What are the measures/ techniques used to control for the specified risks? Can you think of other methods to handle such risks?
Bankers Trust Summary: Bankers Trust (BT) was sued by four of its major clients - Federal Paper Board Company, Gibson Greetings, Air Products and Chemical, and Procter & Gamble - who asserted that Bankers Trust had misled them with respect to the riskiness and value of derivatives that they had purchased from the bank. The first three cases were settled out of court for a total of $93 million. The $195 million Procter & Gamble suit was settled at a net gain to P&G of $78 million. The most lasting damage, however, was to BT's reputation. advisory (or "judiciary) role to P&G, since the firm had retained its own outside experts to create interest rate forecasts. It also claimed that P&G's reputation for using cutting-edge financing techniques cast doubt on its claims to be nave in this matter. This appears to be an example of poor stakeholder management. In focusing on increasing profits, Bankers Trust didn't pay adequate attention to the fact that its clients were vital to its business. Even if it did nothing dishonest, it failed to serve its clients in terms of making them feel informed and at ease with their deals. court, costing the company millions of dollars in settlement and possibly much more in damage to its reputation Why did these problems arise? The root cause appears to have been that BT's clients felt that BT had unfairly exploited their comparative lack of sophistication in handling these sophisticated derivative products. For example, Procter & Gamble (P&G), the client whose case received the most publicity, had entered into complex interest-rate derivatives transactions with the bank. These transactions represented a bet on P&G's part that U.S. interest rates would remain stable, or decline, over the transaction period. If interest rates rose, however, P&G would lose a substantial amount of money. In addition, P&G made its bets more aggressive by leveraging its positions twenty-to-one. The transactions lost a substantial amount after the US Federal Reserve Board raised interest rates repeatedly in 1994. P&G subsequently sued BT for $195 million, claiming that the bank had failed to fully inform it with respect to the risk involved in the transactions. BT countered that it was not acting in an Overview: In the mid-1990s, Bankers Trust (now part of Deutsche Bank) was one of the leading bank in the marketing of innovative financial products. The bank prided itself on its superior financial abilities and on its leading edge risk management with respect to its derivatives trading. Yet Bankers Trust's reputation took a pounding after the bank was sued by several customers alleging various forms of fraud and racketeering with respect to derivatives transactions they had entered into with the bank. Several of these suits have since been settled both in and out of
