Magazine article American Banker

Legal Threat to Bankers Trust on Swaps May Set Precedent

Magazine article American Banker

Legal Threat to Bankers Trust on Swaps May Set Precedent

Article excerpt

Proctor & Gamble Co.'s ill-fated foray into leveraged interest rate swaps could mushroom into precedent-setting litigation if the company follows through on its threat to sue its dealer, Bankers Trust New York Corp.

The Cincinnati-based company disclosed late Tuesday afternoon that it would take an after-tax charge of $102 million, reflecting a bad bet it made on the future direction of interest rates.

In a public statement, the company pointed the finger at its dealer: "We are seriously considering our legal options relative to Bankers Trust, the financial institution that desigend these swaps and brought them to us."

Participants in the derivatives market said such a suit would be the first of its kind by a corporate client against its dealer. But it's unclear what grounds, if any, P&G would have to initiate legal action.

The company acknowledged in its public statement that its own policies and procedures governing the control of swaps "simply weren't followed" in the case of the two contracts.

Treasurer Displaced

While not specifically assigning the blame for the incident, the company said Raymond Mains was relieved of his duties as treasurer and placed on "special assignment."

For its part, Bankers Trust claimed that it fully discussed with P&G the risks associated wtih the swaps, which reflected a view of the future direction of U.S. and German interest rates that later proved incorrect.

P&G entered into the contracts in late 1993. …

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