There aren’t many things we know for sure about Brazil these days. As Gabriel Petrus, a political analyst at business consulting firm Barral M Jorge, told Bloomberg last week, “never before in history have we had so little certainty about tomorrow."
That said, we do know one thing with absolute certainty: BTG Pactual is most assuredly not “Better Than Goldman”, as its billionaire CEO Andre Esteves once joked.
How do we know this? Because Lloyd Blankfein would have never been arrested at his home and then hauled off to jail with “no tie and light stubble on his face” like Esteves was last Wednesday.
As we documented in “CEO Of Brazil's ‘Goldman Sachs’ Is Arrested” and then further in “Market Panics After Arrest Of Brazilian Lawmaker”, Esteves, along with prominent lawmaker Delcidio Amaral, is accused of attempting to bribe a former Petrobras director who was set to give testimony to federal prosecutors in connection with the Carwash probe. Esteves resigned his post last Sunday.
As we went on to detail, BTG clients pulled nearly a third of their money (around $1.1 billion) from the bank’s fixed income funds in the space of 48 hours after news of Esteves’ arrest hit the wires. By Thursday of this week, BTG’s 10 fixed-income funds had lost half of their AUM, or around $1.8 billion.
And the debt (which rallied this morning after the news of the credit line hit):
Although outflows have slowed to a little over BRL200 million per day, the cash crunch caused the firm to sell its stake in Rede D’Or Sao Luiz SA, Brazil’s biggest hospital chain, for some BRL2.4 and has prompted the bank to seek a buyer for its private banking arm, BSI, and for a debt collection business it owns. On Friday, we learn that bank has tapped a $1.6 billion lifeline from Brazil’s deposit guarantee fund. "Credit from the deposit-guarantee fund will help BTG gain time to weather the crisis as it sells assets to raise funds", a person with direct knowledge of the company’s strategy told Bloomberg earlier today.
But that likely won't be sufficient, some say. Wholesale funding is apparently drying up, causing BTG to pull back on trading in an attempt to preserve cash. And before you start thinking JPM-Bear of BofA-ML, note that some manner of shotgun merger isn't likely here. As Bloomberg puts it, "there simply aren’t many Brazil lenders with the heft to take on BTG."
Needless to say, a government bailout at this point is a laughable proposition. The country is in a state of legislative gridlock as Rousseff desperately tries to shore up the budget while facing impeachment calls from lower House Speaker Eduardo Cunha, who the Workers' Party is attempting to remove before he gets a crack at ousting the President. “As we saw from the credit line, the bank is trying whatever it can to raise money and they seem to be doing it in an effective way,” a fixed income strategist who spoke to Bloomberg said, before adding that no matter how "effective" BTG is at securing funds, people "don’t like to see the headlines and that is why they are withdrawing their money - it shows the panic that is going on from the investors’ perspective.”
“It all boils down to the liquidity on one side of their balance sheet versus the other. The reality is that people often make investments that are less liquid than their liabilities,” said Wilbur Matthews,San Antonio-based Vaquero Global Investment LP.
Well yes, Wilbur, that's how the system works or, in cases like this, doesn't work. From giant investment banks to your friendly neighborhood lender, everyone is borrowing short to lend long. The whole thing is one giant, duration mismatched ponzi scheme and when some exogenous or endogenous shock takes the "confidence" out of the "confidence game," it's liquidation time as people come wanting their money which naturally, is tied up in illiquid "investments."
It's BTG now, but as we saw in 2008, it can just as well happen anywhere when something suddenly spooks investors and, more importantly, counterparties. What happens next for BTG is anyone's guess but you can be sure that considering that fractious political environment, and considering the state of the economy, finding a "solution" will not be easy.
And just to underscore how dire the situation truly is, moments ago Fitch just cut the bank to junk:
- BANCO BTG PACTUAL CUT TO JUNK BY FITCH, MAY BE CUT FURTHER