Gets Big Boost From Sale
Of Derivatives; Another Client Has Loss
By Steven Lipin and Gabriella Stern

04/21/1994 The Wall Street Journal PAGE A3

Bankers Trust New York Corp . disclosed that almost three-fourths of its first-quarter profit came from the sale of derivative products, although some of its clients didn't fare so well.

Mead Corp., a Dayton, Ohio, producer of paper products and information services, became the third company in recent weeks to report losses from derivatives purchased from the big bank. Mead said it will take a one-time pretax charge of $12.1 million in its first quarter to close out a "unique leveraged interest-rate swap" contract with the bank. After taxes, the charge was $7.4 million, or 12 cents a share.

Mead's announcement came soon after two other Ohio companies posted losses from similar purchases from Bankers Trust of derivatives, which are financial agreements whose returns are linked to, or derived from, the performance of some underlying asset.

Last week, Procter & Gamble Co., a consumer-products maker based in Cincinnati, announced a $157 million pretax charge in its fiscal third quarter to close out two deritatives contracts. And on Tuesday, Gibson Greetings Inc., also based in Cincinnati, said it incurred an additional charge against earnings of $16.7 million for the first quarter as a result of "unauthorized" interest-rate swaps. The maker of greeting cards and wrapping paper previously announced a $3 million loss on derivatives. Both companies have threatened legal action against Bankers Trust.

The bank, meanwhile, said 70% of its first-quarter earnings, or about $114 million, came from the sale of derivative instruments to clients. Mr. Yates said the pickup in derivative sales resulted from an increased demand from banks and investors, particularly in Europe. Last year, about 31% of Bankers Trust's bottom line came from derivative sales.

The bank also said it incurred losses totaling $49 million in the latest quarter from trading mostly bonds and currencies for its own account, in contrast to the average $149 million it earned in each quarter last year.

Bankers Trust, which announced first-quarter earnings of $164 million, or $1.90 a share, on Tuesday, provided the additional information about its results yesterday to Wall Street analysts.

Timothy Yates, chief financial officer of Bankers Trust, said that "a tremendous majority of our clients use derivatives to hedge risk," while a very small minority have taken losses.

"We believe there will be a slowdown as client policies and procedures tighten, but in the long-term we see that as good," Mr. Yates said. "There's a little slowdown now because of a lack of firm trends in the market, but not for any other reason."

Regarding the bank's trading losses, Mr. Yates said they resulted from a rise in interest rates in many European countries. "We had long positions and we were wrong," Mr. Yates said. "We closed out our positions and reduced our level of activity."

But at a time when regulators are increasingly concerned about banks trading activities, Mr. Yates said "our risk controls worked well. We knew what our positions were and marked them to market constantly."

Tom Schwartz, a Mead spokesman, said the $12.1 million pretax charge reflects losses from several swaps, though "the bulk" came from a leveraged swap. Mead has hedged its debt "as part of our ongoing financial management," he said. "It's a routine part of how we do business. Over the last number of years, we've lowered our interest costs through doing that."

However, Mr. Schwartz added: "This particular leveraged interest-rate transaction with Bankers Trust is a one-time event. We won't be doing those kinds again." Mead posted 8% higher net income of $27.6 million, or 46 cents a share, after the charge, for the period ended March 31.