Date: January 19, 1995
INTERVIEW WITH CHRISTOPHER WHALEN, CHIEF FINANCIAL OFFICER, LEGAL
RESEARCH INTERNATIONAL, WASHINGTON, D.C. AND RUSSELL MOKHIBER,
CORPORATE CRIME REPORTER.
In March 1992, at the height of U.S. investor interest in Mexico,
the Wall Street Journal printed an opinion column by Christopher
Whalen that cut up the conventional wisdom.
"Bridge loans from the Federal Reserve and the Treasury, the
Brady Plan, and now the prospect of free trade, have since 1988
carried Mexico along on a wave of borrowed money and artificial
optimism," Whalen wrote then. "The $20 billion in Mexican dollar
reserves illustrates the dramatic change in investor sentiment
engineered by Washington, as naive investors rush to purchase once
risky Mexican stocks and bonds at premium prices. And yet, in both
political and economic terms, Mexico's current 'stability' is far more
delicate than Washington or Wall Street will admit."
"Just as a dying commercial bank or thrift uses hot, brokered
money to stay afloat, the Salinas economic program is essentially a
Ponzi, or pyramid, scheme, requiring Mexico to raise ever larger
amounts of cash from abroad," Whalen wrote.
He accurately predicted last month's devaluation of the peso. "By
seeking to attract dollars rather than export goods, the Mexican
economy is headed for a repeat of the 1982 'crisis,'" Whalen
wrote. "When financial inflows no longer cover rising debt-service
costs and surging imports, a currency devaluation is inevitable,
particularly if you remember that Mexico's seemingly impressive dollar
reserves cover less than five months worth of imports, a lower 'cover'
ratio than in 1981."
Now Whalen is in the business of picking up the pieces of the
collapse of the peso in Mexico. He is chief financial officer of Legal
Research International (LRI), a cross border, due diligence
investigative firm. LRI does litigation management, asset search and
seizure, intensive background checks, and other types of due diligence
in Mexico. People burned by the devaluation of the peso turn to LRI to
try and recoup at least part of their investments.
Whalen is also the publisher of the newsletter called The Mexico
Report.
Before joining LRI, Whalen was at the foreign department at the
Federal Reserve Bank in Washington, D.C. (1983 to 1985) and a
financial analyst with Bear Stearns (1985 to 1987)
We interviewed Whalen on January 18, 1995.
CCR: What is your work?
WHALEN: We try to help prospective investor in Latin America go and
not make mistakes. If you invest in a third world country or in a
developing market, you must be ready to act against the assets of the
company in the industrialized countries and in the major off-shore
havens. You have to be ready to seize the assets. Most of these
sophisticated companies and individuals in Mexico, Venezuela or Chile
keep their assets offshore. That is the key underlying point of our
work.
CCR: So, Americans who invest in Mexican companies are investing in
companies that keep their assets offshore?
WHALEN: That's right.
CCR: Why do they do that?
WHALEN: Because of the constant risk of devaluation and the constant
risk of political problems other than devaluation. So, for a Mexican
company, if you need to raise capital offshore, if you borrow dollars,
that means you are better off keeping dollar assets offshore,
otherwise, you are going to get whacked, as they all have been whacked
by the devaluation, and you won't be able to service your debt.
We try to help investors up front by trying to avoid any of the
early mistakes. That means if you do business in Mexico, if you have a
contract with someone in Mexico, you also execute a letter of intent
and a contract specifying New York as a forum for jurisdiction. You
also include some other language that I won't get into that gives you
at least the ability, the option, of going after them here, because
you will never get a hearing in a Mexican court. Any attorney who
tells you otherwise is either ignorant or wasting your time.
CCR: What percentage of foreign investments in Mexico have the kind of
protection you are talking about?
WHALEN: Very few. Unless they have explicit cover from the Ex-Im Bank
or something like that, the investments are mostly naked.
CCR: So, you are into preventive investment?
WHALEN: That's true, but the real situation is that eight out of ten
people who call me have existing problems. They are people who thought
they were buying condominiums, or they have a default on a receivable,
or any number of things.
I thought I was going to write a book starting this month, but
now I'm swamped with these calls. I was going to write a book on the
outlaw state in Mexico -- how the Mexicans have done it to us
again. We have been here before.
CCR: Explain to us the problem, in brief.
WHALEN: The problem is that the Mexican model was never free
market. It was never designed for growth in terms of jobs or
exports. It was designed solely to raise dollars, to borrow
dollars. Most of these dollars were used to either pay for imported
consumer products, energy, or they were siphoned offshore in the form
of flight capital. Carlos Salinas, for example, who has never held a
real job in his life, leaves office with a net worth estimated in the
several billion dollar range. How did that happen?
CCR: How did it happen?
WHALEN: He has received gratuities from those below him.
Carlos Hank Gonzalez, the outgoing Transportation Minister, has
been in politics for 40 years. This man has visible assets. He used
to own the airline. His son just bought control of Laredo National
Bank. This man has billions of dollars in visible net worth --
airstrips, ranches, aircraft, real estate holdings all over the world,
bank accounts. Where did he get the money?
CCR: Where did he get the money?
WHALEN: Corruption. We believe he is one of the biggest money
launderers in the country. So, you have this state that oppresses its
own people, steals elections, lacks transparency, lacks a legal system
that functions. And you ask yourself the basic question -- why do we
believe that they are going to treat foreign investors any better than
they are going to treat their own people? And the answer is that there
is no reason to believe that. In fact, the foreign investors once
again have been badly mistreated, because by and large, of the $70
billion or so that flowed into Mexico over the last five years,
perhaps as little as ten or less went into real hard assets -- that
is, plant and equipment, capital or new factories that could produce
export revenues.
Mexico is extremely overindebted. They probably have more debt
service than they have exports this year. And they are headed for
another default.
CCR: Where did all the money go?
WHALEN: It was used to subsidize a very large current account
deficit. Most of that deficit was consumer products -- food, Barbie
dolls -- all sorts of things from offshore that they really couldn't
afford. But because they kept the peso pegged to the dollar, for a
while it worked. Now, as soon as the Federal Reserve starting raising
interest rates last year, the game was over. The cash flow
disappeared.
Keep in mind, if you have a current account deficit that six --
in other words, you are bleeding $2.5 billion a month -- you have to
raise that amount of money just to stay even. And when you add actual
dollar outflows by investors who were selling their peso assets and
going back into dollars, the thing just collapse. That is what
happened in December. They ran out of money.
The illusion of the North America Free Trade Agreement (NAFTA)
was that somehow this country, Mexico, with all this debt and all of
these other problems, could be a market. But in point of fact, it is
going to be a net cost to the United States for the foreseeable
future. And it is going to be an extremely dangerous place for
investors, both current investors and anybody who has any ideas for
the future.
CCR: Give us an idea of the average American investor, where his money
was invested, and what his situation is like now?
WHALEN: Joe six-pack got a call from his broker a year-and-a-half
ago. Broker tells him, "They are doing another piece of the Telmex
privatization. I think you ought to buy some." He comes in and buy
some at say, $56 a share. He rides it up to $72. Broker convinces him
to hang in there because he thinks its going to $80.
Now, Telmex is trading at about $36. And that is about the loss
the average investor has taken in this thing.
CCR: That's a paper loss.
WHALEN: It depends on what your time horizon is. If you wanted to sit
with it for five to seven years, you might come out even. But my guess
is it is going to go lower.
CCR: But the vast majority of investment was from institutional
investors, wasn't it?
WHALEN: Yes, but they represent individuals. The vast majority of the
$70 billion -- probably $50 billion of it -- was short-term portfolio
investment. It was not direct investment in plant and equipment.
CCR: You predicted the collapse of the peso two years ago. What was
the basis of the prediction?
WHALEN: This was essentially a debt driven ponzi scheme. In other
words, they were borrowing dollars, but they weren't creating any
means of repayment. There were no new assets here.
You have to understand. The Mexican model gives free market
economics a bad name. This is not free market economics. This is
corporate statism. We turn public sector monopolies into private
cartels run by friends of the president. We did not create more
opportunity. We did not really open these markets to competition.
Banks in Mexico, for example, were charging people real interest rates
of 30 to 40 percent over their cost of funds. What is that? That is
usury. The whole system was set for a fall from the outset.
From 1982 on, we loaned them enough money to cover interest on
the old debt. The Brady plan in 1989 and 1990, was repackaging and
doing a facelift with really dealing with the debt problem. Today,
their total debt, foreign, public and private, including the
short-term paper that has been in the news the last couple of days, is
about $166 billion. They can't service that. Their exports this year,
if they are lucky, will be about $35 or $40 billion. Their total debt
service is going to be about $45. So, they are under water.
They are not making any money. They have to go from borrowing
money to making money. They have to go to a Korean or a Chilean model,
rather than emulating us. They can't live the way we do. They can't
get people to hold dollars the way we do. They have to go out and make
money.
CCR: Are you saying that U.S. investor money was hijacked by
government bureaucrats in Mexico and that's how they became wealthy?
WHALEN: Absolutely. For example, all sorts of investment projects went
through the ministry of communications and transport. Whenever there
was a project or a privatization, the senior officers in the ministry
were paid a gratuity by the investment bankers. The investment bankers
are completely culpable in this regard because they knew from the
outset what was going on.
CCR: They were paid by the investment bankers in the U.S. or down in
Mexico?
WHALEN: Both. Usually, what will happen is that the bank or the
foreign company will hire a consultant in Mexico to make the actual
bribe. But it is as if they paid it. They just back channel it so that
it is clean for U.S. purposes. They are obviously violating U.S. law
-- the Foreign Corrupt Practices Act.
CCR: Is the Justice Department investigating this?
WHALEN: No. There is an unwritten taboo vis-a-vis Mexico. You just
don't get the same level of scrutiny on securities issues. There is
no willingness in Washington to take them on.
It is important to draw the parallel between what is going on in
Orange County and what is going on in Mexico. You have fraud, you have
failure to disclose risk, you have failures with respect to
suitability. What are we doing putting retail pension funds and
individual funds into Mexico with the huge currency risk?
The Securities and Exchange Commission (SEC) has totally blown it
on the emerging markets. They have looked the other way. When Mary
Shapiro was at the SEC she would go to these conferences and give
these long talks about how wonderful these emerging markets are. Where
was the scrutiny.
I'm a former regulatory. I have worked in regulatory
environments. I am telling you that this whole situation -- these
offshore funds that are domiciled in the Cayman Islands -- these stink
to high heaven. When you read the order on the Bankers Trust on the
derivatives consent decree, the word fraud appears in their about two
dozen times.
Are you telling me that there is not fraud here with respect to
these Mexican firms? These balance sheets are a fiction. These
companies audit themselves. They hire their own auditors. There is no
arms length relationship between an auditor and a company. It is
almost impossible to do a due diligence report in a traditional sense
in Mexico.
CCR: When the American companies look to invest in Mexico, they must
do due diligence reports, don't they?
WHALEN: They pretend to. They hire a big eight firm. They hire a
couple of local consultants. And they kind of scratch the surface and
say it is okay.
CCR: Are you saying that the U.S.-based accounting firms, investment
firms and fund managers should be investigated by the SEC for fraud?
WHALEN: I believe so. At the very least, for lack of due
diligence. Look at Telmex. Telmex assets and liabilities as put forth
in their prospectuses are ridiculous. That company doesn't have
anything like those sorts of assets. Pemex is another one. They have
sold some bonds here in the U.S. They list reserves and other
operating assets for that company that just don't exist.
The best example is the Carbondos project. This involved Southern
California Electric and a few big broker dealers. The World Bank was
involved at one point, but then they got out. The company is located
in a border state called Coahuila. It along the border with San
Antonio, Texas.
Southern California Edison gets sucked in for $150 million. The
thing is a fraud. I went down there on my own dime to do a due
diligence report.
CCR: For whom?
WHALEN: I was going to testify before Congress. I wanted to use it as
an example. I told them that coal facilities, the washing facilities,
the railroad equipment was all torn up. And they were representing
this as a functioning. It had all been scraped. They were representing
this as a functioning facility.
CCR: What is the status of this investment?
WHALEN: It is dead.
CCR: No, the people at Southern California Edison won't talk about it,
but they haven't gotten any money out of it. They are caught. They are
stuck.
Investors get in there, they think they have a real situation,
and they are caught. They can't sell that situation.
CCR: Isn't that because they are relying on the due diligence that is
being done?
WHALEN: Yes. I'm going to make a small fortune helping people get out
of existing problems. We currently are working with two large groups
of investors who were defrauded on condominium projects in
Mexico. They made the payment to a U.S. bank, and that bank was agent
for the project. We are going to go after the assets of the
individuals who were involved in underwriting these projects. There
were a couple of large hotel chains involved in one. We are going to
go after everyone involved offshore. Again, the Mexican courts are a
complete waste of time.
CCR: So, how are going to hook them in the U.S. courts?
WHALEN: Payment was made here. There were U.S. documents, U.S.
letters.
CCR: Were Wall Street firms involved in these cases?
WHALEN: Not in these condominium cases. The Wall Street firms are
involved in the privatization, the toll roads. These things are all
moribund. These projects don't make money in local currency, never
mind dollars. They are going to have to be bailed out.
In all of these deals, you have an exaggeration of assets, a
minimization or lack of disclosure on liabilities, a total lack of
disclosure on the single biggest risk involved in investing offshore,
which is currency risk.
The price/earnings ratios for a Mexican company are immaterial
compared to the currency risk. They don't matter because the currency
risk is huge. All of these companies are subject to currency risk.
CCR: What does this say about NAFTA?
WHALEN: NAFTA was designed first and foremost, in my view, to
perpetuate political stability in Mexico. It had very little to do
with free trade. Many innocent people were sucked into NAFTA thinking
that we were fighting for free trade, when in point of fact, we were
fighting to keep Carlos Salinas in power and keep him liquid.
The people who sold NAFTA were the same people who were on Wall
Street selling these investment deals -- the largest broker/dealers,
the investment banks, the 15 or 20 big U.S. firms with major
investments down there. This is the group. Look at the USA/NAFTA
membership list. That is it. U.S. Chamber. U.S. Mexico Chamber.
CCR: Whose behind the proposed bailout?
WHALEN: Wall Street -- the Friends of Robert Rubin, as I like to put
it. It is a subset of the group that pushed through NAFTA. It is
basically Fidelity, Trust Company of the West, Alliance -- they have
been huge buyers of Peso T-bills and things like that. They are
caught.
Now, these big funds want to socialize the loss. In the past, we
have been privatizing the profit. I don't see them offering to see
them give back some of their profit to help pay for this.
CCR: You are opposed to the bailout.
WHALEN: Yes. The bailout will not help Mexico at all. It will simply
to their debt.
CCR: But it will help your clients.
WHALEN: I'm not sure about that. I don't work for any banks.
CCR: You say that the bailout is being pushed by Friends of Bob Rubin
and Goldman Sachs --
WHALEN: Exactly.
CCR: What is their interest?
WHALEN: They have clients who are thinking about lawsuits. If you can
keep that exchange rate from sinking further, maybe not as many
lawsuits will be filed, a la the derivatives debacle. Why is Dave
Malpass, who is an emerging market economist with Bear Stearns, going
around saying that the peso has got to go back to $3.50. It is now at
$5.50.
They are all trying to cover their asses. They were all
wrong. They were telling clients to buy after the first evaluation.
CCR: If there is no bailout, what happens?
WHALEN: Foreign bondholders are going to take a big hit, probably 60
to 70 percent of what they hold will be lost. Goldman owns some of
this stuff for their own account.
Let's back up for a minute. Nothing we can do in terms of a
bailout is going to prevent Mexico from going through a terrible
deflationary cycle. You are going to have big bank failures down
there. You are going to have private companies defaulting. You are
going to see banks, commercial borrowers -- all of these people -- who
are out there borrowing dollars in the Eurobond market for the last
four and a half years -- unable to pay. They will call it a
restructuring, they will call it this, they will call it that -- but
it will be a default.
At the end of the day, when people realize that they are not
getting paid, they are going to turn to firms like ours and say,
"Help." And we will help them get paid.
CCR: Despite the bailout, if it happens, this collapse will occur
because --
WHALEN: The domestic situation with peso loans by Mexicans with
Mexican banks is horrific. It is absolutely horrific. If you are a
businessman in Mexico for the last three years, your cost of funds has
been 20 to 30 percent higher than Mexican t-bill rates.
At the beginning of 1994, they were claiming that inflation was
in the single digits. The t-bill rate fell down to 10 or 1l
percent. To finance a little export business, you were paying 35 to 40
percent. Nobody can afford that.
So, what they were doing in those days, they were rolling the
credit. They would give you a little new money. They would capitalize
the due interest. And they would write you a bigger loan. They would
just roll it and pretend that the loan was performing.
But now, at the behest of the foreign creditors, Mr. Zedillo is
imposing austerity. He has cut bank on bank loans. Banks aren't making
any new loans any more. So, guess what is happening? Everyone is
defaulting. You are going to have 60 to 70 to 80 percent default rates
on Mexican loan portfolios, credit card portfolios.
Credit cards in Mexico carry interest rates of 70 to 80 percent
annual interest rate. Nobody pays it.
We had two warnings of this. One was the collapse in Spain at the
end of 1993. Early 1994, Banco Latino in Caracas collapses. The whole
Venezualan banking system is now gone. They have had to refund the
deposits. They have now nationalized the whole banking system in
Venezuela.
The same thing is going to happen in Mexico. They are going to
have to refund deposits. They will have rioting if they don't refund
everybody's deposit at par. They will have to print money to do it,
because they don't have the money. That is a lot of cash -- $80 to
$100 billion worth of deposits.
CCR: The politics of the bailout. The argument against the bailout is
just starting to see the light of day. It is being pushed by the same
people who fought against NAFTA and the General Agreement on Tariffs
and Trade (GATT) -- Pat Buchanan, Ralph Nader, Ross Perot, Jim
Hightower.
WHALEN: It is a populist attack versus an elitist bailout.
CCR: That didn't stop NAFTA or GATT -- nor will it stop the bailout,
will it?
WHALEN: I'm a little more optimistic this time, because it is so much
money, and because this is half the Republican's tax cut.
CCR: But it is just a loan guarantee, isn't it?
WHALEN: Mexico will draw on the guarantees, I can guarantee it. They
will draw on the full amount if they can, and they will be defaulted
on.
CCR: President Bill Clinton said today that this bailout package will
not cost the American taxpayer one penny.
WHALEN: Clinton is mistaken.
The banks have said to the politicians, "If you don't do this, we
are in big trouble." People like Lawrence Summers, Robert Rubin and
Clinton turn around and say, "We have to save the financial system."
That is what Greenspan has been saying to members of Congress. But
that is not true.
The banks will take a big hit. It would probably cause much pain,
but we would be better off without the bailout. At the end of the day,
if we give them $40 billion, we are going to have to give them $100
billion. Forty billion is not the end of it. If we go down this road,
it is going to cost us much more than $40 billion.
CCR: So you give the campaign to defeat the bailout a chance?
WHALEN: Absolutely. People have to realize that NAFTA was an
illusion. Carla Hills and Ambassador Katz said that we were going to
create jobs as a result of NAFTA and that there was going to be a net
benefit for the U.S. Now, both Hills and Katz have recanted. They have
admitted that those statements were wrong.
Our relationship with Mexico is closer to Germany's relationship
with East Germany and Central Europe than it is to a free trade
agreement with Canada. Mexico is in desperate need of capital. They
are badly governed. They have a regime that does not understand
business and doesn't understand how to create real growth.
The big surprise three or four years down the road will be when
their oil exports disappear. They haven't been putting enough money in
capital.
The other big joke is privatizing Pemex. The company has nothing
to sell. The company has more liabilities than assets. They haven't
spent any money in capital in 30 years. Most oil companies plow a
third of their oil revenues back into capital. Pemex puts back less
than five percent. It is a heavily decapitalized company that has been
run on a current basis for years and they have milked the thing dry.
CCR: Do you believe that people like Summers, Rubin and Kantor know
what they are talking about and they are lying to the American public?
WHALEN: Yes. If they told the Congress the truth they would never get
this bailout package through.
CCR: The truth is --
WHALEN: The truth is that this is a bailout for wealthy Wall Street
bankers and the Mexican elite. Most the business people in Mexico knew
about the devaluation of the peso before it happened and moved
billions of dollars out of the country. In fact, they probably
precipitated the devaluation by getting a run going on the peso.
CCR: How did they know the peso was going to fall?
WHALEN: They went and beat up the president in a meeting on December
18. They wanted the president to attack in Chiapas and he agreed that
he would. The next day, big businessmen moved billions of dollars out
of Mexico in one day.
CCR: They moved it because --
WHALEN: They knew the devaluation was coming. They knew the real
figures at the Banco de Mexico. The bank ran out of money. It is not
that the bank ran out of money. They were forced to devalue. The head
trader at the Banco de Mexico said "We are done with the $3 billion in
reserves, what do I do?" They cut the rate. If they had kept the
exchange rate where it was, they would have completely run out of
money.
CCR: You are a free-market person who has written in the Nation
magazine, a liberal --
WHALEN: I'm a libertarian. I'm to the right of Attila the Hun on
economics. William Greider said that I'm a "small r" republican and a
"small d" democrat. And that's fine with me.
I'm a Goldwater/Taft Republican. I was against NAFTA not because
of free trade. Free trade is fine. This isn't free trade. When you
have our workers competing against slave labor, people whose real
wages have been falling for 15 years -- this isn't competition. This
is slavery. Jefferson said that commerce between master and slave is
barbarism. And that is where we are today. This is mercantilism. This
is not free trade.
Mexico is our colony. We are a colonial empire. And this is one
our biggest holdings. We have to from time to time go down there and
bail out our general contractor, the ruling party that runs Mexico for
us -- it keeps labor cheap, keeps dissent under control. But that may
not happen this time. The dissent in Mexico over economic issues is at
an explosive level right now. They would never go to war over
democracy. But they will go to war if they can't buy milk. And that is
where they are now.
CCR: Will the friends of Bob Rubin prevail on the bailout?
WHALEN: They may win the early battle, but I suspect that this going
to be a terrible scandal for the democrats. I already have some people
working on this. Rubin should have recused himself from this entire
subject. He has a conflict of interest on Mexico that is a mile
wide. If he can't see that, then it shows you how bad off this
administration really is.
CCR: Why are Dole and Gingrich taking a pro-bailout line?
WHALEN: I think they were intimidated by Rubin and Greenspan.
Greenspan said "You have to do this or else." They told them it
wouldn't cost anything.
[Contact: Christopher Whalen, Legal Research International,
3701 Connecticut Avenue, Suite 200 N.W. Washington, D.C. 20008.
Russell Mokhiber
Essential Information | domain: russell@essential.org