Thursday, 5 February 2009

Brazil House Passes MP 443, The Bill That Gives Preferential Treatment and Taxpayers Funds to State Banks for Rival Takeovers

Joao Paulo Cunha, sponsor of the MP 443 in Congress ...
He is the responsible for all the perks that BB and CEF
will enjoy at the expense of taxpayers.

Bad news. The lower house amended changes made by senators to the MP 443 and passed the bill last night. One of those amendments include the withdrawal of a provision included by the Senate in which a takeover of a private bank by state-controlled Caixa Economica Federal and Banco do Brasil that involved some type of covenant had to be approved first by senators. Furthermore, lower house lawmakers also stretched out the period of validity of this bill through 2011.

Lawmakers at the lower house also revived a part of the bill that created a 3 billion real credit line for the two banks to help finance projects contained in the Accelerated Growth Programme (PAC,) that Frankenstein set up by President Luiz Inacio Lula da Silva to kick start investment in infrastructure. The bill goes now for Lula's signature. The opposition bloc in the lower house showed its laziness and demonstrated that they are far from prepared to challenge Lula's coalition for the 2010 presidential election. The damage that this law can cause to the Brazilian economy is incommensurable. Opponents of the bill said they would set a committee to oversee the BB and the CEF and the emergency credit line. I doubt they will end up doing something.

Someone who thinks that this bill will not have a profound effect on the way private and state financial institutions interact is, in my humble view, very naive. Under the new rules, both state banks can:
1) Bid for banks, insurance companies, private pension funds and other financial institutions. Both banks are authorised to buy control of any financial company, or, what we say openly, nationalise a rival. 2) Easily win equity control of pension fund companies that administer individual retirement accounts. 3) Use their own capital to perform any takeover. While the government said that it has no plans to pump additional capital into BB or CEF to foment purchases, it is well known that they can count on with the aid of BNDES so long as the target bank is of ''strategic´´ importance for the government's objectives. 4) Bid for private banks and present offers for them, independent of parallel offers made by other private banks. 5) Have until 2011 to buy private banks. The banks that were purchased can be resold at market prices. 6) Skip any auction if their purpose is to buy a private bank. Isn't it favouritism?

The imminence of the passage of that bill accelerated the Itaú-Unibanco transaction. Thank God these two banker families, the Moreira Salles and the Setúbals, were clever enough to foresee the tremendous consequences of this bill on the functioning of the Brazilian financial system. Hopefully, there must be some other mergers and takeovers being considered -- only by private players, between private players. In the meantime, no one will look after the lousy use of taxpayers' money sponsored by this awful legislation.

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