VZCZCXRO6469
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 
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¶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