by Nomi Prins
But Ortiz knew the system was stacked against emerging markets. That was the way the IMF functioned. It wasn’t personal, it was business. The idea was to use crisis to press structural reforms, which meant more open markets to exactly this sort of chaos was no antidote. His country had experienced this countless times. Latin America was ground zero for the IMF’s financial experimentation.
Bernanke was in over his head. Fortunately for him, he ran the most powerful central bank in the world. So, he diverted attention to problems of other nations. Mexico’s anemic condition rose to prominence on his agenda because it was the most connected to the United States. On October 20, 2008, Bernanke stressed the need for global coordination with his allies. For the conjurer, the appearance of synchronized efforts was as powerful in fostering confidence as results.
Bernanke touted coordination as if the world was a willing partner rather than hostile participant. Speaking before Congress, he said, “The United States consulted with other countries, many of whom have announced similar actions. Given the global nature of the financial system, international consultation and cooperation on actions to address the crisis are important for restoring confidence and stability.”67 Though the latter was true, it was the US (and European) banking system that lay in disarray. The king money magician was deflecting culpability for Wall Street’s recklessness by blaming the world for reacting to crisis with crisis.
GIVE A BANK A DOLLAR, THEY’RE GONNA WANT TRILLIONS MORE
The United States and Mexico were both very concerned over one another before and after that October period. The Fed began to take notice. On October 28, 2008, at a Federal Open Market Committee meeting, Nathan Sheets, director of the board’s Division of International Finance, addressed the issue of ongoing market operations and the swap proposals the Fed was conducting, noting, “Our interdependencies with Mexico are particularly pronounced.”68
The question was whether there would be a broader effect on US banks if their global outposts suffered in a sort of secondary shock basis. In that case, it might come down to preserving the big US banks with Mexican subsidiaries. As Sheets added, “If the Bank of Mexico or the Mexican authorities move to address tensions in their financial system, the standard that has been set by several Federal Reserve actions… my feeling is that Banamex, owned by Citi[group], would have the same access to these kinds of facilities as other Mexican institutions.”69
In his dual capacity as vice chair of the FOMC, Tim Geithner concurred. It wasn’t Geithner’s first Mexican rodeo either. He had served in the Clinton administration during the 1993 NAFTA negotiations, which opened a new age for trade in North America. And during the first peso crisis, when the Mexican peso was hit by speculation from international bankers, he was deputy assistant Treasury secretary for international monetary and financial policy (in January 1999 under Treasury secretary later turned Citigroup executive Robert Rubin).70
Geithner corrected Sheets. The United States might back US bank subsidiaries in Mexico “if a weak US institution in Mexico faces substantial needs in Mexico.”71 In other words, the United States would call the shots on Mexico’s banking system as it pertained to US mega-banks. It could provide stimulus to US banks with international subsidiaries.72
In the world of conjured money, US banks in foreign lands, like military outposts, could count on Fed support. Citigroup had massive exposure to Mexico—$35.0 billion by December 31, 2008.73
To further supplement its falling foreign reserves, Banco de México agreed to a $30 billion foreign currency swap line with the Fed on October 29, 2008. Just as artisans are vocationally skilled in designing hand crafts, these central bankers crafted facilities to dispense money on the fly. It was the first time the Fed lent money to emerging market countries to prevent a global dollar shortage.74
The Fed established more swap “facilities” to support US dollar liquidity in amounts of up to $30 billion each with the Banco Central do Brasil, Banco de México, the Bank of Korea, and the Monetary Authority of Singapore.75 The purpose was to mitigate difficulties in obtaining US dollars in countries with solid economic fundamentals.76
The IMF, rising in prominence as a result of the crisis, established a Short-Term Liquidity Facility to help member states, mostly those from emerging countries.77 Even the most elitist of the elite hit panic mode. “Exceptional times call for an exceptional response,” IMF head Dominique Strauss-Kahn proclaimed on October 29, 2008.78
Meanwhile, in San Salvador, El Salvador, Latin American leaders joined leaders of Spain and Portugal for the Ibero-American summit. United Nations secretary-general Ban Ki-moon issued an ominous video greeting: “A global financial crisis endangers our work. Prices for food and fuel have escalated, and trade talks are stalled.”79 While the United States focused on its banks, the rest of the world focused on keeping people from starving.
Faces around the room were ashen. When he rose to speak, Calderón said, “Our first goal is to avoid an increase in extreme poverty.” He added, “The drop in employment and the rise in fuel prices could push new millions into poverty in just a year.” Inflation in Mexico had nearly doubled to 5.80 percent since 2007.80 Loan defaults and the amount of past-due loans were mounting quickly.
To help facilitate liquidity in its own country, Banco de México executed a Fed QE move. The central bank announced a program to repurchase up to Mex$150 billion (or US$18 billion) of debt securities issued by the IPAB (Instituto para la Protección del Ahorro Bancario, the Bank Savings Protection Institute).81 It implemented a Mex$50 billion auction of interest rate swaps for investors to switch long-term for short-term debt. This was their version of quantitative easing, similar to actions taken during the 1994 peso crisis.82 Banco de México described them as “measures designed to foster a more orderly functioning of financial markets.”83 Still, Ortiz proceeded with care.
HISTORY REPEATS ITSELF
The pandemonium in 2008 wasn’t the first time US banks and monetary policies hampered Mexico’s economic stability. By the early 1990s, big US banks like BankAmerica, Chase Manhattan, Chemical Bank, Citicorp, Goldman Sachs, and JP Morgan accounted for 74 percent of US–Latin American exposure, or $40.4 billion.84 If the credit worthiness of the region fell, so would the profitability of these giant banks.
Into that debt haze, the Clinton administration signed NAFTA on December 8, 1993. The first victors were banks. The Los Angeles Times concluded, “Banking will be among the first industries opened to foreign competition under NAFTA.” Prior to NAFTA, foreign banks had been barred from operating subsidiaries in Mexico for fifty-five years.85
By January 30, 1995, Mexico’s central bank reserves had shrunk to $2 billion from $24.4 billion the prior year. At the request of former Goldman Sachs co-CEO turned secretary of the Treasury Robert Rubin, President Bill Clinton invoked his emergency powers. He extended a $20 billion loan to Mexico from the Treasury Department’s Exchange Stabilization Fund so that it could repay its debts to US banks. US banks were saved.
Citicorp posted an historic $3.5 billion profit for 1995. As a result of the US bailout, Mexico ultimately underwent a $135 billion bailout of its own banks in the late 1990s. Many local Mexican banks were sold to foreign banks. According to the US State Department, at the time, “The implementation of NAFTA opened the Mexican financial services market to US and Canadian firms. Foreign institutions hold more than 70 percent of banking assets and banking institutions from the US and Canada have a strong market presence.”86
The share in total assets of foreign-controlled banks rose from 24 percent in 1998 to nearly 50 percent by the end of 2000 and to over 70 percent after the purchase of Banamex by Citigroup in 2001.87 In February 2010, Mexican president Ernesto Zedillo joined Citigroup’s board of directors.88
By 2015, five foreign banks, led by Citigroup/Banamex, owned 64 percent of Mexican financial assets, more external bank ownership than in any other country. The top five banks held 72 percent of the country’s total financial assets. Only
one—Banorte—was local.89 Foreign banks in Mexico, armed with cheap money, could afford to be less accountable for speculative activities. Citigroup was also an important bank for Mexican elites.
THE PRE-THANKSGIVING SUMMITS OF STATUS QUO BATTLES
The G20 subgroup of developing and emerging central bank governors assembled in São Paulo, Brazil, on November 8–9, 2008, to address their fears. It was a week before the full G20 event in Washington. They released a routine joint statement. However, packed in the final communiqué was a bold message, the kernel of an alternative monetary system solution. The group still wanted to reform rather than banish the old system, but this was a start:
The Bretton Woods Institutions must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges. Emerging and developing economies should have greater voice and representation in these institutions.90
The declaration sparked power struggles. For Mexico, it opened the door for competition between France’s Christine Lagarde and Mexico’s Agustín Carstens over the second-most-important global monetary policy slot, head of the IMF. Emerging countries found glaring fault in the divide between old institutions and their domestic and global interests.
The IMF had never been led by a non-European member, just as the World Bank had never appointed a non-American president. These were Western democratic institutions, yet they were supposed to work primarily with the developing world. The opportunity to allow a leader from outside Washington or Wall Street signified hope and change in the power structure of Western and developed nations relative to emerging market ones.
The G20 emerging nations subgroup had no sympathy for the advanced nations that had inflicted crisis and economic hardship upon them. The final communiqué from that Meeting of Ministers and Governors in São Paulo in November worried, “Advanced economies, where the crisis came into being, are slowing markedly and some are already close to or in recession.” The group expressed support for a stronger IMF watching over developed economies, stressing, “We believe that the IMF must enhance its early warning capabilities with due regard to systemically important economies, in order to anticipate stresses and identify at an early stage vulnerabilities, systemic weaknesses and spillover risks across financial markets that can endanger both the international financial system and the global economy.”91
Mexico was ground zero for this clash because of its proximity to the world’s most developed economy. The developing countries saw opportunity in establishing a unified voice to consider alternatives to the Bretton Woods system. If they were not to be given a real seat at the table, they would eventually build another one altogether.
Though he did not attend that São Paulo meeting, the year marked Ortiz’s tenth anniversary as a G20 governor. He had attended his first G20 meeting in 1999.92 Ortiz knew the financial landscape well, understanding Mexico’s place in it and the balance of collusion and independence.
A week later, the main G20 Summit on Financial Markets and the World Economy opened in Washington, DC. The atmosphere was tense, hostile even. The broader DC assembly neglected to address the purposefully agitated language of the São Paolo statement as well as its focus on advanced economies’ sabotage of developing ones.93
In DC, Calderón, not Ortiz, spoke on behalf of Mexico, in more tempered tones than Ortiz would have. “The international financial institutions must adopt a much more active role,” he stressed, “supporting emerging and less developed countries so that the impact on economic activity and poverty is minimized.”94
Ortiz was across the Atlantic, in Europe, attending the Fifth ECB Central Banking Conference in Frankfurt, Germany. The two-day conference focused on the topic “The Euro at Ten: Lessons and Challenges.” He joined Bernanke and ECB head Jean-Claude Trichet on a panel to discuss international interdependency and monetary policy during the recent crisis.95
Ortiz remarked that “emerging markets must be cautious and they cannot engage in a persistent fiscal expansion.”96 It was—and remains—typical US dogma to press developing countries for open financial borders regardless of risk. It meant less control over their own economic destiny and more reliance on the whims of the major central banks during financial crises and exaggerated monetary interventions. The more the Banco de México attempted to separate from the Fed, the more it was drawn in. That seemed to be the case with many global central banks—but Mexico had the additional burden of geography.
A December 2008 New York Times article titled “When the US Sneezes, Mexico Catches Cold” noted, “But this recession, it is the profligate United States pulling down fiscally disciplined Mexico.”97 It was a distinct shift from prior crises.
Still, Banco de México’s 2008 year-end report waxed pessimistic. “Deterioration and uncertainty about both financial markets and the outlook for the US and the rest of the world economies negatively affected the Mexican economy and its financial markets… risks of a downward adjustment in economic growth for 2009 have increased considerably.”98 The Mexican Stock Market Index had shed 23.6 percent of its value over 2008.99
To quell the hemorrhaging, Ortiz called for more auctions through December 2008. He later published a paper with the Brookings Institution (in July 2016) explaining that these were established “to provide liquidity to the foreign exchange market and restore its proper functioning, an absence of which threatened to preclude corporations from meeting their US dollar obligations.”100
The world was bailing out the United States. The US government and the Fed were bailing out Wall Street.
Despite slumping markets, Mexico’s GDP for 2008 achieved a 1.4 percent growth rate.101 The figure represented a third of Mexico’s January 2008 forecast of 3.25–3.75 percent. It was worse up north. During the final quarter of 2008, the US economy posted its largest contraction in twenty-six years. US GDP fell 3.8 percent, adjusted for inflation.102 That was alarming for Mexico, with 80 percent of its exports sold to the United States.103 Mexico feared financial shocks from the market, but the ripple effects could be catastrophic if not contained.
GLOBAL CRISIS BENEFICIARY: THE DOLLAR
As a sign of the insanity of money-conjuring policy, the US dollar rose relative to the peso in late 2008—even though the Fed was cutting rates to zero, and Mexico’s rates had risen to 8.25 percent by the end of 2008.104 In a normal world, higher interest rates translate to stronger exchanges rates. External capital is always seeking the highest returns for the least amount of risk. High interest rates provide high returns and therefore attract more capital, which strengthens a country’s economy and therefore its currency. However, this wasn’t a normal world. It was a panicked one, and in panic, the safe-haven currency reigns supreme, even if it’s the one causing the panic.
Bank analysts offered their perspectives on this phenomenon. The dollar’s rebound “is a sign of real panic and risk aversion,” Kathleen Stephansen, head of global economic research for Credit Suisse in New York, told the New York Times on October 22.105 Rising US dollar strength, or “panic behavior,” as Alberto Bernal, head of emerging markets research at Bulltick Capital Markets, called it, “has nothing to do with Mexico and everything to do with the US.”106
Yet it was Mexico that suffered. By the end of 2008, 37,500 jobs in the formal sector of Mexico’s economy were lost.107 In the informal sector, a job pool equal to nearly half of the formal sector, numbers were far higher.108
NEW US PRESIDENT, SAME FED POLICIES
With the financial crisis in full throttle, Barack Obama was inaugurated as the forty-fourth US president on January 20, 2009. Six days later, Tim Geithner was sworn in as his Treasury secretary, sliding over from his New York Fed president slot, where he supported bailouts and neglected proper Wall Street bank regulation.109 Under his watch, national debt would jump from $10.6 trillion to $16.5 trillion. At least a third of that rise went straight to the Fed in the form of bank reserves, more money than would
ever reach those suffering on Main Street.
The change of US presidents and political parties did not provoke a similar change in the Fed chair spot: Bernanke remained captain of the money-conjuring ship. Time magazine named him Person of the Year in 2009, and the Fed continued to craft money from thin air. On inauguration day, the Fed offered $150 billion to US banks in the form of eighty-four-day credit through its Term Auction Facility.110 Two weeks later, another $150 billion auction in twenty-eight-day credit followed.111
The Fed busily coordinated multi-trillion-dollar global central bank efforts to keep the US financial system and its European counterparts artificially solvent and capital markets primed. In contrast, in 2008 the US government fashioned a mere $152 billion economic stimulus package for the “people.”
Mexico followed suit—but with comparatively less grandiosity. On January 7, 2009, Calderón introduced a $150 million economic stimulus package to prevent layoffs (a tiny sum compared to the amount of Banco de México money made available to buy bonds from struggling banks). Then minister of finance Agustín Carstens predicted zero growth. Ortiz characterized that forecast as optimistic in an economic clash of Mexico’s current and future central bank heads. Banco de México predicted a contraction of between 0.8 percent and 1.8 percent and 450,000 formal job losses for 2009.112
Ortiz was fighting a losing battle against the Fed on rates. He finally relented and announced the first cut on January 16, 2009, of 50 basis points, from 8.25 to 7.75. During the first seven months of 2009, he slashed the overnight rate from 8.25 percent to 4.50 percent113 in an attempt to stimulate the economy. The actions were politically motivated, too. The decision to imitate US monetary policy boosted Ortiz’s career.
