Germany Feels Derivatives' Sting Too; Firms Hurt by Risky Trades Say Investments Weren't Fully Explained
When the chief financial officer of one of Germany's largest insurance companies began dealing in complex derivatives with U.S. banks two years ago, his superiors thought nothing of it.</br></br>The officer had managed simple interest rate swaps to hedge the company's vast investments, even reaping a few million dollars in profit.</br></br>What's more, his company, Gothaer Life Insurance, had stood on the sidelines as Anglo-American banks pioneered the use of complex derivatives in other countries, showing that they were useful in protecting large investments.</br></br>But within a year, things had turned ugly at Gothaer. The derivatives -- contracts pinned to the performances of other investments, such as stocks, bonds, currencies and commodities -- overwhelmed the 61-year-old CFO, and losses climbed to $36 million in 1994.</br></br>"We thought we had a cat in our books, but we really had a tiger," said Reinhard Blei, the company's treasurer, who took control of the funds after the CFO resigned.