Derivatives traders still a bunch of snake-oil hawkers

JUST over a year ago, I wrote in this column that some of the people devising and selling derivatives to corporate treasurers were "no better than snake-oil salesmen". Soon afterwards, I received an invitation to lunch from Bankers Trust, one of the biggest derivatives houses in the City, where a very nice senior executive spent an hour or so explaining to me how I'd got it all wrong. The derivatives industry, I was told over a persuasive bottle of Pouilly Fume, was in fact run by squeaky-clean angels.

It has been fascinating, therefore, to see Bankers Trust dragged through the mire over the last week by its one-time customer in the US, Procter & Gamble. In court filings, P&G contends that Bankers Trust's derivative salesmen systematically tried to defraud their clients, and it has assembled a compelling arsenal of tape recordings to support its case.

P&G alleges that the culture of defrauding customers was so pervasive that salesmen used the acronym ROF - "rip-off factor" to describe one method of fleecing unsuspecting clients. A Bankers Trust training instructor is seen in one video-taped training session apparently advising new recruits on how to "rip off" customers. In another transcript in P&G's voluminous filings, a Bankers Trust employee is asked by another how to win a client's confidence and replies: "Lure people into that calm and then just totally fuck 'em."

The evidence is mounting that at least some derivatives traders are not remotely interested in tailoring a product to suit the hedging needs of the client. Instead, they simply go for the deal, whatever the risk to the client. Clients for their part are often incapable of understanding what they have committed themselves to. The result? An unexpected movement in exchange rates, interest rates or raw material prices exposes a horrifying loss.

Of course, one can't feel too sorry for P&G. The consumer products company is one of the toughest in the world and big enough to look after itself. If it had to deal in mindbogglingly complex derivatives, it was perfectly capable of employing its own rocket scientists to make sure it was getting a fair deal.

The Bankers Trust affair is doing enormous damage not only to the bank in the US. It is another black mark for the entire derivatives industry. No board in the country has any excuse now if it has not grilled the company treasurer on precisely which derivatives have been entered into and the worst-case risk to which the company is exposed.

There's one other intriguing post-script to the affair. P&G named eight other companies that it claimed had been bamboozled after dealing with Bankers Trust salesmen. They included the US arm of Jefferson Smurfit of Eire. This company subsequently responded that it knew nothing about the $2.4m (pounds 1.5m) loss cited in P&G's filings.

Nothing has changed my mind about the snake oil salesmen. Indeed, if P&G is right about Jefferson Smurfit, then some of their victims are so successfully fleeced that even after the event they don't know they've been had.

Hopes fade for Fisons

WHEN I spoke to Stewart Wallis on Friday, he remained immutably convinced that Rhone-Poulenc Rorer was trying to take control of Fisons on the cheap. Mr Wallis, the chief executive of Fisons, would personally stand to trouser pounds 2m if he succumbed to RPR's pounds 1.8bn bid, so you cannot doubt his sincerity, nor his absolute conviction that the company can do better by continuing alone.

Mr Wallis has done a superb job for shareholders, propelling the shares from a low of 107p nine months ago to 263.5p today. He's cleaned up the company of peripheral assets and has set down a specific vision of where he wants to take it.

Shareholders will be reluctant to desert him now. However, RPR's case is starting to look pretty compelling, after it raised its bid last week. Shareholders now have the choice between accepting a certain 265p in cash from RPR or a highly uncertain future with an independent Fisons.

Its disposal programme has already been plagued by delays - the sale of the scientific instruments division has been held up three times and may not now be completed before Christmas. The risk is that the string of marketing deals and joint ventures Fisons plans to set up with other drug companies could be equally prone to disappointment and delay.

By most measures, RPR is offering a full price - a 37 per cent premium over the share price before it launched its bid and 18 times Fisons' likely earnings for next year. It has already accumulated almost 18 per cent of the shares in the market.

A white knight could yet appear for Fisons, but without one, its chances of fending off RPR now look slim.

Power struggle

THE seventh bid for a regional electricity company (REC) landed last week. This time it was National Power plonking pounds 2.8bn on the table for Southern Electric. With Scottish Power successfully taking out ManWeb on Friday, the takeover party shows no sign of abating. Yet the country seems no closer to any kind of consensus on what shape the restructured electricity industry should take if it is to deliver maximum efficiency and minimum prices for customers.

Each individual bidder is too busy lobbying to get its own bid past the regulators to consider the wider matter. Yes, they concede, at some stage a halt has to be called to the consolidation in the industry. But, please, not for a while longer, and certainly not until their particular deal is cleared.

The NP bid for Southern, along with PowerGen's for Midlands Electricity, adds a fresh complication to the debate. These two mergers would create vertically integrated energy businesses - responsible for electricity all the way from power station to socket. Such animals would clearly have a potential advantage over traditional RECs, which would continue to rely on them for supplies.

So far, there are not enough of such vertically integrated businesses to ensure serious competition. True, Hanson, with Eastern Electricity plus the power stations it plans to buy from PowerGen, could make a third. But such a trio has more of the makings of a cartel than full-blooded competition.

Keith Henry, NP's recently appointed chief executive, seems genuinely keen to compete, tooth and nail, for business in other REC areas. That is fine, just so long as there are sufficient rivals, with equal firepower, to slug it out with him.

But until the domestic side of the industry is opened to competition in 1988, there is no great hurry for further restructuring. The case for a Monopolies and Mergers Commission inquiry remains overwhelming.


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