Envío Digital
Central American University - UCA  
  Number 207 | Octubre 1998



FOBAPROA: Another State Party Crime

In a democratic country the FOBAPROA scandal would have sufficed to bring a government down, but in Mexico the party regimen of the state makes the president untouchable. Clinton tottered because of an act of perjury in regards to his private life, but Zedillo is impervious to sanction even in the face of wholesale illegality and the economic disaster of an entire country.

Jorge Alonso

Paraphrasing President Clinton's confession in the Lewinsky case, US professor George Grayson described the Mexican Bank Fund to Protect Savings (FOBAPROA) as a time bomb because of inappropriate conduct in the way it was set up. This potentially dangerous time bomb is now front-page news in Mexico, and must be seen within the framework of what is already a very long story.

Centuries of corruption

From the colonial period on, corruption in Mexico has been encouraged by a separation between the law and daily life. Corruption came to be identified with the illegal use of political power for economic gain and personal, family or group advantage. It was not a marginal phenomenon, but rather formed an important part of the system. Bribery and extortion, the sale of political posts, contraband—these crimes have been systematic, tolerated transgressions ever since.

The legacy continued after independence into the 19th century, when new forms of corruption were favored, especially the practice of taking advantage of public works to divert resources into private hands. When a provincial governor complained to Porfirio Díaz that his campaign had cost him far more than the meager salary provided by the post to which he had been elected, Díaz gave him the solution: Don't be stupid, my friend: do public works. The revolution changed little in this respect; one of President Madero's brothers was heavily criticized. And Carranza's government was so infamous that the verb carrancear entered the vocabulary as a synonym for to rob.

Obregón lost his arm in the battle in which he defeated Villa. A popular joke explained that in order to find the missing limb among the dismembered remains of the soldiers, coins were thrown into the air; one dead hand sprang back to life to catch them, resolving all doubts. As President, Obregón maintained that no one could hold out against a blast of 50,000 pesos.

Mexicans have always complained about government corruption, but the scandals have been especially outrageous during certain periods. During Alemán's government, for example, the President and his closest collaborators took all they could get their hands on. López Portillo shamelessly described in print how he traveled around the world for several months as a great potentate after leaving office. The Salinas family has been accused of illicitly amassing fortunes. As one of the politicians most representative of the PRI regime summed it up in an oft-quoted phrase, "A poor politician is an inept politician.

The reign of impunity

Corruption is also rampant in Mexico among businesspeople and government officials who have gone into business. It has played a major role in the accumulation of a large share of the country's private capital. Considerable private wealth has been amassed from public property and funds. The country's eternally ruling Institutional Revolutionary Party (PRI) and one of its central tenets—a powerful, authoritarian presidency—are both decisive factors in the increasing levels of corruption. This is true not only because the party has bought and stolen votes, but also because it has endowed the highest office in the land with a great deal of discretionary power, without legal checks and balances or any need to give a true rendering of accounts. The result has been a dense web of complicity and impunity.

Francisco González, in his article “El México impune", has described impunity as the country's greatest problem because power must be corralled or it will overrun everything.

Plundering the nation

The bank privatization carried out by Carlos Salinas de Gortari's government provides one example of this network of corruption. The privatization of the banks represented 83% of all privatizations carried out before 1991. The banks were sold through what has been described as high-tech political patronage. Both the President's office and the Treasury Secretariat took part in the sale, with no real supervision by the legislative branch. The reports turned in to the Mexican House of Representatives in 1995 were incomplete and incoherent, and the legislators were not given the studies or appraisals drawn up when each bank was sold. Illicit profits were made throughout the whole process. Among those who benefited from the privatization were the owners of many of the brokerage houses that had first attracted and then swindled small depositors under Miguel de la Madrid's government—with its complicity.
The fact that some people had privileged access to public funds for their own private enrichment was more evident than ever under the Salinas government. At the time, the opposition charged that the privatization of the banks, highways and social security system was a fraudulent plundering of the nation. The FOBAPROA scandal, which has been called the greatest fraud in the history of Mexico, followed the same path as these scandals.

The seed of the scandal is sown

Filled with great expectations over implementation of the North American Free Trade Agreement (NAFTA), which President Salinas praised as Mexico's door to the first world, businesspeople went deeply into debt. In 1993, credit grew to 41% of that year's gross domestic product. The recently privatized banks fell over each other to offer loans.

But the day NAFTA went into effect—January 1, 1994— celebrations took second stage as the Zapatista Army (EZLN) burst into the headlines, opposing a treaty that would further impoverish the majority of the Mexican people. 1994 was a disastrous year. The PRI, which had usually provided an arena to peacefully resolve conflicts among the power groups, had to resort to assassination to block Colosio's candidacy. Ernesto Zedillo was the main beneficiary of that political crime. The assassination of the PRI's general secretary followed soon after. The bloody trail led to fortunes, made under the wing of power, linked to drug trafficking.

Because of the "December mistake," Zedillo was forced at the beginning of his term to make an overdue and poorly implemented devaluation, which left Mexico insolvent and faced with imminent payments in dollars. To overcome the crisis, the Clinton administration organized a US$50 billion bailout in exchange for drastic measures and guarantees of oil. Interest rates shot from 20% at the end of 1994 to 109% by the third month of 1995. Salaries fell. Over 7,000 businesses went bankrupt. The domestic market shrank and unemployment rose. A good number of those who owed money to banks could no longer pay. While the portfolio of loans in arrears amounted to 20% of total bank capital in 1990, it had soared to 93.8% by 1995.

Some individuals or businesses had put up collateral for the loans, but found it devalued by the 1995 crisis. In other cases, little or no collateral had been put up, with the collusion of bank owners or officials, and the credit had been used for personal ends. Bankers had lent to each other and to themselves and even to nonexistent companies.

A bottomless pit

Zedillo's government came to the rescue of the business elite in December 1994. Signals went out encouraging bankers to transfer many of these irregular loans to the bailout fund—that is, to FOBAPROA, which is a trusteeship used by the Mexican government through the Bank of Mexico to protect the capital of depositors in the banking system. Both wealthy bankers and banks on the verge of collapse did so. Even bankers who had financed the PRI's 1994 campaign–which played a part in decapitalizing their banks—transferred to the bailout fund the sums they had donated to the PRI.

At the time of the crisis, FOBAPROA served both to save the banking system and to cover up a chain of crimes. Through it the government issued promissory notes for the banks' liabilities, retaining bank stock in exchange. Unlike other countries, the Mexican government guarantees 100% of deposits. Thus, without moving a finger, bankers began to receive the flow of interest payments that these promissory notes generated. The government has insisted that if it had not done this, the country would have been ruined, but it is slowly coming to light that many of the liabilities assumed by the Fund resulted from bank losses due to speculation.

FOBAPROA contains 1,275 loans of over 20 million pesos each, and just 600 of them make up more than 55% of the Fund. Some 700 loans were granted without collateral. Quick fortunes, illegal private financing of PRI campaigns and the indiscriminate transfer of public companies to private interests have all disappeared into FOBAPROA's bottomless pit. Its liabilities equal 5.5 times the banking system's available capital, which shows that operations far in excess of available capital were authorized with the complicity of the officials in change. At the end of February 1998, the executive branch assumed liabilities totaling over 552 billion pesos, or roughly $67 billion.

Not only did FOBAPROA illegally issue the promissory notes for the banks' liabilities by doing it without the required capital backing, it also violated the Constitution in the process. By assuming these obligations without requesting congressional approval, the government violated article 73 of the Constitution, which expressly states that the executive branch requires authorization from the Congress to contract debts. Thus, in a single move, the government broke laws, usurped functions reserved for the Congress and violated the constitutional order. In October 1997, a group of legislators meeting in the Legislative Palace with the National Banking and Stocks Commission president stated that FOBAPROA's discretionary powers needed to be reviewed.

The Opposition Responds

In 1998, the executive branch sent the legislature a bill proposing to restructure the bank bailout, which basically meant converting it into direct public debt—in other words, a debt owed by all Mexicans. The President and his collaborators argued that the debt already existed and would have to be legalized after the fact. They assumed that the initiative would pass as a mere formality, without much debate, just as had always happened as long as the PRI had the majority in the House of Representatives. But in the July 1997 federal elections, the opposition had obtained the majority. These opposition legislators began examining not only the proposed law, but the bailout itself.
Their first move was to request more information, since it was important to know who had benefited from the Fund, but the government refused to give this information, alleging bank confidentiality. The legislators, recognizing this as a pretext to cover up complicity in FOBAPROA's dealings, responded with an argument that was impossible to counter: how was it that confidentiality would be protected if the executive branch saw the lists, but not if the legislative branch saw them?
Because of this study by the opposition legislators, the implications of the presidential bill and the illegal actions that gave rise to it came to light. The injustice of the proposal itself was clear: it privatized the profits and collectively distributed the losses among all Mexicans. If it were approved, the Mexican government would have to pay out nearly $32 billion in interest on the debt, which would increase the public debt from 27.9% of the GNP to 42.4%. This would mean that every single Mexican, even the poorest, would owe more than 6,000 pesos.

Offering no proof, the government insisted both that it had acted legally and that FOBAPROA had served as the means to overcome the banking crisis quickly and at the lowest possible cost, using appropriate measures. It argued that refusing to recognize the debt was simply unrealistic, since it had already been incurred. Furthermore, the government accused the opposition parties of fueling a crisis. All these arguments were summarized in a costly television campaign paid for with public taxes. Government and business propaganda centered on the claim that if the presidential bill were not passed, depositors would lose their money.

The opposition retorted that the Fund had bailed out criminals disguised as bankers and that what was at issue was an alarming case of corruption, with the President trying to pass the cost of his mistakes onto the taxpayers. They described FOBAPROA, originally designed to protect savings and support the stock market, as a system for looting. FOBAPROA had permitted brokerage houses and banks to pass on to it the losses generated by their speculative operations with private and public funds. The authorities did not even require them to repay the capital that had gone into the Fund.

PAN calls bailout "heroes" arrogant and incompetent

The National Action Party (PAN) declared in August of this year that Zedillo's bill was unacceptable, and that his bank bailout was not only illegal but also unjust for encouraging default on loan obligations. That same month, PAN asked that FOBAPROA be cleaned up and those responsible for its mismanagement legally sanctioned.
It argued that the promissory notes held by the Fund would have to be converted into other debt instruments to cover the cost of the bailout, and that the legislature should control the issuance and sale of these instruments through an institute that would oversee the sale of FOBAPROA's assets. According to PAN estimates, this would reduce the bailout cost to 252 billion pesos. PAN also made a proposal to relieve the burden on small- and medium-sized debtors.

For good measure, the PAN's legislative bench chief came down hard on those who tried to pass themselves off as heroes of the Mexican economy. He stressed that the arrogance of those who boasted of having acted in time to prevent an even worse calamity was matched only by their incompetence, since they were making claims that could not hold up to the most superficial analysis.

PRD charges they are bankrupting the people

The Democratic Revolutionary Party (PRD) organized a grassroots referendum on FOBAPROA to make people aware of the fact that, according to the government proposal, all citizens, whether or not they had anything to do with banks, would have to pay for the bank bailout. A survey carried out by Alducín and Associates, published in September 1998, showed that 53% of men and 50% of women do not have bank accounts.

The PRD refuted the threat of the government and bankers that the banking system would crumble if the presidential initiative were not approved as is, pointing out that what really put people's savings at risk was the project to bail out the illicit debts of wealthy businesspeople. The PRD began to look for a solution that would affect neither depositors nor the banking system. It particularly opposed several specific points in the presidential proposal: the plan to convert the 552 billion pesos into public debt, to issue bonds to bankers that could be sold on the market in exchange for cash, to make Mexicans pay out 32 billion pesos a year to the owners of these bonds—which would invariably lead to cuts in social spending—and to make them repay the full value of the bonds issued to the bankers within 20 years.

The PRD proposed instead to punish the high public officials, bankers and businesspeople who had caused the banking crisis by obliging those responsible for mismanaging the Fund to pay. It also demanded that all information on the case be handed over and audited. It proposed creating an institute to protect the deposits of small and medium-sized depositors, cleaning up the banking system to prevent future fraud, and returning their credit portfolios to the banks that had not been intervened by the state. According to this proposal, the banking institutions would have to return FOBAPROA's promissory notes and the rest of the arrears portfolio would go to a financial institution charged specifically with collecting these overdue debts. The recovered funds would be earmarked to help small and medium-sized debtors. The PRD further proposed that a fund be created to insure bank deposits only up to the peso equivalent of $50,000.

Three and a half million citizens participated in the PRD's referendum, of whom 95% said NO to President Zedillo's initiative. In his annual address two days later, the President made no reference to either FOBAPROA or the Chiapas conflict. Many legislators shouted out from the audience, "No to FOBAPROA!" Despite the government's television campaign, the issue had triggered a wave of anti-government opinion.

In the middle of September, the Center for Opinion Studies did a poll on the issue. Over 70% of those surveyed were aware of the FOBAPROA problem and over half agreed that the banks and officials who had authorized the operations should pay for them. Only 9.5% accepted the government's proposal.

Why the cover-up?

When the scandal first broke, the government offered to provide information on amounts, but without naming names. As the correlation of forces changed, it was forced to cede ground. Given the evidence—which it had first tried to cover up—the government agreed that some guilty businesspeople be tried and said that warrants had already been issued against some of them. It even criminally prosecuted one of the businesspeople involved in FOBAPROA, although not for this reason but for tax evasion. Cabal Peniche, one of the biggest contributors to PRI campaigns as well as one of the biggest crooks, remained at large. Popular opinion held that the government did not want to arrest him because if he talked, a lot of other dirt would be uncovered. Meanwhile, the government continued to hide information, using pressure and blackmail and trying to divide the opposition parties. The head of the PRI bench accused the PRD of intransigence and the PAN of fearing to work with the government to find a solution to the problem, because of the electoral cost this would involve.

The money found in FOBAPROA that had been contributed to the PRI's electoral campaign was one of the most important issues brought to light by the scandal. The Fund had absorbed campaign spending financed by Banpaís and Cabal Peniche's Banco Unión. Thus it was proven that the PRI had not only received donations stemming from bank frauds but had not reported these donations, as required by law.

The contributions made known after the 1994 elections represented 4.6 times the national campaign spending limit. The former president of Aeroméxico's administrative council revealed that his company's donation to Zedillo's presidential campaign alone came to 12.3 times the maximum amount that can be contributed by an individual, and 2.4 times the maximum amount that can be contributed by an organization. Naturally, this explains why the government did not want FOBAPROA's contents to be known. It wanted to preserve the anonymity of its illegal donors, guaranteeing their impunity and its channels for continuing this practice in future elections.

The opposition demanded that the PRI return the ill-gotten funds. And, although the issue was not raised, there were legal grounds to demand that the PRI registry be nullified. Ironically, the PRI was not off the mark when it responded to this late-appearing evidence with the claim that its 1994 campaign had "already been judged."

Negotiation or skirmish?

Unmasked, the government, tried to negotiate with the parties. Agreeing in principle that white-collar crimes should be prosecuted, the PRI proposed that 70% of FOBAPROA be converted into public debt and agreed to discuss a plan to support small and medium-sized debtors, then promptly declared that an agreement was near. It sketched out a program to support "debtors in compliance"— those who had restructured their debts and continued making payments—with discounts of up to 60%, and 45% on their mortgages. The plan also included benefits for the agricultural sector and small businesspeople.

But the PRI's maneuvers continued into late September. The PRD charged that the government was still insisting on converting FOBAPROA's liabilities into public debt, and refusing the PRD proposal to return to the banks the arrears due portfolio that had been absorbed by FOBAPROA. The PRD pointed out that the proposed solution made no allowances for small and medium-sized debtors who were not paying because the government's mistaken economic policy had bankrupted them. The PRD demanded the resignation of the National Banking Commission president and the head of FOBAPROA, because those who were party to the conflict could not participate in negotiations about it that might well imply criminal proceedings. It also demanded a political judging of the president of the Bank of Mexico, who had been treasury secretary during the first years of Zedillo's government.

On the last day of September, a new skirmish broke out between the legislative and executive branches over the presentation of the judicial analysis concluding that the government had violated the Constitution by not consulting the Congress about contracting public debt. The PRI bench walked out of the session to prevent a vote on the document. The executive branch and the other parties later reached an agreement on the issue—but this time without the PRD representatives present.

Among other things, the government agreed to withdraw its proposal to convert FOBAPROA's liabilities into public debt. In the proposal agreed upon by only part of the opposition, these liabilities would be turned over to an institute charged with recovering assets. An exchange of portfolios would take place with the five banks that had not been intervened by the state; they would assume the loans greater than $5 million. A new program for smaller debtors was also proposed, as was a greater information flow and a commitment to carry out audits in accord with the law. The PAN representatives demanded that the publicity campaign in favor of FOBAPROA be stopped.

The government thus took the steam out of some of the PRD's demands, although no statement was issued. But beyond any solution that may be found, the key issues—illegality and corruption—have not been addressed.

Yet another crime

In one of his communiqués, the EZLN's Subcomandante Marcos called Zedillo not only a bad economist and worse politician but also a criminal who had sequestered the law and sought to dispose of the nation's wealth at his whim. He described FOBAPROA as a "political and economic crime" and emphasized that the Fund raised fundamental questions about the political and economic model imposed on Mexico by the state party system.

FOBAPROA is not the only crime committed by the PRI. At the end of 1997, a paramilitary band, made up of party activists protected by the army and high political officials, massacred children, women and men who were praying in Acteal, Chiapas. The crime horrified the world. Unable to cover it up, the government meted out the lightest possible punishments. Nine months later, while it has still not responded to the international community's demand that such paramilitary bands in Chiapas be dismantled, it has made progress in its attempt to cover up corruption and guarantee impunity in the case of FOBAPROA. But the government has been obliged to back down somewhat since it no longer controls the legislature–thanks to changes imposed by Mexican voters who are slowly pushing the country towards a transition to democracy. At this point, the idea in the president's office, the state party's strongest bastion, is to let a few heads to roll so that top officials can be saved.

From populism to opulence

Zedillo and the PRI have tried to block the trial of Tabasco's governor Madrazo, who exceeded campaign spending limits— spending almost as much as Clinton in his campaign—with money that also came from FOBAPROA. In a democratic country, the FOBAPROA scandal would have brought down the government, but Mexico's state party has made the President untouchable. While perjury over a private affair has Clinton tottering, Zedillo remains unperturbed by thoroughly illegal actions and the economic disaster wrought upon a whole country.

Mexico's ruling party regime used to be accused of populism, not exactly of trying to create a welfare state but at least to reduce some of its ills. But even after proclaiming its faith in the wisdom of market redistribution, the government came to the rescue some of some of its closest allies after discovering that they had not managed their affairs well. It has freed them from the punishment of the market to prevent their collapse, and shifted the cost to society. It has rejected populism in favor of opulence, and is systematically carrying out a reverse-Robin Hood redistribution of wealth: it is taking from everyone, even the neediest, to give to the rich. FOBAPROA is one more result of a powerful, authoritarian presidency. Even though somewhat corralled by a new legislature that intends to act autonomously, Mexico's ruling party is using its still-strong presidential power to try to get the parties to cut deals over clear issues of legality that should not be open to negotiation.

Towards the year 2020

Any arrangement that does not address both the violation of the Constitution and the injustice of the presidential proposal is a sham. The PRD is very clear about this. The citizens participating in its referendum rejected the presidential solution. Some solution to FOBAPROA must be found that does not involve converting its liabilities into public debt.

Some PAN representatives, proponents of political realism, proposed lowering the percentage from 70% to 50%. Thus, only half of FOBAPROA would become public debt. Others in the PAN were more concerned about the issue of legality and were reluctant to go along with the government because of the political costs involved.

The PRI has pleaded that FOBAPROA not be politicized, even though it has already politicized the Fund itself through the campaign contributions and efforts to save its allies. Those now in power would like to preserve this channel as a means of obtaining large under-the-table donations, so they can continue buying votes and undermining free elections, thus ensuring that they remain in power until the year 2020, as the current treasury secretary once predicted. This is one more sign that the PRI will tolerate only a thin layer of democracy.

Solution or whitewash?

The government presented as a "great achievement" the proposed solution to FOBAPROA reached on September 30 by the executive branch and opposition political parties other than the PRD. Examined closely, the proposal is far from a true solution. In agreeing not to convert FOBAPROA's liabilities into public debt, the executive branch lost a battle but not the war. The opposition victory is important but incomplete. It must be remembered that Mexicans overwhelmingly rejected not merely the size of the loans but rather the whole of FOBAPROA.

Although the secretary of government announced that the agreement would involve fiscal costs well under half the sum of FOBAPROA, the PRI admitted that the cost of bailing out the banking institutions already intervened by the government— which are outside the agreement—amounts to 390 billion pesos, nothing less than 70% of FOBAPROA.

The PRD sees the agreement as inadequate, a whitewash, even a mockery. To find out what underlies it, the PRD has asked the opposition parties that agreed to it to explain why they changed their opinions with respect to FOBAPROA's illegality. It has asked the treasury secretary to explain the extent to which this "solution" has affected the total sum in FOBAPROA and how the obligations contracted would be defined, if not as direct debt. It also asked how this cost would be paid, who would pay and how the Fund's legality would be restored if its operations are illegal— questions that must be answered if a genuine solution is to be found.

TV: indirect censorship

Through the FOBAPROA scandal, the ruling party has also shown how it uses television to bolster presidential designs. Television in itself cannot become an instrument of direct democracy, but it can become an instrument of direct oppression when it responds to the interests of the large business groups that own it. For example, Mexico's two leading chains are linked to the ruling party by shared interests and complicity. This has been seen in the case of both Chiapas and FOBAPROA. As Bourdieu said in examining this medium of mass communication, television encourages indirect censorship, hides what it shows and presents debates that are truly false or falsely true. Mexican television has been cynically seeking to impose its vision of the world on all of society. But despite its great influence, there are points on which some citizens will not let themselves be taken in. The case of FOBAPROA is one of them.

Globalization is not to blame for this

Mexico's endlessly ruling party has tried to attribute the financial crisis to global events or to the opposition for pointing out the government's mistakes in managing the economy. Unable to hide the fact that Mexico is ailing, the incredible argument of Mexico's neoliberal rulers is that things would be worse if it were not for the PRI. But this no longer convinces many people. While globalization is certainly relevant to the financial crisis, unchecked corruption is really to blame and responsibility for this falls squarely on the PRI, which has never been out of office.

In the midst of the global financial crisis, after stock markets have fallen all over the world, leaders in many countries have been forced to abandon demagogic simplifications and propose controls on speculative capital. Globalization requires regulation. And this regulation cannot be effective if it is not democratic. In the case of Mexico, our country will not achieve full democracy as long as it suffers from the state party's corrupting regime.

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