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Transcripts give bank a black eye

Published Oct. 4, 2005

Bankers Trust New York Corp. again faces a barrage of negative news about derivatives this week. But this time, the dealings are in terms anyone can understand _ coverups and ripoffs.

Court documents unsealed by a Cincinnati judge Tuesday after a lengthy battle with Business Week magazine reveal cavalier statements about schemes to trick customers.

Those disclosures are more damaging to troubled Bankers Trust's reputation, say media experts, than previous reports of customer complaints about derivatives, which are complex financial contracts. A much-awaited Business Week cover story based on the unsealed documents will hit newsstands Friday.

In 750 pages of documents made public Tuesday, employees of the nation's seventh-largest bank talk candidly in taped conversations of ripping customers off and using deceptive sales practices to market derivatives:

When a Bankers Trust employee asked one of the bank's salesmen, Mark Schindler, about his relationship with a client, Schindler said: "Funny business, you know? Lure people into that calm and then totally f--- them."

The Bankers Trust salesman who sold Procter & Gamble Co. a money-losing derivative boasted of the risks he persuaded the Cincinnati-based company to take.

"It's like Russian roulette, and I keep putting another bullet in the revolver every time I do one of these" trades, said the salesman, Kevin Hudson.

Later, he said, "I've buried my clients so much that it's going to take me four years to trade them out of this loss."

Hudson's fiancee, Alison Bernhard, warned him that he might lose his job over his selling style. "You're not going to have a job, you're not going to have customers to make money with, if you do stuff like that," said Bernhard, who also worked for Bankers Trust. "You're going to blow them up."

In a training session for new employees, an instructor said that in a hypothetical deal between Sony, IBM and the bank, "What Bankers Trust can do is get in the middle and rip them off _ take a little money." Bankers Trust spokesman Doug Kidd said the remark was an example of "poor humor."

The papers were compiled by Procter & Gamble, which contends it lost $195.5-million last year on derivatives it bought from Bankers Trust. The company is suing the bank and charges that it was misled about the risky investments.

Though most analysts expect Bankers Trust to pull through the crisis, its troubles are a major setback at a time when it seemed to have put its worst problems behind it.

"Bankers Trust was in danger of becoming the poster child for derivatives, but no one knew what they meant," said Robert Mead, a media expert at Robinson Lake Sawyer Miller. The public relations firm counseled big corporations and investment banks during the 1980s junk bond scandals.

"This is much more sensational and it's very disturbing."

Bankers Trust said some of the most damaging quotes were taken out of context. The bank also contends the documents show that P&G officials understood the risks of derivatives.

Bankers Trust tried to keep the documents sealed to avoid the embarrassment of bad press now unfolding. But in allowing Procter & Gamble to add racketeering charges to its suit against the bank, a judge unsealed the papers.

Bankers Trust, one of the biggest derivatives dealers, has been the subject of two Fortune magazine cover stories, was highlighted on a 60 Minutes program about derivatives and was fined $10-million by regulators for lying to another customer, Gibson Greetings, about the contracts.

But before this latest round of bad news, the bank was on track to have a good third quarter, according to analysts. The bank reports earnings in two weeks.

This week's crisis won't damage profits this quarter, said David S. Berry, who tracks Bankers Trust for Keefe Bruyette & Woods Inc., a New York brokerage firm. And even if the bank decided to settle the case and pay damages of between $200-million and $400-million, the bank will pull through, he said.