,^^ THE MEXICAN PESO BAILOUT
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JOINT HEARING
BEFORE THE
SUBCOMMITTEES ON
IXTERXATIOXAL ECONOMIC POLICT AND TRADE
AND
THE AA^STERN HEMISPHERE
OF THE
COMMITTEE ON
INTERNATIONAL RELATIONS
HOUSE OF REPRESENTATR^S
ONE HUNDRED FOURTH CONGRESS
FIRST SESSION
FEBRUARY 22, 1995
Printed for the use of the Committee on International Relations
JUL 2 6
1995
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1995
V
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402
ISBN 0-16-047157-5
r\ THE MEXICAN PESO BAILOUT
Y 4. IN 8/16: H 57/4
The nexican PESD Bailout, 101-1 Joi...
JOINT HEARING
BEFORE THE
SUBCOMMITTEES OX
IXTERXATIOXAL ECOXOMIC POLICT AND TRADE
AND
THE A^^STERX HEMISPHERE
OF THE
COMMITTEE ON
INTERNATIONAL RELATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTH CONGRESS
FIRST SESSION
FEBRUARY 22, 1995
Printed for the use of the Committee on International Relations
i"|i
JUL 2 6 133S
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1995
For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402
ISBN 0-16-047157-5
COMMITTEE ON INTERNATIONAL RELATIONS
BENJAMIN A. OILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania
JAMES A. LEACH, Iowa
TOBY ROTH, Wisconsin
HENRY J. HYDE, Illinois
DOUG BEREUTER, Nebraska
CHRISTOPHER H. SMITH, New Jersey
DAN BURTON, Indiana
JAN MEYERS, Kansas
ELTON GALLEGLY, California
ILEANA ROS-LEHTINEN, Florida
CASS BALLENGER, North Carolina
DANA ROHRABACHER, California
DONALD A. MANZULLO, Illinois
EDWARD R, ROYCE, California
PETER T. KING, New York
JAY KIM, California
SAM BROWNBACK, Kansas
DAVID FUNDERBURK, North Carolina
STEVEN J. CHABOT, Ohio
MARSHALL "MARK" SANFORD, South
Carolina
MATT SALMON, Arizona
AMO HOUGHTON, New York
LEE H. HAMILTON, Indiana
SAM GEJDENSON, Connecticut
TOM LANTOS, California
ROBERT G. TORRICELLI, New Jersey
HOWARD L. BERMAN, California
GARY L. ACKERMAN, New York
HARRY JOHNSTON, Florida
ELIOT L. ENGEL, New York
ENI F.H. FALEOMAVAEGA, American
Samoa
MATTHEW G. MARTINEZ, California
DONALD M. PAYNE, New Jersey
ROBERT E, ANDREWS, New Jersey
ROBERT MENENDEZ, New Jersey
SHERROD BROWN, Ohio
CYNTHIA A. McKINNEY, Georgia
ALCEE L. HASTINGS, Florida
ALBERT RUSSELL WYNN, Maryland
MICHAEL R. McNULTY, New York
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
JAN MEYERS, Kansas
DONALD A. MANZULLO, Illinois
SAM BROWNBACK, Kansas
STEVEN J. CHABOT, Ohio
DANA ROHRABACHER, California
DOUG BEREUTER, Nebraska
CASS BALLENGER, North Carolina
Edmund B. Rice, Subcommittee Staff Director
John Scheibel, Democratic Professional Staff Member
Christopher Hankin, Professional Staff Member
SAM GEJDENSON, Connecticut
MATTHEW G. MARTINEZ, California
MICHAEL R. McNULTY, New York
ROBERT G. TORRICELLI, New Jersey
HARRY JOHNSTON, Florida
ELIOT L. ENGEL, New York
Subcommittee on the Western Hemisphere
DAN BURTON, Indiana, Chairman
ROBERT G. TORRICELLI, New Jersey
ROBERT MENENDEZ, New Jersey
ALBERT RUSSELL WYNN, Maryland
TOM LANTOS, California
MATTHEW G. MARTINEZ, California
ILEANA ROS-LEHTINEN, Florida
CASS BALLENGER, Ndrth Carolina
CHRISTOPHER H.' SMITH, New Jersey
ELTON GALLEGLY, California
PETER T. KING, New York
(Vacancy)
GiLEAD Kapen, Subcommittee Staff Director
Scott Wilson, Democratic Professional Staff Member
Scott Feeney, Professional Staff Member
Anita Winsor, Staff Associate
(II)
CONTENTS
WITNESSES
Page
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
APPENDIX
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
(III)
ISSUES ON THE MEXICAN PESO BAILOUT
WEDNESDAY, FEBRUARY 22, 1995
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-
(1)
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-
marks.
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
Economics.
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-
tion.
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-
ico.
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-
tions.
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.
[Laughter.]
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-
fidence.
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-
lators.
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-
ida?
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
Kaptur.
STATEMENT OF HON. MARCY KAPTUR, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OHIO
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
closer?
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
well.
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
solution.
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
death."
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-
pose.
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
8
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
markets.
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
problem."
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-
propriation."
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.
STATEMENT OF PAT BUCHANAN, SYNDICATED COLUMNIST
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
10
not to the benefit of this country, but to the damage of her national
interests.
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.
11
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-
ing.
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
judiciary.
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?
12
Marcy?
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
open.
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
there.
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
13
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
Mexico.
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-
ket.
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
14
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
Bank.
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.
15
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
[Laughter.]
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
them.
16
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-
ship.
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.
17
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-
cumstances.
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.
18
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-
ico.
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
19
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
there.
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
people.
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.
20
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
connection.
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
21
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-
munity.
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.
22
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-
souri.
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.
23
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
view.
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.
24
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
creditors.
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
country.
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.
25
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
much.
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,
Inc.
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.
[Pause.]
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.
STATEMENT OF JEFFREY R. SHAFER, ASSISTANT SECRETARY,
INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY
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.
26
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-
ficulties.
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.
27
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
view.
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
necessary.
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.
28
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.
29
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
30
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-
ment?
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
31
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-
holders.
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.
Torricelli.
Mr. Torricelli. Mr. Secretary, who declares that a default has
occurred and therefore the agreements on the collateral have come
due?
Mr. Shafer. If we are not paid, we can make that declaration.
Mr. Torricelli. Who makes that judgment in the U.S. Govern-
ment?
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-
cally
Mr. Torricelli. Without reservation, unequivocally, we are
going to exercise our rights.
Mr. Shafer. That is his statement.
32
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-
lar.
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-
ico.
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
33
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
money.
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.
34
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
Congress.
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-
payment.
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
35
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.
STATEMENT OF FRED BERGSTEN, DIRECTOR, THE mSTITUTE
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
issues.
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.
36
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
outlay.
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
loan.
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
away?
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-
cally.
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
versa.
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
floor.
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
37
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
economy.
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-
self.
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.
38
STATEMENT OF JOHN SWEENEY, POLICY ANALYST, TRADE
AND INTER-AMERICAN AFFAIRS, THE HERITAGE FOUNDATION
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
previously.
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
democratic.
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
Mexico.
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-
tion.
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
society.
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
39
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
greater.
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
dangerous.
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.
40
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
again.
Thank you.
[The prepared statement of Mr. Sweeney appears in the appen-
dix.]
Mr. Burton. Thank you, Mr. Sweeney. I have some questions for
you and we will get to those in just a moment. Mr. Whalen.
STATEMENT OF CHRISTOPHER WHALEN, CHIEF FINANCIAL
OFFICER, LEGAL RESEARCH INTERNATIONAL, INC.
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-
parent.
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
security.
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
41
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-
dated.
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
42
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-
ton.
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
that.
43
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-
dix.]
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
industry.
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,
TX.
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
44
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
involved.
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.
45
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
46
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
audit.
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-
cember.
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
the-
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
47
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
new.
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.
Roth.
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-
ation.
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
back.
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.
48
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-
sis.
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-
ico?
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.
49
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.
50
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
Mexico.
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.
51
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-
ion.
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. ROHRABACHER. OK.
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-
tience.
The committee stands adjourned.
[Whereupon, at 3:52 p.m., the subcommittees were adjourned to
reconvene at the call of the chair.]
52
APPENDIX
TESTIMONY OF CONGRESSWOMAN MARCY KAPTUR (D-OH)
HOUSE SUBCOMMITTEES ON WESTERN HEMISPHERE AFFAIRS
INTERNATIONAL ECONOMIC POLICY AND TRADE
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
Mexico.
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
53
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
program.
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
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
54
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
correct?
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
what?
Mr. Barreda: 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 and get
back.
55
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
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.
56
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
57
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
58
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.
59
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
60
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.
61
TABLE 1. Ex(
:hange Stabilization Fund Financing Agreements, 1980-
-6/94
Country
Year
Amount
Agreed ~
($ mil.)
Drew
Amount
($ mil.)
Date(s)
Repaid in
Full by
Mexico
1982
1,0000
825.0
8/14/82
8/24/82
Mexico
1982
600.0
600.0
9/82-2/83
8/23/83
Mexico
1986
273.0
273.0
8/86-12/86
2/13/87
Mexico
1988
300.0
300.0
8/1/88
9/15/88
Mexico
1989
425.0
384.1
9/25/89
2/15/90
Mexico
1990
600 0
600.0
3/28/90
7/90
Brazil
1982
5000
500.0
10/82-11/82
12/28/82
Brazil
1982
280.0
280.0
11/82
2/1/83
Brazil
1982
450.0
450.0
11/82
3/3/83
BrazU
1982
250.0
250.0
IZ'82
1/83
Brazil
1983
200 0
200.0
2/28/83
3/11/83
Brazil
1983
2000
200.0
3/3/83
3/11/83
Brazil
1988
2500
2325
7/29/88
8/26/88
Argentina
1984
3000
0.0
Argentina
1984
500.0
500.0
12,'28/84
1/15/85
Argentina
1985
150.0
143.0
6/85
9/30/85
Argentina
1987
225.0
225.0
3/9/87
7/15/87
Argentina
1987
200.0
190.0
11712/87
12/30/87
Argentina
1988
550 0
550.0
2/88-3/88
5/31/88
Argentina
1988
265.0
79.5
11/22/88
2/28/89
Jamaica
1984
50.0
10.0
12/29/84
3/2/85
Philippines
1984
45.0
45.0
11/7/84
12/28/84
Ecuador
1986
1500
75.0
5/16/86
8/14/86
Ecuador
1987
31.0
31.0
ia'4/87
1/26/88
Nigena
1986
37.0
22.2
10/3 L'86
1210/86
Yugoslavia
1988
50.0
500
6/15/88
9/30/88
Venezuela
1989
450.0
4500
3/15/89
4/3/89
Venezuela
1990
1040
25.0
3/30/90
4/30/90
Bolivia
1986
100.0
0.0
Bolivia
1989
100.0
100.0
7/89
9/15/89
Bolivia
1989
100 0
75.0
9/22/89
12/29/89
Bolivia
1989
75.0
75.0
12729/89
1/2/90
Poland
1989
200.0
86.0
12/28/89
2/9/90
Guyana
1990
31.8
31.8
6/20/90
9/90
Honduras
1990
82.3
82.3
6/28/90
11/20/90
Hungary
1990
20.0
20.0
6/90-7/90
9/5/90
Costa Rica
1990
27.5
27.5
5/2L'90
5/21,90
Romania
1991
40.0
40.0
3/7/91
3/21/91
Panama
1992
143 0
1430
1/31/92
3/92
Peru
1993
470 0
4700
3/18/93
3/18.'93
90-345 0-95-3
62
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
Introduction
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.
63
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 0 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
resources.
64
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
65
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
66
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
67
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.
68
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
crisis.
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.
Conolusion
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.
69
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
70
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.
71
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
72
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
73
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.
74
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
package.
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
75
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,
76
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
77
: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
citizens.
90-345 0-95-4
78
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
catastrophe.
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.
79
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
forever.
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
flows.
.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.
80
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
Politics 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.
81
Pige9
5TH STORY of Level 1 princed in FULL format.
Copyright 1989 Federal Information Systems Corporation
Federal News Service
OCTOBER 10, 1989, TtlESDAY
SECTION: IN THE NEWS
LENCTH: 168*3 words
HEADLINE: RESOMPTION OF HOUSE FOREIGN AFFAIRS COMMITTBB WITH WITNESS KAMMAN. THE
LAST SEtS WAS PAGE RESUME ON PAGE RESUMPTION*** HSE FOR. AFFAIRS OTTE KAMKAN ET
AL-lO/0«/e9
BODY:
(RESUMPTION OF STORY PREVIOUSLY SENT)
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
J
82
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
Poland.
REP. ENGEL: HaB any thought been given to setting up a quasi -governmental
agency, such as an Eastern European Development Foundation, to coordinate the
long-term
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.
83
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
you.
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
84
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
itaproper?
MR . EARREDA : Uhhh .
REP. SOLARZ: Yea?
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.
85
2B • MONDAY, JANUARY 23, 1995 • USA TUUAY
Although the Dow Jbnes^ jn^^oal: ;
aven^e^rose only £modiBSt39!^?M
firsthsdf of the '90s, many std^srand.
Stock: mutual funds d'^V<
gaip^^^Quiipa^
^i:if*^;2^rT^»_ti--:i
stD(^K*mdus^ grotinsi
;.-" *s-*r22sisai^£a
■T.-i-ri^^ve^^rs^Tji
How fund categories fared ^i
OENERAl. FUNDS " ^'T
No. of Total return
Objective funds 1994 '90:7'94
MC Midcap ^99
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 -Z5% -4^5%
S&P 500-stock index — 1^o Sl.6%
SPECIALIZED FUNDS " '^- -
TK ^SdenosJ£t^nology~:^^^^!1^3SlS3SS
Rnandal services 16 - -2.8% 1102%
mantets 47 -9.6% ''6&2%
FS
H ;
EM
CV
FX
6S
RE
PC
UT
Rexible portfolio^
Real estate
UtiBtJes
QL33tobaL^^^S
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%_13%
S427fti2I3nK^
15.4% ^19.4%
Prospects Dim
For Bank Loan
To Mexico
86
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^ov-
emmeni appear lo be lading, even 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
QU/TO
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 taken
by the lead banksj LlUcorp and J.P. .Mor-
pui 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 commercial
banks JR'way.' .Not all ol tne banks have
the same mleresnrror exposure lo .Mex-
ico as Citicorp and .Morgan have.
btnior executives of other large hank-;,
have been troubled or angered by the
manner in which the loan was njyipAcn^
Mhirh they rail remim<;rpnt nf rhy^nnp
era when a few senior bankfp wnniH gci
on the phone and solve intemalional finan-
cial crises U-I^Mni^r Mi.ng tnn nft.n ^fy
foreign debt woes, they said reirne parir-
ages can no longer be pieced together sn
eanty:
The bank executives said the loan's
urgency appears to have been diminisjied
6^ the ii!>t) Diiiion White House rescue
package 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 Mor-
ganl that this was imiiortapi for the limipd
States." said one banker. "Rm thi^ itn't
old boys making calls and getting things
' done anymore -times have changed."
Recording lo an individuaJ familiar
with 'be loan, most hanks l);||lr>.H „ .^-^j^
miltinp "l^no millinn So far only Rfrnt.
America Corp . Chemical BanMng COrri..
LtasjJHanhaUaii Corp . Banltepi TriTa
New York Corp . Banco ijtinAampHrann
de Kvponarlnne^ anri R.nt n> v^..^
SmflJ have IpmalivPiv ]ninp<1 riHmrT^ ^nri
Morgan at that level. Others. inrliiflini>
Bank of Tokyo. .Vatlonsltanir and nr^
Chlrapi Corp , have aprppH tn cm..|i^r
amounts.
to commit formally to a package unless the
loans are collateralized, whitli 'bey ciir-
rerllv areall. antl only if the interest rates
are more attractive. 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 here
The executives who voiced their ohie^--
Ufins said that even though thi^j Ipan may
no longer be necessary, they believe nij-
corp and .Morgan are pu'^hing for j| a<; pnp
banker put it. heranse rh^-wam mprn.,;
Joevervone that they siippnrt Mpvirn ■■
^e of the bankers are rpliirtan;_m
lend to the Mexican government after the
..— "^."..^'^'^^ ihey expenenced in the
tmrTTiev^said ihev wmiM p^^^~,^
cominue lending to their own rlienK
"in .nexicos private sector or commit lo~
purcnasing .Mexican debt for resalTaTa
weekly aucifon. That umilH'hp far mn,p_
acEiannala ihin heinn ]l lh» lail pnrinr.i
major rescue package " said one banker
87
The Nation, 2/13/95
MEXICAN HANDOUT
Bailing Out the
Creditor Class
o
WALKER F. TODD
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
prevent 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 bonrrwM ^^' "'""^ 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
Resa-ve.
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?
In 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 from 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-
88
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.
89
IjRI
Legal Research International, Inc.
March 1, 1995
The H(jn(>rahle
Dan Burton
(Chairman
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
90
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.
91
$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.
92
!})!);{
i;);)2
1!)!)1
Fed/Treasury Foreign Exchange Operations
(millions of dollars)
I' KB
Fed
Treasury
O.IH
,l;ui-!);{
10!). no
25.1
Apr-!);}
22.00
22
,)ui-!);{
12K.00
127.7
Oct.-!);^
22.10
22.1
(2, ()();}. 4 IK)
,Ian-!)2
Tfj.OO
;{.!)
A])r-})2
0.00
0
Jul-!)2
;];{(;. 20
114.4
()(:(,-})2
;^r)H. 10
1 !!).!)
;^(i(;.40
rlan-91
0.00
0
Apr-!)!
17i).40
14(;.!)
Jul-i)l
147.r)0
00. a
( )c.t,-i) 1
105.10
i).4
Total
366.58
1,482.90
651.7
[because the Fed has not in the past been wiUing to di.scuss the aa;ounting
pnxiedures used t(j as.semble the.se 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 hjs.ses 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.
Plea.se 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
93
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
94
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
traffickers.
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
95
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
1994.
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
96
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.
97
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
98
clippings describing Bartlett's connection with drugs and these other alleged
crimes."
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
99
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.
100
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
101
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
released.
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
102
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
prosecution.
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
103
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
104
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
105
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
BOSTON PUBLIC LIBRARY
106
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.
107
♦ 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
government.
Copyright 1995. Legal Research International. All Rights Reserved.
o
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>
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9 780160"471575
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