Within hours of the arrest of BTG Pactual Chairman and Chief Executive Officer Andre Esteves on Wednesday, the bank’s stock was down as much as 39 percent and the bonds 20 percent.
The rationale behind that initial panic was this: Without Esteves, the billionaire executive who’s widely considered to be one of Brazil’s most-talented bankers, BTG’s creditors could bail. And with only 23 percent of its funding coming from equity or long-term debt, some investors worry that a big chunk of money could vanish fast and sink the firm into a paralyzing liquidity crunch.
“What kills banks are runs and people moving their money very quickly,” said Ray Zucaro, chief investment officer of RVX Asset Management. “Liquidity can dry up overnight, so yes, it’s a real concern.”
Such events are extremely rare for large firms, and BTG’s stock later recovered much of its loss. A high-ranking BTG official, who asked not to be identified speaking about internal operations, said that while the bank had some investor withdrawals, it was less than 1 percent of total assets. The bank is also preserving a strong cash position to ensure liquidity, the person said.
Still, it all marks a breathtaking challenge for a high-flying firm whose top executive famously joked that BTG stands for “better than Goldman” and shows that the corruption scandal that has rocked Brazil’s political and business elite and crippled the economy is far from over. Political-risk consulting firm Eurasia Group says Esteves’s arrest on suspicion he tried to interfere with testimony of a jailed former executive of the state-run oil giant for the first time raises the “earnest prospect of financial contagion.
Brazil Energy Insight 
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