by Mark Scheinbaum
American Reporter Correspondent
August 7, 2002
Lake Worth, Fla.
IN URUGUAY, A WEIRD MONEY GAME INVITES U.S. BROKERS
LAKE WORTH, Fla., Aug. 7. 2002 -- I'm not an investment banker in Uruguay nor do I play one on television. But what if - just what if, I'm on to something here?
I literally shook my head upon awakening at my usual 4 a.m. the other morning to check international markets, to clear the cobwebs and my ear drums when I heard that U.S. Treasury Secretary Paul O'Neill was enroute to the capital of Uruguay with a $1.5 billion bailout check to save the South American country's banking industry. Economic anarchy has ruled nearby Argentina for a year and there was no checkbook from Washington. Brazil's currency is in the tank. Venezuela's political and economic woes continue. So why the sudden help to Uruguay? My suspicious mind flashed back to the U.S-arranged international loans to Mexico during the Clinton administration. Talk was, that as much as $20 billion was hastily arranged to prop up a sick peso, which threatened to infect "emerging markets." Similar currency problems in Thailand, Indonesia and other countries had lead to recessions and violence. When the Mexican loans were paid off, in some cases ahead of schedule, the Clinton administration patted themselves on the back for a swift response to a hemispheric emergency. But how needed was the action? Critics pointed out that Treasury Secretary Robert Rubin, former vice-chairman of Goldman Sachs, spearheaded the Mexican rescue. When first appointed to the No. 2 Treasury post, he had to wiggle out of confirmation-hearing questions about a juicy letter to his former Goldman Sachs clients which told them, well, his door was always open to help them. It was reported at the time that one of the largest, if not the single largest underwriter of Mexican debt instruments was Goldman Sachs. A massive default of Mexican obligations would hurt Wall Street, but perhaps devastate Goldman Sachs. Now comes a new administration and Uruguay. One month ago I was checking plane reservations to Uruguay and Argentina. Fortunately, I never went. The early thoughts of a trip south came when a number of individual and institutional clients felt that there were huge money management opportunities cropping up in Uruguay. Most of the newfound interest in the Latin America's home of European culture, urban guerillas, class conflict, and the international Jet Set was due to the misfortunes in Argentina. The flights last a few short minutes from Buenos Aires and were heavily booked. The ferries from Argentina were also crowded and only took a few leisurely hours. Wealthy and not-so-wealthy Argentines and the international community there were reportedly flocking to Uruguay, and were looking for U.S. brokers and U.S. guaranteed investment products and bond managers to bring some stability to their dwindling bankrolls. Many Argentines (restricted to small withdrawals of an official peso, an unofficial devalued peso, and "scrip" issued in each geographical jurisdiction), were probably legally prohibited from making the transactions the travelers had in mind in Uruguayan banks. But there were still thousands of diplomats, resident aliens, and foreign businessmen in Argentine who certainly were not prohibited from scurrying to nearby Uruguay for "safety" and higher investment returns. The investment banking conglomerate most mentioned to me was Citigroup. Going back to the old days of First National City Bank of New York and later just called "Citibank," the new Smith Barney-Travelers Insurance-Citibank consortium had long been a Latin American powerhouse. Citibank gives a U.S. presence of security and stability to people stepping into a branch in Caracas or Cancun, and hires many of the top local investment and economic talent to build local "relationships." It hasn't escaped me that the same Robert Rubin seems to be the power behind the throne at Citigroup. Some folks think he was also the catalyst for some of the corporate governance problems in the U.S.A with his lobbying for an end to the Glass-Steagall Act. This law, born of the corruption of 1929, prevented banks from doing brokerage business, brokers from doing insurance business, etc. The law had to be repealed (with plenty of grease from lobbyists) to permit the Citigroup merger with Travelers - and changed it was. Rumors about the exciting opportunities in Uruguay began to fade, and I started to wonder if the small country would emerge as a Switzerland of Latin America (as it once claimed), or a Lebanon of Latin America. At the peak of wide open prosperity (and corruption) in Beirut, banking, customs, and immigration rules seemed not to matter to anyone. In a few weeks the global recession not only increased its hold on Uruguay, but the already wobbly banking system started to tumble. The technical reasons why this happened are not only beyond my areas of expertise, but probably beyond my comprehension. What I would like to at least try to understand is this: what was the pressing, consuming need to particularly target the banks of Uruguay for personal and swift attention at this time? Could it somehow be due to the underlying investments in these banks themselves? Could it be some high-powered Wall Street connections? Could it be Citigroup?
Mark Scheinbaum is chief investment strategist for Kaplan & Co. Securities., BSE, NASD, SIPC www.kaplansecurities.com