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Lies, Damned Lies, and Veja-El Clarín

Source: Brasil247

Translation: C.E.B.

On May 30, 2015, the Brazilian newsweekly Veja accused Máximo Kirchner, son of president Cristina Kirchner, and ambassador Nilda Garré of maintaining offshore bank accounts.

The story was immediately picked up by the Argentine daily El Clarín, a principal opponent of the Kirchner government.

The problem: It was all a lie, as the very bank where the accounts were supposedly opened confirmed. Read an account of the incident by Marcelo Justo of Carta Maior.

Veja has embarked on these sorts of agitprop campaigns many times before. Consider the phony list of Swiss accounts of government, party and police officials, shown above.  Continue reading


Odebrecht | Risks and Riches

Maracanã undergoes reconstruction

Maracanã undergoes reconstruction

2013 has so far been a time of trials for the Brazillionaire, a caste that has benefited significantly in recent years from the Lula government’s ambition to breed and incubate Brazilian multinationals with acquisitive power — think of JBS-Friboi’s takeover of the venerable Swift & Co.

The most visible sign of decline has been the performance of companies in the Eike Batista group, whose OGX petroleum subsidiary leads losses recently in the BM&FBovespa and is reportedly seeking outside and foreign investment.

Via Brasil 24/7.

With close ties to PT, Odebrecht carries $R 62 billion in debt

The Odebrecht group, which operates in the petrochemical and biofuels markets, produces nuclear submarines, participates in the management of the Maracanã football stadium and is one of the companies benefiting most from the amended Port Law, has run up debts equivalent to 3.5 times its net assets of R$ 17 billion.

Continue reading

Broker and Broker | A Lean Year for Intermediaries


Member brokerages of ANBIMA — Brazilian Association of Capital and Financial Market Institutions

Source: Valor Econômico— Portal ClippingMP.
Translation: C. Brayton

Frustrated by growing costs, most Brazilian independent brokerage houses will close out 2012 in the red. In a survey of the 27 largest Bovespa traders not tied to the major banks, 16 lost money in the first three quarters of 2012.  Among the  houses operating in the black, only one reported profits higher than R$1 million — US$500,000.

The year was notable for internal restructuring and new product distribution strategies. With a view to the future, brokers in this sector are searching for partners in order to survive.  The goal is to rationalize and reduce costs to compensate for lesser margins.

Edemir Pinto, of the BM&F: “Brokerage houses need to think about consolidation.” Continue reading

Brazilian Brokers to Change Exchange?


Sensitive to the challenging conditions faced by brokerage houses and issuers, the BM&FBovespa is studying a plan to restructure the Brazilian brokerage industry. The rules require intensive changes, says Edemir Pinto, CEO of the BM&FBovespa. “The time has come to review this whole system we have here in Brazil.,” he said.

The stock exchange has formed a working group with Anbima, the association of capital and financial  markets companies, and Ancord, the national association of brokerage houses and distributors.

The group will analyse the market and propose changes to the federal government. The Banco Central and the Brazilian SEC-equivalent CVM) support the study and dispatched personnel to follow the process as auditors.

For a September 2012 interview with Pinto by the CME Group — in PT-Br — see here.

The two discussed a buzz-making remark by  Bill Clinton, «I would bet on Brazil first,” and outlined a partnership with the CME Group to offer S&P 500 e Ibovespa futures through the Globex and PUMA order routing platform.

The global preferred strategic partnership between BM&FBOVESPA and CME Group allows their customers to trade contracts of both exchanges in real time. Continue reading

Risk Shopping | Brazilian Cases in Point


Source: Folha de S.Paulo.

Risk evaluation agencies assigned high ratings and low risk to several Brazilian banks that recently failed.

Banco BVA, for example, received a BBB rating from ratings agency LF Rating four days before suffering a Central Bank intervention on October 19.

Austin Rating assigned  BVA a BBB+ less than two months before its collapse.

The same occurred with  Cruzeiro do Sul, liquidated in September with R$ 3.1 billion in debt, and  Panamericano, which underwent a federal intervention on November 9, 2010.


Esteemed customer: you will be able to access funds in your StarCash account until December 13, 2012. Starting December 28, 2012, control will pass to Banco Bonsuceso, which will deal with new cards, card replacements, and so on

Risk ratings affect companies in one of two ways. On one hand, investors use the ratings as a guide to potential investment. Some funds invest exclusively in paper declared risk-free .

On the other hand, financiers evaluate risk using these ratings: the lower the rating, the more expensive it is to borrow money.

With the blessing of the ratings agencies, pension funds such as Petros, Brazil’s second largest, is able to invest in riskier fixed income paper, stamped “safe” by the agencies.  Petros had R$ 80 million in three funds with ties to BVA and invested in the bank’s bonds.

Shopping for Ratings

A practice still allowed by the market aggravated the problem: the so-called “shopping mall of ratings.”Companies needing positive ratings request a preliminary report from a given agency. If the rating is low, they try again with another agency, and so on until receiving the rating desired.

Since it is not yet required to make public these preliminary findings, the investor never suspects that the company has a bad credit rating.

To counter the negative effeects of this practice, the Brazilian SEC — the CVM — will as of January 2013 require the publication of preliminary ratings reports on the Web site of the rating agency

“This new CVM rule should mitigate the «ratings shopping center»  deve mitigar esse shopping de ratings,” says Rafael Guedes, CEO of Fitch Ratings Brasil.

“In Brazil, every agency has its own criteria, and there are major discrepancies,”say Sergio Garibian, ratings director, Standard & Poor’s, Latin America.

In February 2006, Cruzeiro do Sul exited its contract with Fitch, which had assigned it a rating of BB+(bra),  with “elevlalted risk of default.” The same year, the bank signed with Moody’s, which assigned it Baa1 for long-term deposits, and then three months later raised it toA3. Both are considered indicative of investment grade.

Responding to these contradictions, federal deputy Eduardo da Fonte (PP-PE) presented a bill that would make agencies responsible for “damages caused by intentional or negligent conduct in arriving at risk ratings.

“It is not norml for some agencies to classify a bank as low-risk and then watch it go out of business a few days later,” Fonte says. “Either the bank coopted the agency or else the agency is not qualified to rate anyone.”

Erivelto Rodrigues, CEO Austin Rating, says the “shopping mall of ratings” only occur in structures such as FIDCs — investment funds in rights to future receivables.”I don’t believe this happens with companies and banks,” he said.

Para Paulo Rabelo de Castro, CEO of SR Rating, which classified none of the banks in question, “strict regulation is required at a moment when the government is trying to stimulate the market for debentures.”

Brazil’s largest pension fund, Previ only accepts ratings from three agenices: S&P, Moody’sand  Fitch. Funcef, meanwhile, buys private debt instruments that are evaluated by at least one ratings agency, it matters not which.

Funcef was holding notes from both  PanAmericano and Cruzeiro do Sul. In the  Cruzeiro case, it received its entire investment back thanks to a special guarantee clause.

The Risk Mall 101

I can hardly claim to be an expert on the subject, but a study byVasiliki Skreta and Laura Veldkamp — «Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation» seems like a good place to start. The abstract:

Many identify inflated credit ratings as one contributor to the recent financial market turmoil. We develop an equilibrium model of the market for ratings and use it to examine possible origins of and cures for ratings inflation. In the model, asset issuers can shop for ratings — observe multiple ratings and disclose only the most favorable — before auctioning their assets.

When assets are simple, agencies’ ratings are similar and the incentive to ratings shop is low. When assets are sufficiently complex, ratings differ enough that an incentive to shop emerges.

Thus, an increase in the complexity of recently-issued securities could create a systematic bias in disclosed ratings, despite the fact that each ratings agency produces an unbiased estimate of the asset’s true quality.

Increasing competition among agencies would only worsen this problem. Switching to an investor-initiated ratings system alleviates the bias, but could collapse the market for information.

The lede:

Most market observers attribute the recent credit crunch to a confluence of factors: excess leverage, underestimation of risk, opacity, lax screening by mortgage originators, improperly estimated correlation between bundled assets, market-distorting regulations, a rise in the popularity of new asset classes whose risks were diffcult to evaluate, as well as credit rating agency conflicts of interest.

This paper investigates the misrating of structured credit products, widely cited as one contributor to the crisis. Our main objective is to critically examine two arguments about why ratings problems arose and to show how combining the two could produce a ratings bias that imperfectly informed investors would not anticipate.

One argument focuses on asset issuers who shop for the highest ratings. The New York Times explains: The banks pay only if [the ratings agency] delivers the desired rating . . . If Moody’s and a client bank don’t see eye-to-eye, the bank can either tweak the numbers or try its luck with a competitor like S&P, a process known as ratings shopping.

A final thought: the Sadia and Aracruz derivatives crises of 2007 — exchange rate swaps — seem to illustrate the same logic. Risky assets kept off the books until the roller coaster came to a full stop..

In reality, the two largest agencies, Moody’s and S&P, account for 80 percent of market share. When a structured credit product is issued, the issuer typically proposes a structure to an agency and asks it for a \shadow rating.” This rating is private information between the agency and the issuer, unless the issuer pays the agency to make the rating offcial and publicize it. In the model, an asset issuer can purchase and make public one or two signals about the payoff of an asset. We call these signals “ratings.” After choosing the number of ratings to observe and which ones to make public, the issuer holds an auction for his assets. After each investor submits a menu of price-quantity pairs, the asset issuer sets the highest market-clearing price for his asset, and all investors pay that price per share.

Bingo! | Delta Goes Down


Source: Delta defines bankruptcy recovery plan — Portal ClippingMP.

In the annals of contemporary Brazilian bribery scandals, probably none are more painful than the saga of the public works contractor Delta and its ties to organized crime boss Carlinhos Cachoeira — Charlie Waterfall, whose principal business is the murky world of smuggling, numbers racketeering, and “nickel-hunter” gambling machines.

One of Brazil’s largest contractors, Delta had been a star player in the PAC — the federal growth acceleration program — and was afforded the honor of joining the consortium to rebuild the Maracanã Stadium in Rio de Janeiro.

Now, it would be difficult for it to obtain a bicycle-powered newspaper route.

Delta has since voluntarily withdrawn from Maracanã and most other projects.

A congressional investigation is underway — wrapping up early, actually, after company officials and other parties took the local equivalent of the Fifth — but federal police say they have ample evidence of wrongdoing — including the involvement of journalists in character assassinations of Mr. Waterfall’s enemies..

Delta executives appeared on court-ordered wiretaps discussing how to cheat federal contract bidding procedures and infiltrate regulatory agencies, among other things.

And so the rise and fall of Delta turns out to be a textbook case of moral hazard.

Delta intends to pay its non-financial creditors with equipment. Its plan is to reduce its inventory of idle equipment by reducing the number of projects contracted for since January 2012 by  50%. Banks and financial institutions will receive payment starting in June 2014,  payable in 72 monthly installments and corrected by CDI+1%, according to a recovery plan filed yesterday in a Rio de Janeiro court. The creditors assembly is scheduled for December 7. Bradesco is the company’s largest creditor. Continue reading

Risco Brasil | Courts Uphold Derivatives Contracts

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so  far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are  potentially lethal. –Warren Buffet 2002

“It’s an established fact: corporate governance in Brazil is divided into two periods: before the derivatives scandal and after it.” –Rodrigo Zeidan, Fundação Dom Cabral.

According to research performed for the Folha de S. Paulo — and not, for some reason, by the FSP — courts are tending to uphold the caveat emptor school of thought on the subject of

I translate. Author: Adriana Aguia, Valor Econômico Portal ClippingMP.

The exchange-rate derivative contracts that pressured the finances of such major business groups as Sadia, Aracruz e Votorantim, causing billions of dollars in damage during the panic of 2008, are now being  recognized as valid by the Brazilian judiciary.

During the 15 minutes of fame generated by the Aracruz and Votorantim “too big to fail” derivatives cases, Brazil’s SEC, the CVM created and issued a new accounting form — above — in which derivatives contracts would be reflected on an appendix to the quarterly books.

In 2010, CVM issued Instruction 486/10,

which deals with the execution and clearing of derivatives contracts negotiated or registered in organized trading venues: the stock market, the commodity and futures market, and the organized OTC.  The main objective of Instruction 486/10 is to support information-sharing on derivative transactions conducted in the market or in an OTC by the oversight bodies of the stock, commodities and futures exchanges, in keeping with certain recent and unprecedented tendencies in the Brazilian market. Continue reading