Bankers Trust
Encyclopedia
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
banking organization. The bank merged with Alex. Brown & Sons
Alex. Brown & Sons
Alex. Brown & Sons was the first investment bank in the United States, founded by Alexander Brown in 1800 and based in Baltimore, Maryland. The firm was acquired by Bankers Trust in 1997 to form BT Alex...
before being acquired by Deutsche Bank
Deutsche Bank
Deutsche Bank AG is a global financial service company with its headquarters in Frankfurt, Germany. It employs more than 100,000 people in over 70 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets...
in 1998.
History
A consortium of banks created Bankers Trust to perform trust companyTrust company
A trust company is a corporation, especially a commercial bank, organized to perform the fiduciary of trusts and agencies. It is normally owned by one of three types of structures: an independent partnership, a bank, or a law firm, each of which specializes in being a trustee of various kinds of...
services for their clients.
In 1978, Bankers Trust exited retail banking under the direction of its CEO, Alfred Brittain III. The bank sold off its credit portfolio and branches to Bank of Montreal
Bank of Montreal
The Bank of Montreal , , or BMO Financial Group, is the fourth largest bank in Canada by deposits. The Bank of Montreal was founded on June 23, 1817 by John Richardson and eight merchants in a rented house in Montreal, Quebec. On May 19, 1817 the Articles of Association were adopted, making it...
, eventually growing into a formidable capital-markets power.
Bankers Trust became a leader in the nascent derivatives business under the management of Charlie Sanford
Charles S. Sanford, Jr.
Charles Steadman "Charlie" Sanford was an American businessman who served as Chairman of the Board and Chief Executive Officer of Bankers Trust....
, 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
JPMorgan Chase & Co.
JPMorgan Chase & Co. is an American multinational banking corporation of securities, investments and retail. It is the largest bank in the United States by assets and market capitalization.It is a major provider of financial services, with assets of $2 trillion and according to Forbes magazine is...
, 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 it's 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
Trading room
A trading-room gathers traders operating on financial markets.The trading-room is also often called the front office.The terms dealing-room and trading-floor are also used, the latter being inspired from that of a open outcry stock exchange....
, the bank suffered irreparable reputational damage when some complex derivative
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
transactions caused large losses for major corporate clients. Two of these -- Gibson Greetings and Procter & Gamble
Procter & Gamble
Procter & Gamble is a Fortune 500 American multinational corporation headquartered in downtown Cincinnati, Ohio and manufactures a wide range of consumer goods....
(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.
Alex. Brown & Sons
Alex. Brown & Sons was the first investment bank in the United States, founded by Alexander Brown in 1800 and based in Baltimore, Maryland. The firm was acquired by Bankers Trust in 1997 to form BT Alex...
, 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
Deutsche Bank
Deutsche Bank AG is a global financial service company with its headquarters in Frankfurt, Germany. It employs more than 100,000 people in over 70 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets...
acquisition in November 1998, BT pled guilty to institutional fraud due to the failure of certain members of senior management to escheat
Escheat
Escheat is a common law doctrine which transfers the property of a person who dies without heirs to the crown or state. It serves to ensure that property is not left in limbo without recognised ownership...
abandoned property to the State of New York and other states. Rather than turn over to the states funds from dormant customer accounts and un-cashed 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 being wiped out.
In November 1998, Deutsche Bank agreed to purchase Bankers Trust for $10.1 billion; the purchase was finalized on June 4, 1999. CEO Frank N. Newman received $55 million in severance.
In Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, Bankers Trust was acquired by Westpac
Westpac
Westpac , is a multinational financial services, one of the Australian "big four" banks and the second-largest bank in New Zealand....
from Principal Group, who had purchased it three years earlier from Deutsche Bank. This organisation now uses the name BT Financial Group. The Trust and Custody business that Deutsche Bank acquired from Bankers Trust was sold to State Street Corporation in February 2003.
Controversies
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 CommissionCommodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....
(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
Procter & Gamble
Procter & Gamble is a Fortune 500 American multinational corporation headquartered in downtown Cincinnati, Ohio and manufactures a wide range of consumer goods....
, 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
Brooksley Born
Brooksley E. Born is an American attorney and former public official who, from August 26, 1996, to June 1, 1999, was chairperson of the Commodity Futures Trading Commission , the federal agency which oversees the futures and commodity options markets...
, 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
Procter & Gamble
Procter & Gamble is a Fortune 500 American multinational corporation headquartered in downtown Cincinnati, Ohio and manufactures a wide range of consumer goods....
(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
BusinessWeek
Bloomberg Businessweek, commonly and formerly known as BusinessWeek, is a weekly business magazine published by Bloomberg L.P. It is currently headquartered in New York City.- History :...
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 a 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.
Business
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- managing director of the Carlyle GroupCarlyle GroupThe Carlyle Group is an American-based global asset management firm, specializing in private equity, based in Washington, D.C. The Carlyle Group operates in four business areas: corporate private equity, real assets, market strategies and fund-of-funds, through its AlpInvest subsidiary... - Jeff BezosJeff BezosJeffrey Preston "Jeff" Bezos is the founder, president, chief executive officer , and chairman of the board of Amazon.com.-Early life and background:...
- chief executive officer of Amazon.com - Greg CoffeyGreg CoffeyGreg Coffey is an Australian hedge fund manager based in London.-Early life and education:Coffey graduated in actuarial studies from Macquarie University. -Career:...
- hedge fund manager - Henry P. DavisonHenry P. DavisonHenry Pomeroy Davison, Sr. was an American banker and philanthropist.-Biography:He was born on June 12, 1867 in Troy, Pennsylvania, the oldest of the four children of Henrietta and George B. Davison. Henry's mother died when he was just eight years old in 1875...
- banker - Brady DouganBrady DouganBrady W. Dougan is an American businessman. He is the Chief Executive Officer of Credit Suisse. Prior his current position, Dougan was Chief Executive Officer of Investment Banking and acting Chief Executive Officer Credit Suisse Americas .-Education:He has served on the Executive Board since...
- chief executive officer of Credit SuisseCredit SuisseThe Credit Suisse Group AG is a Swiss multinational financial services company headquartered in Zurich, with more than 250 branches in Switzerland and operations in more than 50 countries.-History:... - Richard FarleighRichard FarleighRichard Farleigh is an Australian private investor. He is currently a member of the Business Review Weekly Rich 200 list, a list of the 200 wealthiest Australian individuals.- Early life :...
- private investor - John KeyJohn KeyJohn Phillip Key is the 38th Prime Minister of New Zealand, in office since 2008. He has led the New Zealand National Party since 2006....
- Current New Zealand Prime Minister and investment banker - Herbert L. PrattHerbert L. PrattHerbert Lee Pratt was an American businessman and a leading figure in the United States oil industry.- Early life :...
- director of BT from 1917–38, and head of Standard Oil Company of New York - Sally Shelton-ColbySally Shelton-ColbySally Shelton-Colby is a Democratic American diplomat. She was Ambassador of the United States to Barbados, Grenada and Dominica as well as Minister to St Lucia, and Special Representative to Antigua, St. Christopher-Nevis-Anguilla, and St. Vincent from 1979 to 1981, under Jimmy...
- banker and diplomat - Nassim TalebNassim TalebNassim Nicholas Taleb is a Lebanese American essayist whose work focuses on problems of randomness and probability. His 2007 book The Black Swan was described in a review by Sunday Times as one of the twelve most influential books since World War II....
- author and financial mathematician - Albert H. WigginAlbert H. Wigginthumb|Wiggin, circa 1913Albert Henry Wiggin was an American banker.Born in the town of Medfield, Massachusetts, Albert Wiggin was the son of a Unitarian minister and a cousin of Arthur Francis Holme Wiggin CMG. At age seventeen, he went to work for a Boston bank and in 1892 he married Jessie...
- president of Chase National Bank
Other
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- Chess International GrandmasterInternational GrandmasterThe title Grandmaster is awarded to strong chess players by the world chess organization FIDE. Apart from World Champion, Grandmaster is the highest title a chess player can attain.... - Jack H. JacobsJack H. JacobsJack Howard Jacobs is a retired colonel in the United States Army and a Medal of Honor recipient for his actions during the Vietnam War. He currently serves as a military analyst for MSNBC and previously worked as an investment manager....
- Medal of Honor recipient - Charlie RoseCharlie RoseCharles Peete "Charlie" Rose, Jr. is an American television talk show host and journalist. Since 1991 he has hosted Charlie Rose, an interview show distributed nationally by PBS since 1993...
- Television reporter