Government forces brokers to deleverage, more brokers shut down

February 1, 2010

I practically have to start this post where I ended last night. I said more brokers would be shut down and three were intervened today, but more importantly the Comision Nacional de Valores (CNV) decided to eliminate a popular instrument used by brokers to leverage their balance sheets by accepting deposits from the public. At the same time, the regulator gave brokers six months to lower their leverage (debt) to twice their equity. Both these measures will have an important impact on brokers and could possibly bring down some more. Let me explain.

What the Comision Nacional de Valores (Venezuela’s SEC) did was to ban the use of a financial instrument called the “mutuo”. This instrument has been around for about eight years (i.e. it did not exist before Chavez). In it, a broker sells a client bond and signs a contract the client lends the broker back the bond with some interest. In the end, what the broker is doing is accepting a deposit under the promise of some interest rate for the period agreed on. The broker can then turn around, use the client’s money and even resell the bond to another client. In contrast with a bank, there are fewer regulations, no reserves and little supervision.Thus, brokers could pay more interest than banks and leverage their balance sheet, i.e. borrow money from their clients to do other things.

The problem is that if there is no supervision, depositors don’t have their funds guaranteed by Fogade like at a bank and brokers can borrow more than they should. While many brokers used “mutuos” adequately, others, such as U21, Banco Canaria’s brokerage unit, built up mutuos to absurd levels, such that it went broke.

In recent weeks, as U21 went under and the banking crisis developed, the CNV starting looking into other brokers who had “mutuos” with U21 and found a lot of them that when U21 went under, lost all their capital. So, they kept digging and as they did, they had to intervene more and more brokers. There were rumors that the CNV would impose a limit of two times your equity for all brokers as a way of limiting the mutuos (some brokers had as high as a factor of thirty). But instead, the CNV decided:

1) To give 90 days to all brokers to eliminate all their “mutuos”

2) To give them six months to bring the leverage (debt) they may to twice their equity. They will have to do it such that in two months the leverage is down to a factor of six, in four months a factor of four and then a factor of two after the six months.

I think this decision by the Government is unfair, because due to its inability to supervise the brokers that abused the system, it is penalizing all of them.A more correct decision would have been to limit leverage to twce equity, but allow mutuos to continue, and supervise!

Minister of Planning and Finance Giordani said yesterday there was a de-institutionalization of the regulating entities, but did not explain that it was the Chavez administration that caused it. For example, the Chavez administration named two Heads of the CNV who were former military with no experience in capital markets, both of whom are currently either indicted or have an order to be captured for corruption, one when he was Head of the CNV, the other after wards when he was named President of one of the failed banks. Quite a record, no? They learned fast, but apparently not about “mutuos”.

Giordani, like Chavez, seems to talk like this was all about an out of body experience he had, the lack of supervision, the “financial avalanche”, the external treasuries of the banks at their brokers, and the lack of articulation of the institutions, were all in the end by-products of decisions made by Chavez and his Government or the lack thereof. And Giordani has been Minister of Planning and a member of the Board of the Central Bank for nine of the eleven years of the Chavez administration, so he can’t skirt responsibility. As I said earlier, the “mutuo” did not even exist when Chavez got to power and its abuse took place in the last four years. The website Venepiramides, now well known, wrote one of its first posts under the Title “The parallel financial system of mutuos” in which the author warned that the authorities did not understand the dangers. This was over a year ago, others such as Veneconomia wrote about it in their monthly (by subscription), apparently only the Government was surprised by this.

As of October 31st. of last year, there were “mutuos” to the tune of some Bs. 15 billion, or US$ 2.5 billion at the swap rate. This includes U21 which was intervened in November and is now broke (and depositors lost all their money). With the decision to eliminate mutuos, basically brokers will have to return their money to their investors, all of it, within 90 days. This could be cumbersome for some, it is not easy to deleverage just like that, some assets may be illiquid or just the act of selling them may bring the price down.

Of course, this assumes that all brokers that used mutuos, large and small, did them by the book, which may be too much to hope given what the CNV has found so far. If not, we may see more brokers going under and this post ends like last night’s.

Expect this story to continue…

Stay Tuned!

30 Responses to “Government forces brokers to deleverage, more brokers shut down”

  1. Jose Says:

    The sincere truth is that financial laws allowed Brokerage Houses to do mutuos. It turned Brokerage firms into unregulated banks: asset banks.

    There were two types of mutuos in my opinion: the custody of financial assets under a security lending agreement and cash investments or cash products backed by the concept of security lending.

    I would dare say that most -if not all- venezuelan brokerage houses offering custody of financial assets were doing it thanks to the law having allowed mutuos or security lending. The mutuo basically became the standard for asset custody, otherwise for the majority of- if not all- brokerage houses it became impossible and not economically profitable to be the custodian of assets.

    With the mutuo, all clients´ assets would fall in an omnibus account under the name of the brokerage firm, mixing such assets together with those of brokerage firm. This point is extremely important because a regulator can´t differentiate between the brokerage´s assets and clients´s assets.

    In the United States, strict laws regulate brokerage activities. These laws demand that each client must have a custody account and forbid brokerage institutions to put hands on client´s assets unless the client passes them to a margin account in order to seek financing or leverage.

    Again, this is important. The new law which forbids mutuos does not specify brokerage houses about omnibus accounts and separation of assets. This is also true for banking laws. Lots of bank clients have gone to public offers of venezuelan bonds and have left their bonds under the bank´s custody. Most likeley, such assets are also in an ombibus account. If the bank goes bankrupt, the assets will not be liberated and will be subject to the process of liquidation.

    Therefore, when you open an account with a financial firm in Venezuela, seeking brokerarage services and custody of assets, do so knowingly. Understand that your assets are exposed to financial risk of such institutions. That is, unless they offer you the possibility of opening an account in Caja Venezolana de Valores or a foreign regulated broker such as JP Morgan Securities, Pershing, Wachovia Securities, etc.

  2. Bill Simpson of Slidell USA Says:

    Keeping your savings in US dollars will work, at least for the next couple of years. US inflation should remain under control for the next year or two, so your dollars won’t lose their value. Over the longer term, inflation is a great threat to the dollar because of the high level of US government debt. The euro might be a problem a lot sooner with all the European debt problems in Greece, Spain, Portugal and others. The euro is not a national currency. The dollar is. And the US dollar will remain the world reserve currency for a long time.
    Whatever happens, the US dollar will be safer than your local currency until Venezuelan oil exports can be greatly increased. That might take quite a while even with Russian and Italian help in developing the huge Oronoco heavy oil deposits. If Venezuela ever gets good government, with its’ tremendous natural resource base, it could have one of the world’s strongest currencies. American universities don’t study Venezuela for nothing.
    Gold can go down, as it did today, but it will never become worthless like paper money can. I don’t own any gold myself, but will if inflation really starts to take off.

  3. churlish Says:

    Arturo, since you seem to be hanging around here more and more, hoping to be heard and maybe even engaged in conversation and –God forbid– perhaps even influence someone, may I recommend that you open an account and go ahead and write your own blog and dazzle us all with your invective. I’m sure it will be a resounding success. Go for it!

  4. moctavio Says:

    If he extends his comments I would, but all he does with his ignorant and off the topic comments is prove exactly what I am saying: That this revolution is a failure and all about fanaticism. He thinks he has a readership by coming here, what he has is a confirmation that it is only idolatry that drives this empty revolution.

  5. Eric Lavoie Says:

    Arturo you are a moron, get the message and leave. Miguel can’t you block his ip?

  6. moctavio Says:

    You said leverage =gambling, you were the one that lied. Most brokers manage their leverage very well and use leverage very well, if some did not it was because Chavze put in charge of the system two former corrupt military who were looking how to make money, not how to run the system. It was sheer incompetence. As usual you skip this detail which goes to the hear of the problem: Mutuos did not exist before Chavez, the monster was created by the robolution. And you are still a troll, as usual

    7. The political dissenter/martyr troll

    If your blog is interesting, chances are it’s because you take a stand on things. You have political views you feel passionate about. You build a community of people who are interested in these things and who interact thoughtfully and productively about said things. Heck, some people even manage to disagree civilly. Until political dissenter/martyr troll comes around, starting fights with everyone in a comment thread, spewing its passionate anti-whatever-you’re-into views all over the productive discussion. This troll will likely get mouthy about how pathetic a blogger is for not entertaining dissenting opinions, all the while only being interested in hearing itself talk (or type, as it were). Political dissenter/martyr troll, what good do you think you are doing? Whose mind do you think you are changing? Troll, you are an asshole.

  7. Arturo Says:

    Thanks for the usual insults Octavio. However, why not try to educate your readers by explaining what is fractional reserve banking and how it works to affect them and their families. Then, they will understand why the brokers from which you earn your living are being deleveraged.

  8. HalfEmpty Says:

    Whiskey, fishhooks and OFF are your best investments.

  9. deananash Says:

    I agree with Miguel, it’s not about either / or, but rather, having a diversified portfolio. Apartments in Miami are just about as cheap as they’ve ever been. If you’re choosy (and patient) you can pick up a great deal in foreclosure. And owning property in the States can’t hurt when you have to flee Venezuela.

  10. firepigette Says:

    Thanks Miguel for your informed opinion…

  11. firepigette Says:

    I have thought about buying gold instead of owning stocks( we have lost about 10 % of our investments since the recession), but I am just too financially challenged to know the right thing to do.My husband thinks that it would be a mistake…but then again he knows nothing about it either.

    Bill, you have brought up a subject that is on my mind….

  12. jsb Says:

    How accessible is gold in Venezuela and is it sold at the market rate?

  13. Bill Simpson of Slidell USA Says:

    If you can, and you have some savings, you might want to get some gold coins because inflation could get way out of control and completely wipe out the value of any paper money savings you may have. With the government messing around with the financial system, things can spiral out of control very rapidly. Even in the USA, some wealthy people are buying gold coins and bars to protect their nest eggs. Expect the brain and talent drain to start to accelerate. Some South Vietnamese got out with gold following the fall of South Viet Nam. Good luck.

  14. Isa Says:

    Silly statement of the year: Leverage is tantamount to gambling.

    Well, banks are leveraged a factor of eight. They are gamblers?

  15. Kepler Says:

    Yep, don’t feed him!

    Miguel, seen? They are bringing a guy from Prison-Island to try
    to solve the energy mess.

  16. moctavio Says:

    TROLL ALERT! Yes arturo and as I said this was created and allowed to go on unsupervised by the Chavez incompetent Government, so what the f…. is your point. We know what leverage is, we get it, this is as usual a comment that adds nothing to the discussion because you did not even bother to read it, as usual.

    7. The political dissenter/martyr troll

    If your blog is interesting, chances are it’s because you take a stand on things. You have political views you feel passionate about. You build a community of people who are interested in these things and who interact thoughtfully and productively about said things. Heck, some people even manage to disagree civilly. Until political dissenter/martyr troll comes around, starting fights with everyone in a comment thread, spewing its passionate anti-whatever-you’re-into views all over the productive discussion. This troll will likely get mouthy about how pathetic a blogger is for not entertaining dissenting opinions, all the while only being interested in hearing itself talk (or type, as it were). Political dissenter/martyr troll, what good do you think you are doing? Whose mind do you think you are changing? Troll, you are an asshole.

  17. Arturo Says:

    Leveraging is tantamount to being able to GAMBLE more. It has nothing to do with INVESTMENTS which benefit the country. It is the same as los fondos golondriinos. Don’t you guys learn anything from the problems in the US? Deleveraging the brokers means that they will be unable to assume too much risk. The next thing to do is to dismantle the fractional reserve banking system in Venezuela which is the root of all evil and financial exploitation of the middle classes.

  18. deananash Says:

    China’s stunning rise to power is only a surprise to those who weren’t paying attention. Ditto the man-made disaster that is Venezuela today. Both are decades-long overnight “success” stories. More simply, if you plant apple seeds, then eventually, you’ll get apples.

    And the only way to fix that is to move away from the apple trees, or destroy them (cut off their water and sunshine or cut them down.)

    Just don’t expect the apple trees to change, suddenly or slowly. Because no matter how hard you try, it ain’t gonna happen.

    For him who has ears to hear….

  19. Kepler Says:

    Sorry, I did not express it well when I said “the mess in Germany”:
    she went to a medicine congress and then to visit me.
    The Venezuelan government first asked for many permits, there was a lot of hassle coming here, she got the dollars faster “because she knew someone”, then she had problems with a credit card that was covered, then when she was back they demanded all kinds of papers and she wasted a lot of time on that. That was in 2007 and now it is 10 times worse.

    Still, although that is crazy, that is not the first thing to bring forth in the public discussion. A PSF is not important and the international press is now more and more clear about the situation, but we need to focus on more common messages and priorities when talking about what is wrong with Venezuela and what we want to change.


    And you are in Venezuela, so it is not like they can tell you “es que no sabes lo que vivimos nosotros”.

    There are common topics we need to discuss over and over and only by discussing them will we win over many of those who are still not with us.

    Some of the topic:

    – security (that is an easy one, perhaps the only one the oppo has grabbed more or less well, even if it has not known how to tell me Venezuela is not just worse now, it is much worse than elsewhere)
    – quality primary education, including access to good books for all
    (the demos so far focused too much on “con la educación privada no te metas, i.e. we don’t care a fig about the rest, something stupid as better primary schools are a win-win situation)
    – creation of decent jobs that create value (even the most ignorant person will understand if he gets some explanation, that it is better if Venezuela produces something more than oil and he does it instead of selling chinese scissors)
    – fighting corruption (there are lots of very concrete measures that people can think of)
    – creating transparency
    – promoting open debate in the National Assembly
    – accountability (ex: a law whereby the president has to answer every 6 months live to questions by the opposition, as is the case in Parliamentarian and semi-parliamentarian systems)
    – rubbish disposal, sewage (lots of problems in municipalities with vertederos)
    – energy
    – decent, efficient public transportation

  20. karl Says:

    According to Venepiramides, these are the most affected brokers by the ruling:
    Econoinvest (1.828 millones)
    Bencorp (434 millones)
    AVC Valores (433 millones)
    BOD (354 millones)
    Caja Caracas (274 millones)
    Activalores (267 millones)
    ABA (226 millones)
    Financorp (201 millones)

  21. moctavio Says:

    Juancho: That is Chavez’ story. Why do you think crime went out of control? Chavez destroyed Venezuela’s professional police system and replace it with former of active military with no clue about how to fight crime (Did you know Caldera lowered the crime rate?). Same with the electricity system, health, you name it.

    XX: I have a conflict of interest, write to me at, I will explain.

    JFE: It was a combination of events. First, the law explicitly banned brokers from receiving deposits. Then, Chavez came and destroyed the Caracas Stock Exchange with his policies, eliminating the main business of most brokers. Finally, someone cam up with the idea of mutuos, went to the CNV and had them approved. He then went around to brokers, selling his services on how to set them up.

    Kepler: With the foreign currency quota Chavez has made the middle class recipient of his generosity, jst like any mision. Everytime I say I am against that system, people get mad at me.

  22. Kepler Says:


    Perhaps I expressed myself badly.

    I KNOW. All my relatives live in Venezuela. My brother and sisters are in a similar situation.
    I know how frustrated they are. My sister is a surgeon, she went to Germany 3 years ago and it was a whole mess. Still: as shitty as this situation is, it is less relevant for people abroad who are trying to understand Venezuela’s situation, even for those who are not PSF.
    I also have some aunts and uncles who are much poorer. I won’t even talk about “mi tía chavista” (who, I think, is now not chavista anymore, finally). Do you think they care about dollars? They even never had a credit card or went to another country but colombia…and they just
    “lower middle class”.

    See it from here: the regime is talking (i.e. lying) all the time about how it helps the poor, how it provides finally free education (we know it is a blatant lie), about public hospitals, even about development (we know it is all rubbish)
    And then journalists ask people from the opposition and they come and say “now we have less dollars, we cannot go to the US as we used to”. At the same time foreigners see the videos of the slums in Venezuela.

    I am no socialist, I came probably from the same background as you did, but I tell you: this does not sell anywhere on Earth. It can be fine to talk about that with people who know all the mess, who are in the same situation, but few outside would get it.

    In Venezuela many in the upper-middle groups are not finding a way to talk about common issues with the poorer…and there are and not just about security.

    En Venezuela cada uno anda con su rollo. And as those rollos are not the same, we are not dealing with Hugo.

    Even for poor political interest, we are shooting in the foot if we use that as main complains abroad.

    And I am sorry for my sisters and brother and I know I have it fine here with my euros.

    If we talk to the others, be it in Venezuela or abroad (I think now it is much more important in Venezuela), we need to talk about the most i mportant things for all first.

  23. Robert Says:


    Do you remember in the 90’s on occasion you could get a weekend special on a return flight to the USA for a couple hundred USD. My brother-in-law went to buy a return ticket to Houston yesterday and the price was over 4000 BF. We were both flabbergasted. We were able to buy him a direct Caracas-Houston eticket for 1000 USD and now he is fretting over how to pay us back because if he had to buy this on the street, it’s 6000 BF. Talk about a f**k*d up system.

    This is our first personal experience with the devaluation.

    Spending power has diminished to the point of ridiculous. And he’s a middle class doctor working for national health and his private practice, same as his wife.

  24. Kepler Says:


    I just checked out the post you pointed at. Although the guy is just another PSF, I find it depressing how the Venezuelan who answers there speaks almost half of the time about his inability to get dollars and euros and the like. Although that is a great pain in the ass and can have lots of bad consequences for him (as well as for several relatives I have in Venezuela), there are a million other concerns Venezuelans need to mention first.

    Really: when some people from the middle- upper-middle class start to talk to foreigners about the problems of Venezuela, I hear time after time first and foremost “our dollars, our euros”.

    We lose a little bit of credibility about our ability to care for Venezuela as a whole.

    Giving money to Haiti? I don’t mind that. We have done that before.
    I do mind giving money to Argentina, giving cars to Bolivia, giving money to cuba, giving overpriced deals to Spain, giving free petrol to the US

    I think we have to talk first and foremost about the political mobbing,
    the incredible increase in drug trafficking, in crime (he mentioned it almost en passant),
    the Lista…
    and then about the deterioration of real income for ALL Venezuelans (not just for us and our dollar…or those of my sisters, mind, I am abroad), a corruption that is even worse than before, about the deterioration of quality in public schools (where 80% of pupils are), about the attacks on elected politicians of the opposition, etc.

  25. JFE Says:


    you said that the Mutuos did not exist 8 years ago. What event do you think triggered the appearance of these instruments and not before?

    The easy answer would be lack of oversight. But there must have been something that gave the idea or the green go to the credit institutions to issue these instruments. Perhaps a law was repelled or interest in banks were capped making these “mutuos” more attractive?

  26. XX Says:


    Podria recomendarme una Casa de Bolsa que no valla a quebrar y que participe en las subastas de bonos cambiarios


  27. Juancho Says:

    Miguelito wrote: “…the Chavez administration named two Heads of the CNV who were former military with no experience in capital markets.”

    Esta es una afirmación fantástica. I mean, think about it.

    How about – I took mi caro to el mechanico, even though he’d never actually worked on an automobile. Or, I visited the doctor’s office, but the doctor had never practiced, nor yet studied, medicine.

    What kind of madness is it that El Jefe think jobs – such as head of large financial institutions – are so menial and facile that they require no experience or know how – nothing. Nada. They simply don’t require any kind of qualifications or expertise. At all. The boss simply shows up, drinks few maroncitos, smokes a Belmont or two, barks out a few orders, sexually harasses the younger mujers, and calls it all good.

    What the hell, caballeros? Is is really 2010 here in Venezuela? Maybe those who have never traveled or read a goddam thing consider this reality. To the rest of us it feels like a halucination . . .


  28. moctavio Says:

    Cualquiera que dice que Venezuela es un modelo de democracia participativa se desacredita con esa frase. Chavez agarro el referendum del 2007 y legislo lo mismo que el “pueblo” voto no queria….No vale la pena, es otro fanatico desde lejos…

  29. Li Says:

    No vi donde escribirte directamente pero queria preguntarte si conoces este “blog”:
    Mis amigos dicen que no vale la pena responderle a ese Sr. pero me gustaria ver un intercambio estre ustedes dos 🙂
    Avisame si llega a suceder

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