The Prize: The Epic Quest for Oil, Money, and Power

by Daniel Yergin

Silva Herzog began making secret trips to Washington, D.C., leaving Mexico City on Thursday night in order to see Paul Volcker, Chairman of the U.S. Federal Reserve System, on Friday. He would then fly back to Mexico City by Friday night so that he could appear at social events and no one would guess that he had been out of town. He arranged a $900 million emergency loan from the Federal Reserve, but it was dissipated in a week because of the capital flight. On August 12, 1982, Silva Herzog came to the conclusion that improvisation would not work; there was no way that Mexico could pay the interest it owed. It could, of course, default. But that might cause the international financial system to collapse. The loan exposure to Mexico of the nine largest American money center banks was equivalent to 44 percent of their total capital. How many of America’s and the world’s banks would fall in the first wave, and how many more would be pulled down by them in the second? And how could Mexico function in the world economy?