Chapter 4 Swaps That Shook an Industry
Procter & Gamble versus Bankers Trust
Between 1993 and 1994, Procter and Gamble (P&G) entered into two seemingly innocuous over-the-counter (OTC) derivative agreements with Bankers Trust (BT). On the surface, these interest rate swaps71 appeared to be relatively low-risk transactions. Nevertheless, within five months of signing the first deal, P&G was forced to charge $157 million against its pre-tax earnings ($102 million in after-tax earnings), making this the largest swap-related loss ever recorded by a U.S. industrial company.
The P&G-BT swaps (P&G-BT, for short) are now infamous but not for the reasons you might suspect. Both counterparties were in sound financial health, and their credit ratings were ...
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