Historical Notes: Castelo Branco, Garrido Torres, and Brazilian Financial Institutions Castelo Branco, Garrido Torres, & Brazilian Financial Institutions

Historical Notes (Continued)

Castelo Branco and Garrido Torres

Humberto de Alencar Castelo Branco : (1900 - 1967) Brazilian military officer who was Chief of Staff of the Army in 1963 under President João Goulart.

After the Revolution of 1964, he became president of Brazil (1964 - 1967).

President Castelo BrancoCastelo Branco reformed the Brazilian capital market

Most of the critical economic reforms that led to the 'Economic Miracle' were enacted in his brief three year term in office, with the economic team of Octávio Gouvêia de Bulhões (Ministry of Finance), José Garrido Torres (National Economic Development Bank), Dênio Nogueira (Central Bank), and Roberto Campos (Ministry of Planning).

Castelo Branco had been a colonel in the Brazilian Expeditionary Force in World War II and, as chief of operations, fought along side the Americans in the Italian campaign.

Son of a general and relative of the famous Brazilian author, José de Alencar, Castelo Branco was highly intelligent, having studied both at the French Ecole Superior de Guerre and the U.S. Command and General Staff College at Fort Leavenworth.


José Garrido Torres : Brazilian economist of the Fundação Getúlio Vargas and leader in the effort to reform Brazil's capital market in the 1950s and 1960s.

Garrido Torres participated along with Octávio Gouvêia de Bulhões in the U.S.-Brazil Abbink Mission (1949) and was editor of the review Conjunctura Econômica for a number of years.

Garrido Torres, as Superintendent of Money and Credit from 1958 to 1959, allowed finance companies (sociedades de crédito, financiamento, e investimentos) new ways to sell commercial paper (letras de câmbio), thereby getting around usury laws dating from 1933 that impeded development of the financial market.

Letras de câmbio were sold by door-to-door salesmen and were an essential step in the development of the Brazilian securities market.

Finance companies also sold fundos de acceptance, structured under provisions of corporate law for 'sociedades em conta de participação', precursors to money market funds.

New York UniversityGarrido Torres arranged scholarships for Brazilian security analysts to study at New York University

After the Revolution of 1964, Garrido Torres headed the National Economic Development Bank (BNDE) and encouraged companies to sell shares to the public as a condition for access to government financing.

In 1965, Garrido Torres asked John Schroy for a memo on ways in which the BNDE could contribute to the development of the capital market. Schroy pointed out the need to develop investment professionals and securities analysts and worked with Garrido Torres and Joseph H. Taggart, Dean of the New York University Graduate School of Business Administration, in developing a curriculum and program for training Brazilians in the New York market.

This program, financed by the BNDE, helped in rapidly improving technical competence of Brazilian capital market professionals in the early 1960s.


Licensed Financial Institutions : On December 31, 2020, under Minister of Finance Octávio Gouvêia de Bulhões, President Castelo Branco promulgated Law 4595 that reformed the Brazilian financial market and established a Central Bank authorized to license and oversee financial institutions.

Prior to the reforms of 1964, commercial banks were the primary financial institutions in the private sector, raising funds through demand deposits and earning interest on short-term commercial loans.

Stock brokers were government officials, organized as sole proprietorships, without capital reguirements or rules for accounting and internal controls. Stock exchanges were sindicates of official stockbrokers. Regulations for stock exchange operations had been codified into law decades before, based on rules of the 19th century Paris Stock Exchange, allowing little opportunity for modernization or new ideas.

The Paris Stock ExchangeThe legal basis for the Brazilian market can be traced to Paris in the 19th century

During the 1950s, some finance companies experimented with ways to get around the usury laws that were hobbling commercial banks.

In these years, two types of securities were sold door-to-door: 'letras de câmbio' and 'fundos de acceptance'.

  • The first were low-denomination financial acceptances.
  • The second were collective investments, organized either as 'contas de participação' under corporate law, or condominiums under government regulations.

There were a few closed and open-end investment funds, organized under various provisions.

The legal basis for collective investment and securitized debt was uncertain and privileges granted to official brokers hindered development of the market.

Following the Revolution of 1964, laws introduced new institutions into the market. The philosophy driving this reorganization was, in part, hierachical, and, in part, an allocation of function.

In the securities market, the following hierarchy was established:

  1. The Investment Bank: A finance company that could raise money by selling certificates of deposit. The 'investment bank' could make loans up to a certain multiple of capital and reserves. Capital requirements for a license as an 'investment bank' were quite high. In addition to being able to operate as a finance company, the investment bank could also underwrite new issues and manage investment funds.
  2. The Brokerage Company: A securities broker-dealer that could be a member of a securities exchange, do underwritings, and manage investment funds. However, the brokerage company could not sell certificates of deposits or make commerical loans. A Brokerage Company could provide securities accounts to investors and make margin loans. The capital requirement for a brokerage company was, at the time, about US $300,000.
  3. The Securities Distributor: A securities dealer that could sell securities door to door for a commission and that could act as a dealer. The capital requirements were low, but activities were limited.

In addition to these three licenses, a housing finance system was set up, and Real Estate Finance Companies were licensed. These 'imobiliárias' could make indexed loans secured by real estate and could raise money by issuing indexed 'letras imobiliárias'.

The result of these reforms was a rapid opening of the market to new players and laws that provided the legal basis for a cornucopia of new operations.

Players in the financial market with access to capital scrambled to acquire new licenses and permissions. The São Paulo commercial banks metamorphasized into 'universal banks' with subsidiaries covering a whole range of financial operations.

The combination of unrestricted branch banking and universal banking, combined with the Economic Miracle and the economic size of the country, transformed the Brazilian banking system into one of the most modern and efficient in the world.

By 1979, Banco Brasileiro de Descontos was the largest bank in Latin America with one thousand branches from Porto Alegre in the south to Manuas in the Amazon. Bradesco offered a full range of financial and securities market services.

Amador Aguiar, Founder of BradescoAmador Aguiar, founder of Bradesco. He was one of the greatest bankers of the 20th century

The Bradesco head office at the Cidade de Deus, outside of São Paulo, was the largest consumer of IBM products and services in the world. The computerization of the Bradesco network surpassed the most advanced U.S. banks.

A client could deposit money in a branch in the Amazon and have funds available for withdrawal the next morning from his account at a branch in Copacabana. (In the U.S., in the same year, it took ten days to have a check cleared to a branch just across the street in Florida.)

Brazilian commercial banks did not place priority on developing securities markets. However, the preference given by the government to the so-called 'investment banks' put stock brokers and securities exchanges in a secondary position to commercial banks, as was seen in the case of Decree-Law 1401.

In 1975, Decree-Law 1401 allowed foreign investors, for the first time, to invest in Brazilian closed-end equity funds without the hassle of investment licensing. When the law was first announced, dozens of 'investment banks' announced that they would soon be forming such funds and published expectations for the amounts to be raised ran into the hundreds of millions of dollars.

However, Decree-Law 1401 required that these new closed-end funds be managed only by Brazilian investment banks. Joint-management with foreign investment banks was not permitted. Furthermore, the money could not be repatriated for seven years.

When Brazilian investment banks went abroad to raise funds under Decree-Law 1401, they quickly found that they had no standing in the international investment community. Foreign investment banks were not willing to entrust client's money to Brazilian investment banks with no track record or experience in capital markets.

In the end, only three Brazilian investment banks were successful in placing Decree-Law 1401 funds in the international market: Banco Hipotecário Lar Brasileiro, Banco Bozano Simonsen, and Banco de Investimento do Brasil. The total funds raised were less than US$ 40 million.

The reason why these three banks were successful in raising money, while the others were not, was simply that they were the only banks that had executives with significant experience in the Brazilian securities market. The other executives were commercial bankers.

For example, John Oswin Schroy and Geoffrey Ainsworth Langlands, former executives of Serviço Nacional de Investimentos, were now managing the investment banking operations of Banco Hipotecário Lar Brasileiro and Banco Bozano Simonsen, respectively. Former executives of Deltec, including Roberto Teixeira da Costa and Júlio César Belisário Viana, were now running portfolios at Banco de Investimento do Brasil.

In time, the commercial banks got around to developing their securities operations and foreign investment banks were allowed to operate directly in Brazil.

Globalization of financial markets and the victory of universal banking has smoothed over the rough spots in the capital market reforms of 1964.


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