In August 2004, Interbolsa's risk management committee had to decide upon a request to double the authorized quota for repurchase agreements (repos) on Interbolsa's own stock. Two months earlier, Jorge Arabia had joined Interbolsa, the largest stock brokerage firm in Colombia, as CFO. In this role, he had a seat in the risk management committee.
Arabia had noticed that these repos carried large and diverse risks, not only for the firm but also for other stakeholders, that would lead to an eventual solvency crisis if they were not contained. And the repo business as conducted at Interbolsa entailed conflicts of interest, violated fiduciary duty to the firm's clients, and relied upon lax reporting practices to make transacted volumes meet limits imposed by regulation. However, this business was an important source of revenue for Interbolsa's majority shareholders, including the firm's CEO.
The field-based A case asks students what they could do if they were in Arabia's role and wanted to stop the repo time-bomb. Students must create an action plan, based on information available in the case, aimed at preventing further increases in the repo quota. In the B case, the two faculty case authors reflect upon the problem and discuss what they think Arabia could have done to try to prevent the increase in repo operations.