Hammersmith and Andy

Out of the volatility grew increasing trade in swaps, futures and options. IBM and the World Bank did
the first well-publicized interest and currency swap in 1981.
The Chicago Mercantile Exchange had started trading currency futures in 1972, but in the 1980s
exchange-traded financial futures took off, with the launch of the Eurodollar future on the Merc
in 1981, the opening of Liffe in London in 1982 and Matif in Paris in 1986.
Early heroes of the derivatives industry were Merc chairman, Leo Malamed, academics Merton Miller,
followed by Fischer Black and Myron Scholes (devisers of the Black-Scholes option pricing model),
and Richard Sandor, tireless promoter of derivatives and securitizations.
Midland Bank and Commerzbank fell foul of inexorable interest-rate movements in the 1980s which
they could have hedged with derivatives. The frequency and scale of financial collapses and scandals
goes up. Johnson Matthey Bankers in London, Drysdale Securities and Penn Square Bank in the US
and Banco Ambrosiano in Italy were early casualties. A little close to home, Ambrosiano chairman
Roberto Calvi, "god's banker", was found hanging from Blackfriars Bridge near Euromoney
headquarters, and erstwhile papal bodyguard Chicago-born archbishop Paul Marcinkus disappeared for
a while. In Spain, the Rumasa empire of José María Ruiz Mateos, including 17 banks, was taken over
by the government. In Germany, the private bank Schröder Münchmeyer Hengst collapsed, pitching
senior partner and celebrated chairman of the Frankfurt stock exchange, Ferdinand Graf von Galen,
onto the street and, unfairly, into jail. The real culprit was bulldozer king Horst-Dieter Esch. Then the
US government stepped in to save Continental Illinois.
The mid-1980s in the US was the era of takeover barons, corporate raiders and leveraged buyouts.
Henry Kravis's finest hour at buyout firm Kohlberg Kravis Roberts was the $25 billion takeover of RJR
Nabisco in 1988. At Drexel Burnham Lambert, junk bond king Michael Milken's inside deals with Ivan
Boesky landed both of them in jail and led ultimately to the forced liquidation of Drexel. When US
buy-outs turned sour, the US firms that financed them collapsed or, like First Boston, had to be
rescued.
It was investing in junk bonds that triggered the US Savings & Loans scandal, in which scores of S&Ls
whose bad and sometimes crooked lending was bailed out by the state-backed deposit insurance
system, costing the US taxpayer around $300 billion. Canny private US real-estate investors, such as
Robert Bass, made fortunes buying up distressed real-estate-based debt that had flooded onto the
market.
Guinness left a bad taste
Morgan Grenfell's investment in Milken's deals uncovered the Guinness affair, unseating Guinness
chairman Ernest Saunders and Morgan Grenfell stars Olivier Roux and Roger Seelig.
Craven was called in to put Morgan Grenfell together again, selling it his Phoenix boutique as part of
the deal. Phoenix had been the honest broker in 23 of London's pre-Big Bang mergers. But Craven's
biggest deal was yet to come: selling Morgan Grenfell to Deutsche Bank in 1989.
In the late 1980s the leverage available through derivatives threw up some volatile P&L figures.
Volkswagen came unstuck on some unauthorized currency deals with the National Bank of
Hungary. The broker in the middle Joachim Schmidt did a runner. The London borough of
Hammersmith & Fulham lost $500 million in swaps and swaptions and landed in a celebrated
court case. Britain's law lords controversially ruled the swaps null and void (ultra vires). Bankers
Trust's star currency trader, Andy Krieger, made a killing shorting the New Zealand dollar.
Merrill Lynch and others lost a bundle on new-fangled mortgage strips (this might come back to
haunt us ). Deutsche Bank rescued Klöckner & Co after its dealer Wolfgang Zeschmar's $380 million
loss on oil futures. Chemical Bank, thinking it had a better option-pricing model than the street, became