While the financial market was going well and the securities were gaining value, Garantia had nothing to worry about and exaggerated its leverage with this operation. But in 1997, the Southeast Asian economy, triggered by events in Thailand in July, quickly collapsed, and prices crashed with it. The bank then had to pay investors the difference between what had been agreed in the contract and what the market was actually paying for these securities. The more Garantia sold C-Bonds to honor its commitments, the more the price fell. This spiral only ended when the bank wound up its position completely. Garantia admitted to losses of US$ 110 million in 1997. (Market estimates had the total amount around US$ 500 million.)
The partners injected US$ 50 million from their own pockets to fill part of the gap and show investors that the bank was still strong. The cash could be restored, but the loss of credibility was devastating. For the first time, Garantia was seen to be like any other market player. It was not unbeatable.
Many investors were scared and withdrew their savings from the bank (or, in some cases, what was left of them). The result was that the assets of the funds managed by Garantia fell by half in the second half of that year, from R$ 4.5 billion in June to R$ 2.2 billion in December. The profit plunged to US$ 11 million, one-tenth of the previous year’s earnings.
The atmosphere at the bank was as bad as it could possibly be. Hime, who was in charge of the trading desk and the orchestrator behind the failed maneuver, was so shaken that he did not appear for days. Lemann, Telles and Sicupira, who had been away from the bank’s daily activities for several years, were taken by surprise.
“You will not play with my name and money,” Lemann, normally known for his coolness, shouted at the partners.
In the initial days after the crisis hit, the three main partners returned to the trading desk to try and sort out the damage, but it was too late. At least a dozen people who worked in Garantia, or who knew the bank closely, believe the collapse would never have happened if Telles, the man who had commanded the trading desk so masterfully for years, had still been there. Perhaps this is why Telles still avoids talking about the subject.
“I still feel very strongly about it,” he said.
It was said at the time that Lemann, who until then had been the market’s model banker, seemed to have lost his “Midas touch.” The man who had been admired, respected and even feared now had to give explanations and find ways out of the crisis. One of those he sought out for help was a former rival, Antonio José Carneiro, the man who ended up selling Multiplic to Lloyd’s. (Although he and Lemann were rivals, both had always got on well together and are still neighbors in Angra dos Reis, where they have beach houses.)
“Jorge called me and said the bank had no problem and it was just a question of liquidity... However, the market didn’t even want to know... At times like that, it just closes up completely. The sale of Multiplic had left us with US$ 600 million in cash and we invested it all in Garantia. Not in risky operations, but in CDI interbank certificates, to give liquidity to the securities they had. We trusted them and decided to run the risk of putting the money there. It was very important for them... Jorge recognizes this even to this day...”
The investors who lost money could not believe what had happened. Some months after the crisis broke out, Lemann had to deal with a former – dissatisfied – client during a tennis match at the Roland Garros championship in Paris. Lemann was in the box of Antonio Carlos de Almeida Braga, known as Braguinha, the founder of Banco Icatu and a big tennis fan. During an interval, the two were talking with the speculator Naji Nahas when a couple of acquaintances of Braga approached. When the woman recognized Lemann, she called him a thief and asked when she would have her money back. Lemann did not reply. He left the area downcast, and went away without watching the end of the match.
Even greater embarrassing experiences lay ahead. One of the clients who made a question of publicly demonstrating his discontent with Garantia’s performance was the ex-Formula Indy pilot Raul Boesel, who was sponsored by Brahma at that time. On September 26, 1997, Boesel called the bank and learned that half of the US$ 3 million he had invested there – almost all his assets – had disappeared. In desperation, he tried to take advantage of the good relationship he had with Brahma to resolve the problem. He contacted Telles at the brewer’s head office in São Paulo seeking help. Telles received him and said he would analyze the case and asked him to come back two days later. Boesel returned to the office on the day Telles requested, but the response from the Brahma CEO and Garantia partner was discouraging. Telles said he could do nothing to help.
Boesel became furious. He withdrew the rest of the money, which was still invested in the bank and, as he lived in Miami, initiated a law suit against Garantia in the United States.
The dispute between the driver and Garantia leaked to the press. This worsened Boesel’s relationship not only with the bank, but with Brahma and the brewer broke the sponsor contract a few months later.
Boesel’s main accusation was that Garantia had never warned him that his money had been put in high-risk funds. “Today, I put my money in reliable banks, in safe investments. I earn less but I sleep easier,” said Boesel, who gave up driving in 2008 and became a DJ. People familiar with the situation say an agreement was signed between the two parties years later through which Boesel received the equivalent of 10% of his losses from the bank.
The invincible bank had become very fragile and the press reveled in the bad news. Lemann and his partners, who had always made a point of keeping journalists at a distance, had to swallow their old habit. An article published in the Exame magazine in 1998 made a scathing analysis of this change in behavior:
“It was pathetic to see this previously haughty and inaccessible group recently running to find a press advisor. Only the most hard-pressed need arising from a really tough day could explain the search for a press adviser.”
With the bank’s image damaged to the core, Lemann tried to put a plan into practice that he had been thinking about since the time he became ill in 1994: transfer control of the institution to the younger generation before it was too late. His idea was that these young people could rebuild the name of the institution while he, Telles and Sicupira would dedicate themselves only to their business in the real world. It was a plan that included protecting their investments in Brahma and Lojas Americanas. Under Brazilian law, when a bank collapses, all the personal assets of its owners may be used to cover the debt. In other words, if Garantia were to go bust, the three partners could lose much more than the bank.
The problem with Lemann’s proposal was that it did not interest the younger partners. “Jorge wanted to be paid not only for the price of the shares, but also a premium for control, so there was no deal,” said a close source of the negotiations. It was almost ironic that somebody like Lemann so concerned with creating people and a strong culture was unable to sustain the institution he had created. Lemann spoke about this episode in an interview in 2001:
“The [younger] people really wanted to have a ‘father,’ someone who would pay for the business... They wanted to get the money, the capital they had already, and get another big company or become involved with somebody with a lot of capital, with whom they could continue to do what they were doing, but without putting their own capital at risk. Frankly, this was a disappointment for me...”
The three did not want to remain any longer, and the younger partners did not want to take over the bank. The concept of partnership that had functioned so well for decades disintegrated so quickly that it no longer made any sense. How could a bank with such a tarnished image face tougher competition on the new global market that was fast approaching? Garantia now needed to find new owner, as had also been the case with Salomon Brothers, which was sold to the Travelers Group after a scandal involving irregular operations with American treasury bonds.
The most obvious candidate to buy Garantia was Goldman Sachs. The American bank was the great inspiration for L
emann in creating Garantia, and the two institutions were very close. A former Garantia partner, Bruno Rocha, the owner of the asset management company Dynamo, had even occupied a room in Goldman Sachs’ head office in New York for 18 months at the beginning of the 1990s, when the two banks were working on a joint venture. But despite the similarities in style and the closeness of the two institutions, no deal came about.
The prospect of a wave of privatizations in Brazil led other foreign banks, such as Morgan Stanley, to analyze the possible purchase. However, it was the Swiss bank Credit Suisse First Boston that finally bought Garantia on June 9, 1998, for US$ 675 million. Lemann never forgot this date.
“It was very sad,” he said years later. That bank was a passion. It was built with the greatest tenderness and sweat.”
Under the agreement, the older partners – Lemann, Telles, Sicupira and Haddad – left the bank immediately. They dedicated themselves entirely to Brahma, Lojas Americanas and GP Investimentos. Haddad left the financial market to devote himself to education and became president of the Insper business school, an educational institution aimed at graduate and postgraduate courses with donations from various former Garantia executives. (The main Insper classroom was named after Jorge Paulo Lemann.) Although the partners made a lot of money from the sale – Lemann is estimated to have pocketed US$ 200 million – selling Garantia gave them the previously unknown feeling of failure.
The other remaining 15 partners were to stay with CSFB for up to three years and, in financial terms, had nothing to complain about. The Swiss bank committed itself to pay this group US$ 300 million, providing some targets were achieved.
“Goldman Sachs intended on breaking up what we had in Garantia through an immediate and total integration with it,” said Marcelo Medeiros, one of the former Garantia partners who moved to the Swiss bank. “However, Credit Suisse saw that there was more value in maintaining the bank as it was and gave us complete independence for three years.”
The goals Credit Suisse established for the Brazilians were met a year before the deadline. Four of those who benefitted – Hime, Prado, Luiz Alberto Rodrigues and José Ricardo de Paula (known in the market as “Ricardinho”) decided to celebrate the conquest in great style. Each gave himself a Ferrari 360 Modena, “a small toy,” which was sold at that time for US$ 330,000. Shortly afterwards, when they were free of the contractual entanglements and with their pockets full, most of the former Garantia partners left Credit Suisse. Only four partners decided to remain for another two years: Marcelo Medeiros, Marcelo Barbará, Andrew Shores and Carlos Castanho. Although none of the former Garantia partners remained at Credit Suisse almost 15 years after the acquisition, the Brazilian operation of the Swiss bank still had professionals who started their career in the institution created by Lemann. These included José Olympio Pereira, formerly on the commissioned staff at Garantia who is currently the CEO of Credit Suisse, and Marcelo Kayath, a former analyst who is currently responsible for the fixed and variable income areas of the bank for Latin America.
Many of the reports published in newspapers and magazines at the time of the sale of Garantia said that the bank’s demise was due to the changes through which Brazil was passing – from a closed economy to a globalized and more competitive world, in which local corporations did not have the leverage to fight for space with the world giants. But Garantia did not die because of globalization and tougher competition. Garantia succumbed because it was blinded by its own success, its main partners distancing themselves to let the ship sail on its own. But many of the newer, younger partners were more interested in inflating their personal wealth than perpetuating the institution and upholding the pillars of the culture that made Garantia the biggest investment bank of that period – simplicity, focus, total dedication to the firm and paying due appreciation to the partnership above anything else. The principles that guided the appearance and growth crumbled as the years went by.
Garantia was killed by Garantia itself.
Shortly after Garantia’s downfall, Lemann had to deal with another dramatic situation – this time, a personal one. On March 9, 1999, as his three younger children – Marc, Lara and Kim, then 7, 6 and 3 – were passing through the Jardim Europa district where they lived, heading towards the American Graded School in the Morumbi district, a black Tempra closed in on the armored silver Passat carrying the children. Two men got out of the car and shouted at the chauffer, José Aureliano dos Santos, to get out of the car. He refused, and the outlaws began to open fire. Newspaper reports at the time read 15 shots were fired with .40 and 9 millimeter bullets. The chauffer tried to reverse but was blocked by another vehicle from behind. With the children crying in the back, the chauffer, who had taken a defensive driving course, somehow managed to escape. Lemann’s children were unhurt, but the chauffer was wounded by two bullets that went through the car windows.
After checking that the children were well, Lemann calmly went with the driver to the 15th Police District precinct in São Paulo. Despite the drama, the children then went to school and he proceeded to work.
“I had a meeting arranged, and when I arrived, the secretary said that he would be a bit late,” said executive Luiz Kaufmann, who was finalizing the details at that time to join GP Investimentos. “He arrived an hour later and carried out the meeting normally, without saying anything of what had happened.”
But despite his apparent coolness, the day after the attempted kidnapping, Lemann took a plane with his wife and their three children to the US. They have never lived permanently in Brazil since. (The three older children, from Lemann’s first marriage, have stayed. Anna Victoria and Paulo live in Rio while Jorge Felipe is in São Paulo.) Both Lemann and Susanna still have a home in São Paulo, but their official residence is in Rapperswil-Jona, just outside Zurich in Switzerland, where they lead a simpler life (by billionaire standards) and are much less concerned about safety.
“His children go to the school by bike,” said former president Fernando Henrique Cardoso. “When Lemann needs to go to Zurich, he takes a train.”
One trick pony
The sale of Garantia in 1998 forced Lemann into a new working routine. After 27 years working in the bank he had founded, he now had to redefine his role in the investments he held with his partners. Getting involved in the daily running of a company like Brahma or Lojas Americanas made no sense. He preferred to install himself in the office of GP Investimentos, the private equity firm the three former bankers had founded in 1993. (The name “GP” came from Garantia Partners.) Ironically, Lehmann would remain, physically, very close to the bank he had just sold. The head offices of Garantia and GP were located at number 3,064 Avenida Brigadeiro Faria Lima in São Paulo – with the bank on the 13th floor and the private equity firm on the floor underneath.
Despite Lemann’s presence in the office, GP’s daily operations were run by Sicupira, who had gotten the firm up and running five years earlier. When the company was set up, the private equity sector simply did not exist in Brazil. Sicupira had to explain to investors what it was all about – buying companies that were experiencing hard times, improving their earnings and selling them at a profit some years later to other investors or by listing them on the stock exchange. To set up the first fund, he had to try to raise money in Brazil and abroad. He made 40 trips to the US in one year, all on commercial flights – private jets were not part of his world. His pilgrimage resulted in funding of US$ 500 million – US$ 100 million of which came from the Garantia partners’, mainly the three bankers’, own pockets.
Sicupira used the experience he and his partners had acquired running companies like Brahma and Lojas Americanas to attract investors. While most foreign private equity funds were only involved in the financial aspects of the businesses they acquired, GP’s policy was to take a direct hand in the management. Meritocracy, never-ending cost control and open-plan executive areas would be replicated in the companies into which GP injected money.
Sicupira’s team ini
tially consisted of no more than half a dozen people, including some who had made their career at Garantia, such as Roberto Thompson, and newcomers like Antonio Bonchristiano. Bonchristiano, who was 25 and had a bachelor’s degree in philosophy, politics and economics from Oxford, had worked in the New York and London offices of the Salomon Brothers investment bank. With an intellectual leaning and discreet style, he had met the Garantia people in 1990, having received an invitation to work at the bank, but preferred to remain in Europe. Even though he turned down the offer, Fernando Prado, one of the Garantia partners who interviewed him at the time, kept in touch, and when Bonchristiano was thinking of returning to Brazil in mid-1992, he called Prado and told him he was interested in joining them, but in a different area from investment banking.
“Talk to Beto,” Prado said. “He is setting up a private equity firm.” It was exactly what Bonchristiano was looking for.
He met Sicupira and Thompson in London in October of that year at a dinner at the home of Fred Packard, and on January 2, 1993, he started work as an analyst at GP.
The strategy founded by Sicupira brought its best results when GP assumed control of the companies in which it invested, and sent one of its own partners to run the operation. This was the strategy implemented in 1997, when GP acquired the southern concession of the Rede Ferroviária Federal railroad, which was the origin of ALL (América Latina Logística).
The railroad was losing money, and Sicupira’s main priority was to alter the culture through new leadership, choosing Alexandre Behring, a 30-year-old engineer from Rio, for this mission. The competitive Behring practiced underwater fishing and water polo, and he had shown a talent for business since being hired by GP in 1994, while studying for an MBA at Harvard. He was attracted to Sicupira and Telles’ doctrine of meritocracy and partnership, and gave up an opportunity at Goldman Sachs to work for the Brazilian private equity firm:
DREAM BIG: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz Page 14