize first Dr. Fred Bergsten, the director 
for the Institute for International Economics. 


Mr. Bergsten. Thank you, Mr. Chairman, and the other Mr. 
Chairman. It is a pleasure to be back before you today. I was here 
3 weeks ago today, so you know my basic view. I had a detailed 
statement at that time that Dr. Cline helped me prepare. 

I promised you at the time that we were about to release a big 
study on this. We have now done so. At a minimum, I can tell you 
we have very heavy background for what we say. 

It is a thorough study of the debt crisis of the 1980's. The London 
based Economist magazine took the rather unusual step in its issue 
last weekend of publicizing it on its front cover, with the title Bill 
Cline on Debt, a short summary that he wrote for them of the book. 

This, I think is a rather impressive testimony to the kind of work 
my colleague has done and that we have drawn on in the hearings. 

You know my view that, whereas I do have some problems with 
the specifics of the new program, and I would be glad to share 
those with you, basically it is a good idea. I think it is in the U.S. 
interest, and I think the Congress should support it. 

However, rather than reiterating my basic view of that, let me 
start by going to some of the concerns that have been raised today, 
try to respond to them directly, and maybe help with some of these 

First, since it is most recent, Mr. Rohrabacher said "This sounds 
like such a good deal, how can it possibly be true? How is it that 
there cannot be a loss?" 

First of all, the ESF, like lots of other operations of this t5T)e,''are 
literally revolving funds, meaning, as Secretary Shafer said, you 
take one asset out, you put another in, and vice versa. 


That is why the Congress, for example, in its budget scoring of 
the U.S. contributions to the IMF, does not require appropriation 
and does not count it toward the budget outlay. It is not such an 

We put in dollars. We get the right to draw marks and yen to 
intervene to defend our currency, so the ESF is a revolving fund 
in that sense. 

But, Mr. Rohrabacher says, "What do you mean? There cannot 
possibly be a loss". Of course, there could be a loss. There are two 
ways in which a loss could occur. The first would happen if some- 
body violated a guaranteed commitment and did not repay the 

If the Mexicans do not repay, there could be a loss. The adminis- 
tration has obviously tried to cover that by getting absolutely rock 
solid collateral — the Pemex oil revenues. 

I am told that Ross Perot told another of the committees up here 
that this was an absolutely impregnable device. If Ross Perot says 
it, it must be right? 

That is the way they have tried to ensure repayment, by getting 
rock solid collateral. The question is whether, when the evil day 
came if it ever did, which I doubt, would the U.S. Government back 

My answer is no. They have got a legal requirement. They could 
be taken to court for failing to fulfill a legal commitment to recoup 
moneys for the United States. You would not let them do it politi- 

So I frankly do not worry about that one very much at all. 

The second way you can lose money is if you guess wrong on the 
exchange rates. Suppose they buy marks and yen at one price, and 
when they have to convert back into the revolving fund, the price 
has moved against them. 

My understanding, though you will have to ask them, is that 
they have covered that one too. What I used to do, when Treasury 
intervened to defend the dollar with marks and yen, is to always 
get an agreement with the other country to essentially cover the 
exchange risk. 

In other words, if we defaulted on the dollar when the German 
Central Bank was holding dollars, we had to make it up, and vice 

There were some comments when I testified last to you, Mr. 
Chairman, about some of the difficulties in economic policy we had 
during the Carter administration, and you were quite right. We 
did, if you remember, have a big dollar support program in 1978 — 
a $30 billion program to defend the U.S. dollar. 

As part of that, we borrowed marks and yen, the so-called Carter 
bonds, to defend the dollar in the exchange markets. But we were 
smart. We borrowed marks and yen when the dollar was at its 

When the dollar subsequently strengthened, in part because of 
our operation, we bought the marks and yen back at a much cheap- 
er price, and we made well over $1 billion for the Treasury. 

So it can cut either way. Historically the Exchange Stabilization 
Fund has made money. You can inspect their books. I believe they 
submit them to you regularly. They publish their bottom lines 


quarterly in the Treasury Bulletin. It has basically been a money 
maker over time, but it is true, they could guess wrong. They could 
fail to get cover. They could lose. 

Those are the two tracks that you would have to pursue on that 
particular question. 

A second issue that has come up, and you have raised it, Mr. 
Chairman, as did Mr. Torricelli and Pat Buchanan: What about the 
conditions that the United States has levied on Mexico? 

Are we going to be buying a new enemy next door by levying all 
these conditions? My answer to that is that the United States is 
taking a risk in this operation. The United States Treasury has 
now taken on a large measure of responsibility for the Mexican 

This is a major departure from traditional policy. Traditional pol- 
icy, for exactly the reason you are suggesting, is to rely on the 
international institutions to levy and implement conditionality, pri- 
marily through the International Monetary Fund. 

The IMF is at the center of this, but the Treasury has tried to 
go further, and has clearly stated that it is going to implement the 
conditions. That raises the risk you suggest. 

Frankly, it would have been better to stick with the traditional 
method of relying on the IMF: requiring IMF approval for the Unit- 
ed States to make the actual transfers of the moneys and requiring 
the IMF to monitor the policies in Mexico. 

I suspect the Treasury did it the other way because of you in the 
Congress, because you were putting so much pressure on them to 
make sure that the deal was going to restore Mexican stability and 
to make sure that the United States interests were promoted. The 
Treasury felt it had to do it. 

But that does then raise this question of risk in our relations 
with Mexico, and I think it is a serious one. But then you raised 
what I regard as a contradiction. 

Both Pat Buchanan and Mr. Torricelli, and now you, Mr. Chair- 
man, have asked why we didn't put more conditions on the loans. 
Why didn't we hit them on their immigration policy? Why didn't we 
hit them on credits to Cuba? 

You answered the question yourself. If you had required yet ad- 
ditional conditions on top of the economic and financial conditions 
the Treasury did require, you would have further increased the 
chance of a nationalist, populist backlash in Mexico that would 
have turned this into a foreign policy disaster. 

You cannot have it both ways. 

My preference would have been. A, the Treasury was right to 
limit the conditions to the economic and financial issues, but, B, it 
should have stuck with the traditional approach of lending and 
monitoring through the IMF rather than from the U.S. Treasury it- 

I have answers to the other points raised. If you want to come 
back to me later, I would be happy to do that. 

Mr. Burton. We will be happy to do that. We appreciate your 
comments, although we may not agree with all of them. 

Mr. Sweeney. 



Mr. Sweeney. Thank you very much. I have submitted a pre- 
pared statement. I am just going to Hmit myself to making a few 
remarks because much of what I would have said has been stated 

First, I want to clarify that I do not believe that NAFTA was a 
swindle. I want to start at that point. Free trade under fair rules 
is not bad for America, and it is not bad for any country that par- 
ticipates in that game. 

But what do we mean by fair rules? An open market? A democ- 
racy? Rule of law? Trade liberalization? All of these things in Mex- 
ico, NAFTA will with time push Mexico toward the needed political 
reforms that will open up the Mexican economy and make it more 

My second point is that the problem in Mexico is fundamentally 
political. It has been treated until now, or people have sought to 
treat it as if it was just some kind of market phenomenon. 

It is an economic crisis, but it is also a political crisis. The econ- 
omy is not free enough. The system is still too undemocratic in 

I do believe, I do agree with comments made earlier that the use 
of the exchange stabilization fund under these circumstances is un- 
precedented. I believe it is questionable. I believe the exchange sta- 
bilization fund needs to be amended so that its use is confined to 
transactions in gold and hard currencies, and Presidential discre- 
tion to use the DSF is also narrowed. 

I suspect that the administration fears that the agreement itself 
will not work. To me, at least, the tough conditionality of the agree- 
ment indicates this. It is put together in such a way that at any 
moment, President Clinton can bail out of his bailout to Mexico. 
Therefore there must be some doubts about that in the administra- 

You cannot divorce the politics from the economic issues in Mex- 
ico. The agreement as structured will not work because what we 
are having in Mexico is a political and economic crisis which is, 
each crisis is feeding on the other. 

As the political crisis grows, the economic crisis grows worse. As 
the economic crisis grows worse, the political crisis increases. This 
is the crux of the problem in Mexico, and this agreement is not 
going to solve it. 

I fear that over the next year in particular we are going to see 
a substantial increase in political violence in Mexico. I do not be- 
lieve that the assassinations of Colosio and Ruiz Massieu last year 
were isolated or coincidental events. I think they are very much a 
part of the situation that is going on in Mexico today. 

And what is happening in Mexico? We are seeing a difficult, dan- 
gerous, volatile, slow process of transition from a status corportus 
centralized one-party society, toward a more democratic and freer 

You do not achieve this overnight. You do not do it easily. You 
do not do it without pitfalls, and trying to paint this crisis, what 
we have seen in the last 2 months, simply as an economic phe- 
nomenon, ignores the reality of the transition problem that Mexico 


is experiencing today, and which should be of concern to the Amer- 
ican people. 

I fear literally that President Zedillo's life is very much at risk 
in this process. This has to be taken into account. He is sitting on 
a bomb in Mexico. 

Now, why won't the agreement work? I want to refer here to a 
point in the testimony that I submitted. President Clinton said yes- 
terday that his administration has "done the right thing by the 
American taxpayers and the American people." 

My rejoinder to the administration is a phrase originally attrib- 
uted to Mexican President Lopez Portillo. Lopez Portillo said Mex- 
ico is not an oil well, and yet this ill-conceived United States-Mex- 
ico framework agreement assumes that Mexico is indeed an oil 
well, because the collateral is nothing less than Mexico's oil export 
revenues which henceforth, according to the administration's own 
announcement yesterday, are to be deposited in a special account 
at a U.S. bank — my question is which bank? — with irrevocable in- 
structions. From who? To transfer funds to a Banco de Mexico ac- 
count at the Federal Reserve Bank of New York. 

OK, now I believe that Mexico's economy is weaker than its trade 
statistics suggest, and I believe that its dependence on oil is much 

Now, I am going to refer here to work that is done by George 
Baker, a leading United States expert on Mexico, and director of 
Mexico Energy Intelligence in Oakland. 

Mr. Baker believes that oil does not account for 15 percent of 
Mexico's total exports, as is commonly announced by Mexican and 
United States officials of trade statistics, but rather that oil really 
accounts for up to 40 percent of Mexico's real net exports. 

What Mr. Baker does is that he desegregates Mexico's merchan- 
dise exports, separating out those exported goods made in Mexico 
by foreign, mainly United States subsidiaries. Mr. Baker maintains 
that if such products associated with cross-border intra-firm trad- 
ing are deleted from the merchandise export account, that Mexico's 
net manufactured exports in 1993 actually fall to an estimated $15 
billion from an official $42 billion. 

Now, if Mr. Baker's calculations are correct, and I believe at least 
that they are very accurate, the idea of collateralizing a U.S. emer- 
gency loan package with Pemex export receipts is impractical and 

Mexico's oil exports in 1993 were the equivalent of some 40 per- 
cent of manufactured exports if mining and agriculture exports are 
added to net merchandise exports. 

Now, since Mexico's constitution and its energy regulations pre- 
vent private investment in oil production, or its refining and dis- 
tribution infrastructure, then Pemex needs a free hand to negotiate 
access to capital markets. 

About 40 percent of the Pemex budget is in U.S. dollars. If dollar 
expenditures are included for current operational expenditure such 
as maintenance, services which are mostly imported from Texas, 
then Pemex has to make dollar expenditures of $1.7 to $2 billion 
each year just to maintain production capacity and expand its ac- 
tivities and generate the dollar revenues needed to repay this 
emergency loan package. 


With oil receipts tied up in the Federal Reserve Bank of New 
York, what will happen when Pemex goes to the market to borrow 
$1 billion a year? The bankers Pemex approaches are going to ask 
how is Pemex going to pay, and every prospectus that is issued by 
Pemex is going to carry a very important caveat. It is going to say 
investors and lenders should be aware that the oil receipts offered 
as collateral in this prospectus have been previously collateralized 
to an emergency loan agreement between the Governments of the 
United States and Mexico. 

This agreement jeopardizes the credit lines of Pemex, and there- 
fore undermines its ability to maintain Mexico's oil exports. More- 
over, by tying up 40 percent of Mexico's net merchandise exports, 
this agreement eliminates the freedom of maneuver Mexico needs 
to buy United States goods and services. 

The U.S. Treasury Department is now at the head of the line. 
Private U.S. business has been cut out of the picture. Overnight 
Mexico has been transformed from the diversified economy held by 
Presidents Salines, Zedillo, and Clinton, into an oil well, once 

Thank you. 

[The prepared statement of Mr. Sweeney appears in the appen- 

Mr. Burton. Thank you, Mr. Sweeney. I have some questions for 
you and we will get to those in just a moment. Mr. Whalen. 


Mr. Whalen. Thank you, Mr. Chairman. I have, of course, a 
written statement that has been submitted for the record. 

Since a lot of the basic nuts and bolts that I would have dis- 
cussed today on financial and debt issues have been mentioned, I 
just would like to go through some bullet points and thoughts and 
reflections on what has been said here today. 

First off, as a former employee of the Federal Reserve System, 
and someone who has written about the exchange stabilization 
fund, and the related accounts at both the Fed and the Treasury, 
let me say that neither is this operation profitable, nor is it trans- 

In contradiction to what Dr. Bergsten has said, if you take the 
year-end figures that are published in the Board of Governors an- 
nual report, and the report that is issued by the Federal Reserve 
Bank of New York which is custodian for those funds, the marks 
and the yen he referred to, and then if you take the quarterly 
Cross report, the foreign exchange report that is published by the 
Fed, you will find that the numbers do not reconcile. 

You will also find that the Fed often will take gains and losses 
on currency when they have not actually sold any assets. They play 
this little accounting ledgerdemain so that they can maintain their 
admittance to the Treasury without taking a loss or a gain on a 

Now this is a fraud, of course, but since ESF 

Mr. Burton. Could you move the mike a little closer? 

Mr. Whalen. Yes, I do not know what is wrong with it. Since 
ESF is not subject to annual review, since it is not audited by the 


General Accounting Office as I believe former Chairman, Henry 
Gonzalez valiantly strove for over the last few years. You might 
look at the hearings that the House Banking Committee held in 
the previous session in this regard. 

We have a problem with ESF. 

Let me just speak briefly to what is going to happen in Mexico 
in the next 6 to 12 months which is my business. I am in the con- 
sulting and due diligence business in Mexico. We track down peo- 
ples' assets. We examine prospective investments. I think we are 
pretty much the best at what we do. 

The banking system in Mexico, apart from what has been dis- 
cussed here today, apart from what is in this package, is really 
going to go the way of Venezuela. You are going to see very large 
percentage losses on loan portfolios. You are seeing waves of de- 
faults in Mexico. 

It has even gotten to the point where on a social basis, whole 
groups of people — farmers, credit card holders, you name it — are 
petitioning the President for moratoriums on their debt, and re- 
structuring. It is to the point now where the banks are just inun- 

No bank can survive in the kind of interest rate environment 
that you have alluded to, Mr. Chairman. And let me say that that 
50-percent interest rate is the rate paid on Mexican T-bills. That 
is not what consumers pay. 

Consumers in Mexico are going to pay well over 100 percent for 
credit card debts. They are going to pay well over 100 percent for 
their mortgage payments because interest rates all float over the 
official Government T-bill rate. 

So this is a nightmare, and it is very much like Venezuela. If you 
look at what happened in Venezuela over the last year, and my 
friend Jack Sweeney is an expert on Venezuela, it is exactly the 
same scenario, but with some differences. 

The inflation rate in Mexico, if we are lucky, is going to be under 
100 percent this year. My guess is that it will be higher. What I 
am telling my clients, and what we are basically saying in our pri- 
vate written material is that if the peso is closer to 10 than it is 
to 5 by the end of the year, we would not be surprised. 

The reason for this is very fundamental. Analysts often focus on 
the Mexican money supply, the numbers from the Bank of Mexico, 
the rate of money supply growth in Mexico. 

I would hold that these things are completely irrelevant. The 
only thing that matters in Mexico is the dollar, and there are only 
two figures or two indicators that really should be of concern to se- 
rious analysts — one is the current exchange rate, and the other is 
their balance of trade. 

Until Mexico starts living within its means, and by that I mean 
we cut off further lending from the World Bank and the IMF to get 
them off of this addiction to debt that we have actually encouraged 
over the last 10, 12 years, Mexico is not going to grow and it is not 
going to recover. 

A good friend of mine, Eduardo Valle, who was an official in the 
Mexican Justice Ministry and was responsible for antidrug activi- 
ties in northern Mexico, said to me the other day at lunch that 


there are three economies in Mexico — the productive economy, the 
speculative economy, and the criminal economy. 

Now, for the last 5 years in Mexico, the speculators and the 
criminals have been running that country, and the productive econ- 
omy, business people, you know, the vast majority of the Mexican 
people are literally hostage in their own country. 

Now, I will tell you an interesting anecdote, just because we have 
so much serious material here today. During the negotiations with 
our Government for this rescue package, there were two gentlemen 
representing the Government of Mexico traveling around Washing- 

One of them was a fellow named Luis Tellez who is head of the 
Office of the President. The second was his predecessor, Jose Cor- 
doba Montoya who was head of the Office of the President for Mr. 
Salinas, really the No. 2 man in the country. 

Now, Mr. Cordoba Montoya has met with senior officials of this 
Government. He may have even met with President Clinton, I do 
not know, but I am sure he has met with everyone in the Treasury 
on a number of occasions over the last 2 months. 

This man has been repeatedly denounced in Mexico for ties to 
the Matamoras cocaine cartel. He had an affair with a woman who 
was the chief lieutenant in that organization. 

Do you think that Secretary Rubin knows this? You know, I real- 
ly worry that we are dealing with people in Mexico who are not 
only unfit counterparties for a commercial transaction, but who are 
really beyond the pale. I think that this administration, leaving 
politics aside, has made a gruesome political mistake by embracing 
this bailout, by embracing this Government in Mexico, both with 
NAFTA and now with these new series of transactions. 

You know, no amount of paper, no amount of transactions, or 
agreement with a government that is illegitimate is going to make 
those agreements real. These things are a fraud. When you enter 
into any contract where the counterparty on the other side is acting 
in bad faith, you have committed a fraud. 

I cannot imagine what circumstances or leverage is going to real- 
ly enable the United States to make the Mexican Government do 
what we want them to do. It is an absurdity. 

Let me just conclude by saying that I totally agree with what Mr. 
Sweeney said about political change, but there is a silver lining 
here. The silver lining in Mexico is that my friends on the left — 
I was an adviser to Cuauhtemoc Cardenas last year — are in total 
disarray. The left is breaking up into two or three different pieces 
in Mexico right now. 

And we have just seen a wonderful victory for the center right 
Partido Accion Nacional [PAN] in the State of Jalisco. I dare to say 
that if the United States had the courage to really take its hands 
off Mexico and allow political opening to occur, that it would be the 
right, ironically enough, that would end up picking up the pieces 
when the current government falls apart. 

One of my dear friends in the PAN is a guy named Vicente Fox 
who is going to run for Governor in Guanajuato I believe next year 
in a special election, and then he will probably stay in for President 
for the PAN in the year 2000 if we do not have an election before 


My guess is that we have a wonderful opportunity here to sup- 
port people who are pro-democracy, pro-business, friendly to the 
United States, and yet my fear is that the State Department and 
Treasury's fixation with supporting the very people who have cre- 
ated this disaster, and who are now expected to create the solution, 
is just blinding us to fighting the old battles time and again. 

Let me end it there, Mr. Chairman. 

[The prepared statement of Mr. Whalen appears in the appen- 

Mr. Burton. Your testimony is very interesting. Would you mind 
waiting? We are going to run over and vote and we will be back 
in about 5 minutes. 

[A recess was taken.] 

Mr. Burton. The other members will be back shortly. I want to 
thank you very much for your tolerance and for waiting. 

I will start off the questioning since the others are not yet back. 
Mr. Whalen, the last part of your testimony raised the hair on the 
back of some of our necks. You said that an official of the Mexican 
Government, and I do not recall the gentleman's name 

Mr. Whalen. A former official. 

Mr. Burton. Former official who was instrumental in negotiat- 
ing this agreement? 

Mr. Whalen. Yes. 

Mr. Burton. Is a member of a drug cartel? 

Mr. Whalen. Well, what happened was this. The man's name is 
Jose Cordoba Montoya. 

Mr. Burton. Hold that mike real close to you so we can hear. 

Mr. Whalen. His name is Jose Cordoba Montoya. He was head 
of the Office of the President under Mr. Salinas. His protege, Luis 
Tellez, now holds that position, but more importantly 

Mr. Burton. His protege is also involved, I presume. 

Mr. Whalen. Well, no, no. Really the protege is a young man. 
He has not had time to really mature in that corrupt sort of way 
that one matures in Mexico, but what I can tell you is there were 
several people in the Salinas Cabinet who I think were very delib- 
erately targeted and infiltrated, if you will, by the Matamoros co- 
caine organization. They are very good. They are extremely good, 
at corrupting government officials. 

And by the way, the article that you are going to get an English 
translation of that I published in Colombia tried to talk about how 
the Mexican narcotics structure is really the top dog in the cocaine 

You know, we hear constantly about Colombia, but the Colom- 
bians, in my opinion, are not making most of the money, and they 
are not nearly as influential and as powerful as the Matamoros 
group which is, of course, right across the border from Brownsville, 

Now, there was a gentleman named Emilio Gamboa who was the 
Secretary of Communications and Transport in the Salinas admin- 
istration. He was their first target. The Matamoros Group basically 
turned him. He was not a particular outstanding example of cor- 
ruption, per se. He was from a wealthy family and a product of a 
good education, but he became friendly with a woman named 


Marcel Bodenstock, who he in turn introduced to Mr. Cordoba. 
They start having this wonderful affair. 

They go to the bullfights together, and it became quite an item 
because Mr. Cordoba was not known as a social butterfly in Mexico 
City, so this was unusual. And what I can tell you is that through 
investment relationships, through other financial transactions, a 
number of journalists in Mexico have been able to build a pretty 
good case that Mr. Cordoba and other officials in the Salinas gov- 
ernment have direct and continuing contacts and indeed, or an in- 
tegrated part of the cocaine trafficking organizations in Mexico. 

So when this man is written up last week in a couple of big 
Mexican magazines who are bragging about the fact that he was 
roaming around Washington meeting all of these big and important 
American officials, I just could not help but be struck by that. 

Because as I said to you at the opening part of my remarks, our 
firm is about knowing these Mexicans very well, knowing who they 
are, who they do business with, where they keep their assets, are 
they clean, are they dirty, and so forth. 

Mr. Burton. I would like to have any documentation you have, 
articles or anything else. 

Mr. Whalen. I would be happy to give it to you, Mr. Chairman. 

Mr. Burton. I think that is very, very important not only for 
this hearing, but for the Congress. 

Mr. Whalen. That is why I say it. I do not make these allega- 
tions lightly, but this is — if you talked to anyone in the Customs 
Service or any of the organizations that are really trying to combat 
the drug trade, you will find that they look upon the Mexican Gov- 
ernment at best as being complicit, and at worst, as being actively 

Mr. Burton. Let me ask you this, and Mr. Bergsten might want 
to comment as well. You indicated in your testimony that the Fed- 
eral Reserve and some other major financial institutes juggled fig- 
ures with various currencies in order to cook the book, so-to-speak; 
so that it appears as though nobody can lose any money, and they 
won't lose any money because of these financial transactions. 

I would like for you to elaborate on that a little bit, and I would 
like Mr. Bergsten to comment on that because he indicated that 
there was no real risk of loss with the Mexican agreement. 

Mr. Whalen. Well, let me start by saying that I worked for al- 
most 3 years in the Foreign Department of the Federal Reserve 
Bank in New York, and I have a continuing relationship with peo- 
ple in that area of the bank, and other areas of the bank. 

The ESF portion that is directly attributable to the Federal Re- 
serve is audited annually by the bank's own accountants. They will 
not answer questions about it. They will not work through the fig- 
ures with you and help reconcile them. They consider it off limits, 
completely beyond question, if you will, from the public. They Fed 
basically hides behind the skirts of the Treasury and the Gold Act 
for this. They claim that the discretion given to the Secretary over 
the exchange stabilization fund in the Gold Reserve Act, I believe 
it is called, allows them not to answer questions about it. 

My observation 

Mr. Burton. The language in there does pretty much give him 
carte blanche as I read it. 


Mr. Whalen. Yes. 

Mr. Burton. Yeah. 

Mr. Whalen. Now, my own investigations, just looking at the 
published numbers, the year-end numbers versus the numbers that 
they use in the quarterly report of exchange activity in the ESF, 
intervention activity, and so forth do not reconcile. 

Just take the numbers and put them side by side in the 
spreadsheet, and I defy anyone to figure out what their true profit 
and loss is. 

Now, I can also testify from personal direct experience, having 
worked in currency intervention operations in New York, that the 
accounting is haphazard at best. We used to, for example, engage 
in secret intervention activities in futures contracts which were es- 
sentially undocumented. There is no paper on that for the period 
that I was at the bank. 

I can also tell you that in terms of their investments of funds 
that are both in the Feds account and the Treasury account, it is 
essentially a situation where they will value a given bond, or other 
instrument in a way that is really not market related. 

So when you talk about profits and losses, I guess what I would 
say is until such time as we have an outside audit by the GAO or 
someone else who does not have a vested interest in maintaining 
the secrecy and the lack of transparency that we have seen in this 
area of the Fed and Treasury, I do not believe any numbers. 

Let's drag this thing into the light of day, subject it to an annual 
audit, and then we can discuss intelligently, but right now, the way 
it is run is so obscure that I do not think we could argue about it 
one way or another. 

Mr. Burton. If you have any documentation on that, I would like 
to see it. 

Mr. Whalen. I have some, and I will be happy to introduce you 
to other people who can discuss this more. 

Mr. Burton. Mr. Bergsten, do you want to comment? 

Mr. Bergsten. Yes, I hope the committee will treat this undocu- 
mented gossip for what it is. If you get some documentation, look 
at it seriously. 

If you want to ask the Treasury or the Fed or the New York Fed- 
eral Reserve 

Mr. Whalen. Well, ask them, Fred. 

Mr. Bergsten. To explain to you the numbers in the published 
data on the Exchange Stabilization Fund 

Mr. Whalen. Oh. 

Mr. Bergsten. I have no doubt they will do it for you. 

Mr. Whalen. Fred, that is totally untrue. You call Ted Truman, 
you call up Joe Coin at the Board of Governors, and you ask them 
to walk through the year-end data. 

Mr. Bergsten. I did not say they would take the time to tell you 
all the data. 

Mr. Whalen. Come on. 

Mr. Bergsten. I told the committee if they want to go through 
the data, I am sure that any of those officials will be only too 
happy to do it. 

Mr. Whalen. Well, look, the 

Mr. Bergsten. The published data show 


Mr. Burton. Let me ask a question. 

Mr. Bergsten. The published data show the balance sheet. They 
show profits of $2 billion over the last year. 

Mr. Whalen. No. 

Mr. Bergsten. It is going to take a lot of jiggering to get from 
that to this undocumented gossip. 

Mr. Burton. Let me ask one question, Mr. Bergsten. Do you 
think that they would submit to a GAO audit? 

Mr. Bergsten. I do not know if they would submit to a GAO 

Mr. Burton. Should they? 

Mr. Bergsten. If I were still there running that fund, I would 
have no objection to it. 

Mr. Whalen. Good. 

Mr. Bergsten. The operations of the ESF have to remain in 
some cases confidential, as may any market transactions the Gov- 
ernment does. But valuing the outcome is now, as I understand it, 
subject to normal FASB-type rules. So if you ask them to explain 
to you how they do that, they will do it. 

I am sure they would be glad to debate Mr. Whalen in front of 
you or any committee of this Congress. 

Mr. Whalen. Let me say this, Mr. Chairman. According to the 
Fed, or according to Mr. Fisher who is now running the Foreign 
Department of the Fed, there were no loans to Mexico during De- 

Now, if you all on this committee believe that, and this is right 
in their published report, if you believe that, then we might as well 
close this hearing now. 

Mr. Bergsten. Why is it you think they would lie? 

Mr. Whalen. I think they have other purposes, Fred. 

Mr. Bergsten. I think all your gossip is just that, and I think 
the committee ought to know that. 

Mr. Whalen. Well, I disagree with you. 

Mr. Burton. Let me, let me 

Mr. Whalen. I think that reasonable intelligent people are able 
to look at the facts and look at the marketplace, and the fact is the 
Bank of Mexico had run out of money, so you explain to me how 
they got through the month of December. 

Mr. Bergsten. You are telling us the Federal Reserve in its re- 
port, which I happen to have read as well 

Mr. Whalen. Right. 

Mr. Bergsten. Concerning its exchange market operations of the 
second half of 1994, is lying. 

Mr. Whalen. Yes. That is my allegation. 

Mr. Bergsten. Well, that is a very serious charge, and I think 
they might even take you to court for libel. 

Mr. Whalen. Oh, oh, I hope they do. 

Mr. Bergsten. I think that they should. 

Mr. Whalen. I hope they do, but let me just point out that 

Mr. Bergsten. I hope they do too. 

Mr. Whalen. That during the hearings held by Chairman Gon- 
zalez in the 101st Congress, these same issues were raised in the 
same dimension, and the same basic issues of transparency and 


honesty were raised at that time, so go back and look at that re- 
port, and then you will see that we are not talking about anything 

Mr. Bergsten. And there was a groundswell of opinion in re- 
sponse, including from the rest of the Congress, that something 
had to be done about it? You do not remember that. 

Mr. Burton. Let me, first let me ask this question. When did I 
lose control of the hearing? And then I would like to yield to Mr. 

Mr. Roth. Mr. Bergsten, I do remember sitting on the Banking 
Committee and asking the Fed about hey, let's have an audit. Oh, 
we are audited. We are audited annually. Oh, you are? Oh yes, but 
it is an internal audit, it is not GAO and so on. 

So that is why we asked the Fed hey, how about a GAO audit? 
No, we are not in favor of that, so I think that the Congress has — 
you know, let's be frank about this — Congress is looking at 10 dif- 
ferent things, like we are running back and forth for voting and so 
on, and so the Fed comes in and says OK, I mean, they can bam- 
boozle us, they can bamboozle the CPA's. Why wouldn't they, some 
Congressmen who are, you know, is generalist. 

Mr. Bergsten. Could I just make one comment. Evei-ybody in- 
cluding the Secretary of the Treasury, has acknowledged that this 
transaction with Mexico is a departure for the Exchange Stabiliza- 
tion Fund. 

Mr. Roth. Right. 

Mr. Bergsten. I said it in my testimony 2 or 3 weeks ago. It is 
the first time. That does, I think, put a different light on the oper- 

Mr. Roth. You know, Doctor 

Mr. Bergsten. If you were to ask the GAO to do it, I find it very 
doubtful that the Treasury would oppose that. 

Mr. Roth. The reason I am somewhat dubious, I do respect you 
and I like you personally but it just rubs me a little the wrong way 
when you come and hey, no problem. We are going to make money, 
no risk. 

Come on, the first graders would not believe that. I was offended 
by that. 

Mr. Bergsten. Now wait a minute. 

Mr. Roth. Yes, I remember that, you saying that. Now let me 
ask you something, because you know, people come before our com- 
mittee, and they can get by with murder. They say one thing one 
week, and another week they say something else, and no one ever 
holds them down and says hey, I want to take a look at this. 

Now because I do admire you, I want to ask you something. I 
want you to be perfectly frank with me. Are we heading to trouble 
in Mexico, or aren't we? I want — Ed, where is our staffer? — I want 
you to take this down because I remember this when you come 

Are we heading to trouble in Mexico? 

Mr. Bergsten. The Mexican situation is a very difficult one with 
major implications for the United States. We face the choice of how 
we should respond. 

While I think it is right to respond in the way that has been 
done, I told you last time that I preferred the previous package. 


Mr. Burton. Are we heading for a recession in Mexico? 

Mr. Bergsten. Mexico will of course have a slow-down in the 
economy, maybe zero growth, and it could have a recession. The 
question is, is it a worse recession with worse effects on our econ- 
omy with or without this financial package? I do not call this finan- 
cial support package a bailout. 

I think that with this package there will be a much less deep re- 
cession, with fewer repercussions for other countries and for the 
whole model of open economics and deregulation that we like. 

There is indeed trouble in Mexico: They made a huge policy 
error. They let their trade deficit get out of hand. They let their 
currency get overvalued. 

Four of my colleagues at my institute, going back 2 years, pre- 
dicted that there would be a devaluation there. So there is no sur- 
prise there, but the question is, how do you make it least bad? 

Mr. Burton. Yes, OK. 

Mr. Bergsten. That is the issue. 

Mr. Burton. Mr. Sweeney. 

Mr. Sweeney. I would like to make a comment by way of com- 
parison with Venezuela which is what Chris mentioned earlier. 

When Venezuela floated to believe, or when the administration 
of President Carlos Sandres Perez floated the Bolivar in early 1989, 
the result that year was a contraction of nearly 10 percent of GDP, 
and inflation accelerated to over 81 percent. 

In Venezuela's case, when the economic reform programs were 
put into effect and gasoline prices were increased, riots ensued at 
the beginning of the administration, and several hundred people 
got killed, and thousands more were injured. 

Now, I am not saying that there are going to be riots in Mexico. 
It is a different situation, but I do think that this year we are going 
to see more than a slow down or a mild recession. I think Mexico 
is going to contract by several points the economy, and I think in- 
flation is going to go up. 

Substantially there is going to be banking difficulties which are 
going to aggravate the situation, and the political turmoil in Mex- 
ico is going to feed upon the economic crisis and aggravate that cri- 

I think this is something that Congress should be aware of. It is 
something that should be watched closely. 

Mr. Roth. Well, we have only so much time, and I do not want 
to take too much time away from my colleague, but I want to ask 
this question. Pat Buchanan said this morning: "Hey Congress, get 
a Border Patrol, and get our military to patrol our border, our 
2,000 mile border with Mexico." 

Are we on that type of, facing that type of a problem with Mex- 

Mr. Sweeney. My personal opinion is that there is going to be 
a substantial increase in illegal migration to the United States. I 
think it is difficult, very difficult to quantify how much that is 
going to be. 

I think the notion of putting some kind of wall or fence between 
the United States-Mexican border, and putting National Guard 
units, as Mr. Buchanan suggested down there, is frankly, in my 
opinion, quite ridiculous. 


I think the costs would be huge and I do not think it is going 
to address the fundamental problem. 

Mr. Whalen. They will stand in the desert. 

Mr. Burton. Mr. Rohrabacher. 

Mr. Rohrabacher. Earlier I said almost in jest if anyone be- 
lieves this, they should buy, they should come to California so they 
can buy some Orange County bonds. 

Let me just note that when I thought about that, and I thought 
about Dr. Bergsten, or administration official came here today and 
said I honestly believe that this is equivalent to what was going 
on in Orange County in the sense that people were being sold a bill 
of goods that there was almost no risk, and that they were going 
to receive a value at almost no risk, and a higher value than they 
would otherwise. 

Dr. Bergsten, you said basically the only risks would be is if we 
have rock-solid collateral and there is no problem with that, but 
there could be if something happens to that, and if we guess wrong 
on the value of foreign currency. 

Those are the only two ways that there would be some kind of 
a problem that would cost us, meaning if something goes wrong 
with the collateral, or if we guess wrong with foreign currency. 

We have just heard the testimony from two gentlemen who see — 
now, I admit, I am an expert in international affairs. These two 
gentlemen seem to have some credentials and that. 

I take it that you two gentlemen disagree with Dr. Bergsten's 
analysis about how much we are taking with this financial for the 
United States of America, is that correct? 

Mr. Whalen. Well, let me just briefly say this. The risk is based 
on whether or not the Mexican recovers. That is to say their ability 
to pay. 

Mr. Rohrabacher. Right. 

Mr. Whalen. OK. I would argue that the productive economy in 
Mexico — remember I divided it up in three sectors — has been 
shrinking for a number of years. 

Let me give you an example, on the front page of a big Mexico 
daily last week, the heads of the three largest chambers of com- 
merce in the country said that two-thirds of their membership are 
on the verge of bankruptcy. 

Mr. Rohrabacher. So if the productive part of the economy con- 
tinues to go down, we are risk. 

Mr. Whalen. Exactly. 

Mr. Rohrabacher. Mr. Sweeney. 

Mr. Sweeney. I would concur with Mr. Whalen's remarks. I real- 
ly have nothing to add to that. 

Mr. Rohrabacher. I want to ask one more question and that is 
can you please spell the name of the man, the individual that you 
are saying that has these connection to the 

Mr. Whalen. Well, the article has been copied, and you will have 
a copy of it. 

Mr. Rohrabacher. Could you please pronounce for us slowly. 

Mr. Whalen. It is Jose Cordoba Montoya. 

Mr. Rohrabacher. And spell his name for us? 

Mr. Whalen. It is Jose, J-O-S-E. 

Mr. Rohrabacher. OK. 


Mr. Whalen. Cordoba is C-0-R-D-O-B-A, and Montoya is M-0- 
N-T-0-Y-A, yes. 

Mr. ROHRABACHER. What position did he hold? 

Mr. Whalen. He was head of the Office of the Presidency in 

Mr. Rohrabacher. But you are saying that he has had meetings 
in the last 3 months. 

Mr. Whalen. Yes, he apparently still has some sort of quasi-offi- 
cial role. 

Mr. Rohrabacher. Is it your testimony that he has had a meet- 
ing with the Secretary of the Treasury? 

Mr. Whalen. I do not know that precisely. I do know that he at- 
tended a number of the organizing 

Mr. Rohrabacher. I believe that from your testimony earlier you 
indicated that. 

Mr. Whalen. Well, it has been written up in the press that way. 
In other words, the Mexican press follows this inch by inch, and 
they have alleged that Tellez and Cordoba together were going to 
a number of meetings with the Treasury. 

Mr. Rohrabacher. OK, we will ask. 

Mr. Whalen. Well, this is why I am mentioning it. You should 
ask, is what I am saying. 

Mr. Rohrabacher. I will, but I will let you know that if he has 
not had a meeting with the Secretary of the Treasury, it really 
casts a lot of doubt on your credibility. 

Mr. Whalen. I hope he has not, quite frankly. 

Mr. Rohrabacher. OK. Well 

Mr. Whalen. But the point is if he is even going around with 
a current member of the Mexican Government 

Mr. Rohrabacher. Well, we are going to find out who he has 
had meetings with, and if he has not had the high-level meetings 
that you are talking about, and if there is not some more verifica- 
tion, we will ask the DEA if he is on their drug enforcement list. 

Mr. Whalen. Please do. 

Mr. Rohrabacher. If he is not 

Mr. Whalen. You can talk to the people- 

Mr. Rohrabacher. I just have to tell you. Dr. Bergsten is right. 

Mr. Whalen. Uh-huh. 

Mr. Rohrabacher. In that your credibility has been shot with 
this committee. 

Mr. Whalen. I understand that, and I stand by my statement. 

Mr. Rohrabacher. But if you are correct, if you are correct, and 
Dr. Bergsten, is it your position that this administration has not 
met with this man? 

Mr. Bergsten. I have no idea. 

Mr. Rohrabacher. You have no idea. 

Mr. Bergsten. I just said it was unsubstantiated. 

Mr. Rohrabacher. OK, I will just say this, that if you are cor- 
rect, you have — this is really a chilling testimony, and we will take 
that very seriously. 

Mr. Whalen. May I just say one thing? What I am reflecting to 
you is based on my own reading of the daily and periodical press 
in Mexico, my discussions with people in the Mexican Government, 
people in journalism in Mexico. 


Mr. ROHRABACHER. I understand that, but the point is this 

Mr. Whalen. And that is why I make the statements. 

Mr. ROHRABACHER. You say you are giving us an educated opin- 

Mr. Whalen. That is right. 

Mr. ROHRABACHER. If your educated opinion is wrong in some- 
thing to this degree 

Mr. Whalen. No, I stand by it, quite frankly. 

Mr. ROHRABACHER. To this degree 

Mr. Whalen. I stand by it. 


Mr. Whalen. What I am saying 

Mr. ROHRABACHER. I just wanted to let you know that. Thank 
you very much. 

Mr. Burton. I would like to have for the committee, and for my- 
self, any documentation you have now or in the future. 

Mr. Whalen. I will get it together for you this afternoon. 

Mr. Burton. Let me just thank all three of you for being here. 
We have got to run and vote. Thank you very much for your pa- 

The committee stands adjourned. 

[Whereupon, at 3:52 p.m., the subcommittees were adjourned to 
reconvene at the call of the chair.] 





February 22, 1995 

I would like to thank the distinguished chairmen of the Subcommittee 
on Western Hemisphere Affairs, Congressman Burton, and the 
Subcommittee on Economic Policy, Trade and Environment, Congressman 
Roth, for holding this hearing today on the $47.5 billion bailout of 

The Administration's use of public money in such a manner, and 
specifically, the use of the Exchange Stabilization Fund by the U.S. 
Treasury, is absolutely unprecedented in both magnitude and duration 
— and is, in my judgment, illegal. When I questioned Secretary 
Rubin on February 14, 1995 at the annual Appropriations Committee 
Budget Overview Hearing, he reluctantly confirmed to me that there 
is no precedent for the Administration's action. The United States 
has never extended loans to a foreign country on a medium- or long- 
term basis on such a huge scale (see attached chart) . This 
unilateral action by the Executive Branch is 20 times as large as 
any previous use of this Fund and has been structured for different 
purposes, as I will elaborate. 

Moreover, never has it been the will of Congress to provide the 
Executive Branch with unlimited authority of this sort as a function 


of the Exchange Stabilization Fund. As many observers have 
commented, this situation goes well beyond a short-term liquidity 
crisis in Mexico or a need to defend the dollar in foreign markets. 
This is an aggressive foreign aid authorization to Mexico to prop up 
a failing economy that has its roots in deep-seated political 
corruption, the lack of a rule of law, and a mismanaged economic 

I would like to call your attention to some testimony that this very 
Committee heard on October 10, 1989, which I believe is extremely 
applicable to what we are discussing today, and excerpts from which 
I have attached to my own written remarks. The testimony came from 
officials at the Treasury Department and the State Department who 
were being questioned by Congressman Oilman in connection with a 
proposed economic aid package for Poland. 

Rep. Gilman: I'd like to ask our distinguished panelists 
— there's been a great deal of discussion 
about the possible utilization of a loan 
from the Treasury's Exchange Stabilization 
Fund to help stabilize the zloty as Poland 
tries to attack its inflationary problem. 
And I know our good chairman, the gentleman 
from Indiana, Mr. Hamilton, has raised that 
issue. Can you tell us, has serious 
consideration been given to that, and is 
that possibility presently under review? 
And does the Treasury Department have the 
authority to loan to Poland under this 

Mr. Barreda: Mr. Congressman, the administration has 
decided to support a Polish fund for 
stabilization. We think the appropriate 
way to do that is through an appropriation 
by Congress. We think the Exchange 


stabilization Fund's purpose and use is 
quite different. We've used the Fund for 
intervention exchange markets and for very 
short-term loans, usually bridged to a 
guaranteed repayment in a hard currency. 
The proposal to provide Exchange 
Stabilization funds to Poland on a longer- 
term basis is a totally different use of 
the funds. That is much closer to foreign 
aid, Mr. Congressman. We think, therefore, 
it should be appropriated. 

Rep. Hamilton: Now, let me ask some questions about the 

exchange stabilization fund. I'm not sure 
that I understood the testimony correctly 
early on. But . . . you said it was used 
only for short-term loans. Is that 

Mr. Barreda: That's right, sir. 

Rep Hamilton: By which you meant what? 

Mr. Barreda: We have two uses of [the] exchange 

stabilization fund right now, Mr. Chairman. 
One, we use it for activity in the foreign 
exchange markets where we're exchanging 
dollars for yen or Deutschmarks or vice 
versa. We also do it for some short-term 
bridging. In that case, we make available 
the dollars in exchange for an assured 
repayment in hard currency, and we lock in 
the exchange rate. 

Rep. Hamilton: And short-term, in that context, means 

Mr. Barreda: It's less than six months, according to the 
statute, unless approved by the President 
to be longer. 


Hamilton: You have made longer loans than six months, 
have you not? 

Mr. Barreda: I'm not aware of any, sir. I have been 
discussing with your staff a Mexico loan, 
and I would like to look into that and get 


Rep. Hamilton: $600 million for 12 months to Mexico in 

Mr. Barreda: 

That's the one I want to — 

Rep. Hamilton: Are you not aware of that? 
Mr. Barreda 

Rep. Hamilton: 

I wasn't until now and I'm going to look 
into it and get back to you. 

Now, of course, you could use this money as 
a bridging loan to Poland, could you not? 
That is, you could extend a loan to Poland 
under the exchange stabilization fund, and 
then, when the IMF loan kicks in, it could 
take over the loan. I mean, that's a 
possibility, isn't it? 

If there's an assurance of an IMF agreement 
and it's short-term, we would certainly 
consider that, as I said in my testimony. 
What we want to be sure of is repayment in 
a hard currency and in short-term — 

Rep. Solarz: Will the gentleman yield? 

Rep. Hamilton: Mr. Solarz. 

Rep. Solarz: Thank you very much, Mr. Chairman. . . . 

Mr. Barreda: 

Rep. Solarz: .... You're saying, I gather, that we 
cannot — that if we were to use the 
exchange stabilization fund without an 
assured mechanism of repayment that that 
would be an illegal use of the fund, given 
the criteria that have been built into it, 
or would it be a breach of the fiduciary 
responsibility of the Secretary of the 
Treasury — 

Mr. Kcimman: We think it would be an improper use of the 
fund, Mr. Congressman. 

Rep. Solarz: Would it be an illegal use of the fund? 
Something can be improper without being 
illegal, and I'm not suggesting that we do 
something improper, but I just want to know 
where we stand. 


Mr. Barreda: We can try to give you an opinion on that. 
As — 

Rep. Solarz: Can you — 

Mr. Barreda: It's an improper use of the fund. We don't 
think it should be used that way. If there 
is going to be a chance of loss, we think 
it should be an appropriation. 

Well, in short, I could not agree more. I, too, think the Exchange 
Stabilization Fund's purpose and past use are quite different from 
the way it is being used by the Administration in connection with 
Mexico now. In the past, we have used the Fund for intervention in 
exchange markets and for very short-term loans, usually bridged to a 
guaranteed repayment in a hard currency. Providing Exchange 
Stabilization Fund monies to Mexico on a longer-term basis is a 
totally different use of the Fund, closer to foreign aid. Moreover, 
there is a huge risk of loss, exacerbated by the internal banking 
and financial problems facing Mexico's private lending institutions 
and businesses. For those reasons, the use of the Fund in this 
manner without an authorization and appropriation is improper and, 
again, totally unprecedented. 

In the Wall Street Journal on February 1, 1995 there was an article 
entitled "U.S. Securities Firms and Mutual Funds Have Big Bucks 
Riding On Mexico Rescue." The article pointed out that U.S. 
securities firms earned $133 million in annual underwriting fees for 
Mexican securities, U.S. mutual funds owned $17.1 billion in Latin 
American assets, and U.S. banks were owed $15.9 billion in loans to 
Mexico and $41 billion in loans to Latin America. Led by their 


desire to cash in on returns of 66% on emerging markets, U.S. 
financial institutions gambled by pouring "hot money" into Mexico's 
public sector offerings without fully considering the risks 
involved. Proper collateralization for private sector loans was the 
exception rather than the rule. When the peso began to fall, these 
same U.S. financial institutions saw declines in their share prices 
of more than a dollar and faced potentially huge losses in the value 
of their peso-denominated, speculative investments. 

It is no coincidence that as of last week, Mexico had already drawn 
at least $2 billion dollars from the U.S. loans in order to pay $1.3 
billion to U.S. banks. Its IMF drawdowns were even greater. The 
government of Mexico, in fact, owes the world a minimum of $140 
billion dollars (some say as much as $200 billion) , and about $58 
billion of that amount falls due this year, mostly to U.S. financial 
institutions. Furthermore, Mexico owes U.S. banks alone $18.3 
billion this year. As Walker Todd points out in the February 13, 
1995 issue of The Nation . "With the peso down in value by forty 
percent and Mexico's dollar reserves dwindling, it is clear that 
only a mammoth infusion of funds or forgiveness of its debts can 
prevent the country from defaulting." 

What is interesting to note is that U.S. banks and other financial 
institutions have balked at helping themselves through this crisis, 
especially as the federal government became involved. As a recent 
Wall Street Journal article reported, "Bank executives said the 


loan's urgency has been diminished by the $50 billion White House 
rescue package for Mexico. With a sum that large in the pipeline, 
they said they might as well take their time considering terms of 
any new loans they make to Mexico." Most banks will not even 
consider loaning $200 million dollars to Mexico. Yet Wall Street 
expects the U.S. taxpayers to shoulder a burden of $20 billion from 
the U.S. Treasury. And there is no certainty that amount will even 
begin to cover what is owed. 

We have been told that our U.S. Treasury can supply no record of 
which investors U.S. taxpayers are bailing out. Given that the CIA 
can help Mexico track down Subcommandante Marcos and a few peasants 
in Chiapas, as reported by the New York Times . I find it impossible 
to believe that the Administration does not know who Mexico's 
creditors are, especially its U.S. creditors. Today, let me give 
you an idea of who has directly benefitted from the Mexico bailout. 

After the announcement of the bailout by the Administration, the 
performance rating of mutual funds jumped from negative 6 percent to 
a positive 7 percent. These mutual funds include Scudder, Merrill 
Lynch, Fidelity, Salomon Brothers and other major Wall Street firms. 
U.S. banks had an equally large stake in the bailout. Citicorp is 
owed approximately $2.9 billion by Mexico. Goldman Sachs underwrote 
no less than $5.7 billion of Mexican securities from 1992 until the 
crisis. Chase Manhattan, J. P. Morgan and Chemical Banking 
Corporation are all heavily invested in the Mexican market. U.S. 


banks are so eager to get their investments back that they are 
willing to start a civil war in Mexico if that is what it takes to 
bring "financial stability." A Chase Manhattan memo blatantly 
stated that "the [Mexican] government will need to eliminate the 
Zapatistas to demonstrate their effective control of the national 
territory and of security policy" and further that "the Zedillo 
administration will need to consider carefully whether or not to 
allow opposition victories if fairly won at the ballot box." 

In conclusion, I recommend that this Committee pass an authorization 
bill strictly defining the use of the Exchange Stabilization Fund 
and narrowly prescribing the authority of the Executive Branch over 
the Fund, so that it will no longer be able to use the Fund as a 
form of back door foreign aid. Second, when the use of the Fund 
goes beyond the strict principles of foreign exchange, an 
Appropriation by Congress should be required. 

Finally, we all know Mexico's problem is not merely a crisis of 
currency. Mexico has been building a house of debt. Mexico is in 
the middle of a full-blown social, economic and political crisis. 
More broadly, Mexico faces manifold challenges which defy simple 
banking solutions. As Robert Novak observed in his February 20, 
1995 column in the Washington Post . 

If all sides in Washington view this as essentially a 
financial crisis, there is nobody in Mexico City who does. 
After years of denial by Mexico's rulers and their U.S. 
counterparts, this country's political system is sick unto 
death. The well-informed, patriotic Mexicans I saw here 


feel the U.S. government has done them no favors by 
turning its back on continued corruption, the tightened 
link between drug cartels and the government and the 
absence of real political dialogue. 

Corruption and human rights abuses in Mexico are rampant. Mexico's 
closed political system has permitted one political party, the PRI , 
to hold power since the 1920s through fraud, intimidation and 
outright murder. The questions now being raised in relation to 
Mexico go to the heart of how the United States responds to a crisis 
on our southern border — how we stand up for the best values in us. 
In order to reach a long-term stabilization plan for Mexico, I also 
recommend that this Committee authorize the U.S. to initiate and 
participate in a Hemispheric Commission and appoint a Special 
Ambassador to this purpose. It should carry as its most basic 
tenets — in addition to the long-term stabilization of Mexico — 
the creation of a common rule of law, sustainable economic growth 
policies, and the fostering of multi-party functioning democracies 
among our trading partners in this hemisphere as conditions of 
market entry. 

After all, free trade can exist only among free people. 


TABLE 1. Ex( 

:hange Stabilization Fund Financing Agreements, 1980- 




Agreed ~ 
($ mil.) 


($ mil.) 


Repaid in 
Full by 



















































































































































10/3 L'86 


































































Costa Rica 
























90-345 0-95-3 


Testimony by 

Jeffrey Shafer 

Assistant Secretary of the Treasury 

for International Affairs 

before the House Subcommittee on Western Hemisphere 

and the House Subcommittee on 

International Economic Policy and Trade of the 

Committee on International Relations 

February 22, 1995 


Mr. Chairman and Members of the Subcommittees, I appreciate 
the opportunity to appear before you today to discuss the United 
States response to Mexico's financial situation. 

On January 31 President Clinton, with support from all four 
congressional leaders, announced his decision to proceed with a 
$20 billion United States support program for Mexico. Yesterday, 
Secretary of the Treasury Robert Rubin, Mexican Minister of 
Finance Guillermo Ortiz, and other Mexican and United States 
officials signed four carefully-negotiated agreements 
implementing the U.S. program. In so doing, they set in place a 
package to avert the threat to United States jobs, standards of 
living, immigration concerns, and security interests posed by 
Mexico's economic difficulties. 

I would like to use this opportunity today to review briefly 
with you the events leading up to our adoption of these 
agreements. I would also like to go over some details of the 
package, and how it will work to protect American interests in 
the short-term and in the long run. 

It has been nearly two months since Mexico first encountered 
a liquidity crisis brought on by a loss of investor confidence. 
Almost immediately, the President and congressional leadership 
realized that Mexico's problems were not that country's alone — 
that a Mexican economic collapse would have severe consequences 
in the United States. 

The President emphasized early on the strong economic stake 
we have in Mexico — the more than 700,000 United States jobs 
that depend on sales to Mexico, our third largest export market. 
He recognized the important effects a Mexican economic collapse 
could have on illegal immigration, as it did when Mexico 
collapsed in 1982 and 1983. Then, the apprehension of illegal 
immigrants along our southern border rose by nearly 30 percent. 


Perhaps most importantly, the President recognized that a 
Mexican crisis could threaten one of the most promising economic 
developments in the world today, the advance of emerging market 
nations. These have been the fastest growing markets for our 
exports. Mexico's collapse could knock off course economic 
progress built on opening markets and freeing up the private 
sector. That could set us back years, if not decades in our 
efforts to promote reform around the world. Much of the economic 
and strategic benefits such reforms offer to Americans would be 
deferred. America's hopes for increased demand in emerging 
markets for U.S. products and the good jobs this would bring 
would also be disappointed. 

These important American interests called for the United 
States to take the lead in organizing an international effort to 
restore market confidence, and help Mexico avert economic 
disaster. The President and congressional leadership saw this. 
Together, they announced the Administration's original proposal 
to offer Mexico up to $40 billion in financial guarantees. Such 
guarantees were intended to help Mexico raise funds needed to pay 
off short-term obligations coming due, and restore financial 
stability and confidence in Mexico. 

Treasury officials as well as members of the Administration 
worked diligently with the congressional leadership. Banking 
Committee Chairman Leach, and other Members of Congress, seeking 
to assure passage of implementing legislation needed for the 
financial guarantees. Unfortunately, international financial 
markets did not stand still. Mexico's financial situation began 
to deteriorate sharply. Mexican and other financial markets sank 
to new lows, and the spillover to other markets was visible. By 
the end of January it became apparent that Mexico was approaching 
the brink of a financial precipice. There was no time left to 
wait for congressional action if we were to avert a preventable 
Mexican collapse and safeguard US interests. 

That is why on January 31, President Clinton announced a new 
approach. He said that we would move forward with a $2 billion 
support package for Mexico which would draw on the Department of 
the Treasury's Exchange Stabilization Fund or ESF, with 
participation by the Federal Reserve. The ESF resources are in 
place — the Fund was established by Congress in 1934. The ESF 
authorizes the Secretary of the Treasury to extend loans and 
credits to foreign governments, which meant the new package could 
be implemented without delay. Speaker Gingrich, Minority Leader 
Gephardt, Majority Leader Dole, and Minority Leader Daschle all 
joined in a statement that day declaring their full support for 
the program, and recognizing the President's and Secretary of the 
Treasury's full legal authority to implement it by using ESF 


We were not the only ones that day to recognize the need for 
rapid action. Also on January 31, at the urging of President 
Clinton and after close discussion with Treasury officials, the 
management of the International Monetary Fund announced that it 
was prepared to propose a $17.8 billion support package for 
Mexico, expanding on an earlier $7.8 billion offer. The first 
amount was already the largest program in the history of the IMF. 
The central banks of a number of major industrial countries also 
said they would consider providing $10 billion in financial 
assistance through the Bank for International Settlements, $5 
billion more than the support package that was originally to be 
offered through the Bank. I should note, however, that the BIS 
commitment is for short-term financing. 

The international support for Mexico is impressive. 
Nonetheless, the United States component is rightly seen as the 
key that will enable Mexico to face up to the market. That is 
why Treasury, the Federal Reserve, and other United States 
officials have worked over the past several weeks to complete the 
agreements necessary to implement the President's proposal as 
quickly as possible. 

The specifics of any large financial agreement need to be 
worked out with care. We were, I think, painstaking in drawing 
up the agreements with the Mexicans. We wanted to be absolutely 
sure that our requirement that United States interests be 
safeguarded was met, with assured sources of repayment for all 
Mexican obligations. We insisted, too, that Mexico follow a 
course that will help assure success — that Mexico follow the 
rigorous monetary, fiscal, and structural policies necessary to 
stabilize its economy. And we insisted that the agreements be 
structured to provide us with all the information necessary to 
determine whether Mexico is following through. Nothing less, we 
believed, would accomplish our goal of stabilizing Mexico's 
economy, and protecting the U.S. financial, economic and security 
interests that hinge on Mexico's success. 

There were difficult moments. Towards the end of last week 
markets grew impatient and began to sink, warning us that 
confidence in our ability to conclude a successful program was 
waning. In the end, however, our persistence paid off. The 
agreements we signed with the Mexicans satisfy all our concerns. 
And they offer Mexico the best route for emerging rapidly from 
its liquidity crisis, restoring confidence, so that Mexico can 
quickly regain the path to economic growth, thus safeguarding 
U.S. interests. 

Throughout the negotiations, we also remained confident that 
swapping short-term debt for medium to long term obligations is 
an indispensable part of the solution for Mexico's problems. 
Looking beyond the current crisis, Mexico's prospects are good 


and Mexico is well up to meeting all of its debt obligations. 
Many indicators point to fundamental improvement over the past 
six years or so: 

o inflation declined from over 150 percent in 1987 to 7 

percent last year. The runaway depreciation of the peso has 
boosted inflation temporarily, but Mexico knows what it must 
do to bring it back under control. 

o almost 400 state enterprises were privatized, greatly 
reducing government involvement in the economy and 
bolstering the private sector; 

o tariffs and import restrictions were cut sharply, opening 
Mexico to foreign trade and investment; 

o government spending was drastically reduced, with the budget 
moving from a deficit that stood at 13 percent of GDP in 
1987 to a balanced budget last year; and 

o public debt as a proportion of GDP fell from 75 percent in 
1986 to 45 percent last year, a level below the average for 
OECD countries. 

This underpijining of market-based reforms coupled with new 
commitments embodied in the agreements should help put Mexico 
firmly back on the road to economic growth. 

Let me now take a few minutes to discuss the agreements in a 
bit more detail, and explain to you more fully how our support 
package will work. 

The Agreements 

Secretary Rubin, Finance Minister Ortiz, and other 
officials signed four documents — a framework agreement that 
covers the entire support package, an annex to that agreement 
setting out how Mexico's obligations to us will we backed through 
oil proceeds, an agreement covering medium-term swaps and an 
agreement setting out the terms under which we will guarantee 
Mexican securities. Through these agreements we will make 
available to Mexico up to $20 billion in support over the next 
year, or, at most, a year and a half. 

Mexico has agreed to follow a financial plan showing how it 
will use this support to restructure or refinance short-term 
obligations falling due over that period, switching its debt 
portfolio to longer-term, less volatile forms of finance. This 
plan calls for using about half the resources, holding the other 
half as a contingency. This will make Mexico less vulnerable to 
swings in investor confidence, averting the present liquidity 


crisis, restoring financial stability, and facilitating Mexico's 
return to economic health. 

Forms of Support 

We will make our support available to Mexico in three forms: 
short-term swaps which will allow Mexico to borrow dollars for up 
to one year, medium-term swaps which will extend dollars to 
Mexico for up to five years, and securities guarantees. Under 
these guarantees, the United States will back Mexico's 
obligations on government securities that have maturities of up 
to 10 years. Our backing should encourage investors to lend 
money to Mexico for longer terms at lower interest rates. That 
will further ease Mexico's ability to refinance the short-term 
obligations falling due. 

Let me be very clear on one point. This package does not 
provide Mexico cheap support. We will charge Mexico an interest 
rate for any swaps, and a fee for any securities guaranteed, that 
is sufficient to cover the risks we will bear. Moreover, the 
more support we disburse, the higher will be the fees and 
interest rates — starting at 2 1/4 percent over Treasury 
interest rates and going up to a premium of 3 3/4. That will 
encourage Mexico to turn to regular private market sources for 
capital as quickly as possible, rather than relying on us. And 
if Mexico doesn't respond to that incentive when their market 
access is restored, we can require it to go to the market for 
funds to repay us. 

Two Guiding Principles 

Two other points should be emphasized — indeed, they were 
our guiding principles during the negotiations. One, Mexico's 
return to economic stability depends first and foremost on 
Mexico's pursuing the right economic policies. We cannot do this 
for Mexico, it must make the choice, and it has. The agreements 
we signed condition all our help on Mexico's implementing the 
rigorous economic policies that it has announced. The Mexican 
authorities have given us an economic memorandum spelling out 
what they intend to do on monetary policy, on exchange rate 
policy, on their budget, on privatization and so forth. 

Two, we were unwilling to extend any support to Mexico 
without assurances that we would be repaid. That is why we 
structured the agreements as we did — with strict controls on 
how our money would be used, strong provisions allowing us to 
monitor Mexico's compliance, and assured backing for any support 
we extend. 

Let me say a few more words about both of these concerns — 
the economic and financial conditionality, and the safeguards 


that will help assure Mexico's repayment of its obligations. 

Economic and Financial Conditionality 

To begin with, our agreements with Mexico take as their 
basis the economic stabilization progreun that Mexico has agreed 
upon with the International Monetary Fund. Under that program, 
Mexico will pursue restrictive fiscal and monetary policies in 
order to strengthen the peso and bring inflation down to low 
levels. Stabilization is the top objective because it is the 
only sure way to bring about a resumption of normal, spontaneous 
capital flows and a sustained period of growth. 

The IMF progreun contains strict conditionality in the form 
of performance targets. Those oblige Mexico to cut government 
spending and generate a budget surplus, restrict credit to a 
degree that would bring about a large decline in the real stock 
of base money, and sharply cut back development bank lending. 
Moreover, Mexico has committed to accelerate structural reforms 
in the transportation, telecommunications and banking sectors and 
continue privatization reforms. The accords we have signed 
condition support on additional economic steps by Mexico to 
improve the prospects for a successful stabilization of the 
economy . 

Second, our agreements with Mexico refer to a financial plan 
which will govern how Mexico uses our resources to restructure 
and refinance its obligations. For example, Mexico should retire 
up to $16 billion of Tesobonos — short-term, dollar-indexed 
obligations falling due — over the rest of the year, in part by 
drawing on $10 billion in United States support. We reached 
agreement on this financial plan only after careful analysis and 
study of Mexico's economy and financial profile. We are 
convinced that the plan is realistic and represents the most 
effective use of our support. 

Assuring Performance 

How will we assure performance by Mexico of these 
commitments? The agreements are very strong on that score. 

First, we made provision of support contingent on Mexico 
living up to important transparency and reporting requirements. 
This will be a big step forward for Mexico's financial 
authorities in their dealings with the public and the markets. 
The agreement also ensures that Mexico will provide us with all 
the information we need to determine how Mexico's economy is 
doing, and whether Mexico is living up to its obligations. 
Mexico will provide us with any additional information we need to 
do our job here. 


Second, we are disbursing our support in stages, or 
tranches. Each disbursement will be contingent on our being 
satisfied that Mexico is making progress and meeting all the 
terms of the agreements. Mexico will have to provide a complete 
explanation of how it plans to use any disbursement, before we 
agree to the disbursement request. If we are not satisfied we 
can veto the request. 

Other controls have been built into the agreements. For 
example, in a number of cases, we can accelerate Mexico's 
obligations to us if we determine that they are not complying 
with key terms and conditions. All of these safeguards help 
ensure that Mexico will use our resources as agreed, to stabilize 
its economy, and protect our interests. 

Backing for Unitad Statas support: tha Oil Machanism 

I mentioned backing for our support as a second key concern. 
Repayment by the Mexicans is backed by the revenues from the 
export of crude oil and petroleum products. Under the Oil 
Proceeds Facility Agreement, Mexico's state-owned oil company, 
PEMEX, will instruct its foreign customers to make payments for 
oil and petroleum products into an account at a bank in the 
United States. The agreement contains irrevocable instructions 
to that bank to transfer funds to a Bank of Mexico account at the 
Federal Reserve Bank of New York. These same instructions ensure 
that if Mexico fails to meet its obligations the funds will be 
set off against Mexico's obligations and transferred to a U.S. 
government account at the Federal Reserve. 

These agreements were carefully constructed and meticulously 
negotiated. They protect our interests, and should accomplish 
our goal of returning Mexico to economic stability as quickly as 
possible, preventing the severe consequences we would suffer if 
Mexico were to default on its obligations and suffer a protracted 

Before concluding, I would like to emphasize that the 
Administration intends to keep Congress fully informed of our 
progress as we implement the agreements. We plan to update 
Congress, on a regular basis, about the details on disbursements 
to Mexico, how the proceeds are being used, and any developments 
related to compliance with our agreed terms and conditions. 


Finally, let me reiterate what President Clinton and the 
congressional leadership stated on January 31. They said: "We 
must act now in order to protect American jobs, prevent an 
incrMiscd flow of illagal immigrants across our borders, ensure 
stability in this hamisphara and ancouraga reform in emerging 
markets around tha world." Wa ara fully confidant that the 
agraamants that have just baan signed with Mexico will accomplish 
these objectives by setting the stage for Mexico's rapid return 
to stability. Thank you. 


The Mexican Peso Bail-out 

Testimony Before 

the Joint Sub-Committee Hearings 

of the 

House Sub-Committee on Western Hemisphere Affairs 

and the 

Senate Sub-Committee on International Economic Policy and Trade 

Februar) 24, 1995 

by John Sweeney 

Latin American Affairs Policy Analyst 

The Heritage Foundation 

The U.S. -Mexico Framework Agreement announced on Tuesday, February 21, 
1995, establishes the amounts, terms and conditions under which Mexico shall have 
access to $20 billion from the U.S. Federal Reserve, through the Treasury Department's 
Exchange Stabilization Fund. 

This agreement covers only the ESF portion of President Clinton's $50 billion 
scheme to bail out Mexico's government and U.S. mutual funds, such as Fidelity of 
Boston, with billions of dollars at risk in Mexico and other emerging markets around the 
world. It does not include any additional conditions imposed by the IMF for the $17.8 
billion in standA)y assistance pledged to Mexico, nor a further $10 billion from the Bank 
for International Settlements (BIS). 

This ill-conceived agreement is not viable or credible. I suspect that it is the 
brainchild of panic-stricken politicians and bankers in the White House, Treasury 
Department, and the Government of Mexico who desperately hope that foreign investors, 
Congress and the American people can be fooled into believing that the Mexican crisis is 
a temporary inconvenience that will end shortly. 

President Clinton's bail-out of Mexico will not work. Since the Mexican peso 
was first devalued on December 20, 1994, The Heritage Foundation has argued 
insistently that the Mexican crisis is not a transitory shortage of liquidity, but rather a 
major debt payments crisis, as well as a systemic political crisis which is going to 
continue for the foreseeable future. 

The signs of panic are everjvvhere in this agreement: 

• The legality of the president's use of his executive power to bail-out Mexico's 
government with the Exchange Stabilization Fund is highly questionable. If the first $20 
billion is not enough, will President Clinton increase Mexico's draw at the ESF? 

In hearings before the House International Relations Committee on February 1, 
1995, Fred Bergsten of the Institute for International Economics said that President 
Clinton could, potentially, disburse billions more to Mexico, through the ESF, and 
without Congressional approval, by making use of international swap arrangements with 
other central banks. 

If the Mexican crisis continues, the giant sucking sound American taxpayers may 
hear is the loss of many billions of U.S. tax dollars. That is why the U.S. -Mexico 


Framework Agrccmcnl comes with so many conditions attached: Clearly, even the 
Administration has doubts about the viabiHty of this bail-out scheme. 

• The Administration's agreeement seems to show less concern for American 
taxpayers than for the impact of the Mexican crisis on the U.S. mutual funds that today 
are the largest source of portfolio investment in the world's emerging markets. A single 
mutual fund. Fidelity of Boston, has invested over $8.5 billion in Mexico and other 
emerging markets around the world. Many other mutual funds have similarly large 
exposures at stake in these international emerging markets, which for the most part are 
second-rate countries ruled by third-rate bureaucrats. The view on Wall Street is that 
Mexico is the bellwether for these emerging markets, and that if Mexico collapses, the 
other emerging markets will fall as well. 

• In Mexico City, President Ernesto Zedillo is rightly concerned about the 
economic, political and social repercussions of a crisis that was caused by the Salinas 
Administration's bad policy decision to manipulate monetary and exchange policy to aid 
Zedillo's electoral prospects. Zedillo won in what was hailed as the cleanest elections in 
Mexico's long history of corrupt statism and one-party rule, but the cost was steep: a 
current account deficit of nearly $30 billion and the expenditure of more than $20 billion 
in foreign exchange reserves at Mexico's central bank, the Banco de Mexico. 

The peso's devaluation is a major watershed in Mexican history, because it 
accelerated the collapse of the ruling Partido Institucional de la Revolucion, or PRI, 
which has monopolized Mexico's comipt and undemocratic political system for more 
than 65 years. Throughout Mexico this year, local state elections for governors and other 
public positions will be hotly contested and, probably, increasingly violent elections. The 
conservative PAN party is expected to score big gains in northern and central Mexico, 
while the PRD may do well in some southern states. Regional and local PRI factions 
may not accept orders from the top to respect the results in any elections they lose, and 
it's a given that the PRD will protests all elections it loses, because they always respect 
democracy when they win elections, but cry fraud when they lose. 

Mexico is making a difficult and dangerous transition from a one-party, 
corporatist state towards a democracy. It can be argued that Mexico is suffering two 
parallel crises. One is political, and the other economic, and both crises are growing by 
feeding on each other. The political crisis fuels the economic crisis because the foreign 
investors on which Mexico depends (more than any other country in Latin America) are 
scared away. As Mexico's economic crisis deepens, however, the political crisis also 
grows. Yet another factor contributing to the Mexican crisis is President Zedillo himself. 
Zedillo is perceived as a weak and ineffectual leader. The peso's devaluation was badly 
managed. Zedillo's decision to suspend the offensive againts Chiapas rebels that he had 
ordered only a few days earlier was perceived as a sign of weakness. 

The extent of Zedillo's desperation is revealed by his acceptance of U.S. -imposed 
conditions that effectively make Mexico the ward of the U.S. Treasury and Federal 
reserve, and which therefore are politically unacceptable in Mexico. President Zedillo's 
life, quite literally, may be at risk. In my opinion, the assassinations of Luis Donaldo 
Colosio in March 1994, and of the PRl's secretary general, Ruiz Massieu, later that year, 
were not isolated or coincidental events. 


The U.S. -Mexico Framework Agreement does not "(bring) this crisis to a close," 
as Secretary of State Warren Christopher mistakenly stated yesterday. 

Since Mr. Cliristopher is obviously not trying to deceive Congress and the 
American people, then he must not understand the systemic nature of the Mexican crisis 
in its full economic, political and social dimensions. 

President Clinton said yesterday that, with this framework agreement, his 
administration has "done the right thing by the American taxpayers and the American 
people as well." 

My rejoinder to President Clinton is a phrase originally attributed to former 
Mexican President Lopez Portillo. 

Mexico, said Lopez Portillo, is not an oil well. 

Yet, this ill-conceived U.S. -Mexico Framework Agreement assumes that Mexico 
is, indeed, an oil well, because the "collateral" is nothing less than Mexico's oil export 
revenues, which henceforlli are to be deposited in a special account at a U.S. bank (which 
bank? Citbank? J. P. Morgan?), with "irrevocable instructions" (from who?) to transfer 
funds to a Banco de Mexico account at the Federal Reserve Bank of New York. The 
Administration's official announcement of the deal reads as follows: "As long as 
Mexico meets its obligations, these funds will be freely available for use by the Banco de 
Mexico. If for any reason Mexico should fail to repay the U.S. under any of the financing 
agreements, the U.S. treasury, through the Federal Reserve Bank of New York, would be 
entitled to set off its claims against the Banco de Mexico account." 

But Mexico's economy is even weaker than its trade statistics suggest, and its 
dependence on oil is much greater. Official Mexican and U.S. trade statistics estimate 
that oil exports comprise 15 percent of Mexico's total exports. However, George Baker, 
a leading U.S. expert on Mexico and Director of Mexico Energy Intelligence in Oakland, 
California, believe that oil actuall accounts for up to 40 percent of Mexico's real net 
exports. Mr. Baker disaggregates Mexico's merchandise exports, separating out those 
exported goods made in Mexico by foreign (mainly U.S.) subsidiaries. Mr. Baker 
maintains that if such products associated with cross-border, intra-fimi trading are 
deleted from the merchandise export account, Mexico's net manufactured exports in 1993 
fall to an estimated $15 billion, from an official $42 billion. 

If Mr. Baker's calculations are correct, and I believe that they are indeed accurate, 
the idea of collateralizing a U.S. emergency loan package with Pemex export receipts is 
impractical and dangerous. Mexico's oil exports in 1993 were the equivalent of some 50 
percent of Mexican manufactured exports, and 40 percent if mining and agriculture 
exports are added to net merchandise exports. Since Mexico's Constitution and energy 
regulations preclude private investment in oil production, or its refining and distribution 
infrastructure, Pemex needs a free hand to negotiate access to capital markets. 

About 40 percent of the Pemex budget is in dollars. If dollar expenditures are 
included for current operational expenditures such as maintenance services which are 
mostly imported from Texas, Pemex has to make dollar expenditures of $1.7 billion to $2 
billion each year in order to maintain production capacity, expand its activities and 
generate the dollar revenues needed to repay this emergency loan package under the 
ridiculous conditions imposed by the Clinton Administration. With its oil receipts tied up 
in the Federal Reserve Bank of New York, what will happen when Pemex goes to the 


market to borrow $1 billion a year. The bankers Pcmex approaches will ask how I'cnicx 
will pay. Every prospectus issued by Pemex will contain an important caveat: 
"Investors/Lenders should be aware that the oil receipts offered as collateral in this 
prospectus have been previously collateralized to an emergency loan agreement between 
the Governments of the United States and Mexico." 

This agreement jeopardizes the credit lines of Pemex, and therefore undermines 
its ability to maintain Mexico's oil exports. Moreover, by tying up 40 percent of 
Mexico's net merchandise exports, this agreement eliminates the freedom of maneuver 
Mexico needs to buy U.S. goods and ser\'ices. The U.S. Treasury Department is not at 
the head of the line. Private U.S. business has been cut out of the picture. Overnight, 
Mexico has been transformed from the diversified economy hailed by Presidents Salinas, 
Zedillo and Clinton, into an oil well again. 

Wliat happened to NAFTA and the Partnership for Prosperity signed by the U.S., 
Mexico and 32 other democratic nations of the Americas in Miami on December 1 1, 
1994, only nine days before the Mexican peso collapsed? Mexico is our NAFTA partner, 
yet we are taking 40 percent of our partner's merchandise exports and tying them up in a 
U.S. bank. What kind of partnership is that? 

President Clinton and his Treasury Secretary, Robert Rubin, claim that this 
agreement will restore investor confidence in Mexico. This is a fallacious claim; 1995 is 
a lost year for Mexico. One has only to look at the Venezuelan experience in 1989 to 
draw an image of what may happen this year in Mexico. When Venezuela's government 
allowed the bolivar's exchange rate to float in 1989, inflation exceeded 80 percent and the 
economy contracted nearly 10 percent that year. The Zedillo Administration projects 
economic grow^ of about one percent this year for Mexico, and inflation of 19 percent 
with the peso stabilizing at 4.5 to the U.S. dollar. I believe the Mexican economy will 
contract, and that inflation could easily reach 50 percent in 1995 because the peso may 
continue to weaken. 

Who will invest in Mexico this year under these circumstances? One has to make 
distinctions between portfolio investment, or what Wall Street calls "mad money," and 
direct foreign investment in plants and equipment. Portfolio investors will look either at 
equity or debt investments in Mexico this year, and the debt investments, mainly in 
Cetes, are going to win out because interest yileds will be much higher than for equity 
investments, assuming a stable exchange rate. Equity is investment in the future, and 
right now Mexico's future is very underlain. Under current conditions, equity investment 
only makes sense unless assets are incredibly cheap, and unless these assets have a 
substantial potential to generate foreign exchange by exporting. However, the hot money 
inflows won't be as great as in 1993 or early 1994. 

As for direct foreign investment by private companies (mainly American), there 
will be a general reassessment of the current economic situation in Mexico. The economy 
will contract this year and inflation will rise substantially. Mexican consumers will be 
buying fewer products. Foreign investors in the maquiladora industry will increase their 
investments to take advantage of cheaper Mexican labor costs, and there will be 
maintenance investments of existing foreign operations in Mexico, but new foreign 
investments are likely to be postponed until Mexico manages to get its nose above the 


water again. This will take at least a year, presupposing that President Zedillo gets his act 
together, but right now foreign investors are not convinced that Zedillo can do this. 

In conclusion, I believe that it is important that the appropriate committees in the 
House of Representatives and Senate hold extensive oversight investigations and 
hearings into the causes and consequences of the Mexican crisis. The crisis is not over 
yet, and the Clinton Administration's legally precarious decision to invoke his executive 
powers to bail out Mexico should be opposed by Congress. Many doubts and questions 
need to be clarified. Who in the Clinton administration knew of this impending crisis, 
and when did they know? Who negotiated this agreement? Which private U.S. bank will 
receive the oil revenues of Pemex for transfer to the Federal Reserve Bank of New York? 
What are the Administration's fallback options if the agreement does not work? What 
conditions will the IMF impose on Mexico, and how will the $17.8 billion be disbursed? 
Where will the IMF obtain the resources it needs? What are the terms for the BIS credit? 
Will the U.S. be the guarantor of the BIS credit as well? Is the president's use of the 
Exchange Stabilization Fund legal? In the opinion of many legal experts, the use of the 
ESF to support the Mexican peso is not legal, and the 1934 Gold Standard Act which 
created the ESF should be amended so that it can only trade in gold or hard currencies 
such as the U.S. dollar. 


Statement by Mr. Christopher Ulialen 

Chief Financial OfBcer 

Legal Research International 

February 21, 1995 

House (rommittee on International Relations 

Subcommittee of Western Hemisphere 

Proposed $51 Billion Mexico Bailout 
A Fraud on American Taxpayers 

The over S50 billion in new foreign loans for Mexico proposed by the 
I 'hnton Administration is a bad idea both politically and financially. The 
loans support the larger national interests of neither Mexico nor the United 
States, and are a transparent subsidy for private speculators. Moreover, ''he 
T'linton White House is deliberately misrepresenting both the purpose of the 
loans and the impact this rescue package will have on the very real economic 
crisis now unfolding mside Mexico. 

Congress should enact legislation to block this taxpayer-financed 
bailout for private speculators and instead demand that the Treasurj" help to 
fashion a private sector .solution to the financial problems in Mexico. So far. 
the l .S. Treasury and Federal Reserve System have disbursed over So billion 
since December, including S2.1 billion between E'ecember 22 and January 31. 
1995: S2 billion from the Federal Reserve and Treasury on or about February 
2. 1995- and Si billion from the Fed and Treasury on February 13. 1995. 
Thpre are unconnrmed reports that an additional S4 billion of Federal 
Rt-.-jerve-Treasury mone\ was released to the Mexican government during the 
week tc'llowing February 13. 1995. bringing the total direct U.S. assistance .so 
far to between S12.9 l)illion and S16.9 billion. 

Here are several sumraar>" points that members of Congress need to 
know about the proposed rescue package: 

1. The 850 billion will go almost entirely to foreign investors and 
Mexico's corrupt elite Little if any of the funds made available under these 
loans will ever help the people of Mexico, who are the biggest losers in the 
current financial turmoil. Moreover, the serious financial contraction now 
underwa}' in Mexico will continue in any event, with or without the U.S. aid 

2. The S20 billion m L.S. loans and billions more in loans from the 
\^'orld Bank and IMF will never be repaid , (''ontrary to the optunistic 
statements made by the Clinton \M-iite House regarding the likelihood of 
repa\ment. Mexico is already heavily burdened by over S160 billion in foreign 


debt aud cannot possible repay these additional loans. i More than new loans 
co-signed by the U.S. taxpayer, Mexico needs to restructure its existing 
foreign debts on a private basis and embrace further free-market reforms in 
order to prevent a reoccurrence of the tj^pe of financial crisis seen since 
December 21, 1994. 

3. There are no free Mexican oil revenues available as collateral on 
the S40 billion in loan guarantees . Mexico currently earns roughly S6-7 
billion annually on oil exports, but most of these dollar revenues are already 
pledged to pay the country's S80 plus billion in public sector debt and meet 
other fiscal demands on the Mexican government. Treasury Secretary Robert 
Rubin and Under Secretary' Lawrence Summers are mistaken when they 
asserts that there is any excess dollar revenues available from Mexican oil 
exports to serve as collateral on these loans. 

Mexico's earnings of dollars from oil exports were approximately S6.1T 
billion in 1994. down from as much as Slo billion m 1984 - Moreover, 
declining exports and rising internal demand for energj' make it clear that 
the U.S. Congress cannot rely on oil revenues for security on the proposed 
loans.' By the end of the decade, Mexico's oil exports probabh will disappear 
and the country will become a net-importer of oil and refined energ}- products. 

The bottom line: The Clinton Administration is trying to sneak a 
costly, counter-productne ta.xpayer bailout for Mexico past the Congress by 
making all sorts of hysterical claims about the dire consequences of inaction. 
In fact, the US. should do nothing directly about the Mexican financial crisis. 
Instead, the US Treasury should urge private banks and investors to 
develop a pruate sector solution to the crisis in Mexico and thereby help that 
country to move forward toward economic opening and free-market reforms. 

' Aixordirig to El Financitro ijanuary 9 la&5. Page 4). Mexico's total foreign debt 
public and private reached 314*3 biUion at year-end 1994, \'\'hen foreign holdings of 
Mexico's internal debt and dollar deposits in Mexican banks are added to tlie 
equation, the countr\''s external debt easily exceeds S160 bilbon The Institute for 
International Finance !:■ Wasliington has estimated Mexico's total foreign debt at 
year-end 1994 to be 8166 billion See also E! Financiero 'December 12 1994, Pages 4- 
5; December 30. 1994 Page ,5A) 

- See La Jornada (October 17 1994 Page 1) Because of a lack of capital 
investment, Mexico's state oil company, Pemex, is not able to meet demands for 
energy nnd replace proven oil resen.'es. Moreover Pemex itself has foreign debts of 
S7.6bilhon. See also t^/ F/nanc/Vro (October 27, 1994 PageSi 
' See El Financiero (December 29 1994 Page 11) Mexico has already announced 
plans to reduce oil e\-pc>rts by 3,7 percent during the first half of 1995 because of 
nsir;g internal demand, Internal demand for crude will nse to -52 percent of total 
output in 1995 compared with 49 percent in 1994. 

"* See Zaracostas, John, "Study: .Me>aco on the Road to Becoming Xew Oil Importer by 
End of Decade," Journal of Commerce. December 21. 1994, PageGB, 


The Clinton Administration claims that without the S40 billion aid package 
now before Congress. Mexico will experience further financial upheaval, leading to 
social ills such n greater illegal ijnmigration and poverty. But the truth is that the 
inconsistent economic model of former President t.^arlos Salinas has already built 
these and other problems into the mix. These difficulties will hkely grow much 
worse, thus Bill Clinton would have .-Vmerican taxpayers rescue the Mexican 
architects of the current disaster. 

(^ontrarj' to \Miite House claims that the bailout benefits Mexico, in fact the 
loans will be used to allow foreign investors an opportunity to escape peso 
investments at a lower penalty, leaving the IS. Treasur>' with a potentially open- 
ended commitment to further subsidize the shakj" Mexican economy. Both the 
('linton and Bush Administrations made claLins of job growth and bigger U.S. 
exports to Mexico during the X.AFTA debate, but these promises lie in ruins. 
Incredibly, the President now asks you to believe that these new loans "will not 
cost the I'mted State:^ govermnent ainthmg." in the words of Treasiuy Secretarj' 
Roben Rubin. ' 

Histor}' and the disingenuous statements made by officials of the Mexican 
go\ernment argue strongly in fa\'or of caution. The fact is that not one pemiy of 
the aid package proposed by President Clinton and apparently endorsed by the 
Republicans in Congress will ever reach the niiUions of people in Mexico who 
really do need help. Tlie proposed S40 billion rescue package announced on 
Januarv- 12 actually is a hidden subsidv for Wall Street and Mexico's elite, not a 
helpful hand as the (?'lmton Administration now claims. 

Uliile the Treasury' remains blind to the true scope of the Mexican debt 
crisis, officials inside the central bank are alanned by recent developments. In a 
confidential presentation in early January to the board of directors at one Federal 
Resene Bank, a direct comparison uas made between the situation facing 
Mexico's financial system and the asset price deflation that has crippled 
\'enezuela's eojiiomy since the stait of 1994 Tlie Fed presentation concluded that 
Mexico's government will be forced to print money in order to refund deposits in 
bankrupt conmiercial banks or face civil unrest. 

Mexico faces further peso devaluation as and when commercial banks 
collapse under the sheer weight of bad loans, this on top of the effective 30-40 
percent peso collapse since December 2 1st. Compared to the paltn," S40 billion now 
on the table 'o rescue Wall Street punters, Mexico faces a domestic asset meltdown 
that could total in the hundreds of billions of dollars. 

^ It IS interpsting to note ihnt the U.S, was recently forced to redeem S400 million m 
loan RTjarantees Ibi' Iraq 


:Vs the internal econoiny in Mexico shrinks, its swollen, S160 plus billion 
foreign debt will grow ever larger and force another debt default, initially time 
involvnig private rather than pubhc sector borrov\ers. The process di'i\'ing the 
gradual collapse of the Mexican banking system and commercial companies with 
large doHar debts is a still ccaioealed financial catastrophe that seems inevitable, 
but should come as no surprise m Washmgton or on WaU Street. Mexico's 
mgenious peso Ponzi scheme has. after all. coUapsed several times before over the 
past 170 years. Rather than asking Congress to forgive their gambling debts, 
holders of Mexican debt should consult a priest or bartender 

A Free Market Solution 

Mexican President Ernesto Zedillo confronts an enormous national 
crisis not of hi.'^ making but which is now his sole responsibility. Millions of 
Mexicans and many others outside the country are looking to him for a 
solution to the economic chaos caused by the more than 40 percent 
devaluation of the peso against the dollar over the past week. 

The good news is that the hardest part namely the long-delayed 
ad.iu.^rment of the bloated Mexican currency, is now largely complete. UTiile 
the peso may continue to fall against the dollar over the next several weeks 
and months, the process of restoring genuine stability to the financial 
markets has already advanced a long way and can be completed as soon as 
Zedillo presents a credible economic strategy- based on continued market 
liberalization Unfortunately, it seems that Mexico, with the assistance of 
Washington and Wall Street, is preparing to repeat the very mistakes that 
caused the Mexjcm economic crisis in the tirst instance. 

The January 31 decision by the Clinton Administration to make 520 
billion a\ ailaMe to Mexico convinced many in Washington that the peso crisis 
of 1995 is resoh-pd. The Mexican currency had fallen over 40 percent since 
December 21 and almost 50 percent since January of 1994. Yet while the 
L'.S. bailout reassured Wall Street banks and their clients, this 
unprecedented public subsidy for private offshore debts had little effect on 
the brutal economic contraction now underway south of the Rio Grande. 

Restoring confidence to foreigners who choose to speculate in short- 
term Mexican debt is not the same as providing meaningful assistance to the 
Mexican economy. In particular, the proposed aid package will have little or 
no effect on the deteriorating situation inside the Mexican banking and 
financial system. Crowing numbers of credit analysts acknowledge that 
many Mexican commercial banks and finance companies are insolvent and in 
imminent danger of failure because of defaults on peso loans by Mexican 

90-345 0-95-4 


Any viable program to revive Mexico's economy must begin with a 
complete repudiation of the key Haw in the economic policy of the previous 
government, namely pegging the peso to the dollar. Experience teaches us 
that a pegged currency implies a future devaluation. From the verj' outset, 
Mexico's new government must publicly admit that in the future the Banco de 
Mexico (Bauxjco) will target internal price stability rather than a fixed 
exchange rate as part of a new program for stable economic growth and 
investment within the Xorth -\merican Free Trade Agreement. 

Eanxico must eliminate future risk of sudden currency shocks. The 
central bank should publicly declare that it will end open-market 
intervention to .'-upport the peso and allow the currency to float until it 
reaches a "natural' level supported by the countrj-'s commercial and 
investment flows. Once the peso reaches a truly free rate against the dollar 
«nd the tlirear of a future maxi-devaluation is eliminated, interest rates in 
Mexico will fall and economic growth will return to a country where many 
once strong export industries are on the verge of collapse. 

As former Finance Minister Jaime Sera Puche correctly told the 
leaders of the G-7 nations several years ago during the EC's currency crisis, 
foreign exchange market intei"vention is an exercise in futility. To further 
bolster the sagging peso, the Zedillo government must end interventionist 
restrictions on currency' trading and allow speculative short-selling of pesos 
and other domestic financial instruments in order to help expand and 
strengthen the domestic capital market inside Mexico 

Mcirecer, by liherahzing the currency market banks and companies 
will be able to avoid the type of huge financial looses that discourage 
investment and now threaten Mexico's basic financial stability . With over 
S160 billion in total foreign debt and an economy new over 40 percent smaller 
in dollar terms than at the start of 1994. Mexico now is on the verge of a new- 
debt crisis Only through prompt action to reassure domestic and foreign 
investors by continuing to open the economy can Zedillo avoid a complete 

Next. Banxico and the Zedillo government must reject the misguided 
and self serving advice now coming from the U.S. Treasury to respond to the 
crisis by either throttling internal growth or using new foreign loans to 
temporarily restore liquidity to the peso By rejecting austerity and increased 
foreign debt. Mexico can permanently solve the current short-term volatility 
of the peso and build a firm foundation for fostering new job creation and 
higher real wages -- two important aspects that were noticeably absent from 
the economic program of the previous government. The self-serving bankers 
on Wall Street will argue for more debt and economic discipline, but Mexico's 
people need growth and jobs. 


Consistent with the ending of foreign exchange market intervention 
and lifting controls on short-sales of the peso, the Mexican government 
should quickly end its socialist system of wage and price controls. Just as the 
peso needs to find a natural and sustainable level against the dollar, Mexican 
wages and prices must also be allowed to float freely to let the Mexican 
economy to find competitive "parity" vs. the V.S. and Canada. After an 
immediate, one-time upward price adjustment to accommodate the recent 
devaluation, wages and prices should stabilize and track Mexico's long-terra 
rate of inflation. 

Before rushing forward with new privatization schemes recommended 
by the same avaricious Wall Street banks that engineered the present crisis, 
the Zedillo administration should devise a new approach to selling part or all 
of the remaining state-run companies in order to maintain government 
revenues while encouraging private initiative in the economy. Simply selling 
state-owned assets to finance an unsustainable foreign e.xchange rate current 
account deficit or income redistribution program is a mistaken policy of the 
previous government that a successful Zedillo administration must abandon 

Finally, President Zedillo must tell the Mexican people that while 
political tensions in Chiapas may have started the run on the peso, the true 
cause of Mexico's worst financial crisis since 1981 came from an 
unsustainable economic program that emphasized foreign borrowing in 
dollars rather than real growth in domestic peso terms. In order to regain 
badly needed political credibility. Zedillo must assure Mexicans and foreign 
investors that the priority for the future will be jobs and exports, not new- 
foreign debt and artificial "stability" built on fickle short-term investment 

.Ainidst all of the recent bad news about Mexico, the Christmas crisis of 
1994 presents an exciting chance to change many aspects of the old economic 
fonnula, a contradictory mixture of corporate statism and free market ideas 
that hurt Mexico's newly opened economy, destroyed millions of jobs and 
created the conditions leading to the current crisis. By rejecting discredited 
expedients such as more foreign debt, currencj' market intervention and 
wage'price controls. Ernesto Zedillo could turn the present crisis into an 
opportunity and complete the free market opening in Mexico that his 
successor only just began. 


Rirhard Christopher Whalen is Chief Financial Office of Legal Research 
International. Inc., a Washington-based financial servnces firm that provides 
proprietary research. in\'esiigation due diligence, asset search serMces, cross-border 
litigation manaerement. and strategic business counsel to multinational companies in 
the L' S,, Canada. Western Europe and the Far East. 

In addition to his duties as an officer of LRI. WTialen edits Hie Mexico Report, a 
formightly review of political and economic affairs in Mexico that combines news, 
independent analysis, interviews, and commentaries by observers in Mexico. In 
addition lie publishes a fortnightly fax newsletter on U.S. business and political 
de\'elopirients known as Wasliington & Wall Street which pro\'ides analysis and 
commentary on political developments in Washington affecting the Federal Reserve 
trade polic\' and the L .S. econom\ 

V\'halen was born on Januarv 6. 1959 and graduated from \'illano\ a Uni\'ersity 
wTih a degree in History in 19.81. From 1981 through the end of 1982. he worked as a 
staff uTiter for the House Republican Conference Committee, which was then 
chaired by Rep. Jack Kemp (Fi-N"\"). In March of 1983, he accepted a position with the 
Federal Reserve Bank of New York, where he worked as a financial analyst in both 
the Bank Supervision and Foreign Departments. 

At the start of 1986 VMialen joined Bear. Stearns & Co. working as a bond 
dealer in the London branch of this respected Wall Street firm. He had specific 
responsibility for establishing new business relationships with tinancial institutions 
from 'Japan. Whalen has experience in trading both fixed income and derivative 
products such as futures, options and other types of derivative financial instruments 

In 1983. Whalen was appointed a director of The N\'halen Companj'. an 
international consulting and public relations company founded in 1969 bv Richard J. 
Whalen Between 1988 and 1995. he served as lobbyist and/or foreign agent for the 
government of Chile under President Augusto Pinochet and Pakistan under President 
Zia al Haq and worked as public affairs counsel for a \ariety of domestic and foreign 
companies. In 1994. Whalen ?er\ed as an adviser to the presidential campaign of 
Cuauhtemoc Cardenas Solorzano in Mexico. He \vas a principal of The Whalen Co. 
through December 1994 and remains a director and member of the board. Ulialen does 
not presently serve as lobbyist or foreign agent, 

\Mialen is the co-editor of the 1990 book Trade Warriors: The Guide to the 
Politic s of Trade and Foreign Investment . He has testified before Congress on issues 
including the P'ederal Reserve System and the Mexican business en\ironment. He has 
contributed ai'ticles and commentaries on finance and political themes to publications 
uichuUng: Tii<' American Banker Barron's, Tlie Christian Science Monitor, Dinero 
(Colombia). Este Pais (Mexico) Tlie Freeman, Human E'jents. Tlie Journal of 
Commerce. Reforma/El Xorte (Mexico), Proceso CMexico), Tlie Xadon. Tlic Xew York 
Times, Tlie IV.?// Street -Journal and Tlie Washington Post. Whalen is co-lounder and 
acting secretar\' of the Herbert Gold Society, an informal organization of current and 
fornu-r officials of the Federal Reserve, Treasury Department and the Congress who 
enjo\' arguing about matters affecting the political economy. 



5TH STORY of Level 1 princed in FULL format. 

Copyright 1989 Federal Information Systems Corporation 
Federal News Service 

OCTOBER 10, 1989, TtlESDAY 


LENCTH: 168*3 words 




REP. HAMILTON: Mr. Bereuter? 

REP. BEREUTER: Mr. Chairman, I am still catching up here. May I defer to Mr. 

Smith first? 

REP. HAMILTON: Mr. Smith? 

REP. SMITH: Thank you, Mr. Chairman. Mr. Kamman, since Poland owes 

approximately $39 billion in foreign debt, what do you see as the applicability 

of the Brady Plan to Poland? And if you could, how does that $39 billion break 

down to, say 1990 's service payments? How much do they owe for that year? 

MR. KAMMAN: Well, I think the expert on debt would be Mr. Barreda, but one 

thing about Poland, most of the debt is official and not private bank, and the 

Brady Plan is essentially for private bank debt. 

(To Mr. Barreda) Bill, would you want to add something to that? 
MR. BARREDA: That's right, the Brady Plan is for private debt and that's about 

S9 billion for Poland. Any country is eligible for the Brady Plcm, the 

conditions are an IMF program. World Bank programs, cind domestic policies that 

encourgae private investment, including foreign countries. 

Subject to those conditions, I think we certainly could consider the application 

of the Brady Plan. The Brady Plan's benefits are that it opens various options, 

market determined, to either reduce the total outstanding debt, such as buying 

back the debt, or reducing the interest rate through one method or another. As 

I said, if those conditions were met, we certainly would consider it for Poland. 

REP. SMITH; What is the anticipated service payments in fiscal yeau: 1994 for 

servicing that debt? 

MR. BARREDA: Estimates -- we're working with the Poles right now, but estimates 

are on the order of $ ( $$ ) 3 to $4 billion. 

REP. SMITH: Could you tell me, Mr. Barreda, what the status of the Paris Club 

rate restructuring negotiations are? 

MR. BARREDA: We have been consulting with our allies in the Paris Club and with 

Polish authorities on the best way to proceed, and we're looking at options now 

and seeing what the Poles would prefer. The US position isn't very strong, 

although we favor prompt and generous action of the Parts Club, and that's what 

we're pushing for. 

REP. SMITH: In addition to the SlOO million in food assistance and the $140 
[million] from the EC, what do you see as the impact of this food aid on the 

domestic producers in terms of their price, in terms of productivity? Is there 

any fear that this could have a negative impact? 

MR. GOLDTHWAIT: I believe that one reason we are moving very deliberately with 



Page U 
Federal New* Service. OCTOBER 10. 1989 

MR. KAKMAN: Mr. CongresBman, we are doing a trade and development program, a 

half million dollar project in Hungary already. It hae been agreed upon and is 

being implemented. And that was mentioned, I think, during the President's 

visit there. There is interest, I know, in Poland. It's not quite as far 

along, but I think it would be appropriate to consider doing similar things in 


REP. ENGEL: HaB any thought been given to setting up a quasi -governmental 

agency, such as an Eastern European Development Foundation, to coordinate the 


efforts of both the public and private sectors, as we assist the economic 

revitaliation of Poland, Hungry and hopefully other East Bloc nations along the 

line? Any thoughts on that? 

MR. KAMMAN: Certainly there's been a lot of debate about what is the most 

efficient to put together, as you say, the private and the public sector here. 

For the moment, that is not something that we intend to do, although it ia 

certainly the purpose of the President's mission, that he ' b aumounced today, to 

go to Eastern Europe, to Poland, and possibly also a mission that would visit 

Hungary, to look into the structural requirements of those economies. And that 

would be a combination of both public and private expertise. 

Whether we need to set up a different institutional framework is something I 

think we'd want to leave open until we see the progress of the structural 

reforms . 

REP. ENGEL: Okay. Thank you, Mr. Chairman. 

REP. HAMILTON; Mr. Gilman. ^^ 

REP. GILMAN: Thank you, Mr. Chairman. ^^ 

Mr . Chairman, I want to commend you for holding the hearing in a timely fashion . 

We've just received the bill. I'm pleased to be co- sponsoring it. I think the 

Polish government certainly needs help and needs it promptly, and we're 

certainly at a turning point in history, and it's up to our nation to help 

bolster this new democratic initiative. 

I'd like to ask our distinguished panelists -- there's been a great deal of 

discussion about the possible utilization of a loan from the Treasury's 

Exchange Stabilization Fund to help stabilize the zloty as Poland tries to 

attack its inflationary problem. And I know our good chairman, the gentleman 

from Indiana, Mr. Hamilton, has raised that issue. 

Can you tell us, has serious consideration been given to that, and is that 

possibility presently under review? And does the Treasury Department have the 

authority to loan to Poland under this program? 

MR. BARREDA: Mr. Congressman, the administration has decided to support a 

Polish fund for stabilization. We think the appropriate way to do that is 

through an appropriation by Congress. We think the Exchange Stabilization 

Fund's purpose and use is quite different. We've used the Fund for intervention 

exchange markets cmd for very short-term loans, usually bridged to a guaranteed 

repayment in a hard currency. 

The proposal to provide Exchange StaUoilization funds to Poland on a longer-term 

basis is a totally different use of the funds. That is much closer to foreign 

aid, Mr. Congressman. We think, therefore, it should be appropriated. 

REP. GILMAN: Let me -- 

MR. BARREDA: The Other concern -- 

REP. GILMAN: -- pursue that a mcxnent with you. Is our assistance to Poland 

going to be based on an IMF loan? 

MR. BARREDA: We have said that the use of this $200 million that we are asking 

for and that we would try to leverage with the assistance of other countries, 

would be conditional on an IMF progrcim. 


Federal News Service. OCTOBER 10, 19S9 

said ic was used only for shore -term loans. Is chat correct? . j 

MR. BARREDA: That's right, sir. 

REP. HAMILTON: By which you meant what? 

MR. BARREDA; The use --we have two uses of exchange stabilization fund right 

now, Mr. Chairman. One, we use it for activity in the foreign exchange markets 

where we're exchanging dollars for yen or Deutechmarks or vice versa. We also 

do it for some short-term bridging. In that case, we make available the dollars 

in exchange for an assured repayment in hard currency, and we lock in the 

exchange rate . 

REP. HAMILTON: And short -term, in that context, means what? 

MR. EARREDA: It's less than six months, according to the statute, unless 

approved by the President to be longer. 

REP. HAMILTON: You have made longer loans than six months, have you not? 

MR. BARREDA: I'm not aware of any, sir. I have been discussing with your 

staff a Mexico loan, and I would like to look into that euad get back. 

REP. HAMILTON: $600 million for 12 months to Mexico in 1982. 

MR. BARREDA: That's the one I want to -- 

REP. HAMILTON: Are you not aware of that? 

MR. BARREDA: I wasn't until now and I'm going to look incb it and get back to 


REP. HAMILTON: Now, of course, you could use this money as a bridging loan to 

Poland, could you not? That is, you could extend a loan to Poland under the 

exchange stabilization fund, and then, when the IMF loam kicks in, it could take 

over the loan. I mean, that's a possibility, isn't it? 

MR. BARREDA: If there's an assurance of an IMF agreement and it's short-term, we 

would certainly consider that, as I said in my testimony. What we want to be 

sure of is repayment in a hard currency and in short-term. 

REP. S0LAR2: Will the gentleman yield? • 

REP. HAMILTON: Mr. Solarz . 

REP. SOLARZ: Thank you very much, Mr. Chairman. 

What would you - - on a scale of zero to ten, with ten being a certainty that 

there'll be an IMF agreement and zero being a certainty there won't be, where 

would you put it? 

MR. BARREDA: I can't answer that, Mr. Congressman. 

REP. SOLARZ: Well, Mr. Kamman, do you want to try? 

MR. KAMMAN: Well, those locins are essentially a Treasury decision. They want to 

be sure - - 

REP. SOLARZ: I'm asking you for a judgment about the likelihood of an IMF 

agreement with Poland. 

MR. KAMMAN: I'm sorry. I thought you indicated the likelihood that we would 

extend a loan. 

REP. SOLARZ: No. The likelihood that there'll be an IMF agreement, on the scale 

of zero to - - 

MR. KAMMAN: Well, since they're in a -- since they're in a very early stage, 
it's hard to maJce that judgment. I think it's highly likely. I'm not going to 

put it on the scale, but it's highly likely. 

REP. SOLARZ: Say eight or nine? 

MR. KAMMAN: Well, I would say highly likely. 

REP. SOLARZ: Well, if it's highly likely that there will be an IMF loan and if 

the Poles also know that their etbility to get the Si billion stabilization loan 

depends on their getting an IMF agreement, would the Treasury object to using 

the Exchange Staibilization Fund for a loan right now to be repaid by Poland when 

it gets its IMF agreement, eo that they get the short-term funds? 

MR. BARREDA: I think the Treasury would object, sir, because there is 


Page 3 1 

i Service. OCTOBER 10. 1989 

CO get am IMF agreement, then? 

MR. KAMHAN: I think they would welcome it either as a bridge loan or ae a grant. 
Whether in eocne other form it. would be useful, I don't, think we've had that much 
discussion with them yet. 

REP. SOLARZ: Right. And you're saying, I gather, that we cannot -- that if we 
were to use the exchange stabilization fund without an assured mechanism of 
repayment that that would be an illegal use of the fund, given the criteria that 
have been built into it, or would it be a breach of the fidiciary responsibility 
of the Secretary of the Treasury - - 

MR. KAMMAN: We think it would be an improper use of the fund, Mr. Congressman. 
RBP. SOLARZ: Would it be an illegal use of the fund? Something can be improper 
without being illegal , and I 'm not suggesting that we do something improper, but 
I just want to know where we stand. 

MR. BARRBDA: We can try to give you an opinion on that. As -- 
REP . SOUVRZ ; Can you - - 

MR. HARREDA: -• it's an improper use of the fund. We don't think it should be 
used that way. If there is going to be a chance of loss, we think it should be ' 
an appropriation. 

REP. SOUUIZ: Right. But, can you let us know whether it is illegal as well as 

MR . EARREDA : Uhhh . 
MR. EARREDA: Certainly. 

REP. SOLARZ: Finally, there's been some talk about the possibility of having 
Mr. Walesa, when he comes here, address a joint session of Congress. Mr. Kamman 
(misprounouces) -- Kamman -- does the administration have a view on this? Would 
it support such a request? Would it oppose it? 

MR. KAMMAN: The administration has always regarded the issue of who addresses 
the Congress to be in the prerogative of the Legislative Branch. And I have 
mentioned today -- I think you were here at the time -- that the President today 
announced that he would be inviting President Jaruzelski and Prime Minister 
Mazowiecki in the coming, year. And certainly when Walesa is here, which I 
understand will be November, we expect that he will receive much attention auid 
many honors. But I think the form of that is really up to the Congress. 
REP. SOLARZ: But you would have no objection to his being invited to address a 
joint session? 

MR. KAMMAN: I think it's completely in the real of the congressional 
prerogative . 

REP. SOLARZ: Oh, I would have hoped you could have done a little bit better thcui 
that . I mecin, this man is one of the extraordinary figures of our century. 
MR. KAMMAN: We very much admire Mr. Walesa. But I think it's not right for the 
Executive Branch to make a judgment about how he's treated at the -- 
REP. SOLAR2 : Well that's simply false and untrue because we frequently receive 
requests from the administration to invite various people to address a joint 
session. So it's not as if the administration taikes the position that it never 
speaks out on this question. It -- 
MR. KAMMAN: Yeah. 

REP. SOLARZ: -- very often -- I mean in the past when we've had people who are 
invited to address a joint session, it is always accompanied by a request from 
the President to the leadership of the Congress urging that such an invitation 
be extended. So in light of that fact, do you want to let us know whether the 
administration would like such an invitation to be extended? 

MR. KAMMAN; I think the administration judges that the Congress knows its own 
mind on the issue, and we will let the Congress be the judge. 



Although the Dow Jbnes^ jn^^oal: ; 
aven^e^rose only £modiBSt39!^?M 
firsthsdf of the '90s, many std^srand. 
Stock: mutual funds d'^V< 


stD(^K*mdus^ grotinsi 

;.-" *s-*r22sisai^£a 


How fund categories fared ^i 


No. of Total return 
Objective funds 1994 '90:7'94 

MC Midca p ^9 9 

CA'. -Cflyittm appi aUaUdri , ■7... .;,V>.^1S5l 

G Growth „564 -2 .2% 534)% 

Qt ::Gn3yMBt^ioomr:i~ziz:4^2::iz^Qa^3iB^ 

B JEquityHncome 121 -Z 5% -4^5% 

S&P 500-stock index — 1^o Sl.6% 

TK ^SdenosJ£t^nology~:^^^^!1^3SlS3SS 
Rnandal services 16 - -2 .8 % 110 2% 

mantets 47 -9 . 6% ''6 &2% 


H ; 


Rexible portfolio^ 
Real estate 


IF International 
EU lEufO 

IS Jntemaf I snnaikx). 
NR.ltetusal fKKxsoes 
EN Errvironmental 
04 J3anada£L^^ 

AU Gold^^ 

IT £tat&t America 
JA Japanese 

SourcK Uppw Analyttcai Sarvtan 

-2.7% 402% 
-3.1 % 41 .5% 
-9.0 % 37 .5% 
-0.7% 31.1% 
U% 22.5% 

-105% ej% 

-12.2 %_1 3% 

15.4% ^19.4% 

Prospects Dim 
For Bank Loan 
To Mexico 


The Wall Street Journal, Feb. 13, 1995 

By TiMOTHV L. O'Bricn 

Slo^/ R«pofl»r o/Tmc Wali. STUcrr Jouhmal 

Prospects (or a possible S3 billion pn 
vaie-bami uaiik luaii lu in? .viexinT^o v- 

emmeni appear lo be lading, e ven though 
a mucn larger rescue plan by the Olnton 
administration has aiready calmed Mexi 
can financial markets. 

Some banks bein^ asked to nartirjp;t] e 
in the new bank loan are voicing obieclions 

Zedillo's Risky Strategy 

By tryiiif t 


I uuunrctiOD in 
o{ Chiapas. .Mrxico'l 
prvsideot may rally hia political oppo- 
arnu. Article on pace AlO. Meanwhile. 
Meuco't currency criaia might end up 
creating inveatment opportunities. CL 

to Its liberal term^ and the approach ta ken 
by the lead bank sj LlUcorp and J.P. .Mor - 
pu i 6t t-o 

— reople close to Citicorp and Morgan 
maintain the loan is moving forward and 
may be completed by next week, but the 
banks declined to comment ofricially. But 
executives at several other banks said lust 
the opposite 'It appears to be stud, "said 
one. " Who volunteered the commercia l 
b anks JR 'way.' .Not all ol tne banks have 
the same mleresnrror exposure lo .Me x- 
i co as Citicorp and .Morgan have. 

btnior executives of other large hank-; , 
have been troubled or angered by th e 
manner in which the loan was njyipAcn^ 
Mhirh they rail remim<;rpnt nf rhy ^nnp 
e ra when a few senior bankfp wnniH g ci 
on the phone and solve intemalional finan- 
cial crises U-I^Mni^r tnn nft.n ^fy 

foreign debt woes, they said reirne parir - 
ages can no lon ger be pieced together sn 

eanty : 

The bank executives said th e loan' s 
urgency appears to have been dimin isjied 
6 ^ the ii!>t) Diiiion White House rescue 
packag e lor .Mexico. With a sum that large 
iilvMy in llie pipeline, they said they 

After the value of the Mexican peso 
plummeted late last year, aticorp and 
Morgan began rounding up partners to 
help support the beleaguered currency. 
Dunng the first week of January, the two 
banks approached several other banks 
seeking S200 million from each of them for 
a S3 billion package. 

We were told |by Citicorp and M or- 
gan l that this was imiio rtapi for the limipd 
States." said one banker. "Rm thi^ itn 't 
old boys making calls and getting things 
' d one anymore -times have chang ed." 

Recording lo an individuaJ familiar 
with 'be loan, most hanks l);||lr>.H „ .^-^j^ 
miltinp "l^no millinn S o far only Rfrnt. 
America Corp . Chemical BanMng COrri.. 
Lt asjJHanhaUaii Corp . Banltepi TriTa 
N ew York Corp . Banco ijtinAampHrann 
de Kvponarlnne^ anri R.nt n> v^..^ 
SmflJ have IpmalivPiv ]ninp<1 riHmrT^ ^nri 

M organ at that level. Others. inrliiflini> 
Bank of Tokyo. .Vatlonsltanir and nr^ 
Chlrapi Corp , have aprppH tn cm..|i^r 

to commit formally to a package unless th e 
l oans are collateralized, whitli 'bey ciir- 
rerllv areall. antl only if the interest ra tes 
a re more attra ctive. One person familiar 
with the loans said they are currently 
structured at 1.5 percentage points above 
Libor. a floating-rate bank index, for 
the first SIX months after they are made. 
Some bankers are asking for two percent- 
age points above Libor. 

While loan syndications can often be 

rocky affairs, bankers are typically tight- 
lipped about such negotiations. But more 
than haggling m-er term.; app»a|^ [pjy ^, 
work h ere 

The executives who voiced their o hie^-- 
U fins said that even thoug h thi^j Ipan may 
n o longer be necessary, they believe ni j - 
corp and .Morgan are pu'^hing for j| a<; pnp 
banker put it. heranse rh^-wam mprn.,; 
Joevervone that they siip pnrt Mpvi rn ■■ 

^e of the bankers are rpliirta n;_m 
lend to the Mexican government after th e 
..— " ^."..^'^'^^ ihey expenenced in th e 
tmrTTiev^said ihev wmiM p^^^~,^ 
cominue lending to their own rlienK 
" in .nexicos private sector or commit lo ~ 
p urcnasing .Mexican debt for resalTaTa 
w eekly aucif on. That umilH'hp far mn,p_ 
acEiannala ihin heinn ]l lh» l ail pnrinr . i 
major rescue package " said one banker 


The Nation, 2/13/95 


Bailing Out the 
Creditor Class 



ne of the most preposterous fudndal crimes of the 
century, the official mana/ement of the 1980s 
developing-countriei debotrias. is being repeated 
belore oiu very eyes, ancf by many of the original 
perpetrators to boot. As this is wntten, the Clinton Admin- 
ististion is pushing, and Congrns seems poised to approve, 
a loan guarantee package for Medco of up to S40 billion. This 
is on top of hastily arranged mtematiooal credit lines worth 
S18 bUlion, most of them gu&ranteed directly or indirectly by 
the United States and coWled up since Christinas. 

Meuco owes the woiJa about S120 billion (more than 
SI 60 billion by some estimates), and about $58 billion of that 
amount falls due this yds. Hence the need for a total aid pack- 
age of about $58 biUton, although it is not yet cert:un that 
most or all of that aid vnll be drawn upon. One must be oi- 
acting and dear aJiout who the principal beneficiaries of a 
U.S. guarantee o/Mcxico's foreign debts would be: Mexico 
owes foreign— ofimarily U.S.— investors in stock shares and 
bonds about SbO billion. Also, about $18.3 billion of the 
$120 billion t6tal is owed to U.S. banks, led by Citicorp with 
about t2.9pil]inn. With the peso down in value by one-third 
and Mexico's dollar reserves dwindling, it is clear that only 
a mammoth infusion of funds or forgiveness of its debts can 
pr ev e nt the country from defaulting. 

The original crime, now being repeated, was the prtafligate 
tending of billions of dollars from the U.S banUng system 
between 1974 and 1982 to as gaudy a band of tinpot military 
dictators, kleptoaatic presidents and bon vivanl finance minis- 
ters as ever graced a Connecdcul Avenue diplomatic reception, 
followed in August 1982 by the discovery that the borrowen 
either could not or would not repay the money. But it was not 
practical politics to recognize the stupidity of the situation 
and call the lenders into account. No, orthodoty and good 
form required the ongoing pretense that the loans were still 
good, with a host of jerry-built solutions from the Treasury, 
the Federal Reserve, the International Monetary Fund and the 
World Bank. So, as an African economist once told me, "One 
class of people bo nrrwM ^^' "'""^ in \A a different class of 

The LM.F.-policed austerity regimes that weir used to keep 
the loan money flowing (usually only enough to pay the in- 
terest; the principal was rarely reduced) became legendary in 

Walker F. Todd, of counsel to the Cleveland law firm of Buck- 
Ingham Doolittle & Burroughs, was formerly assistant gen- 
era' counsel and research officer at the Cleveland Federal 

developing countries during the 1980s. What did governing 
elites or international flnancial diplomats care if the vanishing 
middle classes and teeming poor of the Third World paid the 
price of "adjustment" while the lifestyles of the rich changed 
not at all? 

I n 1982 Mexico owed U.S. banks about $25 billion . The 
dirty secret of bebt Cnsis 1 was that foreign banks had de- 
posits of /light capital f rom rich residents of the debtor na- 
tions that would have covered much (and in some cases all) 
of the banks' claims on the debtor countries. But despite the 
price paid for "adjustment" by the middle classes and the 
poor of the developing countries, not to mention the price 
paid in lost ocport sales to those countries by U.S. manufac- 
turers and farmers in the heartland, the names of the thieves 
and the amounts they stole were never disclosed. 

T/ie govemirjg elites in both 
countries who earned this mess 
expect to escape censure. 

Now, by devaluing the peso, Mexico has again committed 
moral Cif not technical) default on its doUar-denominaied ob- 
ligations. This is the principal legacy of the administration of 
former President Carlos Salinas de Gortari and his suppon- 
en in the U.S. establishment. It is doubtful that Mexico can 
meet its external obligations during 1995 without either debt 
relief (always the right answer in intenutional lending prob- 
lems involving developing countries) or new loans from First 
World govemmenu and banks (the Establishment's preferred 
solution). After the lost decade of the 1980s, idieved only brief- 
ly in the early 1990s by the North American Free Tlade Agree- 
ment rinandal bubble, the Mexican people Tmd themselves 
mux more confronting official demands for renewed austerity, 
quiet acceptance of further reduced wages (now apprtidmaiely 
60 percent below 1980 levels in inflation-adjusted peso terms), 
reduced possibilities for immigratioD to the United States to 
escape po^rrty, and diminished prospects for lenewed growth 
of the Mexican economy for the foreseeable future. 

But here is where the truly intolerable pan begins again: 
The governing elites in both countries who caused, exacerbat- 
ed or covered up this mess expect to escape censure, just as 
happened in 1982. -.' 

Secret credit lines for Mexico from the United States, Japan 
and European governments amounting to as much as $12 bil- 
lion were negotiated twice in the past Ofteen months or to, 
ostensibly to defend the peso, but it is now clear that the only 
possible use of those lines would have been to finance the flight 
from the peso of Mexico's governing elites and their compa- 
triots in the international financial system. Amusingly, through 
a tripartite credit line involving Canada as well as Mexico, 
which was announced pubUdy in April 1994, the Umted 
States essentially has agreed to lend Canada dollars that Can- 


The Nation 2/13/95 

■da can tbeo lead to Mexico, which further wealceu the U.S. 

dollar Our own ciediion now vindemand thai we have under- 
written the foreign debu of our two ncighborj. Federal Re- 
lerve Chairman Alan Greenspan was an aaive promoter of 
thote credit lines, as well as the current bailout effort. 

The principal purpose to be served by the new Modcan bail- 
out package is to prevent a loss of conndence of foreign in- 
vestors in a host of other developing nations, like Argentina. 
But this is a silly exercise, a true confidence game, because 
DOW DO rational investor could have faith in Mexico's govem- 
tDg Institutional Revolutionary Party (PRI), which has en- 
joyed so much ofndal U.S. support in recent decades. The 
Banco de Mexico, the country's central bank, was still inter- 
vening in the Mexico Qty stock oichange and rigging teso- 
bono (treasury bill) auctions in the same week that the bailout 
package was presented to Congress, a dear indication that 
stability has not returned to the country's shaky flnandal 
markets. Also, if other countries have mismanaged their fl- 
nandal affairs and are courting disaster for their cunendes, 
there is not much that a bailout of Mexico can do to re- 
ftore investor confidence. Besides, the prospects for repay- 
ment from future Mexican oil receipts, for example, are 
somewhat limited: At current oil production and price levels, 
the gross export receipts for Pemex, the national petroleum 
company, are only about $8.5 billion per year, and most 
of that has already been pledged to other purposes. The time 
is long since past in Washington for a repetition of the Paul 
Volcker -directed "lend new money to meet the interest pay- 
ments and pretend that it is all still good debt" strategy of 
the 1980s. 

Dissent has broken out in both the Republican and Dem- 
ocratic parties over various aspects of the bailout. A variety 
of esnraneous conditions are being proposed to sweeten the 

deal: demands that Medco looses iu ties to Cuba and crack 
down on illegal Immigrants to the United States (red meat for 
the right), and calls for stronger enforcement of labor and 
environmental protections (for the Uberal left). But at bottom 
what is needed is a prompt and fuU disclosure of what the 
$40 billion will be used for. The names and amounts paid for ■ 
each disbunement under the cicdit line should be published. 
If there are Charles Knlingt, Ferdinand Marcoses and 
M. Danny Walls lurking, the public is entitled to know who 
they are and what they intend to do wiib the money they re- 
ceive at our expetue. And if the names disclosed prove to be 
those of prominent Moocans and U.S. banks, securities firms, 
mutual funds and pension fund managers, then we should 
know that, toa Who knows, with enough disdosure, maybe i 
no ODe would step forward to daim the money. But don't 
count on it 

Unfortunatdy, no new U.S. loan guarantees administered 
by the costing PRI gcMcnunent can foster real stability in Ma- 
ica And support for the side agreements to NAFTA misses 
the point entiidy. Dissenters in Congress should insist on 
complete institutional and financial reform of the Medcan 
government, which might then do more to address labor and 
environmental concerns from an authentic Mexican perspec- 
tive, not merely as a PRI concession to the United Stales. The 
PRJ has forfdted all moral authority to govern. President 
Ernesto Zedillo Ponce de Leiin should invite the two main op- 
position parties to join his Cabinet on a full power-sharing 
basis, with all the important Cabinet ministries going to the 
opposition. The PRI itself should be dissolved. 

To combat the PRI's almost unnatural hold on the affec- 
tions of many of Mexico's uneducated poor, truth commis- 
sions independent of the PRI, like those used in Chile after 
Pinochet, should be established to iirvestigate matters like the 
use of foreign credit lines by the Banco de Mexico, the mas- 
Hcre of student demonstraiori in Modco Oty in 1968, the 
manipulation of the 1988 dection results, the responsibility 
for the assassinations of Luis Donaldo Colosio (flist presi- 
dential candidate of the PRI) and }osi Francisco Ruiz Mas- 
fieu (second -ranking PRI official) in 1994, and the murders 
of journalists and opposition activists under Salinas. Also, 
■ separate inquiry should be mounted into the influence of 
drug runners and money laundereis in Mocican pubUc life, 
as well as their coimections to forngn intelligence services. 
As for Washington's pending actions: It once was a federal 
felony under the Johnson Act for any person subjea to U.S. 
jurisdiction to lend money to a fordgn government in default 
on its loans from the United States. After 1945, however, the 
act was amended to accommodate the formation of the Bret- 
ton Woods institutions. Only international fmandal "out- 
laws" like the former Soviet Union and China were oduded. 
Then in 1992, during the euphoria over market openings in 
Russia, the Johnson Act was quietly amended further to ex- 
empt from its prohibitions former Soviet -bloc countries tha' 
were not yet members of the I.M.F. and World Bank, estall 
lishing the prindple that even outlaws may now borrow monr 
in international fmandal markets. This is too bad, for as th 
crimes of 1982 are repeated, this time we lack a good felor 
gfj^'l/^t^'th which to punish the miscreants. 



Legal Research International, Inc. 

March 1, 1995 

The H(jn(>rahle 

Dan Burton 


Subcommittee cjn Western Hemisphere 

Hinise F(;reit;n Al'f'airs ( lommittee 

2170 RHOB 

Washin^'ton DC 20515 

Dear Mr. (chairman: 

Thank ycju fur asking meet to testify before ycnir panel last week during your 
hearings on the $20 billion bail(jut for Mexico. The hearing was of necessity 
abbreviated and I am happy to comply with ycmr requ(\st ibr further informaticm, 
which 1 pnjvide below in two sections: 

Jose Cordoba Montoya 

During yesterday's hearing, I stated that Jose Maria Cordoba Montoya, who was 
formerly head of the (jffice (jf the presidency under President Carlos Salinas de 
Gortari and is now Mexico's representative here in Washington to the Inter- 
American Development Bank (IDB), apparently was closely involved with the 
neg(jtiations for the $20 billKjn loan package for Mexico. 1 stated that along with his 
protege and successor, Luis Tellez, who is currently head (jf the (office (jf the 
presidency in Mexico, press reports in Mexic<j indicate that (/ordoba had .served a 
key role in brokering the loan deal, even though he does n(jt have any direct role in 
the Zethll(j government. 

I also stated at the February 22 hearing that Mr. ('ordoba has in the past year been 
linked with the Matamoros (Cartel, MexiccVs biggest and arguably (jne (jf the world's 
largest and most powerful c(jcaine trafficking (organizations. Perhaps the single best 
citati(m (m this subject from the press was the September 1994 ccjlumn by 
Raymundo Riva Palacio in the daily Refdrrmi, which contained spec;ific 
allegatKjns of an (jngcjing affair between Cordoba and a woman named Marcela 
Rosaura Bodenstedt, who is the wife oi and is als(; herself a chief operative (jf 
Juan Garcia Abrego, the head of the Matamoros Cartel.' Bodenstedt, a former 

' A foniier Mexican official in charge of anti-narcotics activity, Eduardu Valle, testified at the Mexican le hant 
consulate in Waslungton on August 25. 1994 about the coimection between Marcela Bodenstedt and the 
office of Jose Cordoba in Mexico City. In the documents he subuutted to the Mexican attorney general's 

1^701 Connecticut Avenue, N.W., Suite 200, Washingtcm, D.C. 20008-4501 
Telephone: (202) ;{G3-K1GH/Internet: WHALENcXmnA.oRC 


offuual in llu^ Mtixican federal judicial police, also has a close relationship with 
Emilo Gamboa Patron, the former h(!ad of the Ministry of Communications and 
'iVansport in th(> Sahnas ^'overnment. Incredibly, (Jamhoa was named head of the 
National Lottery by I'resident Zedillo late in i;)!)4. ^ 

The Kiva I'alacio column and otiier jjuhlished reports wc^ni sijjnificant for s(W(>ral 
reasons: (1) the first mention of the relationship between (lonh^ba and th(> 
Matamoros (Cartel ai)i)eared in the nominally pro-^jovc^rnnu^nt daily Refornui; (2) the 
all(^t,'ati(ms, mack* by caie of Mexico's leading; commentators and other n^jjorters, 
went unchallenged and unjuiswered; and (;{) there was no attempt by the M(*xican 
gov((rnm(uit to discnMiit the* n^ports in subseciuent news coverage. More(jver, the 
fact of this relationship is common knowhfdge among my sources m the Mi^xico 
political and i)usiness communities, as w(di as among U.S. law enforcement and 
foreign service personnel, indicates that then* is good rea.son to Ixdieve Kiva 
Palacio's account. ^ 

In addition, the close* ti(*s between (-ordoba and memb(*rs of the (llinton and Hush 
Administrations are well-docuiiK^ntetl in the Mexican press, f'erhaps the l)(*st 
example is the term coined by El Fiminricro columnist Carlos Ramirez, who for 
several years has repeatedly refereed to the NAFTA agreement, which m Spanish is 
known as the Tralado tie Libre Conwrcio (TLd), as the TraUido Cordolxi Lake, 
because of the personal and profe.ssional ties between (lordoba and National 
Security Adviser Anthony Lake. 

Ramirez and otlu^r reputable commentators in the Mexican daily and periodical 
jiress have written volumes about the close collaboration between Lake and 
(Cordoba, both during the effort to push NAFTA through Oongn^ss and thereafter. A 
cursory examination of the index for the dailies El Financicto, La Jornada and 
Rcfornia for the !!)})()- 1!)!)4 p(*rio(i, as well as the extensive coverage in the weekly 
FrixTso for th(* same period, provides ample documentation for the existence of a 
close working relationship between Lake and (Jordoba. 

Uuring the entire Salinas scxcnlo, (lordoba has been the main int(*rm(Hhary between 
Mexico (!ity and Washington, and reportedly has met with and interacted personally 
with a number of members of the (Clinton and Bush (labinets. In specific reference 
to the role of (lordoba in the recent m^gotiations for the $20 billion U.S. loan to 
Mexico, 1 refer to the rJanuary i^O, li)!)r) article in the w(*(*kly Froceso written by 
former Washington correspondent Carlos Puig. The gist of the article is that "the 
team of Salinas and (Cordoba, and Cordoba ahme, are involved in the talks for the 

office were phone records siiowing culls between inenibcrs of the Matamoros Cartel and the office of tlie 
presidency in Mexico City Valle has sought political asylum in the U.S. and now lives m Washington. 
^ See Riva Palacio, Raymimdo, "Relacioiies Peligrosas," Rc/iirnui. August 29, 1994 See also the several 
articles in the weekly magazine I'mcvso. September 5, 1994, pp. W-M. and Golden. Tim, "Mexico's Dnig 
Fight Lagging, With Gr;ift Given as a Cause." New York Times. August 7. 1994. 

■* Usually, when the Mexican government attempts to discredit a critic, they employ hysterical, very loud 
protests and personal attacks tliroiigli government controlled print and broadcast outlets. In the case of 
allegations of corruption, however, the usual approach is to avoid mention of the case when the 
allegations come loo close to the mark. 


$40 billi(jn air i)a(;kat,'e." The article details Ikjw (lordoha, rather than the new 
Mexican ambassador, Jesus Silva Herzog, conducted the negotiations (jn behalf of 
Mexico and, in ^(Mieral, has been directing M(!Xico's foreign affairs in Washington. 

In a February 8,1 995 article in El Fijumcicro, Washington correspondent Dolia 
Estevez highlights the previ(ms relationship between (lordcjba and former Mexican 
ambassador to Washingt(jn Jorge Montano. Among other things, the article 
ccmlirms that in November 1992, (Jordcjba personally called io advise the (/linton 
White House (jf the appointment of Muntano. A.s the article repcjrts: "This was 
tantamount to his being named ambassador of dordoba." 

Exchange Stabilization Fund 

The sec(md major issue raised during the hearings was with respect to the 
transparency of and the accounting procedures used by the Exchange Stabilization 
Fund of the Federal Reserve and Treasury.^ During the hearing, I stated, based 
upon my personal experience and upcjn my conversations with former and current 
employees, that the Federal Reserve Bank of New York (FRBNY) used peculiar and 
apparently inconsistent methods for repcjrting prcjfits and l(jsses frcjm the ESF". I 
als(; staUnl categorically that the FRBNY had in the past taken gains and losses 
without actually selling any foreign currency; that is, the FRBNY apparently 
marked its portfolio to market at a given date but (Ud not actually realize a gain or 
loss by purchasing (hilars, contrary to the publicly available information released by 
the Federal Reserve B(jard (FRB). 

Perhaps the biggest and most inii)ortant piece of evidence available to the public 
with regard to the accounting practices of the ESF come fnjm the pul)lications of the 
Federal Reserve Board (FRB). The two most important dcjcuments are periodic 
"Treasury and Federal Reserve Foreign Exchange Operations" and the annual 
report of the FRB. The mijst recent data available for the Fed/ESF foreign exchange 
operations are year-end 19911 According to Joseph Coyne, \w,\{\ of public affairs at 
the FRB, the year-end data for 1994 should b<! available by mid-April. 

The table on the next page shows the year-cmd profits and losses reported by the 
FRB (first column), ccjmpared with the periodic reports of realized profits and losses 
repcjrted for the Federal Reserve and Treasury(second and third columns). A 
cursory glance at the figures show that the amounts do not match and, moreover, 
that the trends in terms of gains and losses alscj appear to be at variance. All 
amcjunts are in millions of dollars. 

^ The ESF is miinnged and administered by llie Foreign Department of (he Federal Reserve Bank of New 
York. For further background, see Todd, Walker, "Disorderly Markets: The Law. History, and Economics 
of the Exchange Stabilization Fund and US Foreign Exchange Market Intervention," Research in 
Financial Services. Vol 4, pp 1 1 1-179, 1992, JAl Press Inc , ISBN: ()-5593X-4Kl-6. 





Fed/Treasury Foreign Exchange Operations 

(millions of dollars) 

I' KB 





10!). no 











(2, ()();}. 4 IK) 







;];{(;. 20 



;^r)H. 10 

1 !!).!) 









00. a 

( )c.t,-i) 1 







[because the Fed has not in the past been wiUing to di.scuss the aa;ounting 
pnxiedures used t(j as.semble figures, I canntjt say whether the numbers are or 
are not accurate. What can be said, however, is that there appetirs to be no 
connection between the trains and repcjrted at year-end by the FRB and the 
transat:tions executed for the Fed and Treasury as reported in the |)eriochc reports of 
Treasury and Federal Re.serve Foreitrn Exchan^;e Operations . At the yery least, this 
subject, requires greater attention fnjm the (Congress, starting with legislati(;n to 
authorize annual authts by the (lenc^ral Acc<juntnig Office (jf the FedTTreasury ESF 
functKjn. let me know if I can be of any further assistance to you or other member of 
the ('ommittee. 

Yours sincerely, 

(Christopher Whalen 
(Chief Financial Officer 


Mexico: The Narco System 

By Christopher Whalen 
Dinero (Colombia) 
November 1994, Pages 162-176 
[English translation] 

The September 28, 1994 assassination of the secretary-general of 
Mexico's ruling party, Francisco Ruiz Massieu, is the second major political 
killing in that country this year. The attack is also one of literally 
thousands of kidnappings, murders and other violent incidents directed 
against members of the country's business and political elite, as well as the 
political opposition, by the bosses of Mexico's thriving underworld. In the 
most simplistic sense, the murder of Ruiz is a challenge by the leading drug 
lords in Guadalajara, Tijuana and Matamoros to the existing poUtical order. 
But the daylight execution of Ruiz, the former governor of the state of 
Guerrero, also represents a feud among familiars; a fratricidal rivalry 
whereby politicians aligned with one narco gang are being hit by other rival 
groups that make up the Mexican drug Mafia. 

For example, most foreigners do not know that Ruiz's family is deeply 
involved in the Acapulco, Guerrero, business community, which in turn is 
dominated by the local drug lords. Just two weeks before the former 
governor of Guerrero was gunned down, police directed by his brother, 
Mario Ruiz Massieu, who is the official in the Mexican Attorney General's 
office responsible for combating drug activities, closed a number of 
nightclubs owned by various drug capos (bosses) in the seaside resort city. 
One local observer says that some of the managers of these clubs were "set 
up;" police planted cocaine in their offices and arrested them on trumped- 
up drug charges. According to the source, the closures were the last straw 
in a running feud between Ruiz and the local drug capos, and provoked this 
act of retaliation against the number two man in Mexico's ruling party. 

Foreign observers, particularly the expatriate press, naively attribute 
the rising levels of violence in Mexico to pohtical motives, but such easy 
explanations ignore the significant new factor that has entered that 
country's poUtics over the past decade: cocaine. Whereas in the past, 
members of the ruling party and their friends, relatives and allies in the 
criminal world settled disputes behind closed doors, today the fighting is 
being done in public, in front of hotels and in poor barrios. The head of the 
railway workers union was also killed in front of a Mexico City hotel in 
1993, and dozens of other police officials, journalists and opposition 
members have died violently over the past five years. 

The uprising in Chiapas and the murder of presidential candidate Luis 
Donaldo Colosio on March 23, 1994, in a poor neighborhood in Tijuana are 
only the most extreme examples of how Mexico's social and civic 
institutions are crumbling under the pressure of drug-related lawlessness 


and corruption, factors that are making Mexico a very dangerous place even 
for members of the ruhng eHte. Indeed, the same environment of 
lawlessness and impunity that has allowed Mexico's ruling party, known as 
the PRI, to govern for over 65 years is now aiding the expansion of the 
influence of the narcotics trade. 

There are 19 distinct drug cartels in Mexico and four dominant 
groups, the largest of which is the Gulf or Matamoros group. It is widely 
assumed by savvy observers that the Grupo del Gulfo led by Juan Gcircia 
Abrego, engineered this latest assassination. As with the Colosio case, a 
man who is said to be the actual perpetrator of the Ruiz assassination was 
apprehended almost immediately, but the real, intellectual authors of the 
crime will probably never see justice. Notably, in this latest assault Mexican 
officials did not even try to pretend, as they did with the Colosio slaying, 
that this gangland hit was a random act, a senseless display of violence. 
Most Mexicans know otherwise. 

Federico Reyes Heroles, editor of the monthly magazine Este Pais, 
says bluntly that the killing of Ruiz was a deliberate hit by Mexico's 
powerful drug lords. News reports in the days following the killing included 
numerous off-the-record comments by government officials confirming the 
suspicion that the killing was a hit organized and paid for by drug 

Another prominent Mexico City editor, speaking off-the record, goes 
even further, saying that the killing of Ruiz, a close associate of President 
Carlos Salinas and other powerful figures in and out of the Mexican 
government, particularly Agriculture Minister Carlos Hank Gonzalez, was 
part of a continuing political dispute between Mexico's biggest drug cartels 
and their partners in the Salinas government. "Carlos Hank is the biggest 
money launderer in Mexico," says the veteran journalist. "This killing was a 
reprisal for the murder of Colosio, a tragic event which many people believe 
was engineered by Hank and other officials around Salinas." He goes on to 
say that as in Colombia, Mexican politicians are being killed off because of a 
power struggle related to money and drugs, not over questions such as 
democracy and human rights. Beyond the death of Colosio, however, 
another explanation exists: the need to maintain the appearance of "fighting 
drugs" to placate Washington. 

In Mexico and other parts of Latin America, the term lavadolares 
means money launderers or those "who wash money." Just two weeks before 
the killing of Ruiz, Treasury Secretary Lloyd Bentsen told an audience in 
Mexico City that the U.S. currently has no less than 12 separate 
investigations underway concerning money laundering operations based in 
Mexico. He said the governments of Mexico and the U.S. have recently 
intensified efforts to exchange information on illicit drug and cash 
laundering operations in an attempt to clamp down on the growing 


business. This announcement shocked Mexicans generally and sent a wave 
of fear over the country's drug lords, who rightly fear that the new Zedillo 
government will launch an anti-drug, anti-corruption campaign early in 
1995 in order to repair Mexico's image and persuade the U.S. government 
that Zedillo is serious about fighting drugs. In this scenario, the Ruiz killing 
is a direct warning to Zedillo and his backers, particularly dinosaurio Carlos 
Hank, from the drug trade. The message: Don't even think of arresting a 
member of the cartel or their people inside the Salinas government to 
appease the Clinton Administration. 

Of course, most Americans are shocked and appalled by the 
suggestion that officials of Mexico's reformist, Harvard-educated 
government would actually plan to murder members of their own party or 
have direct business relationships with Mexico's cocaine lords. The fact is, 
however, that the violence linked to the drug trade in Mexico is less a civil 
war than a family squabble; a form of vicious attrition that hurts Mexico's 
dearly purchased image as a leader among the "emerging markets" around 
the world. 

In a recent interview. President Salinas himself admitted that the 
annual flow of cocaine and other illicit drugs through Mexico totals some 
$100 billion annually. The Drug Enforcement Agency (DEA) and local 
sources in Mexico, such as the opposition daily La Jornada, estimate that 
the profits from this flow of drugs (90 percent of which comes from 
cocaine) amount to some $25-30 billion a year. In other words, the profits 
from drugs moving through Mexico into the U.S. every year are more than 
twice the total revenues of Mexico's petroleum industry and will roughly 
equal the cost of servicing Mexico's total, $160 billion-plus foreign debt for 

The rise of the drug lords as sources of political power in Mexico is a 
relatively recent development, but one that was helped and assisted by the 
fact that the country's political system was already hopelessly corrupt. For 
decades members of the PRI have enriched themselves through corruption 
and dirty dealing at home, while borrowing from foreign banks and 
secreting the dollar proceeds into offshore bank accounts. Now, with the 
passage of the North American Free Trade Agreement (NAFTA), the door has 
been opened for a vast expansion of the drug trade into the United States. 

"The NAFTA is now openly referred to as the 'North American Drug 
Agreement' by U.S. Customs and Drug Enforcement Agency personnel," 
wrote former Customs chief William von Raab last year. "This overt 
skepticism reflects discontent over the fact that national security concerns 
have been neglected in the NAFTA negotiations . . . Nothing we [see leads] us 
to believe that Mexico has tackled 'hard enforcement,' i.e. arresting 
significant drug figures, cracking down on money laundering or disrupting 


drug enterprises. Without a real hard-enforcement anti-drug effort by the 
Mexicans, NAFTA will hurt (the U.S.]." 

Fraud on route to and at the ballot box has been used to preserve the 
very profitable political status quo, creating a poisonous political situation 
tailor made for the drug traffickers, who have been able to assimilate 
themselves easily into the existing power structure. "It has become 
fashionable to speak of the 'Colombianization' of Mexico due to narcotics 
because of the recent wave of assassinations in the last month that included 
two former state attorney generals, a judge, and which culminated in the 
March 1993 assassination of Cardinal Juan Jesus Posadas in Guadalajara," 
wrote Alicia Ely Yamin, a lawyer who spent several years in rural Mexico 
working as a human rights advocate among the poor. "But the problem of 
drugs has its own dynamic in Mexico and has existed for a long time. The 
endemic corruption in the Mexican government, the incredible sums of 
money to be made in the drug trade and political pressure from the United 
States have combined to make the drug war a lethal cancer that is quickly 
spreading throughout Mexican society... Two days after the murder of 
Posadas, a high official in the Attorney General's Office admitted to me: You 
can't speak of infiltration in Mexico. Here the authorities and the drug 
traffickers are the same people. Permeation, but not infiltration." 

De la Madrid's Faustian Bargain 

The de facto alliance between the Mexican political system and the 
leaders of the drug trade dates back more than a decade to a time before the 
advent of cocaine as the major commodity, when marijuana and heroin were 
the primary drugs coming into the U.S. from Mexico. In the old days, the 
police and army sold a little bit of marijuana and later heroin, according to 
one former police official, but it was relatively small compared with other 
parts of the economy. Today, the cocaine money is so big that 
narcotraficantes are actually challenging the existing leadership of the PRI 
for national control. 

On June 11, 1993, a lawyer and writer named Luis Javier Garrido 
published a stunning article in La Jornada called simply "The Narco 
System." This courageous overview of the historical and political roots of 
government c-^'operation and backing (if drug production and transshipment 
in and through Mexico was translated by the CIA and circulated among U.S. 
governmental agencies, but received little attention in the craven foreign 
press. Both Garrido and other observers in Mexico say that during the 
depths of the 1980s debt crisis, when Mexico's rulers were cut off from 
foreign credit, the de la Madrid government arranged a secret concordat 
with the drug lords. The deal: In return for keeping their billions of illicit 
dollars in the country's nationalized commercial banks, the drug lords 
would be left unmolested. 


The go-between between the drug trade and the de la Madrid 
government allegedly was Manuel Bartlett Diaz, the former head of the 
Interior Ministry who is now governor of Puebla. Along with Enrique 
Alvarez del CastiUo, the Former Attorney General, and Juan Arevedo 
Gardoqui, the Former Secretary of Defense, Bartlett Diaz has been accused 
of being involved with the torture and murder of DEA agent Enrique 
Camarena. In her 1988 book "Desperadoes," Time correspondent Elaine 
Shannon tells the story of how Camarena traced the connection between the 
drug lords and their patrons in the Mexican political system, and died a 
martyr's death as a result. 

Bartlett, Alvarez and Gardoqui are said to have acted as some of the 
de la Madrid government's chief intermediaries with the drug trade 
throughout the 1980s, right up to the start of the Salinas presidency. For 
his part, the former Interior Minister declares his innocence and says that 
"there is no concrete evidence" to connect him with the Camarena slaying. 
But Bartlett also avoids visits to the U.S., where it is unclear whether or not 
he might be subject to detention or arrest. "The charges," says Bartlett, "are 
made with falsehoods, calumnies and without fundamental facts, just like 
all of the accusations made during these flawed proceedings." 

Despite such denials, however, it is clear that the Mexican government 
is very concerned about any allegation of connection between Bartlett and 
the narcos. When journalist Zachary Mcirgoulis of the English-language 
Mexico City daily. The News, wrote a report of the charges against Bartlett, 
the order immediately went out from the office of the President that the 
writer be terminated - an edict that was followed almost immediately by the 
owner of The News. 

Indeed, when Bartlett took office as governor of Puebla in 1993, 
President Salinas himself attended the swearing-in ceremony and, in an 
extraordinary display of official insecurity, personally attested to the 
"honesty" of the man who had helped him obtain and hold onto power 
through the fraud-tainted 1988 elections. Those attending included 
outgoing U.S. Ambassador John D. Negroponte and Canadian envoy David 
Winfield, Papal nuncio Geronimo Prigione, and national and state level PRI 
and business leaders. Salinas made attendance at the ceremony mandatory 
for members of the PRI, a test of loyalty to the government. 

Such exaggerated displays of support are necessary because rumors 
continue to implicate Bartlett in the murder of journalist Manuel Buendia as 
well as DEA agent Enrique Camarena. The respected Monterrey daily El Norte 
reported in January 1993: "With his image clouded by the shadow of drug 
trafficking, the DEA's threat to bring him before a U.S. grand jury on a 
charge of drug trafficking and complicity in the torture-murder of Camarena 
hangs over Bartlett. Significantly, insurgent, anti-government political 
groups in the state of Puebla have circulated a 'black book' with newspaper 


clippings describing Bartlett's connection with drugs and these other alleged 

According to El Norte, the "black book" was compiled by former 
Interior Minister Fernando Gutierrez Barrios, a veteran Mexican warlord 
and long-time familiar of the CIA who succeeded Bartlett in that key position 
in late 1988. Some believed that Bartlett would remain governor in Puebla 
for a year or so to save face, and then resign. But he has not done so, in 
part because of Salinas' political debt to the man who fixed the 1988 
election and in part because Bartlett is part of former President Miguel de la 
Madrid's political circle. "This group has some very powerful members," 
notes one press report, "including [former] Interior Secretary Patrocinio 
Gonzalez Garrido (1992-1993) and current Transport Minister Emilio 
Gamboa Patron, another man who has had a meteoric political career." 

"The production and sale of narcotics has been, as we know and as 
many studies have shown, a 'lifesaver' for the Mexican economy," wrote 
Garrido last year. "As a result, the most recent governments have tolerated 
and even sponsored it, thus turning it into a major political factor. Relations 
between the United States and Mexico thus became marked by fundamental 
disagreements not only over the growing immigration of Mexicans seeking 
jobs on the other side of the border but also over the production and export 
of narcotics, particularly because the Mexican authorities regard these two 
things as essential elements of their economic policy. Hence the fears that 
under a North American FTA the drug trade will intensify, not diminish. 
Given the shortcomings of the Mexican economy, drugs have furthered the 
agenda of the [PRJ] technocrats by creating jobs, raising the income and 
living standards of poor peasants, contributing to local causes among low- 
income earners, building schools, clinics, or roads, and thus gaining the 
support of entire communities." 

Garrido and others now argue that successive Mexican governments 
have encouraged an increasingly close relationship with the drug 
traffickers, for one purpose: the PRI "system" needed them and their dirty 
money during the 1980s. Better to ally with the boys in Guadalajara and 
Tijuana, de la Madrid and his cronies reasoned, and use their money to 
maintain one-party rule. A key player in making this decision was the then- 
personal secretary to de la Madrid, Emilio Gamboa Patron, who controlled 
the flow of information in and out of the President's office, and thereby 
became a prime target for subversion by the drug cartels. 

In the years since the 1984 deal was struck with the drug lords by 
Manuel Bartlett, various agencies of Mexico's federal and state governments 
were gradually infiltrated and the line between them and the network of 
drug traffickers became blurred. Interior Minister Jorge Carpizo MacGregor 
and Finance Minister Pedro Aspe, two of the most respected members of the 
Mexican government, have explicitly confirmed this frightening analysis in 


public remarks. In his previous position as Attorney General, Carpizo 
explicitly stated numerous times in the Mexican press that he and his 
trusted aides were "surrounded by traitors" inside the Attorney General's 
office who are allied with the drug cartels . 

Ricardo Pascoe, a senior official in the center-left Party of the 
Democratic Revolution, says the ties between the government and the drug 
trade are not an isolated situation. "This is no sub-Mafia, no renegade 
operation," says the well-known political activist. "The connections between 
the drug trade and the Mexican government represent a deliberate decision 
by Miguel de la Madrid to seek an alliance with the drug barons in order to 
raise money. Salinas has continued this relationship. The state has made a 
decision that the way to stay in power is to get access to money. Without 
foreign money, the PRI structure would crumble overnight." 

He continues: The assassination of Cardinal Posadas in Guadalajara 
has to do with this very question of money and power... The Posadas 
murder was related to the financial situation because of the common link to 
drugs. The story in Guadalajara is that the Cardinal had evidence of the 
government's relationship with the drug trade and was getting ready to give 
the information to the head of the church. He was killed in the midst of all 
the confusion by a highly skilled, well-trained operative sent to get him. 
Remember, like the drug lords, the government must also maintain physical 
control over certain parts of the underworld. There is always the problem of 
enforcement in the bottomless pit of the drug trade, and the government 
must constantly enforce on the enforcers, in effect, to keep the system 
under control." 

Andrew Reding, Director of the North America Project of the World 
Policy Institute, believes that the killing of Cardinal Posadas was deliberate; 
a direct challenge to the ruling elite in Mexico. "Posadas was the only major 
authority figure in Guadalajara not owned by the narcotics traffickers," 
notes Reding. "The drug barons killed him to send a message to the 
government. Posadas was an outspoken critic of drugs and guns. They 
actually opened the doors of the car in order to murder him. The Mexican 
government does not want it to become known that the drug traffickers 
have such influence. What we have seen here is a very scary demonstration 
of the drug cartel's growing strength and power." Even today, the Salinas 
government's propaganda machine continues to maintain that daylight 
shooting was accidental, but few Mexicans believe this version of events. 


The Salinas Gang 

Even with a flood of new foreign investment coming into Mexico under 
the Salinas Administration, there is no indication that the influence of the 
drug lords has been diminished. Quite the contrary, recent revelations 
indicate that the cartels have established working relationships with several 
members of the Salinas inner circle and have provided financing for a 
number of privatization deals. 

Eduardo Valle, former aide to Interior Minister Jorge Carpizo, has 
given to the Mexican go\'ernment documents and testimony allegedly 
linking government officials and drug traffickers to the assassination of 
presidential candidate Luis Donaldo Colosio. The former official, who is 
known as "the owl" {el Buho), worked as a senior official directing Mexico's 
anti-drug efforts. He says that Colosio was murdered March 23 in Tijuana 
by members of the Crupo del Gulfo cocaine cartel, with the involvement of 
Colosio campaign officials close to Communications and Transportation 
Minister Emilio Gamboa. Included with the documents provided by Valle 
during testimony given on August 25 at the Mexican consulate in 
Washington was a DEA report about telephone calls last December by cartel 
members to the offices of the presidency. 

Valle fled to the United States in August, 1994, saying he feared 
reprisals and wanted to protect important documents. He continues to 
accuse Gamboa and other officials of maintaining direct connections with 
the so-called Gulf Cartel in Mexico. But Valle is not the only Mexican making 
such allegations. In a recent column in the daily Reforma, Raymundo Riva 
Palacio asked with his usual puckish humor: "Why is [Transport Minister 
Emilio] Gamboa Patron so nervous?" 

"In good order he must explain his relationship with Marcela 
Bodenstock Perlick, whose dealings and relationships offer some of the 
more picturesque episodes in recent political life," he explained. "More than 
anything else, the interest in Mrs. Bodenstock comes because she works for 
the Cartel del Golfo, headed by Juan Garcia Abrego and allied with the Call 
cartel, the narcotics organization based in Colombia." 

Riva Palacio reminded readers that Eduardo Valle has described the 
role played by Bodenstock in the largest single cocaine organization south 
of the border. "Marcela is an ex-police official and the woman of Marcelino 
Guerrero, the former agent in the federal judicial police who works under 
one of the chief lieutenants of Garcia Abrego, Oscar Malherve," Valle told 
the influential weekly Proceso. 

Riva Palacio's revelations show just how close the drug lords have 
come to the very top of the PRI power structure: "The reconstruction of the 
relationship between Gamboa and Bodenstock, which now touches the 


highest levels of the government, begins in the late 1980s when the current 
transport minister was a high official of Televisa. Marcela Bodenstock 
Perlick also had excellent relations with the Executive Branch and, 
apparently, was well known by the [U.S.] drug enforcement agency, known 
as the DEA." 

"None of this seemed to bother Gamboa. On the contrary, according 
to the version of events now circulating at the highest levels of the 
government, Gamboa introduced her to the former head of the Office of the 
President, Jose Cordoba Montoya. This first introduction was not the last. 
In the middle of 1990, Jose Cordoba was attending a bull fight, which he 
follows with great enthusiasm. Gamboa also attended and was accompanied 
by Marcela Bodenstock, who immediately became close to the adviser to the 
president. The relationship flourished and over a long period of time they 
were seen together in society, particularly at parties in Mexico City and 
elsewhere. There is no precise date for the end of the relationship, but 
sources remember them being together all of last year." 

These revelations are not the first nor the most troubling indication of 
official complicity in the drug trade in Mexico. In the state of Vera Cruz in 
November of 1991, two years after Carlos Salinas had taken power and two 
years before the NAFTA vote, Mexican soldiers captured and executed over a 
dozen U.S. trained Mexican drug agents at a remote airstrip. When the 
federales landed to arrest the occupants of the drug ferrying aircraft that 
they had been following, Mexican Army regulars, who were apparently 
waiting to refuel the drug-carrying plane, bound the hands of their fellow 
citizens and executed them at close range. Many of the dead were found to 
have powder burns on their palates. The Washington Post reported that a 
U.S. Customs Service plane had trailed the first two aircraft, filmed the 
incident and was subsequently hit by ground fire, but returned safely to the 
U.S. The mysterious video tape capturing these crimes has never been 

Aside from the alarming facts of this case, consider the issue raised 
by the simple act of refueling the drug-carrying plane. Legally there are 
only two outlets for aviation fuel in Mexico, the state airport monopoly and 
the military. Since drug traffickers apparently have no problem refueling 
literally hundreds of aircraft annually for trips between Mexico and 
Colombia to deliver product to the Mexican cartels, one must assume that 
they obtain the fuel with official acquiescence. Overall, illegal air traffic in 
Mexico increased by 55 percent in 1992, according to a report prepared for 
the Mexican government. The report, entitled Evaluacion y seguimiento 
sobre el control de drogas en Mexico, says officials confiscated 40 tons of 
cocaine during 1992, but admitted that the total amount flowing through 
the country has mushroomed. 

Indeed, Eduardo Valle says that during 1988-1989, the peak years of 
the Crupo del Golfo, three planes, each loaded with 6 tons of cocaine, were 


landing weekly in Matamoros in order to transship the drugs into the Umted 
States. He explains why no action was taken to stop this huge cocaine 
operation by then-Attorney General Enrique Alvarez del Castillo. Valle calls 
the former Attorney General "a scoundrel" whose appointment "was a 
mockery to the country" because he shielded the cocaine traffickers from 

The vast amount of money generated by the drug trade must be 
legitimized or laundered, and the recent privatization process has prox'ided 
the perfect mechanism to handle the billions of dollars in profits that flow 
from illegal narcotics. A practice used by the drug trade during the Salinas 
sexenio has been to buy the equity and debt issued to finance the sale of 
former state-run enterprises, particularly the commercial banks and large 
commercial enterprises such as Telmex. Another favorite avenue for 
laundering drug money is real estate. 

Businessmen who did not have much money a decade ago, many of 
whom helped to finance the PRl presidential campaign in 1988, are now 
among the wealthiest people in the world, with no apparent reason for or 
legitimate sources of their new wealth. The collapse in early September 
1994 of the Cremi Union financial group illustrates one such situation. 
Carlos Cabal Peniche was a businessman of little apparent wealth or 
influence until the beginning of the six-year term or sexenio of Carlos 
Salinas. In a matter of months, he amassed sufficient financing to acquire 
several banks as well as a large part of the operations of the U.S. 
agribusiness Del Monte in Mexico and Central America. Fraudulent 
business practices and insider loans eventually caused his bank tofail, but 
the episode still leaves unexplained how this obscure individual came to be 
considered one of Mexico's leading business men with a reported net worth 
over $1 billion. 

Today, Cabal Peniche is a fugitive from justice and his financial 
empire lies in ruins with hundreds of millions of dollars in losses for the 
go\ernment and investors. Officials in the Mexican Attorney General's office 
are in\'estigating a suspected connection between Cabal Peniche and money 
laundering, according to La Jornada. An wise veteran observer of the 
Mexican business scene alleges that most of the money behind the purchase 
of Del Monte came from illicit sources. "We don't ask any questions in 
Mexico," he confides. '7ou could walk into a bank with millions in cash and, 
in most cases, nobody would say a word." 

Cabal's apparent connection with drugs and money laundering is 
reinforced by his relationship with Emilio Gamboa. Mexican Federal Deputy 
Alejandro Encinas, who sits on the commission investigating the Coloslo 
assassination, says: "In Mafia terms, Gamboa Patron was Cabal Peniche's 
'godfather.' This relationship, first personal, then political, allowed the 
emergence overnight of a very strong economic group that bought the 


Cremi and Union Banks and established a new financial consortium in 
southeastern Mexico." The PRD official alleges that "although Gamboa now 
denies it, his relationship with Carlos Cabal Peniche has long been in 
evidence, ever since the days when Carlos worked in the Presidency when 
Emilio Gamboa was private secretary to former President Miguel de la 
Madrid Hurtado." 

The fact is that there are literally dozens of business people and 
government officials in Mexico whose apparent wealth vastly exceeds any 
possible legal sources and, in fact, arises from their political relationships. 
An alliance of convenience has been forged between drug traffickers and 
technocrats, with the additional upshot that Mexico's financial institutions 
would lose a great deal if money laundering were halted. Former Transport 
Minister Andres Caso Lombardo, who has never held a significant private 
sector job, owns ranches, commercial properties, homes and aircraft valued 
in the many millions of dollars. But perhaps the most notable example 
currently in the Salinas Cabinet is Agriculture Minister Carlos Hank, a career 
civil servant with only modest business experience whose apparent personal 
fortune now totals in the billions of dollars. Though his name does not 
appear among the Forbes list of 24 Mexican billionaires, he is without 
question one of the most powerful men in the country. 

Carlos Hank Gonzalez has visible ties to the Gulf Cartel through 
Marcelino Guerrero. Eduardo Valle describes Guerrero as one of Mexico's 
biggest money launderers and says the drug trafficker is involved in 
development projects all over Mexico, including resorts in Cancun "which are 
tied to investments by Jorge Hank Rhon," the son of Hank Gonzalez. In 
addition, Valle has provided telephone records showing that an associate of 
Guerrero "makes and receives calls from people in the office of the President, 
among them Arturo Salgado Cordero, coordinator of giras presidenciales, and 
the former head of the Office of the Presidency, Jose Cordoba. 

The "Grupo Hank" has vast business interests in Tijuana and all along 
the U.S. -Mexico border. Another son of Hank Gonzalez, Carlos Hank Rhon, 
recently purchased control of the parent of Lciredo National Bank in Texas. 
Over a year ago. Hank sold his interest in Taesa, Mexico's third largest 
airline, but news reports continue to question whether he still controls the 
highly profitable and surprisingly liquid airline. A recent report in El Norte 
asks "who is the real owner of Taesa" in direct reference to Hank Gonzalez 
and notes that the DEA has focused a great deal of attention on searching 
the company's planes for contraband. 

Hank, however, is only one of many members of the pohtical-business 
elite who works in apparent cooperation with the drug traffickers. Earher 
this year, the daily Excelsior carried the following report by Cesar A. 
Renteria: "Mayor Victor Perez Ruiz declared today that the tourist 
development area of Nuevo Vallarta in the municipality of Bahia de 


Banderas has become a 'money-laundering' center, created by the drug 
traffic operating on the state of Nayarit's southern coast and in some of the 
country's other states. He claimed that sums of money m the millions from 
drug producing and distribution rings have been invested in industries such 
as hotel and restaurant businesses in the aforementioned tourist complex, 
the largest in the state." 

"Victor Perez Ruiz stressed that one of the leading 'entrepreneurs' is 
the notorious drug trafficker Joaqxiin 'El Chapo' Guzman, the 'lord and 
master' of the entire municipality of Bahia de Banderas. His power 
embraced the entire Vallejo sierra and lowlands, where El Chapo owns large 
expanses of land planted with marijuana. The mayor asserted that the newly 
opened five-star Hotel Paraiso Rar'isson was built with money contributed 
by Fl Chapo, through a ^ront man, noting that he is the main stockholder of 
the property, located in the Nuevo Vallarta complex. He added that other 
drug traffickers hold shares in the Puerta del Sol Hotel and other large 
establishments in the municipality of Bahia de Banderas. He considered it 
incongruous that this application of funds, 'backed and promoted by Celso 
Humberto Delgado's administration,' should have become a 'money 
laundering' operation involving the proceeds of drug dealing and sales. 
"Perez Ruiz concluded by stating that this [money laundering] might be the 
reason that Nuevo Vallarta is a leading resort on the national level, offering 
tourists comforts and luxuries similar to those found in Acapulco, Cancun 
and Puerto Escondido." 

In a related story, the regional daily El Mahana of the state of 
Tamaulipas puts the case very bluntly: "The infiltration of narcotrafico in 
political, public and private institutions represents a deadly threat to 
democracy in Mexico. As a consequence, it is necessary to change the laws 
to target the [financial] resources of the drug trade that are interfering with 
the productive activities of the country. The problem is to establish a 
culture of drug pre\ention while at the same time dealing with those already 
caught up in addiction or trafficking. The drug organizations have the 
ability to marshal enormous financial resources, behind which can come 
repressive actions." 

Over There, Over Here 

Most Americans, while conceding the obvious peril from drugs, still 
prefer to think of Mexico's problem with narcotics as a distant concern that 
does not threaten them directly. Think again. The vast money flowing from 
the drug trade through Mexico is not only destroying that country's civic 
and legal institutions, corrupting its leaders and blocking the transition to 
democracy, but is rapidly moving to acquire influence north of the border. 

In the recent elections in Mexico, the ruling PRI spent $72 for every 
vote officially cast in its favor, a level that will be rivaled in the U.S. only by 


the fierce California Senate race between Democrat Diane Finestein and 
millionaire GOP challenger Michael Huffington. The ruling party's 
presidential effort cost 36 times more than that of the center-right PAN, and 
over 300 times more than that spent on the election effort of Cuauhtemoc 
Cardenas and the center-left PRD. The PRI's expenditure for the election 
was gigantic by any measure, but keep in mind that the $250 million figure 
represents only direct, officially reported spending and does not include the 
billions of dollars directed by Salinas through government agencies such as 
Pronasol and business groups aligned with the PRI. 

In state and local races, opposition parties on the left and the right 
have alleged that drug money was also used to buy or intimidate voters, a 
troubling twist in a system many already call a "narco democracy." But don't 
believe that the Mexican drug lords limit their influence to Mexico or mere 
local officials. From San Diego to Washington, huge investments can be 
found in American banks, companies and real estate that are secretly tied to 
Mexico's drug groups. One need only take the trouble to look for the telltale 
flow of dirty money. 

The Wall Street Journal reports that U.S. authorities are investigating 
several Wall Street investment houses for links with money laundering, 
including Dean Witter, Prudential Securities, Paine Webber, and Bear, 
Stearns & Co. Code named "El Dorado," the investigation is part of a larger 
effort that includes the prosecution of two officers of American Express Bank, 
who were recently convicted for helping members of the Gulf Cartel move 
money through U.S. banks. Officials at the Treasury say that the U.S. is 
plaiming raids on a number of banks operating along the border in an 
operation code named "Condor." 

In testimony in Brownsville, Texas, in May of this year, Francisco Perez 
Monroy alleged that his cousin and business partner, Juan Garcia Abrego, paid 
"millions of dollars" to Javier Coello Trejo and other senior officials of 
Mexico's justice apparatus to allow free shipment of cocaine through the Gulf 
Cartel in Northern Mexico into the U.S. Not only does Perez Monroy's sworn 
testimony confirm the allegations made by Eduardo Valle about official 
comphcity in drug trafficking, but sheds new light on a scheme to launder $25 
million in Gulf Cartel drug money through Bankers Trust and American 
Express Bank. 

Bankers, however, are not policemen, nor are the problems of drugs 
and money are limited to Wall Street. Consider the example of the Gangster 
Disciples, a Chicago street gang that was virtually unknown 18 months ago 
but which now controls the vast cocaine trade in South Chicago. The 
Gangster Disciples recently established a political action committee, "21st 
Century Vote," which is under investigation by the FBI. The leader of the 
organization, Larry Hoover, who operates from a prison cell (like some of 



3 9999 05983 864 7 

his counterparts in Mexico) says that he plans to use his group's pohtical 
power to win several seats on the city council. 

The Gangster Disciples, which boasts an estimated 30,000 members 
in the Chicago area alone, is just one of dozens of groups around the U.S. 
that derive their power from the torrents of money generated by the cocaine 
trade. The Chicago Tribune reports that "a variety of politicians - black and 
white, liberal and conservative -- has courted the PAC's influence, confident 
that the group can register voters, raise money and elect mayoral and 
aldermanic candidates." Sound familiar? 

Other than the difference in location and language, there is no 
fundamental difference between the way the drug trade has perverted 
Mexico's political system and the erosion now visible inside nearly every 
major American city -- and in Washington itself. The fact is that many of the 
policies and decisions taken in Washington over the past decade, from 
supporting single-party rule in Mexico to ignoring the exploding drug trade, 
have directly contributed to the growth of the "narco system." As was the 
case with the American Mafia during the Prohibition years, short of full 
legalization, no form of government action seems to be effective in 
controlling the financial and political power of these modern-day outlaws. 

"After 1968 the Mexican police were selling marijuana to the middle 
classes," Eduardo Valle comments. "That is just for starters. Now, what 
happened when the Vietnam war people, who were directing strategies in 
Southeast Asia, took control of the narcotics bureaus in New York and other 
cities after the Kennedy assassination? What happened after the CIA started 
using drugs to finance the counterrevolutionary movements in Latin 
America? There you have a long story of perversion. The United States has 
an enormous responsibility in all of this (drug business]." 

Christopher Whalen writes from Washington, where he pubhshes The 
Mexico Report, a fortnightly newsletter on Mexico and serves as Treasurer of 
Legal Research International, a firm that provides litigation managetnent, 
cross-border due diligence and communications strategy with respect to 
Mexico and other emerging markets. 


♦ There is continuing 

speculation that Jose Cordoba Ls 

going to be sacrificado to satisfy 

public anger at and foreign 

curiosity in the murder of Luis 

Donaldo Colosio. This will be an 

unpleasant surprise to Pepe. 

Cordoba's many friends in 

Washington, including National 

Security Adviser Anthony Lake 

and his deputy, Samuel Berger. 

Former Under Secretary of State 

Bernard Aronson recently 

confirmed in an interview that "for 

^, ,, . „ ^ n 1 [the Bush Administration], to talk 

!n^ ^T.ll^\TJ ' T] to Cordoba was .Umost the s^mie as 

10, 1995, by Chns Whalen ^^^^ ^ g^l^^^ „ ^^^^^^ ^^^j^ 

not specifically recall how many 
times he met with Cordoba during 
his tenure as the chief State 
Department official in charge of 
U.S. relations with Latin America, 
but said that "he met with me 
many times." Aronson also told 
Pascal Beltran de Rio of Proceso 
that Cordoba maintained close ties 
and met frequently with Bush 
National Security Adviser Brent 
Scowcroft, former USTR Carla 
Hills, Under Secretary of State 
Robert Zoellick, and former 
Secretary of State James Baker III. 
When asked if he knew anything of 
the personal connection between 
Cordoba and Marcela Bodenstedt 
Perhck, the former newscaster for 
Televisa and now heutenant in the 
Gulf Cartel, Mexico's biggest 
cocaine trafficking organization, 
Aronson rephed: "1 know nothing." 
South Carolina Senator Ernest F. 
HoUings has denounced the 
relationship between Cordoba and 
various U.S. officials. Senate 
Banking Committee Chairman 
Alfonse D'Amato (R-NY) has also 
raised questions about drug 
connections in the Mexican 

Copyright 1995. Legal Research International. All Rights Reserved. 


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ISBN 0-16-047157-5 

9 780160"471575