Odd Lots - 41: Billionaires Help Tell the Story of Brazil's Boom and Bust

Episode Date: August 15, 2016

The 2016 Summer Olympics in Rio de Janeiro have been tainted by protests, economic slowdown, and a massive political scandal. In this episode we take a look at Brazil's boom and bust as told through the prism of the country's elite. Alex Cuadros is the author of "Brazillionaires: Wealth, Power, Decadence, and Hope in an American Country." He tells how a commodities boom gave rise to larger-than-life Brazilian billionaires including mining mogul Eike Batista, soybean farmer-turned-senator Blairo Maggi, and beer-and-burger-king Jorge Paulo Lemann. He tells us why 'Brazillionaires' sometimes argue over their place on public wealth rankings, what happened when Batista's Porsche went missing, and how Brazil's billionaires favor dead bugs in their decorating.See omnystudio.com/listener for privacy information.

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slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing Corporation Distributor. Hello, and welcome to another episode of Oddlots. I'm Tracy Alloway, executive editor of Bloomberg Markets. And I'm Joe Wisenthal, managing editor of Bloomberg Markets. So, Joe, have you been watching the Olympics at all? Yes, 100%. I love the Olympics.

I totally drink the Kool-Aid. I think it's amazing. I get obsessed about sports. I would never otherwise get obsessed with. I'm a huge Olympics fan. All right. So you know, obviously, it's taking place in Brazil this year. year, right? Absolutely. And, you know, unlike in past years, well, I guess every year there's

controversy leading up to the games about is the country going to be ready, was it worth it, is it going to be an economic loss? But it definitely seems like those stories were much more dramatic this year for all kinds of reasons. It seems like the stories of unpreparedness were worse and the economic toll and the corruption far worse in Brazil this year than in previous games, I would say. Right. So you've obviously had a pretty vocal contingent of Brazilians who are voicing their outrage, that they're hosting the Olympics, they're spending all this money on Olympic infrastructure and things like that. And that's in the middle of a massive government corruption scandal. It's also in the middle of a big economic slowdown for Brazil. So you can see

how people would be more sensitive about the Olympics than they might otherwise be. So it's quite a change, if you think back to, you know, just five or six years ago to what Brazil looked like, you remember, Joe, Brazil was like the emerging market economy, right? It was like the golden member of the Bricks contingent and it was doing everything right, couldn't do any wrong, things were going swimmingly. I remember that very vividly. I have this recollection of some TV story I saw from 2008, right, as our economy was in conclusion. collapse. And they were down in Brazil and the economy was booming. And they said, you know, Brazil hasn't completely figured out. It's not even dependent on the rest of the world because they don't

need to import anything. The economy is totally self-sufficient. It's thriving. And it seemed like Brazil was going to be the model for every other country to follow. Right. So I should say In honor of the Olympics in Brazil or in honor of Brazilian outrage at the Olympics, we are going to talk today about how we got from a golden member of emerging markets to where we are today in terms of Brazil. And we're going to do it slightly differently because we're going to look at it through the prism of people who got very, very rich through Brazil's rise and as it sort of entered the global economy. And with us to discuss that is Alex Quadros. He is actually a former Bloomberg reporter who's just written a fantastic book called Brazilianaires, The Godfathers of Modern Brazil. And it's all about Brazil's rise and the sort of larger than life personalities and

extremely wealthy people that played a role in that. So it should be good. I can't wait. Let's get right started. Hi. Thanks for joining us. Hi. Thanks so much for having me.

So I suppose just to begin, do you maybe want to walk us? through how you got started on the book. I know you were with the Bloomberg billionaires team at the time. Tell us how it all began. Right. So billionaires weren't something that I'd ever really given much thought to before as a class of people. But Bloomberg had this brilliant idea in 2011 to create a team of journalists that would exclusively cover the world's billionaires.

It was really the kind of beginning of the zeitgeist moment for discussions about inequality and how billionaires are coming out of the financial crash a lot better than everyone else and so on. I think the team was formally being created right as Occupy Wall Street was setting up in Zucati Park. But I was living in Sao Paulo, already working for Bloomberg, covering stock. And because I spoke Spanish and Portuguese and could write in English, they asked me if I would be the guy for Latin America for this team. And I took it on.

And as I studied these people, these incredible, as you say larger than life characters, I realized that I had a really unique window on two really important stories. And one of those stories was this boom that you were talking about in Brazil, this story of national ambition, the possibility that this country might finally be tasting prosperity. And there were these people at the top of the pyramid who were especially benefiting from that wave. At the same time, I realized I had a window on something that was happening the world around. which was the rise of, you know, this new global class of billionaires and, you know, a story about how they relate to their own wealth, what maybe is the role of a billionaire in society. So as I did the job, I kind of took notes the whole way

and eventually turned it into this book. The period in which you were covering billionaire for Bloomberg and several years around that seemed to be a huge period, not just for this study of billionaires and inequality, but Latin American billionaires in particular. There's obviously the rise of Ike Batista. Also, those were the years around then. Carlos Slim, from Mexico, becoming one of the world's richest people at one point that looked like he was going to be the richest person in the world.

what was distinct about this particular group of billionaires that you were covering? Right. So absolutely. It was a moment when it seemed like they were going to, you know, the new engines of world growth would be these emerging markets. And Aikibacista became not only Brazil's richest man during this time, but the world's eighth richest man worth $30 billion. surfing this wave of enthusiasm about the country's economic prospects, you know, promising to build a company that would be the next Petrobras, another company that would be the next Vali, you know, this unprecedented industrial empire in Brazil, that turned out to be a bubble,

of course, because he didn't have much of what he said he did. And when that became clear, it all came crashing down. But he was kind of the most flashy of all of the figures and maybe the closest to a more American style of entrepreneur. You know, he was a salesman. He loved to show off his wealth. He would invite reporters to his sprawling mansion in Rio. He would show off his yachts, his jets.

When we were calculating his wealth for the Bloomberg billionaires index, His people even sent photos of his yachts and jets and so on as kind of corroborating evidence, I guess. Like a lot of billionaires or a lot of rich people in general tend to be coy and they don't make a big deal about their own personal wealth. But he talked very specifically about wanting to get to number one and he knew where he was on the charts of billionaires at any given point. Absolutely. And in fact, when we were putting together the Bloomberg Billionaires Index, he was not. happy with where we had him on the list. We had him at $30 billion, which for most people, I think, would be fine. That'd be enough. Yeah, that would be enough. But he felt that he should

be several billion higher. And on the eve of the launch of the index, he actually called me up to harangue me about all the reasons why he should be higher on the list. And at a certain point, I cut into the harangue to ask him if he regretted having said that he would be the world's richest man within just a few years. And he responded, you know, very angrily, Jesus, Alex, you're so primitive. But then quickly switched back into pitch mode, as was his way. And, you know, this ostentation wasn't just fun and play. It was actually something meaningful to him. He had an ambition to change the way that people in Brazil thought about wealth.

He thought that, you know, people don't admire entrepreneurs in Brazil. And this is partly because, you know, all these headlines we see about corruption in Brazil, This is nothing new. This is the way that business and politics has always been done. And wealth in Brazil has always had this kind of taint, this feeling that it's inherently dirty. And he wanted to change that idea of wealth. And at a certain point in this conversation, he told me, you know, Brazilians have always admired the American dream.

What we have now in Brazil is the Brazilian dream. and I happen to be the example of it. Brazil has one of the highest inequality rates in the world. Is there something specific about Brazilian culture or society or the economy that kind of lends to that? Is it the sort of history of one hand washes the other in terms of business that you were pointing out? Is it the sort of comfort with corruption, I guess, is a terrible way of putting it. But historically, that's what there's been. Yeah, well, Brazil, you know, unlike the United States where, you know, the colonial development was really freewheeling, everything in Brazil happened in a very top-down way directed by the Portuguese crown.

And so from the beginning, the way to get ahead in Brazil was much more through personal connections than through, say, actual business. business skills. So this idea of business and success as something you get through personal connections has prospered. And it manifests in this kind of natural relationship with corruption. It's a country where the elites in business and in politics have been very successful at serving their own interests, really often at the cost of the public interest. And we see this, for example, in the tax system. The tax system in Brazil is incredibly regressive. Dividends are completely untaxed. You know, even the United States, that bastion of socialism taxes dividends. So it's a

structure that allows fortunes to maintain themselves over time, the inheritance taxes are also incredibly low. They top out at 4% in most states. And interest rates are really high, which means that if you have money in the bank that you're not investing and putting to work, you can earn a tidy return above inflation without really doing anything. I want to get to how it all came tumbling down the economic bubble and Ike's personal decline. But before I do that, you know, I think Ike is probably the one Brazilian heir that became an international name. Who else really stands out? What other characters should we know about? Well, he's definitely the best known because he really put himself out there so much.

There's another guy who is now Brazil's richest man, and now that Aiki has gone down in flames named Georgi Paolo Lehman, he is really discreet and low profile, but Americans should know who he is, and people around the world should know who he is, because he and his partners control Anheuser-Busch InBev, Burger King, Heinz, and Kraft. And if you add up the market value of all those companies,

I think it's bigger than Berkshire Hathel. the way. And Berkshire has partnered with them, right? Exactly. Warren Buffett is a friend of Lehman, and they have partnered to take over Heinz and Kraft. All right. Well, Joe mentioned it already. We've been talking about the good times in Brazil. Everything was going great. These vast fortunes were made during the boom times. What happened to sort of make it all fall apart and to get to where we are now, where we have this big corruption scandal, we have the economy sort of teetering on the brink and we have a lot, a lot of outrage on the streets. A few different things.

One is luck because this amazing commodities boom that happened, you know, a decade ago because China's economy was going crazy. When that fizzled out, that was a big blow to Brazil because Brazil, you know, is a major export of oil, iron ore, beef, soybeans. But that's only part of the story. The other big part of the story is that President Gilma Husef, who came into office in 2011, made major economic errors. But I think there's a misconception about what kind of errors she made. I think when people think of the Workers' Party, Gilma, Lula, they think of social programs. and they think, well, they just spent way too much on redistribution. In fact, those, that kind of spending was a much smaller piece of the puzzle than massive corporate subsidies that she and Lula handed out.

This was a really strange contradiction inside this ostensibly left-wing movement that, you know, wanted social justice. they also had this top-down idea of economic development. In Brazil, it's called Gizim Volvimichismo developmentalism. And the idea is that the state kind of directs development by funneling subsidies to favored sectors. The problem is they just funneled subsidies to everyone without much criteria, without much control. And Brazil's state development bank, the BNDES,

until recently was lending out more just in Brazil than the World Bank lends out in the entire world. Whoa. Was there a moment before it became apparent that it was all crashing where there were people sort of warning that this is all about to collapse, but people didn't heat it? Like, I think back to Iceland. And in the years before it collapsed, there were a few people saying, this is completely unsustainable. There's a credit bubble here. This is all built on a house of cards. Was there sort of like some specific moment where people said something is wrong before it really took hold that it was all about to go down?

You know, there may have been, but the chorus of sort of euphoria about Brazil was so strong that those voices were really drowned out. If you consider Ikeba Chista maybe the canary in the coal mine for this crash in Brazil, there were voices of skepticism about him, people saying he doesn't actually have all that oil and all that iron ore and this is a giant bubble. But, you know, this was really a kind of herd instinct phenomenon like we see so often in. you know, in the market like we saw in with the dot-com bubble or with the subprime mortgage bubble, you know, there were maybe voices of skepticism, but they were so few and far between that, you know, I think it was hard to hear them above the, above the din. How much did, you know, in all these crashes, usually there's some element of over-extending credit and lending that went bad.

How big of a story was that in Brazil? the credit bubble aspect? Very big. And certainly in Ike Bacchista's case, he was able to raise a lot of money in the bond market, even though he had no revenues. And this was partly because money was cheap and people were hungry for returns. In Brazil's case, the country definitely took on way too much debt. Gilma and her economic advisors thought that, okay, the economy grew 7.5% in 2010.

You know, there's no way it's going to grow any less than 5, 6% over the next few years. And they borrowed accordingly. But, you know, they didn't spend the money well. And that bill came due. And, you know, when she narrowly eeked out re-election in 2014, she, in, 2014, she, in immediately shifted to austerity, you know, and that accentuated the economic drop that we've seen lately. So, Alex, give us the sort of epilogue on Batista.

We have enthusiasm for Brazil turned to fear. We have the bubble sort of bursting, credit coming due. What happens to him and billionaires like him? Do they get wealthier? Does inequality kind of become more concentrated? and the man on the street loses out, or do they lose it all? I know a lot of people are worried about how Ike Bacchista is doing now, so I want to put everyone at ease and say that he's doing just fine.

He lost $30 billion, but he still lived very well. He, at least until recently, was being paid a salary of $5 million a year by this sovereign wealth fund from Abu Dhabi, and he still lives a lifestyle very similar to the one he lived when he was the world's eighth richest man. You still see his kids flying around and chartered jets. One of his kids is a DJ. You know, he's still DJing all over Brazil. There was a story about one of his, like his Ferrari is being seized, right?

Or am I hallucinating that? Well, Aiki is, and I'm on a first name basis with him, not because we're, friends, but because that's in Brazil, he's just known by his first name, Aiki, because he's such a big figure. But he is facing charges of insider trading because he started selling shares in his oil company shortly before it announced that it was halting its operations, you know, and prosecutors believe that constitutes insider trading. And at a certain point, some of his assets were seized, including several very nice cars, a piano, even, a Faberje egg that turned out to be fake. He had tens of thousands of dollars in hard currency in his home.

But the most surreal thing about this episode is that the judge who ordered the seizures actually, for some reason, took one of the ones. of Aike's cars home with him, a Porsche Cayenne, and was found driving it around town. And he claimed that he'd done it. You are not supposed to do that. No, he's just, he's doing due diligence, obvious. Right. Well, he claimed it was because he thought it could be, uh, damaged by rain in the impound lot. So it was really a selfless act. That's amazing. And they found ultimately that this judge had embezzled a lot of money from an unrelated drug trafficking case, and he was taken off the case. So Ike's trial is now frozen. It has a new judge, but nothing has happened with it. And in the meantime, he looks like he's trying to make his comeback, or at least some kind of comeback. He talks about

a partnership he struck with a South Korean scientist who is famous for having faked the cloning of human stem cells and they plan to build a lab to clone rare animals in Brazil. He has another partnership to make generic Viagra that dissolves under your tongue and a number of other businesses. But he's working on raising money. And I think that, you know, I wouldn't be surprised if he succeeds in raising money. And even if he returns to being a billionaire, I don't think he'll get to the level he was before.

But I think he will come back. Is it wrong to say that I really admire that kind of thing, like someone completely collapsing and then just going right back at it? I find it kind of impressive. I think there is something admirable about it. it, you know, that kind of persistence and perseverance. At the same time, you know, that level of self-belief becomes a problem when you put other people on the hook for it, right? And that was his big problem.

It wasn't just his money that went up in smoke when he crashed and burned. It was not just investors' money, you know, not just little mom and pop savers, but also public money because the Brazilian government through this massive development bank generously backed his ventures. So, Alex, one of the themes that you sort of explore in the book is whether or not having billionaires like you do in Brazil can end up being a good thing for society or a bad thing. And a lot of the wealthy people that you speak to are sort of at pains to emphasize that they

do a lot of good for the community. their wealth kind of trickles down to the poorer people. Where do you come out on that debate? Can they be good? They can be good. They can be a part of progress. But I think that whenever you have concentrated wealth, it becomes a danger not just for democracy,

because it can be used to influence public policy, but it can become a danger to the functioning of free markets. When they accumulate enough market power, you know, to squash their competitors, that's not good for the economy as a whole. And, you know, what's interesting, and, you know, when I talked to them, and I would ask, for example, Blydeumage, who was a soybeans billionaire, senator, former head of the Senate's environmental committee, even though he was an agribusiness tycoon, I asked him if he felt uncomfortable being so rich in a country as poor as Brazil.

And he said, no, because, you know, his, the company that his family runs creates jobs and provides tax revenue and so on. And he saw no conflict of interest even in the idea. idea that, you know, as an agribusiness tycoon, he was influential environmental policy. And I think the point here is that billioners can be part of the progress of society. At the same time, I think that they can confuse their self-interest and their own quest for expansion with the broader public interest. And that's really where the problems come in because that idea, I think, justifies, for example, putting money to work in the political system. So to wrap up, are you optimistic about Brazil?

In, say, 10 years or 20 years, will they get, or at some point, will they actually achieve the prosperity that it looked like they might be achieving a few years ago? I think that by the same token that the euphoria around Brazil, you know, a decade ago through 2010, was excessive. I think that the pessimism now is also excessive. It's really hard to see the silver linings right now. And there are very few Brazil optimists out there. But I'm a stubborn Brazil optimist. And I think that some of the things that are happening now, even though they look really bad, are maybe the birth pangs of something new in Brazil. These corruption investigations, you know, are embarrassing and disruptive.

And, you know, they're not going to, they're not going to be smoothly resolved anytime soon. But they may be the start of a different relationship between the. political class, and the business world. So 10 years, I am hopeful. I have to ask one more question, since we are dealing with Brazilianaires. Alex, tell us what was the most outrageous thing that you experienced or heard about while you were researching for this book and doing the Brazilian billionaire's beat? So when I was getting to know the billionaire world for Bloomberg, at one point I took a tree, trip to Rio and I asked a luxury real estate broker to show me his finest property.

And he said, okay, but you have to pretend to be a potential buyer. So I was there faking being a billionaire. We arrived at this duplex penthouse right on Ipanama Beach that cost $13.7 million. We were shown around by a beach butler, who was shown around by a beach butler, who wore shorts and flip-flops. And, you know, it was all maybe the kind of luxury you would expect. In the master bedroom, there was a panic button you could press, and metal shutters would lower over the doors and windows. But what really shocked me in this place was when the butler led us into this room

where there were these wavy bands of garish color on the walls. And it looked kind of tacky next to everything else, but the butler told me to look closer. And I leaned in, and the color in each stripe, the purple or orange in each stripe, was formed by thousands of exotic butterfly wings. But the butler told me, you know, not to worry because they had all been environmentally certified, whatever that means. You're still in a bedroom filled with dead bugs, though. That's pretty creepy.

All right. Alex, thank you so much for joining us today. Thank you. I love that conversation, Tracy, especially having remembered and having thought about all of those years when people talked about how Brazil just had it made and it was impermeable to the concerns of the outside world, getting the inside story of the huge turnaround. I thought it was fantastic. Yeah, it's funny how quickly things changed because I remember back when I used to cover some of the big banks on Wall Street, they were so bullish on Brazil and bricks in general and they were all setting up offices in the country. And then a lot of those offices had to close over the past year or two. So really stunning turnaround there. And it'll be interesting to see what happens if the pessimism right now is overdone or if there's more pain to come. Who knows? Yeah, and it's a great story too, I think, because it is this combination of a country's rise and fall coupled with these extraordinary characters. A lot of economies boom and bust, but I think Brazil had some sort of unique symbols or unique icons of the boom that make it a particularly compelling story.

Absolutely. All right. Well, that's been another episode of the Odd Lots podcast. You can follow me on Twitter at The Stallwork. And I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. Thanks for listening. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini. We'll bring you the latest headlines, in-depth analysis, and big interview. views, all the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture.

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