All the Presidents' Bankers (71 page)

Clinton credited McColl in his signing speech, saying he “stayed with me half the night once. You may think you can’t stay up half a night talking about interstate banking. [Laughter] You may think it would put you to sleep even though—but you have never heard Hugh McColl talk about it.”
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“We know this bill is good for consumers for reasons that have already been stated,” Clinton continued. “I wish I had thought of Tom’s line myself—it’s easier for a New York bank to expand into Kuala Lumpur than Jersey City.”
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That would no longer be the case. From now on, banks could do both.

When Clinton thanked Labrecque and Kovacevich for participating in the ceremony, he told them, “Since the beginning of my administration I have looked for ways to tear down outdated and unnecessary regulatory barriers to economic activity. . . . I intend to continue pursuing similar opportunities to streamline and modernize government regulation.”
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Mexico Falters, Bankers Quiver

Outside US borders, the post-NAFTA world wasn’t the nirvana Clinton had promised. An international financial crisis had been simmering for months, most acutely in Mexico, where the Brady plan enabled US banks to “reschedule” $20 billon of Mexico’s $84 billion of debt, thereby adding more debt and causing local banks to shun the needs of citizens and small businesses in preservation mode. US banks took advantage of this weakness by buying Mexican banks. In 1990, the only foreign bank operating in Mexico was Citibank, with assets amounting to about 0.5 percent of banks’ total assets. Under NAFTA, market share limits rose to a 30 percent cap on the equity interest of foreign banks in Mexico’s banking system. By 1994, twenty-four of the thirty major Mexican banks were foreign-owned or -operated, including by Citigroup, Santander, J. P. Morgan, and Chase Manhattan. NAFTA took away Mexico’s control over its financial system and shifted it to the United States and Europe.

As Clinton talked up the benefits of NAFTA, Mexico was buckling under oppressive debt and a declining currency in a potential redux of the LDC debt crisis of the previous decade. After liberalization and NAFTA, the Mexican peso dove nearly 50 percent within six months, causing a vicious recession.
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Real income levels for many Mexican citizens and the newly emerging Mexican middle class got slammed as a result.

On December 2, 1994, Mexico’s finance minister, Jaime Serra Puche, met with US bankers at the New York Fed to assure them that his government would support the faltering peso. He promised that Mexico would restrict
domestic credit and adopt austerity measures to protect the currency.
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But promises weren’t enough to spark a rise in the peso or economic stability in the country. Stanford-educated economist Guillermo Ortiz Martínez replaced him in a matter of days.

That same week, on December 7, 1994, after Bentsen resigned from his Treasury secretary post, Clinton announced that Rubin would replace him.
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A few weeks after the announcement, Mexican president Ernesto Zedillo devalued the peso.
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The devaluation unleashed a currency meltdown that rippled through Latin America. Worse for the bankers, the possibility of a default and a chain reaction of large potential bank losses loomed. They needed a bailout.

Clinton considered the Mexican financial crisis that struck between late 1994 and early 1995 “one of the biggest crises” of his first term. On the evening of January 10, 1995, after Rubin was sworn in, he met with Treasury official Larry Summers, Clinton, and his advisers to discuss it.

According to Rubin’s account of the evening, “Sitting on a sofa in the Oval Office during my first hour on the job, I was answering questions from the President that I had been asking others only a couple of weeks before. Larry had phoned me in December, while I was on vacation in the Virgin Islands, to bring me up to speed on the unfolding Mexican situation. I didn’t know much about Mexico’s economic problems, and I didn’t understand why a peso devaluation was urgent enough to interfere with fishing.”
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Rubin must have come up to speed fairly quickly because Clinton recalled that Rubin was very concerned about a crisis. “If Mexico defaulted,” wrote Clinton in his memoirs, “the economic ‘meltdown,’ as Bob Rubin tried to avoid calling it, would accelerate . . . [and it] could have severe consequences for the United States . . . [and] a damaging impact on other countries, by shaking investors’ confidence in emerging markets in the rest of Latin America, Central Europe, Russia, South Africa, and other countries we were trying to help modernize and prosper.”
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Rubin and Summers recommended asking Congress to approve $25 billion in loans to help Mexico pay its debts and bolster investors’ confidence in return for Mexico’s “commitment to financial reforms.”
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The figure was the largest US government–offered foreign aid since the Marshall Plan.

The Mexican Bailout

By January 30, 1995, Mexico’s reserves had shriveled to $2 billion, from $24.4 billion a year earlier.
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Rubin proclaimed, “Mexico has about forty-eight hours
to live.”
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The next day, President Clinton invoked his emergency powers to extend a $20 billion loan to Mexico from the Treasury Department’s Exchange Stabilization Fund. It was just one part of the full bailout, but it was the part that Rubin could push and Clinton could approve immediately without going through Congress.

Heavy hitters like BankAmerica, Chase Manhattan, Chemical Banking, Citicorp, Goldman Sachs, and J. P. Morgan, who learned nothing from the first LDC debt crisis—except that the government would help them contain losses—accounted for nearly 74 percent of Latin American exposure, or $40.4 billion.
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The bailout saved them, and later enabled them to buy Mexican banks that were weakened as a result. A decade later, foreign banks, led by Citigroup in the United States, owned 74 percent of Mexican financial assets, more external ownership than in any other country.

The backlash against Rubin was immediate. Accusations that he would personally benefit from what became a $51 billion bailout package traversed Congress. Before a congressional panel on February 23, 1995, Rubin, who had made $26 million in his last year at Goldman Sachs, retorted, “What Goldman Sachs has to do with Mexico is of no interest to me.”
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But that wasn’t quite the truth. Rubin’s command of Goldman had coincided with its bulking up on Mexican deals. In his February 28, 1995, address to the House on the matter, Indiana Republican Dan Burton pointed out, “Goldman Sachs was the largest United States underwriter of Mexican bonds . . . [with] $5.17 billion in investments made in the Mexican markets, more than double . . . the next two highest companies.”

On March 9–10, 1995, the Senate Banking Committee held hearings on the administration’s use of funds to bail out Mexico and whether it caused the crisis or exacerbated it.
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Those investigations went nowhere. The committee acknowledged connections between the Treasury and Mexico, but it all floated away as hot air from a leadership claiming to have taken appropriate action. Rubin had a clear conflict of interest—but was never held accountable.

The Mexican bailout stabilized the bankers’ positions. Rather than the losses they would have booked without it, Citicorp posted a $3.5 billion profit for 1995, the most in history by a US bank. In November of that year, it negotiated a new headquarters building in Mexico City, with 85,000 square feet of office space.
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(Chase Manhattan recorded a $2.46 billion in net profit for 1995.)

In October, President Zedillo visited the White House to discuss the success of NAFTA and the bailout. In a joint press conference, Clinton addressed
the bailout: “I did it because I wanted to stop bad things from happening. I did it because I have a vision of what our partnership will be in the future. But I seek no special advantage for the United States and certainly no influence over the internal affairs of Mexico.”
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As a result of the US bank bailout, Mexico was forced to undergo a $135 billion bailout of its own banks in the late 1990s. Furthermore, the bailout did nothing to help Mexican citizens. Instead, it extended the cause of financial liberalism and saved US banks with Mexican exposure from potential losses.

In February 2010 Zedillo became a member of Citigroup’s board of directors.
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Bankers Forge Ahead

Rubin and the bankers resumed their focus on domestic deregulation as if nothing had happened—indeed, as if deregulation was needed to combat such international economic strife. In May 1995, Rubin resumed warning that the Glass-Steagall Act could “conceivably impede safety and soundness by limiting revenue diversification.”
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Banking deregulation was still inching through Congress despite the Mexican crisis. As they had during the Bush administration, both the House and Senate Banking Committees had approved separate versions of legislation to repeal Glass-Steagall. Conference negotiations had fallen apart, though, and the effort was stalled.
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By 1996 other industries, representing core clients of the banking sector, were being deregulated. On February 8, 1996, Clinton signed the Telecom Act, which killed many independent and smaller broadcasting companies by opening a national market for “cross-ownership.”

Deregulation of energy companies that could transport energy across state lines led to blackouts in California and a slew of energy derivatives trades that further crushed the economy. Before deregulation, state commissions regulated companies that owned power plants and transmission lines, which worked together to distribute power. Afterward, these could be divided and effectively traded without uniform regulation or responsibility to regional customers.

The number of mergers and stock and debt issuances ballooned. As industries consolidated and ramped up their derivatives transactions and special purpose vehicles (off-balance-sheet, offshore constructions tailored by the banking community to hide the true nature of their debts and shield their profits from taxes), bankers kicked into hyperdrive to generate fees and
create related securities and deals. Many of these later blew up in the early 2000s in a spate of scandals and bankruptcies.

Meanwhile, bankers ploughed ahead with their advisory services, speculative enterprises, and deregulation pursuits. President Clinton and his team would soon provide them an epic gift, all in the name of US global power and competitiveness.

CHAPTER 18

T
HE
L
ATE
1990
S
: C
URRENCY
C
RISES AND
G
LASS
-S
TEAGALL
D
EMISE

“Today I am pleased to sign into law S. 900, the Gramm-Leach-Bliley Act. This historic legislation will modernize our financial services laws, stimulating greater innovation and competition in the financial services industry. America’s consumers, our communities, and the economy will reap the benefits of this act.”

—President Bill Clinton, November 12, 1999
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D
URING THE SECOND HALF OF THE 1990S, THE FINANCIAL, TELECOM, AND ENERGY
industries accumulated $4 trillion in bond and loan debt, eight times the amount of the first half of the decade. Debt issuance from 1998 to 2000, the height of the stock bubble, was four times what it had been from 1990 to 1998, and six times more for the energy and telecom sectors.
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The financial sector issued $1.7 trillion in loans to itself.
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The frenzy of consolidating and speculation pushed the stock market to greater heights. On October 14, 1996, the Dow Jones closed above 6,000 for the first time in history.
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The economy appeared to be buzzing along as well. And no one was looking beneath the surface of all this newfound market-connected, banker-incited, policy-enabled wealth to inspect the debt being accumulated to subsidize it all.

Against the backdrop of the soaring stock market and bubbling economy, on November 5, 1996, President Clinton dispatched Republican presidential candidate Bob Dole to recapture the White House. Clinton gained just 49.2 percent of the popular vote, but increased his Electoral College total to 379.
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The markets were euphoric, in particular within the telecom and energy sectors, and “dot-com” mania escalated another notch. On December 5, 1996, Federal Reserve chairman Alan Greenspan gave his infamous speech suggesting that “irrational exuberance” could be causing the extraordinary boom in stock prices.
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He did not suggest that inflated merger deals and derivatives trading had anything to do with it.