UPDATE 3-Norway brokerage Terra shut by U.S. investment row

Wed Nov 28, 2007 9:08am EST

(Recasts with finance minister, analyst, details)

By Aasa Christine Stoltz

OSLO Nov 28 (Reuters) - Norwegian bank Terra Gruppen shut its brokerage arm and sacked its chief executive on Wednesday due to the furore over failed U.S. investments it sold to four Norwegian municipalities before this summer's credit crunch.

The decision to wind up Terra Securities followed a warning by the country's financial regulator that the broker's licence may be revoked due to "serious and systematic" breaches of good business practice.

Terra Securities said it will close its business "with immediate effect" and seek bankruptcy after it admitted failing to adequately inform the towns that bought the highly leveraged investments of the risks involved.

The brokerage, which has become the latest victim of the global liquidity squeeze triggered by U.S. subprime mortgage crisis, accounted for about 1.1 percent of the Oslo bourse turnover in October, but it plays a bigger role in many local communities through local savings banks.

Analysts said the Terra row, in which municipalities invested about 4 billion crowns ($726.3 million) in notes and associated leverage schemes, would probably only have a small impact on Norway's healthy financial sector.

"I have spent 10 years of my life building up the Terra Group, and it is of course bitter to leave the company," said Ola Sundt Ravnestad, who resigned as Terra Securities chief executive on Wednesday.

"This whole case is first and foremost sad for the 70 employees and others who are directly affected."

Terra Securities, the brokerage arm of the Terra Gruppen owned by 78 Norwegian savings banks, sold to the municipalities of Rana, Hemnes, Hattfjelldal and Narvik structured municipal portfolio fund-linked notes put together by Citigroup (C.N).

The notes were based on debt issued by U.S. cities and states with high credit ratings, but the four municipalities had leveraged their investments with short-term loans, which became costly when global financial markets dried up in August.

Terra Gruppen had said earlier this week that its broker would take some financial responsibility for the losses but the offer was rejected by the municipalities.

FALLOUT SEEN LIMITED

The Financial Supervisory Authority said other companies in the Terra group were not affected by the possible revocation of the broker's licence and analysts said the case would have only minor implications for other parts of the financial sector.

"This will have some indirect effect," said analyst Tom Svendsen at Norwegian broker CAR.

"The level of income on such structured products, or savings products, which have been good for the banks, will be tougher to maintain in the future," he said, adding that the sums involved were not big enough to impact the sector's overall health.

Norway's central bank declined to comment on the possible fallout of the Terra case for the Norwegian financial sector.

The Oslo bourse's index grouping savings banks .GFBX was down 0.4 percent at 1233 GMT, while the stock exchange's benchmark index .OSEBX was up 2.0 percent.

Terra Gruppen said on Wednesday that the bankruptcy of its brokerage arm meant that it no longer had any responsibility for the losses.

"Terra Gruppen now has no responsibility, that was in Terra Securities," Terra Gruppen chairman Gabriel Block Watne told a news conference.

But Finance Minister Kristin Halvorsen said Terra should help the towns, who in part invested future cashflows from local power plants to pay for the investments. "Absolutely, I think that Terra Group should participate in covering the losses in the municipalities," she told reporters in parliament.

The four towns face requirements to stump up more cash to meet guarantee requirements on the leveraged investments, which they claim they knew nothing about when entering the deal.

Terra's attorney said it was likely that Citigroup would liquidate their positions if the towns did not come up with 150-160 million crowns in guarantees on Wednesday.

He estimated that the towns stood to lose about 350 million crowns, depending on what happens to the investments. (Additional reporting by Wojciech Moskwa, John Acher and Camilla Knudsen, editing by Will Waterman/Richard Hubbard)

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