How Andre Esteves’ arrest could torpedo Brazil’s economy

In his last interview before being arrested two weeks ago, Brazilian billionaire banker, Andre Esteves, gave no hint of impending trouble, says the Financial Times. “We are in a tough moment”, he observed, referring to Brazil’s sinking economy. But now the former systems analyst, who rose to become the “golden boy” of Brazilian finance, is facing his own crisis – “one with the potential to unravel his empire and torpedo Brazil’s economy”. His detention opens “a new frontier” in the vast bribes-for-contracts scandal at oil giant Petrobras, which continues to convulse the country (see below).

In his heyday, Esteves, 47, used to boast that the initials of his investment bank BTG Pactual stood for “better than Goldman”, says Bloomberg. Born into a middle-class Rio family, he started his career at Pactual in 1989 “fixing computers” and caught the eye of the founder, Luiz Cezar Fernandes, who put him to work on the back office of the trading desk. Before long, he was in the thick of the action. Fernandes later said that he took a liking to Esteves because they were both outsiders, with “no financial education or ties to Brazil’s traditional family-owned banking community”. More importantly, Esteves excelled at, and enjoyed, making money.

In 2002, he teamed up with three partners to engineer a boardroom coup that toppled his mentor. “I was surprised when they turned against me,” Fernandes said. “But nobody could argue with a guy who was making a lot of money for the bank.”

No one doubted that, says the FT. A noted rainmaker, Esteves established himself as “the bold face of Brazilian finance” during the country’s boom decade and made a big splash internationally. After running Pactual for four years, he sold it to UBS for $3.1bn in 2006, becoming a billionaire. Two years later, he left to form his own firm, BTG. When UBS was on its knees after the financial crisis, Esteves pounced: buying back UBS Pactual for $2.45bn in 2009 – less than he’d sold it for three years earlier. He built it into Latin America’s largest investment bank. “The firm is less a boutique and more a pocket battleship,” noted The Economist of BTG Pactual in 2010. “It might eventually make it to the bulge bracket.”

A year later, The New York Times observed that “no one embodies the financial ascent of Brazil better” than the debonair Esteves, whose “global mentality” made him a star at events such as Davos. A workaholic, who shunned the “conspicuous consumption” common in São Paulo, he played down his influence – driving an old pick-up truck and seeming “virtually anonymous among the suits of the financial district”. “I am not good at spending money,” he once said. “I am good at making it.”

The fallout from his arrest has been severe, says Bloomberg: a third of BTG Pactual’s value has been wiped out in a week. As one investor noted: “He was the key guy and now it’s a kingdom without its king.”

What is the ‘Carwash’ scandal?

Andre Esteves joins more than 100 people who have already been arrested in the so-called “Carwash” scandal – so called because police discovered early in the probe that a service station had allegedly been used to launder cash. The scandal has engulfed Petrobras, including a former top executive at the state-owned oil giant and the boss of Brazil’s biggest construction conglomerate, says Ambereen Choudhury on Bloomberg. The sweeping investigation into alleged corruption involving some R$6bn in bribes “has helped make Brazil’s real the worst-performing major currency this year, contributed to an economic contraction and shaken the government of President Dilma Rousseff”.

This week’s news that the country’s GDP fell by a record 4.5% in the third quarter has confirmed fears that Brazil is on track for the worst recession since the Great Depression. Esteves’ arrest has intensified the jitters. “As an outside investor it does give me pause,” says Ray Zucaro of RVX Asset Management in Miami. “I just don’t know where the next shoe will drop.”

Until now, the Carwash scandal has mostly involved the “murky underworld” of the energy and construction industries, politicians and “black market money dealers”, says Joe Leahy in the Financial Times. Esteves’ embroilment changes all that, taking it “directly into the world of high finance”. He has been accused of conspiring with Delcídio do Amaral – the head of the ruling Workers’ party in the senate – and two others to persuade a state witness to drop testimony against him over an allegedly corrupt petrol station deal. All deny the charges.

The detention of Amaral – “the first sitting congressman to be detained in Brazil’s democratic history – puts further pressure on the left-leaning Rousseff”, who is herself “fighting an impeachment movement against her in congress”. The Carwash is far from over. Indeed, “it may be only beginning”.

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