These are the lessons of the Interbolsa case
written by Deicy Pareja, On May 20, 2020
The case of this brokerage firm shows that financial malpractice can drive a company into bankruptcy and leads to mistrust in the market.
The million-dollar disaster of Interbolsa, whose liquidation was ordered by the national government in November 2012, remains unresolved: there is still no justice or reparation; the victims are still unhappy.
Bad practices brought the country's banking system to the brink of becoming unstable, and one of the errors that took its toll was the lack of thoroughness of the regulatory authority, in this case the Financial Superintendence. The 492 victims, including both natural and legal persons, recognized to date by the Government, claimed COP 254,000 million, but only recovered COP 65,000 million.
Among those affected are notorious cases of important entities that lost millions: Protección Pension Fund, Mansarovar Energy and Alianza Fiduciaria. In addition, the brokerage firm did not pay a loan of COP 17,000 million to the BBVA bank, which it used to show liquidity back then. Finally, what triggered the scandal was the complaint filed by the bank about the default on the debt.
Diego Agudelo Rueda, director of the Finance and Banking Research Group at Eafit University (Medellín), says that, upon intervention and subsequent liquidation of the brokerage firm, the public wants to better understand the risks of investing in Colombia's financial markets.
The expert says that the financial system plays a fundamental role in a country's economy, consisting of channeling surplus economic resources from individuals and institutions to companies and entities that require them for their liquidity needs or investment projects.
A risky business strategy
The director of the Finance and Banking Research Group says that the fall of Interbolsa has its origins in a highly risky business strategy that went wrong. To him, it pays to understand the general aspects and characteristics that made it particularly risky, and eventually, doomed to fail.
Interbolsa's strategy was to make the shares of textile company Fabricato marketable and increase their worth disproportionately to obtain more money for the same shares.
"To illustrate the effect of this aggressive purchasing strategy, let's consider that at the beginning of November 2010, Fabricato was traded at COP 26, while on November 1, 2012, prior to Interbolsa's intervention, it was traded at COP 91, which means an effective valuation of 87 percent annually," the expert points out.
Agudelo also indicates that this strategy involved a high risk because the brokerage firm and the customers involved were borrowing money to finance the purchases of Fabricato shares. That increases yields if business is successful, but magnifies losses when things go wrong.
From an academic perspective, the researcher talks about the lessons learned from this case, one of the most notorious of the country, and quotes in his academic article: “The Interbolsa debacle and the risks of investing in securities markets”.
See the mistakes
The brokerage firm used a method known as a "maturity mismatch," i.e., it was borrowing short-term funds to invest in the long term. It also employed a method called "repo" operations, which provides a share as collateral for a loan over a certain term, usually no longer than three months.
According to the expert, in normal situations, "repos" are very safe investments for those who deliver funds, because Stock Exchange provisions require shares serving as collateral to be liquid, but in this case it was not.
Although banks have control systems in place to reduce the risk of a "maturity mismatch" problem, the brokerage group did not have one, much less the backing of a solid financial institution in the event of a liquidity problem.
"An additional aspect that further diminished this strategy is that Interbolsa provided both Fabricato shares and its own shares as collateral. At first, the market accepted them. What wound up making the deal unsustainable was the fact that market agents, some of whom were knowledgeable about the strategy, began to avoid renewing the "repos" made on these shares, or to grant new funds to the brokerage firm," says the expert in his article.
Although the regulation was modified after the Interbolsa case, Agudelo emphasizes in his text that the lessons learned from the case include the fact that greater regulation and oversight of brokerage firms is required to prevent them from incurring in such risky deals financed by money from third parties, or from being able to perform strategies involving unplanned "maturity mismatches".
Before the scandal, few imagined that Interbolsa was working so sloppily, because it was a thriving company, with credibility, an investment management company, rated AA+ (before it was intervened) and was recognized on the securities market as offering very attractive opportunities for both short and long-term yields.
Another lesson, in the researcher's words, is that you should not expose all the capital in a few securities. "Remember the old maxim of not placing all your eggs in the same basket. There is no company, no matter how solid it may be, that is completely exempt from collapsing," he says.
What could an investor have done?
Be attentive to comments, as in the last month, before the Government intervened Interbolsa, there were rumors about the need for the brokerage firm to renew its loans with banks; there were also comments about mismanagement and corporate governance issues.
Also, be aware of the operational risk, and check that the brokers themselves are not mishandling business.
On the other hand, adds the expert, regarding the firms' customers, it is very important to review the risks involved in their transactions in financial markets. "For example, the shares offered as collateral in the repos, in addition to being liquid, must be issued by solid companies, free from suspicion of speculation.
Following the scandal of one of the country's most important brokerage firms, many people distrusted the Colombian securities market and withdrew from it, so there was a major crisis of confidence in the system. It has been more than five years and the country has still not been able to get over this mistrust.