This paper examines the paradoxical outcomes of financial reforms in several Latin American countries during the 1970s, which aimed to end "financial repression" and free domestic capital markets from usury laws and government-induced distortions. By 1983, these reforms led to widespread bankruptcies, massive government interventions, nationalizations of private institutions, and low domestic savings. The paper reviews the intrinsic imperfections of financial markets and the legal prerequisites for their efficient operation. It then analyzes the experiences of Latin American countries, particularly Argentina, Chile, and Uruguay, in financial liberalization. The paper discusses alternative ways to organize domestic capital markets under Latin American conditions and considers policies regarding links between domestic and international financial markets. It concludes by suggesting a mixed approach that combines public and private financial agents, with a focus on maintaining a credible threat of bankruptcy to discipline borrowing and lending. The paper also emphasizes the importance of a healthy political, judicial, and social infrastructure for a stable financial system.This paper examines the paradoxical outcomes of financial reforms in several Latin American countries during the 1970s, which aimed to end "financial repression" and free domestic capital markets from usury laws and government-induced distortions. By 1983, these reforms led to widespread bankruptcies, massive government interventions, nationalizations of private institutions, and low domestic savings. The paper reviews the intrinsic imperfections of financial markets and the legal prerequisites for their efficient operation. It then analyzes the experiences of Latin American countries, particularly Argentina, Chile, and Uruguay, in financial liberalization. The paper discusses alternative ways to organize domestic capital markets under Latin American conditions and considers policies regarding links between domestic and international financial markets. It concludes by suggesting a mixed approach that combines public and private financial agents, with a focus on maintaining a credible threat of bankruptcy to discipline borrowing and lending. The paper also emphasizes the importance of a healthy political, judicial, and social infrastructure for a stable financial system.