Question

Based on the Bankers Trust / Procter & Gamble cases

• Explanation of strategies and transactions involved.

• What went wrong? How was the loss accumulated?

• Who was/were responsible for the disaster/mishap?

• What lessons are to be learned from the case/disaster?

Answer 1

BT suffered from serious reputational risk, lost the trust of its valued clients and laid bare the process lacunas in its system.

BT was dealing with complex derivatives and getting into them with clients who trusted them and considered them to be the best. Instead what transpired was that BT misused this trust by not being transparent in their dealings. If they had clearly explained to their clients all the risks and costs that may need to be borne in the event the hedge went against them, clients would have further investigated them.

BT got over confident and seemed to have bred a culture of deceit and profits at any cost. It also seems to have not placed adequate emphasis on communication between employees regarding client matters. The attitude of it’s alright to scam the client by not keeping them fully informed seemed to be rampant within the organization. Perhaps it was more a case of employees having to reach targets at any cost. Unfortunately that pressure translated into the most undesirable form with BT employees not putting their clients on top.

In the case of clients like P&G who while being financially savvy may not have been fully aware of how the more complex derivatives worked, BT could have spent time earlier on making them aware of the risks. P&G went after BT with a vengeance and made several incriminating allegations against them, warning off other valuable customers who might have done business with BT.

If BT employees and management had been more discreet in their internal communication and far more transparent in their conversation with clients it would have done their business and reputation a world of good.