The collapse of Banco Master has officially spilled over into the public sector.
Brazil’s Federal Police executed search and seizure warrants against Rioprevidencia (Rio de Janeiro’s state pension fund) on Friday. The probe centers on the fund’s 970 million reais ($184M) investment in financial bills issued by the now-defunct lender.
📉 THE CRITICAL MISMATCH:
- The Asset: The securities purchased were not eligible for coverage by Brazil’s deposit guarantee fund (FGC), leaving the pension fund fully exposed when the Central Bank liquidated Master in November due to “violations of financial-system rules.”
- The Fallout: Following the police operation, Rio Governor Claudio Castro immediately removed the fund’s President, Deivis Antunes.
🛡️ THE “CLAWBACK” STRATEGY: Facing a near $200M hole, Rioprevidencia is using a legal aggressive maneuver to make itself whole:
- The Court Order: The fund secured a ruling allowing it to retain proceeds from payroll-deducted loans (consigned credit) that would have normally flowed to the bank.
- The Recovery: Rioprevidencia claims this cash flow retention will fully settle the investment within ~2 years, bypassing the bankruptcy line.
💡 ANALYST TAKEAWAY: This is a stark reminder of “Counterparty Risk” in the search for yield. Pension funds often chase higher returns in private bank paper (Letras Financeiras), but when the issuer fails, the difference between “insured” and “uninsured” debt becomes an existential political crisis. The speed of the President’s removal suggests that governance questions regarding why this concentration of risk was allowed in the first place are just beginning.
👇 LatAm Credit Investors: Is the “payroll retention” precedent a win for asset recovery, or does it undermine the legal hierarchy of bank liquidation?