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Cablegate: Despite Crisis, Morgan Stanley Bullish On Brazil

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RR RUEHGH RUEHRG
DE RUEHSO #0621/01 3260951
ZNR UUUUU ZZH
R 210951Z NOV 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8724
INFO RUEHBR/AMEMBASSY BRASILIA 9880
RUEHRG/AMCONSUL RECIFE 4245
RUEHRI/AMCONSUL RIO DE JANEIRO 8925
RUEHBU/AMEMBASSY BUENOS AIRES 3329
RUEHAC/AMEMBASSY ASUNCION 3576
RUEHMN/AMEMBASSY MONTEVIDEO 2809
RUEHSG/AMEMBASSY SANTIAGO 2576
RUEHLP/AMEMBASSY LA PAZ 3985
RUEHME/AMEMBASSY MEXICO 0850
RUEHKO/AMEMBASSY TOKYO 0401
RUEHBJ/AMEMBASSY BEIJING 0472
RUEHHK/AMCONSUL HONG KONG 0501
RUEHGH/AMCONSUL SHANGHAI 0015
RUCPDOC/USDOC WASHDC 3210
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 SAO PAULO 000621

SIPDIS
SENSITIVE

STATE FOR WHA/BSC, EEB/CBA
DEPT OF TREASURY FOR JHOEK, BONEILL

E.O. 12958: N/A
TAGS: EINV ECON EFIN ETRD EAGR BR
SUBJECT: DESPITE CRISIS, MORGAN STANLEY BULLISH ON BRAZIL

REF: A. 07 Sao Paulo 832; B. Sao Paulo 483

SENSITIVE BUT UNCLASIFIED

1. (SBU) Summary: On November 10th, Ambassador Sobel met with the
senior Brazil management of Morgan Stanley to discuss the firm's
prospects and how the firm is weathering the current financial
downturn. Management reported that while they expect mergers and
acquisition activity to be brisk, certain business lines, including
stock trading and equity issuances will be down significantly.
Despite this, Morgan Stanley remains bullish on Brazil and lists
Brazil as its top emerging markets investment opportunity. Senior
management also noted that they are starting to see a significant
reduction in new consumer credit loans due to interest rate ceilings
on loans to retirees. End Summary.

MERGER ACTIVITY PROMISES TO BE BRISK
- - - - - - - - - - - - - - - - - - -

2. (U) On November 10, Ambassador Sobel met with Charles Stewart,
Head of Latin American Investment Banking and Daniel Goldberg, Head
of Mergers and Acquisitions for Morgan Stanley. Goldberg re-affirmed
prior statements that mergers and acquisition activity in Brazil
continued to be strong - especially in the financial and
telecommunications sector. Using the Banco Itau merger with
Unibanco as an example, he pointed out that many financial players
are consolidating as a defensive measure. He noted that Banco Itau
was a large bank with a $30 billion market capitalization and a
strong balance sheet prior to its merger. However, despite its
relative strength, it was suffering from customer withdrawals after
the financial crisis hit. While the banks insisted that they had
been in discussions long before the merger was announced, Goldberg
opined that Unibanco was likely driven into the merger by fear, and
Itau wanted to reassure its shareholders and depositors that it had
the strength and scale to weather the current financial storm.

3. (U) Goldberg indicated that the financial crisis would also
affect the way companies paid for their acquisitions. While in more
normal markets, cash deals are very common and are used as
incentives to shareholders to approve a merger, he expects the
volume of stock-for-stock deals to rise in the coming months. As
the number of "survival deals" increases and companies hoard cash to
maintain a strong balance sheet, he anticipates that stock, not
cash, will be the acquisition currency du jour.

TRADING REVENUES EXPECTED TO FALL SHORT
- - - - - - - - - - - - - - - - - - - -

4. (SBU) Morgan Stanley and Credit Suisse share the title of top
traders on the BOVESPA (Brazilian Stock Exchange). Morgan Stanley
is expecting that, in 2009, both the volume of trading will decline
and, as market values remain low, the profitability of the trades
will decline as well. They are assuming trading profits for
customer accounts will be down 40 percent next year. He noted that
Morgan Stanley also expected significantly reduced trading profits
from its proprietary trading accounts (stock trades for Morgan
Stanley's own account).
BRAZIL REMAINS THE BEST OF THE BRICS
- - - - - - - - - - - - - - - - - - -

5. (SBU) Stewart stated that while Morgan Stanley expected profits
to be down in Brazil in 2009, the firm remained committed to the
Brazilian market. He shared that Morgan Stanley's research
department tracks over 150 emerging market nations and that Brazil
is the top investment pick in the group. He expects to see a
rotation of money out of Russia and the Middle East and into Brazil
as investors grow disillusioned with the lack of profitability of
their other emerging markets investments. Stewart noted that within
the past month, billionaire real estate investor Sam Zell invested
another $50 million in Brazil. (Comment: Econ/Poloff was unable to
independently verify the size/type of investment made by Mr. Zell
although public filings indicate that he recently increased his
stake in Brazilian real estate developer, Gafisa, to over 18

SAO PAULO 00000621 002 OF 002


percent. End Comment).

THE LAW OF UNINTENDED CONSEQUENCES
- - - - - - - - - - - - - - - - - -

6. (SBU) Goldberg noted that originations of new consumer credit
loans fell by 90 percent in October. He explained that a
significant portion (28 percent) of consumer financing to Brazilian
middle and low-income earners is repaid through automatic payroll or
pension deductions (credito consignado) (Ref A). In an effort to
protect its retired population from usury, the Instituto Nacional do
Seguro (INSS), the Brazilian Social Security Administration,
mandated that interest rates to retirees be capped at 2.5 percent
per month. While this was not a problem in a relatively lower
interest rate environment, tighter credit markets are driving up
consumer credit rates (approximately 80 percent per year on
fixed-rate consumer loans), making it uneconomic for banks to lend
to the retired population. (Note: See Ref B for more on credit and
interest rates in Brazil. End Note.) Goldberg referred to the
result as proof of "the law of unintended consequences" - INSS
attempts to protect its retirees from high interest rates has
resulted in them being shut out of the current credit market.
(Note: Analysis of the growing credit market and whether concerns
are warranted regarding recent increases in nonperforming consumer
loans will be forthcoming Septel. End Note.)

7. (SBU) Comment: The observations of Morgan Stanley senior
management reinforce market commentary that Brazil maintains
investor interest despite the market downturn. More troubling,
however, are Goldberg's comments regarding the tightening of the
consumer credit market and whether this indicates a more serious
credit problem longer term. Post will continue to monitor this
situation and report on any possible negative impacts this
tightening credit could have on the overall economy. End Comment.

8. (U) This cable has been cleared by Ambassador Sobel and
coordinated with the U.S. Treasury Financial Attach in Sao Paulo.

WHITE

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