The Easy Case for Derivatives Use: Advocating a Corporate Fiduciary Duty to Use Derivatives

By Adams, Edward S.; Runkle, David E. | William and Mary Law Review, February 2000 | Go to article overview

The Easy Case for Derivatives Use: Advocating a Corporate Fiduciary Duty to Use Derivatives


Adams, Edward S., Runkle, David E., William and Mary Law Review


In the 1990s, derivatives left their mark in newspaper headlines, financial statements of corporations, and the minds of brokers, CEOs, shareholders, lawyers, regulators, legislators, and investors worldwide. Two very distinct perceptions of derivatives have emerged, depending on one's level of sophistication and personal experience with derivatives. To victims of misused derivatives, with inadequate, information, they can be seen as a herd of stampeding zebras: terrifying and destructive. Containing their power can be a mystery. From this perspective, avoidance is the only safe harbor. To the savvy investor, derivatives are more akin to a team of horses. Harnessed and used appropriately, they are productive, efficient tools that maximize resources and reduce risk; however, when inadequately harnessed or misused, they have the ability to deliver a painful bite or even a fatal kick.

In all fairness to the "derivaphobes," good reason exists to be wary. During the 1990s, derivatives were blamed for major financial losses across every sector of the economy. They spared no industry and chose indiscriminately between large and small, new and old companies. From 1983 to 1993, the total reported monetary loss attributed to derivatives was about $2.1 billion.(1) In 1994 alone, however, this loss mushroomed to $10 billion.(2) Some of the most notable publicly reported or acknowledged derivatives losses include:(3) Gibson Greetings ($20.7 million);(4) Proctor & Gamble ($157 million);(5) MG Corp., the U.S. subsidiary of Germany's Metallgesellschaft AG ($1.5 billion);(6) Dell Computer ($43 to $53 million);(7) Atlantic Richfield Co. ($22 million);(8) Marion Merrell Dow Inc. ($11.1 to $13.9 million);(9) Mead Corp. ($7.4 million);(10) Paramount Communications ($20 million);(11) Caterpillar Financial Services Unit ($11.5 million);(12) City Colleges of Chicago (approximately $48 million);(13) Odessa College ($10 million to $22 million);(14) Escambia County, Florida ($25 million);(15) and Wisconsin's investment fund ($95 million).(16)

Two of the most infamous and devastating derivatives catastrophes ended in bankruptcy. One of England's oldest banks, Barings PLC, founded in 1763,(17) could not survive an estimated $1 billion loss attributed to derivatives.(18) Orange County, California, one of the wealthiest counties in the country, filed for Chapter 9 bankruptcy after suffering a loss of almost $2 billion as a result of derivative misuse.(19) According to their broker, Merrill Lynch, however, the portfolio could have rebounded to its full $21 billion value, plus $300 million in interest, if Orange County had ridden out the losses for a few more months.(20) A flurry of investigation and litigation, both civil and criminal, has surrounded Merrill Lynch ever since the county's bankruptcy filing.(21) The brokerage firm recently agreed to pay a $2 million penalty to settle SEC charges of negligence in the company's dealings with Orange County.(22) The settlement closed the door on over three years of controversy and litigation concerning Merrill and the Orange County debacle. Previously, Merrill settled with the county for $437.1 million in a civil suit and agreed to pay $30 million to resolve a criminal investigation.(23) Merrill consistently denied any wrongdoing throughout all legal proceedings.(24)

The Asian currency crisis of early 1998 renewed skepticism about the safety of derivatives.(25) In February 1998, J.P. Morgan & Co. filed suit against a large South Korean bank and a South Korean securities firm, SK Securities Co., for their inability to fulfill obligations on swap contracts involving exchange of U.S. dollars for various Southeast Asian currencies.(26) SK Securities filed its own lawsuit against J.P. Morgan in Korea for failing to adequately inform SK Securities and other local investors about the risks involved in the derivatives transactions.(27)

The sharp devaluation of the Russian ruble in mid-August of 1998 continues to shake investors' confidence in the foreign market and the use of derivatives. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

The Easy Case for Derivatives Use: Advocating a Corporate Fiduciary Duty to Use Derivatives
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.