(Recasts with finance minister, analyst, details)
By Aasa Christine Stoltz
OSLO Nov 28 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
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
"Terra Gruppen now has no responsibility, that was in Terra
Securities," Terra Gruppen chairman Gabriel Block Watne told a
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)