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Banking

Refco ramifications: A crisis with a twist

Latin America is no stranger to banking crises. Every so often a banking system will implode, and depositors will lose all or some of their money.

A number of Latin banks had credit lines to Refco

It has happened again.

This time, though, there’s a twist: the banks losing money weren’t taking the deposits, they were making them. Banks across the world, but especially in Venezuela and central America, had accounts at an unregulated Bermuda-based financial institution called Refco Capital Markets.

“RCM is a nightmare for a big part of the financial intermediaries tier of the Venezuelan banking system,” says a veteran Venezuelan financial industry observer. In return for loans from RCM, those Venezuelan intermediaries placed securities on deposit there; it seems now that they might not get these back. Although these were collateralized loans, often RCM would loan only up to half the value of the collateral, so the banks would still lose 50% of their money. And most of the time the banks didn’t draw down their entire credit line with RCM.

Collapse

RCM was a wholly owned subsidiary of Refco, the US financial institution that went public with a $585 million IPO last year in August and collapsed two months later.

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