Photographer: Miguel Schincariol/AFP/Getty Images

Brazilian Crisis Does What Three Coups and a Default Couldn't

  • Second-oldest brokerage joins wave of closures as losses mount
  • Exchange promised 4.5 million new investors, lured just 6,000

Corretora Souza Barros Cambio e Titulos SA survived three coups, a sovereign default and hyperinflation that doubled prices every other month. But Brazil’s second-oldest brokerage couldn’t withstand today’s crisis.

After almost nine decades, only a few of the once 150-strong workforce remain at the company’s mid-century offices in downtown Sao Paulo to tie up loose ends before closing its doors for good. In the end, the straw that broke Souza Barros’ back and brokerages like it wasn’t so dramatic as a military coup. Competition and a market that never quite lived up to its potential was enough to do the job.

In a note to clients and employees posted on its website, Souza Barros thanked “everyone who participated in these past 87 years,” saying “we wouldn’t have gotten here” without them.

Half of Brazil’s 10 biggest brokerages have posted losses every year since 2012, even as the head of the BM&FBovespa SA declared that Latin America’s biggest exchange was on course to lure 4.5 million new investors by 2015. Instead, the bourse attracted fewer than 6,000.

“The exchange is out of touch,” Raymundo Magliano Filho, director of brokerage Magliano Corretora and former chief executive officer of the BM&FBovespa. “Instead of moving forward, we’re going backward.”

The BM&FBovespa’s press office said in an e-mailed response to questions that the estimate to boost individual investors by 10-fold to 5 million by 2015 was based on “extraordinary” prospects for Brazil’s economy in 2009. A worsening domestic outlook contributed to “a frustration of expectations."

Overly Optimistic

As BM&FBovespa CEO Edemir Pinto reiterated the 5 million target as recently as September 2014, it was becoming more and more obvious the goal was unobtainable. A BM&FBovespa study, conducted by the Getulio Vargas Foundation in 2010, placed the number closer to 1.19 million by December 2020 -- which would be twice the 558,000 investors the market has now. Even that is turning out to be overly optimistic: The estimate was based on average economic growth of 4.1 percent a year between 2010 and 2020.

Instead, growth in Brazil has plummeted. Latin America’s largest economy slid into a recession in the second quarter -- shrinking 2.6 percent -- and economists in a weekly Central Bank survey are forecasting the longest contraction since the 1930s. A plunge in commodities prices and an emerging-market selloff coincided with a corruption scandal that has crippled Brazilian builders and left President Dilma Rousseff fighting for her political survival.

Magliano Corretora has fired two-thirds of its 105 brokerage employees in recent years, the firm’s director said. SLW Corretora sold its portfolio to Guide Investimentos in March, joining more than 30 other firms that have exited the business since 2011, according to the Central Bank. Others are merging to weather the downturn. Sao Paulo-based Rico and the Brazilian unit of Caixa Geral de Depositos combined operations in July 2014, the same month that XP Investimentos bought Clear Corretora.

Fearing the End

For months, Souza Barros traders swapped whispers that the end was near, but it wasn’t until the firm started selling its furniture that the worst was confirmed, said one former employee who asked not to be identified. The company’s CEO, Carlos Alberto de Souza Barros, the grandson of the founder, didn’t respond to e-mails and phone calls requesting comment.

“We see a bad scenario, with products sold in mass and price wars,” he told Valor Economico newspaper in May when announcing the decision to close. “That’s not the way Souza Barros operates.”

Today, investors are more likely to pull out of Brazil’s market than jump in. The Ibovespa stock index, which tumbled 2.5 percent Tuesday, has lost 22 percent from its peak in May. The $888 million outflow from the iShares MSCI Brazil Capped ETF this year is the most from any exchange-traded fund in New York.

“It’s a huge challenge that the sector is facing now,” Caio Villares, director of the brokerage Concordia Corretora and president of Ancord, the sector association, said from Sao Paulo. "The exchange has to work with brokerages on financial education to make the stock market more popular."

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