BRAZIL-Machado's weekly audio "revelation"

Another cabinet minister bites the dust

Two incidents probably do not make a trend, but it’s a start. Former president of Transpetro, (a Petrobrás subsidiary) Sergio Machado released what could become his regular Monday audio recording of a telephone conversation regarding Lava-Jato. 

This call was to Cabinet Minister Fabiano Silveira, Minister of Transparency and Combat of Corruption. What was released to the TV news did not appear to be particularly criminal but Silveira did seem to be critical of Lava-Jato. That was sufficient to generate all manner of protests in the Temer administration’s legislative base of allies.

Silveira resigned yesterday. That’s two down!

I simply find it incredible that when Sergio Machado calls, people actually talk to him! Why not just say, “Hello Sergio, you called at a bad time. I’m very busy. I’ll call you back.” Then just never call! Machado says he has 6 hours of audio recordings so you can pretty well figure that he is also recording your conversation!

Are those who talk to him really that damned dumb or naive?

The other thing I find at least strange is that there is a Cabinet-level office dedicated to ensuring transparency and combatting corruption. Experience has taught me that ensuring transparency is simply a matter of controls, governance, and compliance (i.e. management) exercised at the proper level  of management and independently audited.

Combatting corruption is a police matter for the Judiciary to handle.

I have investigated corporate fraud in Brazil for nigh on 20 years and I’ve handled some pretty “hairy” cases. I have yet to see a case that did not involve some fragrant violation of straightforward and simple control and governance principles. Every one of the frauds could have been avoided or stopped in their tracks with appropriate controls and appropriate management.

As a matter of professional preference, I do not deal with public sector companies. I find them lacking in appropriate controls, procedures, and governance. It usually doesn’t require a lot of imagination to perpetrate a fraud in Brazil’s public sector!

I revert to the lessons of the 18 Century Enlightenment with regard to the underlying reasons for controls. Adam Smith postulated the Man is neither moral nor immoral but rather is motivated by self-interest. 

When you go to the shopping center you don’t lock your car because you are necessarily certain that someone will try to steal it or its contents. You also lock it  to keep “an honest person honest” and to make things difficult for a dishonest person. 

The same applies to applying controls in an enterprise. We do so not because employees are innately dishonest or honest but rather to ensure that they will perform their tasks in accordance with the rules and constraints that keepthem honest and protect the enterprise. And if they violate the rules, they face sanctions. That’s what I call “keeping it simple”.

At the enterprise level combatting corruption is usually a simple matter requiring only proper controls (sign-offs, verifications, audit, etc.) and a robust compliance policy.

Compliance is not simply a matter of ticking the boxes on the document flow. I once had a case in which a major service supplier’s address was a parking lot! Even if all the sign-offs and procedures associated with that service provider were totally in order, the fraud was also "in order"! Nobody had verified the actual physical existence of the provider or if the provider even rendered the contracted service. 

That is clearly not the way compliance is supposed to work! The paperwork was totally in order but the provider was not! Someone was responsible for that “oversight”, either by accident or design. “Accidents” should be disciplined and “designs” should be met by dismissal.

At the country level, especially a country like Brazil that requires a coalition of various political parties to govern, the problem is complex but the solution relatively simple. Brazil has a total of 35 political parties (and 35 presumed different ideologies?), and a reputation for bargaining political support on a “quid pro quo” basis often involving graft, kickbacks, bribes, etc. Trying to get the collective support of that many parties is like trying to pick up a turd by the “clean end”!

This is Michel Temer’s dilemma. While he has to satisfy the populace and get the economy in order, he can’t do it without a legislative base. With virtually every political party worried about getting caught up in the Lava-Jato investigations the “quid pro quo” offered to Temer by the parties is to restrain Lava-Jato. 

This is contrary to Temer’s solemn promise to the public that he will not inhibit Lava-Jato in any way, shape, or form and will not tolerate attempts to force him to choose between losing what little popular support he currently has or giving in to the demands of the parties in exchange for the policies that will get Brazil back on track and in the offing increase Temer's popular support. 

In short, there is simply no “clean end” to grasp, and the landscape is strewn with the turds left by the PT's 13-year use of the playing field.

It’s pretty clear that Sergio Machado’s strategy is to save his own skin by dragging as many members of Temer’s team as possible into the mud. If Temer allows the pressure to build he will find himself facing a serious confidence/credibility crisis.

If I were Temer’s crisis consultant (which I clearly am not!), I would recommend a "bare knuckles" aggressive response strategy. 

The first step would be to check with his Cabinet to see just how many members have spoken to Sergio Machado, when and about what. 

Any audios that pre-date the break between the PT and the PMDB should be noted.

The next step should be to "de-construct" Sergio Machado. It’s clear that he is seeking only to save his neck from the Lava-Jato noose. Most people repudiate that kind of cowardice and Temer should throw Machado under the bus ASAP!

For those conversations that pre-dated the end of the alliance of the PMDB with the PT the following responses might be prepared:

• At the time of that recording we were an allied party of the PT coalition. That was in the early phases of the Lava-Jato investigation. As the extent of the PT’s corrupt schemes were exposed, we felt that the alliance was no longer in our interest as the party that put together the 1988 Constitution;
• The PT was more strongly opposed to Lava-Jato than were we. In fact, as I wrote in my letter to Dilma, I was left out of the party’s major deliberations, and had become very upset with what I was seeing and hearing. I concluded that it was time to break the alliance;
• The calls recorded by Machado were made prior to the break-up of the alliance when it was the PT that was strongly critical of Lava-Jato and we were allies;

For those calls that occurred after the split or could occur in the future: 

• Temer needs to tell his cabinet members to simply refuse to talk to Machado; 
• And if for any reason that is not possible and the subject of Lava-Jato should surface, the person should say that he/she does not think it proper as a member of an Executive Branch cabinet, to comment on actions of the Judiciary. (Mirroring the same comments made by Sergio Moro.)
• He should also talk to the political patrons of his cabinet appointments to ensure that they “buy in” to the strategy to isolate Machado.
• No one should mention the names of any politicians that come under the scrutiny of Lava-Jato; 
• Temer should clearly state that an investigation is not necessarily an indictment and everyone, regardless of position, should be considered innocent until proven guilty. Allegations of a crime are not sufficient to prejudice someone’s career and reputation. 
• We are trying to return Brazil to civilized dialog and discussion of our differences, not fan the flames of hateful rhetoric.

In my view, Temer has not been sufficiently forceful in this area. Either he has power or he does not. Against the PT’s thuggish and arrogant rhetoric he cannot afford to transmit any weakness or hesitancy.

He should also avoid creating any ministries that suggest that he is even worried about Lava-Jato (even if he is). And he should not show any fear whatsoever of the likes of Sergio Machado. Throw him to the wolves and forget about him!

That might do it! (Just a thought!)

BRAZIL-Three warnings and Temer's Challenge

You might have heard this story before

A newly-elected president entered his new office for the first time and found 3 sealed envelopes on his desk. On each envelope was written a message. On the first was the instruction: “To be opened on the occasion of you first major crisis”, the second and third envelopes had the same message for the second and third major crises, respectively. Skeptical but interested he put the three envelopes into a drawer. A few months into office the president had a major crisis and remembered the letters. He opened the first one to find the instruction: “To resolve this crisis, blame your predecessor. Good luck!” and was signed only, “A friend”. He did as instructed and it worked. Some time later he had a second major crisis. He opened the second envelope to find the instruction: “Blame the opposition. Good luck!” and was signed as before. It worked. Roughly a year later he had a third major crisis and now convinced of the wisdom of his anonymous friend, he opened the third envelope. He found the following instruction: “This is your third major crisis. Take out three sheets of paper and three envelopes. Sorry!” and signed as before.

Temer’s Challenge

Temer’s situation is rather similar. Having to modify his proposals could be his first major crisis. He has now come up against the threat of opposition to his four principal proposals: 1) To impose a limit on federal expenses; 2) To change the calculation method on retirement benefits; 3) To change the rules for pre-salt oil exploration to remove the requirement that Petrobrás have 30% of alloperations; 4) To establish rules of governance in the pension funds of state-owned companies.

As expected, the PT’s representatives in the Senate and in the Lower Chamber oppose all of the proposals. Proposals 1, 2, and 3 have run into snags as legislators want to “discuss” the proposals further.

Proposal 1 affects the two largest items in the federal budget: education and health. Both are considered political “plums” because they are subject to “earmarked” expenses that are required by law. The “earmarking” is a problem because allocations are not based on the performance of projects or personnel in their respective sectors. There are no performance demands on those in charge of the results of their areas of responsibilities so both the Education and Health ministries are wonderful places to insert “phantom” employees or total idiots who don’t know how to do anything. Clearly, the probability is high that the two ministries with the largest earmarked budget allocations are bloated with patronage appointments. It’s natural, therefore, that those legislators who negotiated those appointments will want to protect their prerogatives. Consequently, Temer’s dominant strategy in this case would seem to be to allow for extensive discussion in the legislature while conducting a thorough audit of both ministries to identify any “phantom employees” who don’t even show up to work, “idiots” who are in charge of nothing at all and/or any incidents of bribes, kickbacks, or other such malfeasance. He could then approach the patrons of those employees to threaten to have the information leaked to the press. The strongest pressure to discuss and change some items in this proposal is in the Lower Chamber. This chamber of the legislature is reportedly stillunder the control of suspended former president, Eduardo Cunha. However, Temer would be wise to avoid seeking counsel or assistance in that quarter. Dilma was recently quoted in an interview that Temer was “controlled” by Cunha. In short, Temer is wise in this case to assemble “facts” from independent or loyal sources and then use the information to “leverage” his findings in accordance with whatever modifications are proposed by the legislature or members thereof.

Proposal 2 is the suggestion to change the retirement rules of Brazil’s social security system. Those who most want to modify or oppose the current proposal are the labor unions that are allied to the PT. The proposal is based on the projection of the age distribution of the population over the next few decades when Brazil is likely to have fewer contributors to support a larger number of retirees. Maintenance of the current structure of the system would seriously affect Brazil’s economic growth. Only one party has declared to be in favor of the current proposal. All others want to discuss modifications. There are 48 votes in the Senate and 227 in the Lower Chamber for modification.

Proposal 3 to remove the requirement that Petrobrás have a 30% interest in all pre-salt exploration and drilling projects is totally favored and already approved in the Senate and has been approved there (with the exception of the PT that is against everything) but faces 123 votes in the Lower Chamber in favor of modifications.

Proposal 4 to impose stricter governance rules on public sector pension funds was already approved by the Senate and enjoys the favorable votes of 178 legislators in the Lower Chamber but 90 suggest need for modifications.

The figures suggest that the recommendation of the first letter, i.e. blame the previous administration, is a good one. Temer would be wise to pin as much controversy as possible on the Rousseff administration and the PT. He has only been president for just over two weeks so whatever resistance he encounters from the parties now allied to his administration can still be dealt with in the context of PT policies before he assumed office and the fact that he was excluded from the inner circle of Dilma’s principal allies and advisors. That might be enough to deal with the more recalcitrant members of his coalition. His dominant strategy is to keep them all talking and debating while he goes about negotiating support while he seeks to avoid any modifications that will retard the recovery of the fiscal accounts.

The table below provides the number of votes of each political party allied to the Temer administration and the disposition of each with regard to each proposal

Disposition of Votes per Party

Party

S

LC

#1

S

LC

#2

S

LC

#3

S

LC

#4

S

LC

PMDB

19

66

M

F

M

M

F

F

F

F

PSDB

11

51

M

M

M

M

F

F

PT

10

58

O

O

O

O

O

O

O

O

PP

6

49

F

M

M

M

F

M

F

M

PR

4

41

M

M

M

F

F

M

F

M

PSD

4

33

F

M

M

M

F

M

F

F

DEM

4

28

F

M

M

M

F

F

F

F

Others

23

187

?

?

?

?

F

?

?

Total

81

513

Where: # = no. of proposal; S = Senate; LC = Lower Chamber; M=modify, O=oppose; F=favoor

As the party that originated proposals 3 & 4 in the Senate, the PSDB did not have to cast its vote.

Temer has negotiating issues in both the Senate and the Lower Chamber on proposals 1 & 2 and negotiations on proposals 3 & 4 in the Lower Chamber only.
  

Reconciling all of the potentially conflicting interests and/or demands for patronage from the parties to the new coalition will be a formidable task and constitute Temer’s first major challenge. He can ill afford to “lose”.

Analysis:

To deal with the negotiations in the Lower Chamber, Temer is wise to avoid having to deal with Eduardo Cunha. As noted in the text above, Dilma stated in a recent interview that Cunha is the real power behind Temer. He can ill afford to seem to lend support to her claim.

If Cunha should lose his mandate either via the Lava-Jato investigation or the Parliamentary Inquiry regarding a violation of "decorum", Temer's ability to negotiate around Cunha's influence is enhanced.

Moreover, with 35 years in the Congress, Temer has a few friends of his own and as interim President he has considerable power so Dilma may have overestimated Cunha's power over Temer. Nevertheless, you can expect Cunha to "make a move on Temer" . 

There are signs that the economy has begun to respond favorably to Temer's proposals and this will also serve to strengthen his bargaining power with the Congress. He needs to rely on such improvements and generate public support to get what he needs to create the environment for recovery.

The plea bargains of both Sergio Machado and Pedro Correa (see previous posts) are potential "bombs" that could make Temer's negotiations more difficult and could affect the eventual votes in the Senate that might allow for the return of Dilma Rousseff to the presidency.

Temer's cabinet appointments continue to be challenged to the delight of the PT that continues to claim "moral superiority" and a conspiracy to keep it out of power and thus to carry out its proposed "reforms".   

It's an extremely complicated and difficult juggling act.  

NOTE-Business Risk Report

Dear Reader,
I have placed my regular Business Risk Report on Linkedin as a post. If you would like to read it, you can find it there.
If you would like to receive the report, please advise and I will put your name and e-mail address on the distribution list.
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Regards,
Jim

BRAZIL-Useful idiots?

They live among us

Josef Stalin was reported to refer to those who believed and supported him as “useful idiots”.

Journalists, especially in the written media, used to be known for their healthy cynicism most especially with regard to politicians who paint themselves as victims.

Apparently, things have changed. Numerous foreign journalists and non-journalists (who can sometimes be forgiven for being stupid or misinformed) have bought into Dilma’s assertions that she is the victim of a “coup d’état” hatched by an evil, rich and corrupt right wing elite.

The “useful idiots” hold demonstrations that get press coverage and journalists affirm in writing that Dilma is correct. They base their arguments on the questionable public and private morality of those who are charged with judging her impeachment in the Congress.

They buy Dilma’s argument that she has been unjustly accused because she has committed no crime, has no hidden offshore bank accounts and took no public monies for personal benefit.

However, they appear not to understand anything about the charges against Dilma Rousseff. She has not been accused of any violations of the Penal Code. No one has accused her of having hidden offshore bank accounts or of dipping her hands into the public till.

The Brazilian Constitution specifies that a president can be impeached for crimes of responsibility, i.e. not properly performing the functions of the office of President as specified in the Constitution. 

Her obstinate pursuit and repetition of policies that failed miserably, unfinished and overpriced public works, refusal to deal with the legislature and her use of creative accounting to hide the true condition of the fiscal accounts of her government are the basis of the charges against her. 

She is not facing impeachment for “plain vanilla” crimes and nobody has as yet suggested that she has committed any. Whether she was an accessory to any such crimes is still under investigation but that was not included in any of the charges of the impeachment document.

I emphasize that she is facing impeachment for irresponsibly exercising the functions required of the President of Brazil as specified in the Constitution and for which dismissal from office is justified if she is found guilty.

Those outside Brazil would do well to inform themselves in that regard. Moreover, impeachment is the way presidential political systems simply fire the President. 

In any reputable and responsible private sector company, a CEO who behaved as did Dilma Rousseff would be fired by the Board of Directors. In a democracy, the Board of Directors is the voting public and its representatives as selected in open elections. A full 68% of the public support her impeachment (i.e. dismissal) and only 10% approve of her handling of the government. 

One simply can’t walk into her office like Donald Trump in his TV program and say, “You’re fired!”

She is not, repeat not, being judged in a court of law for criminal offenses. She is being judged for dismissal for crimes of responsibility by the Senate under the watchful eye of the Chief Justice of the Supreme Court to ensure that the Constitution is obeyed during the proceedings.

If that constitutes a “coup d’état” and a threat to democracy, it is by far one of the strangest coups in history! It seems to me that she is simply being fired by the only legitimate means available.

The character and moral principles of the “jury” are moot. I am not aware of any jury selection procedure that evaluates the characterof those being chosen to sit in judgment of any defendant! To my knowledge, no member of the Senate (i.e. the jury) has as yet been convicted of any crime.

It would behoove those who jump on Dilma’s bandwagon to first verify the procedures and constitutional provisions for firing a President in Brazil.

Moreover, as shown in the post below, and supported by the rate of unemployment (11 million out of jobs), the number of jobs closed over the past couple of years, the dismal conditions of the fiscal accounts, the plundering of Petrobrás, and the situation of other state-owned companies and banks, one is hard-pressed to assert that Dilma Rousseff does not deserve to be fired for exercising the requirements of her office irresponsibly (repeat: as required by the Constitution). And impeachment is the way a country “fires” its president.

And finally, although it seems doubtful, she could still “walk”!

I am not surprised that some individuals express sympathy and agreement with Dilma’s assertions of a coup, but I confess surprise at the professional journalists who are expected to verify facts before writing poorly-informed opinions in otherwise responsible media.