DREAM BIG: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz

by Cristiane Correa

  His doctors recommended that he should take leave for a while to look after his health. After the scare, Lemann went to the United States – to Cleveland, Ohio – to carry out a series of exams. He had also to slow down his tennis training. Even when he was leading Garantia, Lemann was still finding time to take part in international competitions and won three world veteran championships, the first of which was in 1986 when he was 47. Lemann became physically and mentally shaken by the illness, stepped out of the limelight, rarely even appearing at the firm for a whole year.

  With Lemann absent, the old principle of never leaving people with a lot of money in their hands was simply forgotten. On the rare occasions that Lemann spoke about the subject, he claimed that he would never have distributed so much profit in one go among the partners and commissioned staff. Instead, he would have looked for another opportunity to invest the earnings, as he had in the past when he used the bank’s cash to buy Lojas Americanas and Brahma.

  The three businessmen continued to think in the long term, but many of the bank’s partners were not such ardent fans of this philosophy.

  “The money began to go into their pockets, the dream of building no longer existed, the Pope was absent because of illness and the radical bishops were far away,” Telles once said. Even some of the partners from the new generation, such as Marcelo Barbará, now recognize the side effect of having all that money:

  “I was the last to buy an imported car... I had a red Parati, with no air-conditioning, and everybody made fun of me... Then all that money came and I bought a Volvo and an Audi on the same day. Then I bought a penthouse where I still live. It was a generation of extraordinary wealth... But I think that all these accumulated resources in the hands of people knocked the bank over and removed the company’s focus...”

  The seed of self-destruction had been planted.

  In 1993, a year before the bank’s record profit, the economist Claudio Haddad was chosen by Lemann, Telles and Sicupira to be Garantia’s superintendent. By that time, Haddad had been with the bank for 15 years – first as chief economist, then as partner responsible for the corporate finance and finally as its chief executive (he left Garantia temporarily from 1980 to 1982 to take up the position of first public debt director of the Central Bank) – and, in theory, he was the person in charge of the institution after the three partners.

  One of Haddad’s talents was to hire other top line economists such as André Lara Resende. The son of writer Otto Lara Resende, André was from Minas Gerais and graduated from PUC Rio de Janeiro. He also had a Ph.D. in economics from the Massachusetts Institute of Technology, MIT. Lara Resende worked at Garantia from 1980 to 1988 and, like Haddad, had a gap period when he worked for the government. He was one of the creators of the Cruzado Plan in 1986 and would be part of the team that created the Real Plan in the following decade.

  During his period in Garantia, Lara Resende recruited a young economist who showed great potential named Armínio Fraga. Fraga had a doctorate from Princeton University and stayed in the bank for just over three years.

  “One aspect that drew my attention was that the three [Lemann, Telles and Sicupira] did everything very simply,” said Fraga, who was the chairman of the Brazilian Central Bank from 1999 to 2002. “There is no doubt that the winning culture on the Brazilian financial market was the one they created.”

  Lemann appreciated the refinement and theoretical consistency that Haddad and the other star economists brought to a bank that had previously been populated by PSDs. The world was starting to globalize and financial operations were becoming so sophisticated that he needed people who were in touch with new times – something that not all the older employees managed to do.

  “When I left in 1991, I was selling products that I didn’t even understand,” said Castro Maia, the bank’s former sales manager. It was thanks to the new group of highly educated professionals that the bank managed to enter areas that had been previously unexplored. An extensive report published in the Gazeta Mercantil newspaper at the beginning of the 1990s analyzed this transformation:

  “Even more recently, when the gains from public securities shrank, the market noted how Garantia was skillful in creating business in the private sector with operations called financial engineering, e.g. debentures, foreign debt conversions and foreign funds. Garantia was the first Brazilian bank to show ability in this complex terrain of financial engineering. It was a pioneer – and is now being followed in this special area by some other banks...”

  Although Haddad seemed to be the right name to lead the troops into this new world, his appointment to superintendent did not go ahead without objection.

  His main rival for the job was Antonio Freitas Valle from São Paulo, who was also a Garantia veteran.

  Known as Tom, when Freitas Valle was 19 and studying at law school, he got a job in Banco Mercantil de São Paulo, thanks to a recommendation from his father who was a friend of owner Gastão Eduardo de Bueno Vidigal. But three months was enough for him to realize that he had nothing in common with the place. Like the overwhelming majority of the Brazilian companies and banks at that time, Mercantil had a strict hierarchy, and promotions were usually offered to those who had been there longest.

  “To make things worse, I was forced to wear a suit all the time,” said Freitas Valle. His sister’s boyfriend, who was a broker at Garantia, asked him at the time if he knew anybody who was willing to work hard and earn money. Freitas Valle immediately threw his hat in the ring, to the disgust of his father who saw the prospect of a more solid career for his son in the staid Mercantil.

  Freitas Valle began working in the settlement area, as was the rule in Garantia. His official workplace was a small office in Rua São Bento, in the center of São Paulo, but he actually spent most of his time away from it.

  “I was the only one in the settlement area who used a car,” he said. I drove around the city in the bank’s Volkswagen and did all sort of things I was told to, even buying toilet paper in the Carrefour supermarket.”

  Where Haddad was cautious, Freitas Valle was daring. When he got married at 23, he arranged his honeymoon in Tahiti, even before he had the money to pay for the trip:

  “I got married in November and received the commission from Garantia in December. I got an overdraft from Banco Nacional to pay for the trip, relying on the money that would arrive the following month... Everything worked out in the end ... You have no idea of the things we can get in life without making calculations. In fact, if you were to make too many calculations, you would never leave your parents’ home...”

  For somebody as impetuous as Freitas Valle, the obvious way ahead was via the trading room, the part of the bank where most adrenaline was flowing by far. In contrast to Haddad, an academic with an exacting international background, Freitas Valle had never been very interested in studying. He gave up his law course before entering Garantia to study economics at the Fundação Armando Álvares Penteado (FAAP) university. Some time before graduating from FAAP, he was transferred to Rio and did not think twice about giving up university. It was only in 1987, at the great insistence of Telles, that he registered for a rapid course in Harvard. What he lacked in terms of a diploma was outweighed by his instinct for operating on the market, and when Telles left for Brahma in 1989, Freitas Valle took charge of the trading desk. If Haddad was the man of ideas, Freitas Valle was the man of action.

  The row between the two became more open in 1990, when the Garantia head office was transferred from Rio to São Paulo and all the bank’s areas began to operate under the same roof. Until that point, the trading room, controlled by Freitas Valle, had been in Rio, and the corporate finance area, headed by Haddad, in São Paulo. Two years after the change of address, a tactic by the Garantia brokerage on the Bovespa caused Freitas Valle to lose ground.

  On February 12, 1992, the brokerage tried to artificially lower the value of shares in the Ibovespa index, particularly Telebrás. It had a buy or “put” option in which
it would win if the Ibovespa fell, but would lose if the index rose. The problem was that the stock market was rising and the brokerage would lose money when it had to settle the option. Between 12:30 and 1:00 that day, the Garantia and Talarico brokerages began to buy and sell shares between themselves at below the market value (in Brazilian financial jargon, this kind of operation is called “Zé com Zé”). The Bovespa spotted this unusual movement, interrupted the session and immediately demanded an explanation from those involved. It then opened two administrative processes against the two firms (numbers 001/92 and 002/92). The case for manipulating the trading session was featured in the press.

  Lemann was “livid” over the episode, according to a former partner of the bank. Having its credibility damaged is always an enormous risk for a financial institution, but the situation was even more delicate as, at the time, the case of the speculator Naji Nahas, accused of being responsible for the collapse of the Rio stock market in 1989, was still fresh in the market’s memory. This gave the Bovespa a great opportunity to punish Garantia, an arrogant and supposedly invincible bank, which would set an example for all the players in the financial sector.

  Garantia relied on technical opinions from economists Affonso Celso Pastore and Mário Henrique Simonsen as well as KPMG to defend itself. Although Freitas Valle had not been the operator directly involved in the maneuver – this was the job of the floor trader – he was deemed responsible in his capacity as the head of the desk. The artillery that was turned against Freitas Valle did not only come from the Bovespa and the CVM. Some Garantia partners took advantage of the situation to add fuel to the fire.

  “For us, everyone is a trader – from the trader at the session and the desk to the director,” Haddad said at the time.

  Young partner Fernando Prado, known in the bank for his intelligence as well as his explosive temperament, was one of the most determined to undermine the credibility of Freitas Valle, who was his direct boss.

  “Fernando wanted Freitas Valle’s place and did everything he could to damage him,” said a former senior member of Garantia.

  The solution to cool things down inside and outside the bank was to send Freitas Valle, who was then 35, to Harvard as a sort of exile. (The São Paulo stock exchange concluded that the action had been market manipulation and one of the punishments imposed on the Garantia brokerage was the suspension of those involved in the episode.)

  He stayed in the US for six months, and when he came back, his job had been downgraded, the activities that had been under his supervision split among Fernando Prado, Eric Hime and Luiz Alberto Rodrigues, known as Careca. (Rodrigues died in a motorbike accident in the Atacama desert in 2010.) The working atmosphere was no longer right for Freitas Valle to continue in the bank, much less for him to fight for the position of superintendent. He sold his shares and went off to look after his life.

  “I have no bad feelings,” he said. “It was a professional thing... But I became an adult after that event.”

  People close to Freitas Valle said that he left with around US$ 15 million in his pocket, although he would not confirm this amount when asked. What is certain is that Freitas Valle left Garantia so rich that he even thought of retiring. However, two months later, he was involved in another business when he founded Banco Matrix with André Lara Resende and Luiz Carlos Mendonça de Barros, on the principles had learned in Garantia. Matrix appeared in the newspapers and magazines in the 1990s, not only for its spectacular results – it began with assets of US$ 8 million, which expanded to more than US$ 100 million two years later – but for the controversies that surrounded it. Two of its main partners – Mendonça de Barros and Lara Resende – had previously been in the government and suspicion arose that the bank’s winning bets on the exchange rate, interest rates and public debt securities were due more to insider information than the team’s talent. Nothing was ever proven, and Matrix continued to be a money-making machine after the departure of Mendonça de Barros in 1995, and Lara Resende in 1997.

  In 1999, Freitas Valle would find himself at the center of an investigation once again. During that year, the then PT Congressmen Aloizio Mercadante headed a congressional investigating committee (CPI) to investigate a number of Brazilian banks, including Matrix, that may have benefited from insider information when the Real underwent a massive depreciation.

  “People from the Central Bank were putting pressure on us every day, inspecting us on a daily basis,” said Freitas Valle. “It was really debilitating.”

  Nothing arose from the Matrix investigation. But the painstaking inspection of the operations of a number of financial institutions led to the imprisonment of one of the big bankers of the 1990s, Salvatore Cacciola, an Italian from Milan who owned Marka. His bank was left with a huge hole after the Real depreciated at the beginning of 1999. To plug it, Cacciola appealed to the Central Bank, which sold him dollars at below the market rate – aid that cost the public coffers R$ 1.5 billion. Fingers were pointed all over the CPI, including at a number of the Central Bank’s directors, amongst them the chairman Francisco Lopes. Cacciola was initially condemned to 13 years in prison for embezzlement and fraudulent management, and spent a number of years hiding in Italy until he was arrested in Brazil in 2008. He spent four years in prison in the Pedrolino Werling de Oliveira Penitentiary, better known as Bangu 8, and was freed conditionally in 2011.

  The grinding from the CPI, successive international financial crises and tougher competition among the investment banks in Brazil, led Freitas Valle to give up his banking career in 2001. People close to him say his personal fortune in 2012 was around US$ 500 million.

  “Of the Garantia partners who left the bank, Tom was the one who did best,” said one of his former colleagues. He now spends his time managing an investment fund consisting, to a great extent, of his own assets.

  By the middle of the 1990s, Banco Garantia was the most fully developed example of a Brazilian investment bank. It had the best economists, traders and executives. Its results were always impressive, well above the market average. Its influence could be seen not only in Brazil, but also abroad. Its prestige was such that it brought the former British prime minister, Margaret Thatcher, to Brazil in 1994 for a meeting with local businessmen. A report in the Folha de S. Paulo newspaper at the time described the bank as, “swift in its decisions, merciless with its enemies, it fights to kill. A true ‘serial killer.’”

  “Serial killers” generally do not make many friends, but this never bothered the Garantia partners. In fact, the biggest concern of these new millionaires created by the bank was to become even richer. “They [Garantia] were very big, they went to the limit, and their competitors did not like those people at all,” said a former executive of a rival bank from that time.

  It was mainly after the departure of veterans like Freitas Valle that the partners Prado and Hime became the informal leaders of the new generation at the bank. The two were allies within the bank and friends outside. They pushed Garantia’s natural appetite for risk to hitherto unknown levels. Prado headed the corporate finance area while Hime was the genius in the trading desk operations. (Hime was the youngest professional to become partner in the bank when he was 24.) A number of former Garantia employees said that Prado and Hime were responsible for supervising around 80% of the bank’s revenues in the second half of the 1990s.

  One aspect of the Garantia culture that Prado and Hime embraced was an aversion for rigid hierarchy, and both made a point of acting on their own, without giving much information to Claudio Haddad, who was Garantia’s superintendent.

  “Claudio never worked in the ‘kitchen’ of the bank (the trading desk), so it was difficult for him to control what the lads were doing,” said a former Garantia worker. “And, as long as the money was pouring in, none of the main partners was bothered about this situation.”.

  One episode in particular made it clear that Prado and Hime felt no shame about embarrassing their boss.

  Once a year, the bank
promoted the BIG Weekend (called after Banco de Investimentos Garantia) at which the institution’s future was discussed. The meetings took place in hotels, and all employees were invited to take part, and while the work was intense during the day, everyone relaxed at night. The 1993 event was so raucous, that there was even a fireworks display on Saturday evening. Haddad, annoyed about the noise, complained to the staff the following morning, so at the following year’s meeting, held in the Villa Rossa hotel in São Roque in upstate São Paulo, not only was there a repeat of the fireworks display, but it took place under the window of the room where Haddad was sleeping.

  “It was embarrassing because, after all, Claudio was the bank’s main executive...” said a former employee. “But nothing was done. Lemann saw it but said nothing.”

  The “tradition” of disturbing Haddad’s sleep ended after the 1996 BIG Weekend, when the fireworks display was so big, it was accompanied by the local fire brigade.

  No big company, in practice, closes its doors from one day to the next. It takes years of a deteriorating culture before the moment that vulnerability truly manifests itself. For Garantia, this moment arrived in 1997, when an unexpected crisis hit Asia, and the bank felt the side effects of globalization in the most painful way possible. Risk control, precaution and long-term thinking were not demonstrated by the bank’s trading desk at that time.

  Garantia had made money from C-bond portfolios for a long time. These were short-term Brazilian foreign debt securities financed through an operation known in the financial sector as “repo” (repurchase agreement). The mechanism worked as follows: the seller (in this case Garantia) offered the owners of the securities the right to sell them in the future for a pre-set amount. As the future amount was slightly below the present value, the operation was a kind of insurance for the owner of the security, since all he had to do if there was a big sudden depreciation was exercise the selling right at the price agreed with the bank, thereby reducing his loss.