P&G lost $157M on a swap it didn't understand — Bankers Trust said 'we set 'em up'

In early 1994, Procter & Gamble, one of the world's largest consumer goods companies, had a $157 million loss from a complex leveraged interest rate swap sold by Bankers Trust. The swap, known as a 5/30 swap, was a highly leveraged derivative that the company's management did not fully understand. Bankers Trust presented the trade as a low-risk way to lower P&G's borrowing costs, but the structure was effectively a massive bet that interest rates would stay flat or decline. When the Federal Reserve raised rates in 1994, the swap collapsed.

P&G sued Bankers Trust in October 1994, alleging that the bank had misrepresented the risks and sold a product that P&G's management could not understand. During the lawsuit, P&G discovered 6,500 secret tape recordings of Bankers Trust employees. The tapes revealed that the bank's brokers described the business as 'a wet dream' and said 'we set 'em up' — referring to clients who could not understand the derivatives they were buying. The tapes also showed that Bankers Trust had provided P&G and another client, Gibson Greetings, with incorrect valuations of their derivative positions.

Bankers Trust settled the P&G lawsuit in May 1996, and the scandal prompted regulators to investigate the over-the-counter derivatives market. The Bankers Trust case became a landmark in derivatives regulation, leading to new disclosure requirements for complex financial products. Gibson Greetings, which lost $20 million in a similar trade, also sued Bankers Trust and was later sanctioned by the SEC. The case is widely cited as the moment Wall Street's practice of selling complex derivatives to unsophisticated clients was exposed to public scrutiny.