Charles S. Sanford Jr., chairman and chief executive of Bankers Trust New York Corp., told shareholders that his trading strategy can be adapted to what he acknowledged is a difficult market. Following are excerpts from his speech, delivered Tuesday after the bank announced a $122 million after-tax loss for the first quarter. The loss was attributed to trading and Latin American exposure and an after-tax provision of $35 million for expense-reduction programs.
We accept full responsibility for what happens on our watch, just as we accept the challenge to prove once again our ability to confront adversity, adapt, and thrive.
Bankers Trust has entered into various agreements and consent orders with banking, securities, and commodities regulators concerning our derivatives business. Both management and the board of directors take such matters most seriously. Management had implemented certain changes in our business practices prior to the agreements and orders.
We are now well along in implementing policies and procedures, and in improving controls and systems, that would further guard against the employee activities that created last year's problems in our leveraged derivatives business.
Under the terms of the various regulatory agreements and orders, Bankers Trust paid a civil money penalty of $10 million and has engaged Derrick D. Cephas, former New York State superintendent of banks, and Benjamin R. Civiletti, former attorney general of the United States, as independent co- counsel to report on matters concerning our derivatives business. That report, which will be public, is expected in the second half of 1995.
As reported, Bankers Trust is being sued or has entered into settlements with a small number of our customers that have sustained losses in connection with their leveraged derivatives activities. The settlements have been accounted for in our published financials. Among the various actions, Bankers Trust was sued by Gibson Greetings, alleging that we misled them regarding risks in leveraged derivative transactions.
Before the merits of the allegation could be adjudicated, we discovered, as part of our own internal investigation, unacceptable conduct on the part of a Bankers Trust employee. We acted promptly to settle matters with Gibson Greetings, and terminated the employee who had violated the firm's code of business conduct. Make no mistake about it, we will not tolerate such conduct in the future.
We have also been sued by Procter & Gamble and, in that instance, are defending ourselves vigorously against claims that we believe are not supported by the facts.
As a matter of policy, we have placed, and will continue to place, on nonperforming status leveraged derivative accounts receivable when we believe that there are doubts about collection. The placement of these receivables on nonperforming status does not diminish in any way our intent to seek payment.
Receivables related to Procter & Gamble account for about half of the approximately $350 million of accounts receivable resulting from leveraged derivative transactions are now on nonperforming status.
The expense-reduction plan includes the elimination of 1,000 regular staff positions worldwide and a reductions of approximately 400 temporary staff, in addition to other expense initiatives. These actions will reduce the corporation's existing cost base by approximately $200 million in 1995 and approximately $275 million in 1996. As of the end of the first quarter, approximately half of the planned staff reductions had been achieved. The plan will be implemented fully in 1995.
As most of you are aware, Latin American securities have sustained huge losses since the Mexican peso was devalued and allowed to float. The resulting extreme market moves were compounded by the associated sudden absence of liquidity, which made it very difficult to manage the risks on a daily basis in ways that had been routine.
I should add that these were all activities and positions that were a regular part of our businesses. We were aware of the exposures and we were within the statistical limits of our risk management systems. Bankers Trust has shown over the years that we have comparative advantages in doing these businesses profitably. We intend to be active in them, although we are adjusting our parameters.
At this point, we will continue to take steps to reduce the impact on the firm should conditions in Latin America again become volatile. In addition, part of the $200 million expense-reduction program for 1995, while involving all of our businesses, will help restore the client financial risk management and the trading and positioning business functions to profitability.
Further, revenue from the client financial risk management business has fallen off dramatically, not just with respect to Latin America, but globally. The number of transactions and the number of customers have remained relatively steady, but the mix of business has shifted to lower- margin transactions.
Market intelligence indicates that these trends are a broad phenomenon across all firms and end-users. What may be unique for Bankers Trust is that it may be hitting an area where we have been one of the leaders and had built an infrastructure to handle the process smoothly.
We also believe that the market demand will not be limited to just the very simplest transactions. Unlike a few years ago, the routine flow now includes a great variety of underlying market indices and structures, which continues to play to our strengths. In addition, we continue to see client demand for complex but nonspeculative transactions.
Clearly, at this point in the financial cycle, the use of many forms of leverage, including leveraged derivatives, is down substantially. But leveraging is just one of several ways to use derivatives, and many clients are actively using derivatives that do not involve leverage as a vital part of managing their business.
Some derivatives serve simple, routine purposes and others serve more complex strategic purposes, but increased leverage is certainly not a necessary result of using derivatives. Many clients are learning that derivatives are versatile and efficient tools for achieving a better balance of risk and return in their operations. As new applications are developed and new users are educated, the overall market for derivatives should grow on average over time - even though particular types may wax and wane in popularity as market conditions change.
We also want to make it clear that our risk management strategy is not exclusively tied to derivatives. Risk management is not a product, it is a powerful process to identify, measure, and monitor risks; to assess overall portfolio risks; and to develop and execute strategies that move clients closer to their preferred balance of risk and return. Derivatives are an important part of the risk management tool kit, but many risk management solutions do not rely on derivative transactions.
One example is giving clients risk information and analytic services. Another is helping clients diversify the risk of their assets. Another is helping clients optimize all the elements of their capital and financing structure to reduce liquidity risks and lower financing costs.
With respect to revenues in the trading and positioning business function, we are giving new emphasis to our long-standing client market activities in foreign exchange and sovereign bonds. Further, we have adjusted the trading strategy to reflect the end of the prolonged bull market in interest rates, and have returned to an approach to the business that served us well over a long period of time.
