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Borrowing $4,000 from his dad
The bet that failed
Ray Dalio started Bridgewater in 1975. By the early 1980s, emerging countries were carrying heavy debt, and he calculated that they would not be able to pay it. That was a very controversial view, and after Mexico defaulted he was asked to testify to Congress about what might happen to the economy.
He expected a disaster, and he could not have been more wrong. He lost money for himself and for his clients, laid off everyone, and ended up so broke that he borrowed $4,000 from his dad.
What he changed
The choice in front of him was to put on a suit and tie, commute, and work for somebody else. He knew he wasn't very good at working for people. Before the collapse he had little humility and insisted he would be right. Afterward he wanted people to tear apart whatever he thought, and he taught himself to diversify his bets so that he cut his risk without cutting the upside.
From that bottom, Bridgewater kept climbing until it became the largest hedge fund in the world.
Why did Mexico's default rattle the banks?
Mexico told creditors in August 1982 that it could not make its scheduled payments on foreign debt. Many large American banks had lent heavily to Latin American governments through the 1970s, and for some of them those loans were comparable in size to their entire capital. Regulators and the International Monetary Fund organized emergency loans and rescheduled payments so that the banks would not have to write the debts off at once.
How far did the debt crisis spread?
Within months Brazil, Argentina, and a long list of other developing countries also needed to restructure their debts. Lending to the region dried up, and many Latin American economies stagnated through the 1980s, a period often called the lost decade. The crisis was only resolved in 1989, when the Brady Plan, named for US Treasury Secretary Nicholas Brady, let countries swap their bank loans for tradable bonds.
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