As Brazil Devalued, Some Got Rich
By SIMON ROMERO
Sao Paulo, Brazil -- While many Brazilians are fretting over the effects of currency devaluation, Roberto Ruhman is celebrating.
Ruhman, managing director of Banco Matrix, guided his bank to spectacular profits because of Brazilian government's decision more than two months ago to abandon a system that had kept the currency artificially high in value.
In January alone, Matrix almost quadrupled its earnings for all of 1998, thanks to its prescience in betting that the currency, the real, would fall. "We seized the opportunity that existed for us to profit when the shift in exchange-rate policy arrived," Ruhman said. Matrix, a well-known investment bank, is not alone. More than a dozen banks, some of them U.S. institutions such as J.P Morgan and Citibank, also had huge profits after the devaluation, according to preliminary figures from Austin Asis, a bank analysis firm. Chase Manhattan is at the top if the list, with earnings of about $150 million in January, more than double its net income in Brazil last year. At a time when high interest rates and diminished foreign investment are crimping the economy, the banks' financial results have touched off a debate over the fairness of a system that has allowed a handful of big and rich institutions to profit while the population as a whole is suffering. "As a citizen I feel indignant," said Renato Janine Ribeiro, a professor of political philosophy at the University of Sao Paulo. "And as a critic of the political system, I see this as a continuation of a trend in which the government is being manipulated by a financial system without much responsibility." The concentration of riches among the few is nothing new in Brazil, a nation of 165 million known for its skewed distribution of wealth. Although changes carried out by President Fernando Henrique Cardoso have improved things somewhat, the richest 10 percent of the population make an estimated 44 times what the poorest 10 percent do, in an economy where the per-capita income is roughly $250 a month, according to government figures. While some banks have come under scrutiny by left-wing members of Congress over accusations that they used inside information before the devaluation, most banks profited legally, either by purchasing government bonds linked to the value of the dollar throughout last year or by purchasing currency-futures contracts that helped insulate their exposure to the Brazilian currency. "Any reasonable person knew there would be a change in currency policy and prepared for it," said Paul Bydalek, president of Atlantic Rating, a Brazilian bank rating company. Brazil, which has the most complex financial system in Latin America, allows banks and other companies plenty of ways to profit in times of crisis, and not many of them involve traditional lending. During the times of hyperinflation, for instance, banks prospered largely by investing in high-yield government bonds. Today, most large banks maintain offices in tax havens like the Cayman Islands, where they can keep dollar-denominated accounts out of the sight of the central bank. Some of the country's larger banks have subsidiaries in Argentina, the United States or other countries, allowing them to spread their risk over several currencies. Or, banks can buy and sell contracts on the Bolsa de Mercadorias e Futuros, the world's sixth-largest futures exchange, with 86 million contracts negotiated last year. Not all banks amassed profits from the devaluation. Banco Fonte Cindam, a Rio de Janeiro-based investment bank, was sold to Banque Nationale de Paris earlier this month after it lost 25 million reais, or about $13 million, betting that the real's value would remain stable. Banco Boavista, which is part-owned by Credit Agricole of France and Grupo Espirito Santo of Portugal, opted for a large capital injection to cover losses in its investment funds. Banco Marka, another Rio de Janeiro investment bank with an active trading desk suffered losses in the aftermath of the devaluation. Nonetheless, some of Brazil's industrialists are upset over what they see as unequal treatment from the monetary authorities. "With interest rates where they are, it's clear the government is still not that concerned about the productive sector," said Fernando Bezerra, a senator from the state of Rio Grande do Norte and president of the National Industry Confederation, in a telephone interview. Bezerra's complaint, although not new, has been given new life after Brazil's agreement with the International Monetary Fund. Under the accord, officials expect the gross domestic product to shrink as much as 4 percent this year, weakened partly by an 8 percent drop in industrial production. Domestic interest rates of more than 40 percent, combined with a scarcity of financing from abroad, have deeply wounded Brazilian industry, which suffered a 2.3 percent drop in production last year. Despite the complaints about banks that were enriched by devaluation, there are advantages in having a healthy banking industry. As officials from Cardoso's government have argued, the economy is better off without the type of banking crisis that has damaged developing economies like those of Russia, Indonesia and Thailand. Since the start of the president's first term in 1994, the central bank has acted to ease the takeover of ailing banks by healthier ones. Foreign banking companies including HSBC Holdings, Banco Santander and ABN Amro acquired Brazilian banks with extensive retail operations, introducing new levels of competition. The central bank has sometimes financed these takeovers with its own funds. Then, there is the discussion spurred by this latest example of Brazil's disparities. "We Brazilians are trying to understand what brings us wealth and what makes us poorer," said Nilton Bonder, a rabbi and author of "The Kabbalah of Money." "We see an economy which is a sort of weakened system that allows things that could be immoral but are not illegal," he said. "It's as if an economy which should be a reality has been turned into a game."
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Carl Remick