BREAKINGVIEWS-Colombia brokerage fail more MF Global than Lehman

Mon Nov 19, 2012 9:16pm IST

By Raul Gallegos

NEW YORK Nov 19 (Reuters Breakingviews) - The collapse of Colombia's largest brokerage evokes MF Global MFGLQ.PK more than Lehman Brothers LEHMB.UL. Interbolsa's ICB.CN rapid demise is a tale of an ambitious firm with shoddy financing felled by bad bets and a chronic lack of liquidity. Despite its importance to the country's financial markets, however, the fallout shouldn't be systemic.

Interbolsa handled a third of the daily activity in the Bolsa de Valores de Colombia BVC.CN and was also a dealer in its home country's sovereign debt. But unless the dodgy funding turns out to be more pervasive, absorbing the loss of such a big player should be manageable. Interbolsa was leveraged at 18 times equity - higher than U.S. firms operate under, but not worryingly so.

The bigger problem was Interbolsa's repurchase agreements. Rival brokerage Ultrabursatiles reckons, for example, that repos on shares of Fabricato FHT.CN equaled 70 percent of the textile maker's market value as of early November. It also appears Interbolsa may have used its $174 million of assets under management to create a market for such illiquid stocks to finance operations. If so, that went far beyond the questionable use of repos by MF Global and Lehman to hide exposures or mask leverage. There may also be more surprises. Colombia is probing the possibly illegal use of customer funds, market manipulation and tax evasion.

It’s hard to blame the watchdogs much, though. They can only step in once a brokerage fails to honor an obligation, as Interbolsa did in early November. Colombia’s Superfinanciera monitored the lack of liquidity and a sale that didn't materialize.

Colombian authorities also have no power to scrutinize other parts of the larger Interbolsa financial group, which includes an asset management arm and an airline. This means they see an incomplete picture. The government has frozen Interbolsa's assets and given the troubled holding company six months to reorganize or face liquidation.

It needs more options. Even before the 2008 financial crisis, U.S. watchdogs could have intervened more directly. Post-mortems on MF Global and Lehman found the problem was that regulators failed to act, worked at cross-purposes and sought to protect their own fiefdoms first.

Colombia's problem is a lax approach. There's no guarantee giving watchdogs more teeth will prevent future scandals. But leaving any capital market at the mercy of its middlemen, whether a mature one like America's or a developing one like Colombia's, is asking for trouble.

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CONTEXT NEWS

- Colombia's regulators have opened a criminal investigation into the failure of the country's largest brokerage Interbolsa, the attorney general said on Nov. 14. The financial markets regulator took administrative control of the firm earlier in November, citing liquidity issues after it failed to pay back an $11 million overnight loan.

- Reuters:

Colombian govt orders reorganization of Interbolsa parent [ID:nL1E8MGE3K]

Colombia opens criminal probe into Interbolsa collapse [ID:nL1E8ME3UO]

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

- For previous columns by the author, Reuters customers can click on [GALLEGOS/]

(Editing by Jeffrey Goldfarb and Emily Plucinak)

((raul.gallegos@thomsonreuters.com)(Reuters messaging raul.gallegos.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS COLOMBIA/BROKERAGES

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