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Mexican Crisis Holds Lessons for U.S. (DAVID LUHNOW, 10/13/08, Wall Street Journal)

[M]any of the lessons of the Tequila Crisis and others like it apply to the U.S.

Among the most important: Don't be ruled by ideology -- stay flexible and act decisively. Help those with mortgages they can't pay. Take stakes in troubled banks. Don't expect to turn a profit on government investment.

"Do whatever it takes to restore confidence," Mr. Ortiz said in an interview. "Once you lose it, it's very difficult to get it back."

In today's globalized financial markets, once trust is blown, the markets will often overreact and the crisis will spin out of control. As a result, policy makers may need to take steps they never imagined taking. The longer they wait, the worse the pain. We are already learning this lesson the hard way.

In nearly all financial crises, the government usually reacts too slowly at first. In the case of the U.S., the Federal Reserve and Treasury tried to put out each fire as it flared, first bailing out Bear Stearns, then insurance giant AIG, then lender Washington Mutual.

At some point, an event happens that causes the market to lose confidence. In Mexico, it was a failed attempt by the central bank to gradually devalue the peso, a move that destroyed the bank's credibility. In the U.S., it may have been letting Lehman Brothers Holdings Inc. fail, a move that created uncertainty among investors as to which financial institutions would be saved and which wouldn't.

Since then, authorities in both the U.S. and Europe have been scrambling to catch up to the crisis. "Despite all of the measures that have been taken, the authorities are now behind the curve ," Mr. Ortiz said in remarks Sunday to the Institute of International Finance in Washington. "It's better to err on the side of doing too much rather than doing too little."

In the end, Mexico acted directly to tackle the underlying problem of bad debt by launching a program to restructure mortgages, with banks, borrowers and the government all sharing loses.

The key to a mortgage restructuring: "Keep it simple," says Vincent Corta, who led Mexico's bank bailout program for several years. "We tried fancy schemes that didn't work. We ended up saying, 'OK, you pay half your mortgage, and we'll pick up the other half.' "

Mexico's bank bailout itself didn't ward off a major economic recession, although the country was also dealing with a currency crash. But within a few years, Mexican banks were healthy and the economy was growing again.

What lasted longer was political bitterness linked to the bailout, which was seen as having helped rich bankers at taxpayers' expense.

At the time I thought the Lehman decision was a bit of sensible line-drawing by Mr. Paulson, but I couldn't have been more wrong. It was foolish.

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IMF and G-7 Say They Will Not Let Banks Fail: Western financial leaders assure an anxious world that all bank deposits will be guaranteed and any necessary steps will be taken, however unorthodox. (Pete Engardio, 10/13/08, Der Spiegel)

Now the great confidence game begins. In high-powered forums that accompanied the G-7 and International Monetary Fund in Washington this past weekend, Western financial leaders sought to assure panicky bankers and money managers in no uncertain terms that all of the measures needed to halt a worldwide meltdown are in motion.

While short on the details many market analysts had hoped for, the broad brushstrokes of forceful, coordinated action by Western governments were unveiled: No more Lehman Brothers-like failures of major financial institutions will be allowed. All bank deposits will be guaranteed. The banking systems of the G-7 nations will be flooded with almost unlimited liquidity. And if all that fails, any other tool -- regardless of how economically unorthodox -- will be used if needed. The British government's widely anticipated move to take majority control of the Royal Bank of Scotland Group and HBOS is expected to be the first of many such actions across Europe. Fifteen European Union countries that use the euro as currency met in Paris this weekend. They pledged to provide guarantees of new bank debt through 2009, authorize the purchase of preferred shares to invest in problematic banks, and provide recapitalization funds where needed.

The message of Banque de France Deputy Governor Jean-Piere Landau at an Oct. 12 breakfast meeting at Washington's elegant Willard Intercontinental Hotel was typical. "I think the conditions for stability are met," Landau declared. "It is very difficult to see why there will be no stabilization." At a nearby hotel, Richard Fisher, president of Dallas Federal Reserve, told a crowd of international bankers that U.S. authorities "can and will restore order in the credit markets" and "will continue to pursue every avenue and every option."

Posted by Orrin Judd at October 13, 2008 7:51 AM