Dear friends,
I hope you have followed the unraveling political (and economic) situation in Brazil. There are certainly a number of good primers and articles available for those would like to catch up on what is going on and understand the main players, the drama, and the significance.
Here are some suggestions for background --
An interesting graphic, but not up-to-date. [http://lavajato.mpf.mp.br/entenda-o-caso/imagens-2/infografico-geral]
a) Operação Lava Jato, or "Operation Car Wash," is the largest investigation into corruption and money laundering that Brazil has ever seen. It started on St. Patrick's Day 2014 and got its name from a chain of gas stations with car washes used to launder money by one of the criminal rings initially investigated. The investigation has grown in depth and scope, but the name stuck. With more than 40 operational phases covering crimes including active corruption, passive corruption, obstruction of justice, international money laundering, criminal organization, and fraudulent management, more than 1000 orders for search and seizure have been carried out. The accused include major members of the largest political parties, the petroleum concern Petrobras (see below), the transnational meatpacking company JBS, and many others. The current estimate for the amount of money involved is more than R$20 billion (think R$1 = .3 USD or .0002 BTC, and you get the point) and climbing every day. Damages are estimated do be double that. So far more than 200 people have been imprisoned and at least 150 plea-bargaining agreements have been made.
b) Petrobras -- the country's largest semi-public, semi-state-run company, is involved in exploration, refining, transporting, etc., etc., petroleum on a worldwide scale. A cartel of contractors, via bribes paid to high-ranking Petrobras executives, side-stepped the normal bidding process and guaranteed themselves, through a distribution process that apparently resembled soccer championships [http://lavajato.mpf.mp.br/entenda-o-caso/documentos/arquivo-1-regulamento-futebol -- in Portuguese] and other means, the most lucrative contracts for mind-boggling fees. Petrobras officials then suborned public officials, so as to guarantee that only those participating in the cartel of contractors would be inited to participate. Some of the categories of irregularities were: excluding legitimate bidders, pre-determining the winner, carrying out unjustifiable direct negotiations, including in contracts illegal benefits and excessively high pricing, accelerating contracts by suppressing necessary and relevant steps, and leaking confidential information.
c) Financial operators would move money abroad between those paying bribes and those receiving them. This was done in cash and in such a way as to make the money look clean -- via fake contracts with shell or otherwise fictitious companies. Money was also transferred in kind. Some of these money launderers are part of international networks of so-called doleiros ("dollar-ers"), operating in countries such as Angola, Nigeria, Mozambique and the Dominican Republic.
d) Odebrecht, a Brazilian conglomerate operating in engineering, construction, chemicals and petrochemicals, and present throughout the world, controlling the largest construction company in Latin America and the 5th largest petrochemical company in the world (Braskem) -- a member of the cartel. Several of the highest-ranking executives, including the president (and son of the founder) Marcelo Odebrecht, were sentenced to almost 20 years in prison for corruption, money laundering, and organized criminal activity. At the end of 2016 executives admitted to bribing politicians from 12 countries. The company had created a special department, called "Structured Operations," to handle the paying of bribes. They also became the majority owner of a bank in the fiscal "paradise" of Antigua, to facilitate operations. In April of this year, a US-based judge ordered Odebrecht to pay fines totaling $2.6B to be divided between the US ($96MM), Brazil ($2.39B), and Switzerland ($116MM).
e) And most recently, thanks to the investigations into JBS, the world's largest meatpacking company and a mega-player in the worldwide food and beverage industries, we learned in secret audio recording between co-owner Joesley Batista (brother Wesley is the other co-owner) and President Michel Temer that JBS has been suborning high- and low-ranking officials in just about every political party in Brazil since at least 2010. The list of "donations" to politicians includes the names of 1,829 candidates in 28 parties. It appears that they were successful in electing 179 deputies (members of the lower house of the legislative branch), 28 federal senators, and 16 governors. More to the point, Temer himself not only approved of payment of monthly "allowances" to silence ex-senator and president of the lower house Eduardo Cunha, senator Aécio Neves, and a "dollar-er," but he himself had received bribes of R$15MM as early as 2014 to grease the wheels for one of JBS's companies. Further, we learned that Batista had opened accounts overseas for ex-presidents Luiz Inácio Lula da Silva and Dilma Rousseff, totaling $150MM, in 2014. Ex-minister of the economy, Guido Mantega, had intermediated the payments. A JBS director reported paying bribes of R$35MM to five present and ex-senators of the PMDB, Temer's party, to guarantee the re-election of Dilma (PT) in 2014.
The Federal Police of Brazil, akin to the US FBI, has stepped up their game substantially, using secret recordings, traceable bank notes, tracking devices in backpacks and suitcases used to carry the money, and more. The conversations recorded have been nothing short of jaw-dropping. One example was Batista's telling Temer that he wanted someone from the Receita Federal, analogous to the US IRS, to be removed, as he was being difficult. Another was an example of trying to influence the Supreme Court's decision regarding charges against Cunha.
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Oh, how could I forget -- https://en.wikipedia.org/wiki/Teori_Zavascki or https://pt.wikipedia.org/wiki/Queda_de_avi%C3%A3o_Beechcraft_King_Air_prefixo_PR-SOM_em_2017 in Portuguese -- the justice in charge of the Lava Jato trials was killed in an airplane accident on January 19 of this year. The current hero of the saga is Sérgio Moro, the federal judge heading up the investigations. We fear for his safety. He has used the media as a means of protecting himself. Fortune listed him 13th among the World's Greatest Leaders in 2016 and depicted him as a modern-day Eliot Ness, the head of the Untouchables who brought down Al Capone. He was also listed by Time that year as one of the 100 Most Influential People. Bloomberg Businessweek listed him number 10 in their list of the 50 Most Influential People in the World of Finance.
Remember that Temer was the VP under President Dilma Rousseff, who was impeached. Now Temer, who has no VP, is in real danger of being subjected to an impeachment process. A few hours ago -- https://www.bloomberg.com/politics/articles/2017-05-21/pressure-mounts-on-temer-as-brazil-lawyers-vote-for-impeachment
I just talked to my neighbor, a politics and economics anchor for O Globo, and she said things are going to get worse over the next two weeks.
[Among other things, I need to re-think how long I will hold my long positions in UBR and EWZ, which I bought Thursday morning after the tremendous crash in the BOVESPA, Brazil's main stock exchange.]
Bye for now!
