Theft at the Public Till
to generate excess returns when interest rates fell. An okay bet if you know you are taking it. Maybe an okay gamble to the unknowing if you happen to be right and interest rates fall. A bad bet - maybe even theft -- if interest rates fall and you never told your customers what they were buying. In 1993, the Minnesota legislature last year banned municipalities from investing in derivatives with one exception-mutual funds like the one Piper runs. That exception was the result of heavy lobbying by Piper. Which itself raises all sorts of questions. Was the exemption to allow Piper room for theft? That was its effect. The argument at the time was that the local firm would never abuse its own “unlike those boys from New York” and needed to be taken care of. It sure was. Public officials are, of course, not the only ones whose ignorance or inattention is exploited by the bankers. While the sagas in the public world occur all too often (repurchase agreement scandals in the early eighties, tax-exempt bonds to fund McDonalds soon thereafter, phony investments in the latter part of the decade), most do not extend their reach to the pri- vate sector. The world of derivatives is an exception. It is all to easy to be beguiled by a smooth talking salesman who insists that what he is about to sell you is tailor made for a problem you didn’t know you had but sure want no part of. Gibson Greetings sued Bankers Trust over similar investments. The suit says that in the fall of 1992, “recognizing its opportunity for gain at the expense of an unknowing customer and ignoring its obligations as Gibson’s advisor and banker,” Bankers Trust began selling increasingly com- plex derivatives to Gibson over the next 16 months. The company alleges that the bank and its securities affiliate “knowingly and deliberately did not reveal the material risks and misrepresented the nature of the transactions and thereby deceived and defrauded” the company. “Bankers Trust and BT Securities repeatedly and intentionally falsely advised Gibson that by enter- ing into proposed transactions, its risks and exposure would be substantially reduced,” the suit alleges. “In reality, Gibson’s aggregate risks stemming from these modifications dramatically increased... Bankers Trust failed to ensure that Gibson understood the nature of and risks inherent in these derivatives transactions.”
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