Procter and Gamble versus Bankers Trust: Caveat Emptor

The case was written to detail the multitude of issues involved in what is frequently cited as the most prominent derivatives debacle in U.S. financial history. Although finance students are routinely schooled in the construction and valuation of various financial derivatives, including foreign exchange and interest rate swaps, they rarely see how these specific instruments fit within the corporate frameworks of financial policy and procedure. The failure of Bankers Trust to divulge all of the valuation details behind the transaction sold to Procter & Gamble in 1993-94, and the failure of P&G's treasury staff to pursue their own valuation and mark-to-market due diligence on the transactions entered into, combine to create a situation in which disaster was an eventuality. Topics include the understanding and valuation of leveraged interest rate swap transactions, a bank's possible fiduciary duties in regards to corporate customers, and corporate philosophy on differentiating hedging from speculation.