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A consortium of banks created Bankers Trust to perform trust company services for their clients.
In 1978, Bankers Trust exited retail banking under the direction of its CEO, Alfred Brittain III. The bank sold its credit portfolio and branches to Bank of Montreal, eventually growing into a formidable capital-markets power.
Bankers Trust became a leader in the nascent derivatives business under the management of Charlie Sanford, who succeeded Alfred Brittain III, in the early 1990s. Having de-emphasized traditional loans in favor of trading, the bank became an acknowledged leader in risk management. Lacking the boardroom contacts of its larger rivals, notably J. P. Morgan, BT attempted to make a virtue of necessity by specializing in trading and in product innovation.
The company shied away from using market data distribution products from companies such as Reuters, instead choosing to develop its own systems in-house. A small development team based in London created BIDDS (Broadgate Information Data Distribution System) which included the Montage front-end package that traders used to obtain data from data feeds and broker screens.
In early 1994, despite all its prowess in managing the risks in the trading room, the bank suffered irreparable reputational damage when some complex derivative transactions caused large losses for major corporate clients. Two of these -- Gibson Greetings and Procter & Gamble (P&G) -- successfully sued BT, asserting that they had not been informed of, or (in the latter case), had been unable to understand the risks involved.
In 1997, Bankers Trust acquired Alex. Brown & Sons, founded in 1800 and a public corporation since 1986, in an attempt to grow its investment banking business.
The bank suffered major losses in the summer of 1998.
Shortly before the Deutsche Bank acquisition in November 1998, BT pled guilty to institutional fraud due to the failure of certain members of senior management to escheat abandoned property to the State of New York and other states. Rather than turn over to the states funds from dormant customer accounts and uncashed dividend and interest checks as required by law, certain of the bank's senior executives credited this money as income and moved it to its operating account.
Bruce J. Kingdon, the head of the bank's Corporate Trust and Agency group spearheaded the fraud and (in 2001) entered into a guilty plea in the US District Court for the Southern District of New York and was sentenced to community service. Certain of his subordinates were thereafter barred forever by the SEC from working in the securities markets.
With the Bank's guilty plea in the escheatment lawsuit, and thereafter its status as a convicted felon, it became ineligible to transact business with most municipalities and many companies which are prohibited from transacting business with felons. Consequently, the acquisition by Deutsche Bank was a godsend to the bank's shareholders, who avoided losing their entire investments.
Deutsche Bank sold Bankers Trust Australian division to the Principal Financial Group in 1999 who, in turn, sold it to Westpac October 31, 2002. This organisation now uses the name BT Financial Group. Deutsche Bank announced on November 5, 2002 that it would sell The Trust and Custody division of Bankers Trust to State Street Corporation. The sale finalized in February 2003.
In 1995, litigation by two major corporate clients against Bankers Trust shed light on the market for over-the-counter derivatives. Bankers Trust employees were found to have repeatedly provided customers with incorrect valuations of their derivative exposures. The head of the US Commodity Futures Trading Commission (CFTC) during this time was later interviewed by Frontline in October 2009: "The only way the CFTC found out about the Bankers Trust fraud was because Procter & Gamble, and others, filed suit. There was no record keeping requirement imposed on participants in the market. There was no reporting. We had no information." -Brooksley Born, US CFTC Chair, 1996-'99.
Several Bankers Trust brokers were caught on tape remarking that their client [Gibson Greetings and P&G, respectively] would not be able to understand what they were doing in reference to derivatives contracts sold in 1993. As part of their legal case against Bankers Trust, Procter & Gamble (P&G) "discovered secret telephone recordings between brokers at Bankers Trust, where 'one employee described the business as 'a wet dream,' ... another Bankers Trust employee said, '...we set 'em up.'" The bank's row with P&G made the front page of major US magazines during 1995. On October 16, 1995, the US magazine BusinessWeek published a cover story that P&G was pursuing racketeering charges against Bankers Trust: "The key evidence: some 6,500 tape recordings."
Both the magnitude of losses and the litigation by well-known companies caused market regulators to intervene. Concerns motivated by the particular Bankers Trust case eventually extended to the OTC derivatives market in general. The US CFTC embarked on a failed attempt to take over part of the bank regulators' role in regulating the OTC derivatives market in the late 1990s. The thesis of an October 20, 2009, broadcast of the PBS television magazine Frontline, Early Warnings of the Economic Meltdown, was that the failure of Congress to allow CFTC a role in regulating derivatives was a key element eventually leading to the Financial crisis of 2007–2010.