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High-Finance Side Bets Are Wall Street’s Scandal of 1994

December 31, 1994

NEW YORK (AP) _ If derivatives mean nothing to you, keep an eye on Super Bowl XXIX.

Aside from betting on who will win the game, the adventurous and their money will have other opportunities to part ways. Bookies and casinos will take bets on just about any statistic - the score by quarters, the number of field goals and even who will score the first touchdown.

Those are the kinds of wagers that got money managers, big and small companies and a rich California county in trouble this past year.

The big-time side bets, called derivatives by the banks and brokerages that sell them, were on the direction of interest rates or the dollar’s value compared to other currencies.

Used conservatively, derivatives can offset the risk of rising interest rates by rewarding the investor when rates go down. But since the payoff can be big, some investors weren’t content with merely hedging their bets.

When they tried to use the derivatives to make money rather than prevent losses, they got sacked. Derivatives are proving to be the Wall Street scandal of 1994.

Most of the $12 trillion derivatives market consists of contracts between banks, brokerages and the investor. It’s a typical securities business scandal - distant and difficult to comprehend, but eventually takes unintended victims.

Orange County municipal workers are uncertain about their futures and the county is considering importing trash to make money. It isn’t clear whether the County will have to turn to taxpayers to make up some of the shortfall.

Gibson Greetings Inc. is eliminating 5 percent of its work force, or about 130 jobs, to save $5 million next year, although it says the cuts aren’t related to millions in derivatives losses.

Procter & Gamble was the first to draw widespread attention to derivatives this past spring. The company had to set aside $102 million of its profits because of losses.

It wasn’t until Orange County went to bankruptcy court that derivatives regained the nation’s attention. The Los Angeles suburb lost $2 billion from its investment fund, partly because of losses on derivatives.

But dozens of other companies, municipalities and investment funds have gotten burned.

Gibson, which sued Bankers Trust New York Inc. over $19 million in losses, got the bank to cover all but $6.18 million of the loss. Gibson had said the losses threatened its survival.

Without a central marketplace for most derivatives, the securities have been largely unregulated. Now the federal government is signaling that banks and brokerages that sell derivatives will be held responsible for losses by investors who didn’t understand what they were getting into.

The Securities and Exchange Commission and the Commodities Futures Trading Commission together fined Bankers Trust $10 million for the Gibson derivatives deal. The regulators said the bank’s securities dealing division misled Gibson about the value of the derivatives. Ticker

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Financial markets are closed Monday. for New Year’s ... On Tuesday., the National Association of Purchasing Management releases its closely watched report on the manufacturing economy ... Orange County has a bankruptcy court hearing Wednesday. on whether it can make some interest payments ... GM and Chrysler announce yearend auto sales figures on Wednesday., followed by Ford on Thursday. ... Retailers announce December sales figures Thursday. ... December’s unemployment figures are released by the Labor Department Friday..

End adv for release weekend editions Dec. 31-Jan. 1

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