The Party Is Over : Part 1

Bordering On Chaos: Mexico's Roller-Coaster Journey to Prosperity
by Andres Oppenheimer

Mexico's growing pains in the era of NAFTA and globalization have been singularly acute and dramatic: a guerrilla uprising, the assassination of political leaders, revelations of high-level corruption, economic collapse, and a $50 billion bailout. Bordering on Chaos is an unrivaled account of the headline-making events that have threatened Mexico's social, political, and economic stability. It is essential reading for anyone who wishes to understand Mexico today-when, more than ever before, what happens in Mexico directly affects the U.S. national interest.

Chapter 1

There was a jubilant atmosphere at the offices of Salomon Brothers on the thirty-sixth floor of New York's World Trade Center on Tuesday morning, December 20, 1994, as dark-suited traders of the securities firm got to work. The holiday spirit had already taken over the city: Salvation Army volunteers in red-and-white Santa Claus outfits were ringing their bells rhythmically on the sidewalks, the sounds of Christmas carols seemed to be coming from everywhere, and people in elevators and office corridors were greeting one another with once-a-year warmth. At their desks, the brokers were expecting the sweetest present - a fat Christmas bonus.

That day, members of Salomon Brothers' securities division were to attend an early morning briefing by John Purcell, the tall, youthful-looking fifty-four-year-old managing director of the firm's emerging markets research division. Topic: the international outlook for the coming year. The small audience followed Purcell's moderately upbeat speech with great attention: As in most Wall Street brokerage firms, Salomon Brothers' emerging markets department was an elite division, and its managers were company stars. Since American investors had rediscovered Mexico in the early nineties and made profits of up to 50 percent a year in that country's stock market, securities firms had made huge profits from a boom in U.S. investments in the fledgling economies of Latin America, Eastern Europe, and Southeast Asia.

Purcell had been a pioneer in the emerging markets success story: A Ph.D. in political science from the University of California in Los Angeles who had given up teaching at age forty to try the excitement of Wall Street, he had been among the first to discover the potential of Mexico's stock market. In the late eighties - at a time when few Americans would consider investing a penny south of the Rio Grande - Purcell had published a report entitled "Mexico: A world class economy in the 1990's." Having lived in Mexico for a year in the staunchly nationalistic seventies, and fascinated by the bold free-market reforms that President Carlos Salinas de Gortari had begun to implement after his 1988 inauguration, Purcell had seen a golden future for Mexico. The subsequent phenomena rise of Mexico's stock market had proved him right. By the early nineties, Salomon Brothers had placed more than $15 billion in Mexico, making juicy profits for its clients. In the process, Purcell's research department had grown from a one-person office - him - to a staff of twenty-five.

But at about 9:30 A.M. that morning, the world collapsed on Wall Street. Purcell had just concluded his speech and returned to his desk when there was a sudden commotion outside his office: A news bulletin flashing across the computer screens said that the Mexican government had just announced a devaluation of the currency. Everybody was stunned. Few on Wall Street had expected such a bombshell - at least not that soon. Just a few weeks earlier, in a November 22 report on Mexico, Salomon Brothers had told its clients that "although we believe that an eventual more rapid depreciation of the peso may become necessary, the probability of a one-off devaluation is virtually nil." Not only had Purcell received assurances from top Mexican officials during a recent visit to Mexico City that there would be no devaluation, but his economic projections - based on Mexican government figures monitored by international institutions - showed that the country's foreign reserves were high enough to withstand pressures for a devaluation in the near future. All of a sudden, the "virtually nil" possibility had become a dreadful reality.

Within hours, U.S. investors who had bought peso-denominated Mexican stocks had lost $10 billion, a figure that would climb to more than $32 billion in coming weeks. Americans who had put their money into mutual funds run by firms such as Fidelity Investments; Alliance Capital; Scudder, Stevens & Clark; Goldman Sachs; and Salomon Brothers were now facing huge losses. This time, unlike in the 1982 Latin American debt crisis that had also been ignited by Mexico, the big losers were not a few giant U.S. banks, but hundreds of thousands of small American investors - retirees, nurses, and office employees throughout the country - whose pension and retirement plans had placed part of their savings in the Mexican stock market. In Mexico, the impact was even worse: an estimated $70 billion loss in the stock-market value of Mexican corporations, an avalanche of bankruptcies, and nearly a million layoffs over the next twelve months.

The telephones at Salomon Brothers began to ring off the hook. Purcell and his aides tried to reach their contacts in Mexico's Central Bank and the finance ministry, people they had just had lunch with in Mexico City earlier that month, but nobody would come to the phone. A low-level official they finally reached was of no help - he didn't know what to say. Purcell and his aides called their colleagues at other New York securities firms, some of which were suffering much bigger losses in Mexico than Salomon Brothers. Everybody on Wall Street was frantically calling everybody else, but nobody seemed to be getting any answers on what Mexico had done or how it would affect U.S. investors. The herd was extremely anxious. By noon, normally blasé Wall Street brokers had lost their cool. The pack was on the move. Purcell began telling the irate Salomon Brothers clients who were calling him from across the nation, "I don't like what's going on!" To most, that could only mean one thing: "Sell!!!!"

Weeks later, amid escalating fears that the massive pull out of U.S. investors from Mexico would extend to markets as far away as Italy and Singapore, President Clinton rushed to put together a $50 billion international bail out package for Mexico, including $20 billion in U.S. Loan guarantees. In nominal dollars, it was the world's largest rescue program ever, dwarfing the Marsha plan or any financial help Washington, D.C., had ever granted Europe, Israel, or post-Communist Russia. It was a matter of national security, U.S. officials explained: A Mexican collapse would trigger a full-fledged Latin American financial crisis, which would possibly extend to Eastern Europe and Southeast Asia. And America would be hit like no other country: Mexico was already vying with Japan to become the United States' second largest trading partner, after Canada, and hundreds of thousands of U.S. jobs would be lost if Mexico were forced to stop buying U.S. goods. Furthermore, U.S. Treasury officials said, a Mexican financial crunch was likely to drive up by 30 percent the number of illegal immigrants crossing the border to California and Texas - an additional 430,000 illegal immigrants a year.

© 1999 by Andres Oppenheimer

About the Author

Andres Oppenheimer is a Latin American correspondent for the Miami Herald and the author of the widely praised book Castro's Final Hour. In 1987 he was co-winner of the Pulitzer Prize for his reporting on the Iran-Contra scandal. He lives in Mexico City and Miami.