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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 blase 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.
Of course, there were also domestic political considerations. Clinton, already with an eye on the 1996 elections, could ill afford to allow Mexico to go under. It was his pet project. He had gambled part of his political future on Mexico, helping push the North American Free Trade Agreement (NAFTA) through Congress over the objections of angry labor unions and many domestic producers. Only two weeks before the latest Mexican devaluation, at the thirty-four-nation Summit of the Americas in Miami, Clinton had praised Mexico as a mode for economic development and had proposed expanding the U.S.-Canada-Mexico trade agreement into a hemisphere-wide free-market area. Now, his grandiose plans seemed shattered, and the president was facing political sniping from all sides for bailing out Mexico at a time of dramatic budget cuts at home.
But while Mexico's financial collapse took Wall Street and the rest of the world by surprise that Tuesday morning, it did not happen overnight: It was preceded by a series of spectacular events over the previous eleven months, most of them unprecedented in Mexico's history since the turbulent days of the 1910-1917 Mexican Revolution. The first of a string of devastating blows to Mexico's much-cherished economic and political stability had taken place nearly a year earlier, on an eventful night that seemed borrowed from the opening page of a Hollywood script, but was only too real.
* * *
President Salinas de Gortari and his wife, Cecilia Occelli, couldn't have been in a better mood on December 31, 1993, as they dressed up for the New Year's Eve party they were hosting at the presidential residence of Los Pinos. It was to be their last New Year celebrated at the presidential palace - Salinas was about to complete his six-year term in December 1994 - and they had decided to spend it with their families and best friends. Salinas, a short, prematurely bald man with ears that seemed disproportionately large for his head, looked tanned and rested after returning earlier that day from his first real Christmas vacation in years. He had spent a week playing tennis and jogging with his children in the southern resort of Huatulco, after returning from an official visit to Asia during which he had been enthusiastically received by the Japanese government and business community.
The New Year's Eve party was to be Cecilia's occasion to play hostess - dispelling rumors that Mexico's first couple was living in virtual separation since word had gone out that the president was dating a soap opera star with whom he was alleged to have conceived a child - and to invite all the relatives and friends who for one reason or other had been left out of the president's official schedule during the year. It was not only to be a party to get together and have a good time, but also to celebrate Salinas's phenomena success.
As he entered his last year in office at only forty-five, Salinas was on top of the world. Few Mexican presidents had approached the end of their terms enjoying such popularity. Salinas had just won approval of NAFTA, the groundbreaking commercial treaty with the United States and Canada that was to go into effect at midnight - only a few hours away. The deal, which would gradually eliminate customs duties between the three countries over a fifteen-year period, was to propel Mexico into the big leagues of international trade. From now on, Mexico and its two business partners would become the world's single largest trading block. Mexico, long stereotyped as a backward country of peasants napping under cactus trees, was about to make a dramatic leap into the First World.
* * *
"Carlos Salinas de Gortari is reversing Mexico's history," Time magazine had proclaimed in naming the Mexican president 1993 International Newsmaker of the Year for Latin America. "Salinas has a most single-handedly energized a nation that used to be jealous and resentful of the dynamism exhibited north of the border."
A Harvard-trained public administrator who according to his aides was so impressed by Asia's economic success that he had sent his children to a Japanese school in Mexico City, Salinas had dazzled Wall Street and Washington, D.C. The Harvard label was tagged to him so often in U.S. press reports that amused Mexicans were joking that "Harvard-trained" had become their president's first name. Salinas was seen in the United States as the first of a new breed of Mexican leaders, the kind of young, pragmatic, U.S.-educated politicians who jogged every morning, wore Cassio plastic watches, Timberland heavy-duty shoes, and signed their government decrees with generic ballpoint pens, in sharp contrast with the pompous, visibly corrupt leaders of the past. The Mexican press had dubbed him la hormiga at mica - the atomic ant - because he seemed to be everywhere, moving like an insect, showing up at half a dozen meetings a day and generating more head lines than newspapers could accommodate.
A man of the nineties, Salinas seemed determined to challenge some of Mexico's age-old ideological hang-ups. He was somebody U.S. officials and foreign investors could talk to - in their own language. Shrugging off a century of troubled U.S.-Mexican relations - and recent economic fiascoes such as Mexico's 1982 nationalization of the banking industry - Wall Street investment firms had finally found a Mexican leader they could trust.
* * *
The figures indeed were looking great. Foreign investment in Mexico's stock market had risen by a whopping 98 percent in 1993. Wall Street and London brokerage houses were pressing their clients to buy as many Mexican stocks as they could and take advantage of the economic miracle led by Mexico's young president. The country could boast record international reserves of $24.5 billion, up 25 percent from the previous year. Inflation had dropped to 8 percent from a record 160 percent a year when Salinas had taken office. New York brokerage houses were forecasting economic growth rates of more than 3 percent a year for the foreseeable future. Forbes magazine's ranking of placing Mexico right after the United States, Germany, and Japan as the world's wealthiest people had just included thirteen Mexicans - country with the most billionaires. "You can't any longer think of Mexico as the Third World," the magazine had declared.
President Clinton, after wavering during his presidential campaign on whether to support NAFTA, had wholeheartedly embraced the plan for a new trade partnership with Mexico. Following the steps of President Bush, he had used the image of Mexico's U.S.-educated president to push the free-trade agreement through Congress - suggesting that the United States faced a now-or-never chance to bring Mexico into its fold. Clinton proclaimed his "enormous admiration for President Salinas and for what he is doing," and called the Mexican president "one of the world's leading economic reformers." Salinas was ecstatic. It was about as much praise as any foreign leader could get from a U.S. president.
This new image wasn't just good public relations, for which the Salinas government was doling out more than $11 million a year just in the United States. The president had in fact changed Mexico's economic course over the past five years. A man who had a foxy grin to match his shrewd personality, Salinas had built on free-market measures begun by his predecessor to launch a full-fledged economic opening, reversing several decades of nationalistic and statist policies. He had privatized 252 state companies, including Mexico's biggest commercial banks, the telephone monopoly, and hundreds of money-losing firms, netting about $23 billion in government reserves while reducing massive government subsidies to these enterprises. He had also accelerated Mexico's transition from a country that had relied on state-run oil exports for 78 percent of its foreign income in the early eighties to a nation that now made 81 percent of its income from private-sector manufactured goods exports, even if critics pointed out that such change resulted largely from lower international oil prices.
Excerpted from Bordering On Chaos by Andres Oppenheimer Copyright © 1999 by Andres Oppenheimer. Excerpted by permission.
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