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This happened to the German metals and mining concern Metallgesellschaft last year after it charged into the derivatives market. The company bought oil futures for a subsidiary -- just before oil prices collapsed -- leaving it < with $1.3 billion in losses and triggering a national scandal. Prosecutors have been investigating the role of fired CEO Heinz Schimmelbusch, who has denied doing anything wrong. Nonetheless, bank creditors demanded the layoff of 7,500 ofMetallgesellschaft's 46,000 employees and the sale of several divisions as the price for rescuing the company.
But while some people have lost their jobs, Wall Street has become richer. Thanks to record sales of everything from derivatives to new stock and bond issues to merger financing, the pretax profits of U.S. brokers and investment banks zoomed to an unprecedented $8.9 billion last year. "I see no reason why 1994 won't be better than 1993," exults Sanford Weil, chairman of Travelers Cos., which owns Smith Barney Shearson. "We're having a great time."
By no coincidence, Wall Street's big winners have been firms that are leaders in designing and selling derivatives. Record earnings at Goldman Sachs brought joy to its 161 partners, who each reportedly got $5 million or more in profit sharing, which they can withdraw when they leave the company. The results brought even greater glee to 10 senior partners, who are believed to have got more than $25 million each in profit sharing. At Merrill Lynch, which raked in $1.3 billion after taxes, directors awarded chairman Daniel P. Tully $9.6 million in salaries and bonuses in 1993, an increase of more than one- third from the previous year.
Wall Street is also spending lavishly to provide its whiz kids with all the tools they can use to build ever more elaborate toys. The arrival of powerful computer workstations in the late 1980s gave the quants the number-crunching capacity they needed to bring forth their brainchildren. Now Goldman Sachs, J.P. Morgan and Morgan Stanley each spend anywhere from $800 million to $1.2 billion a year to hone their derivatives operations. The money goes for the computers and software it takes to design and monitor derivatives contracts, and for the salaries of the quants who pilot the equipment.
And what has Wall Street finally wrought at the end of the day? Like nuclear power, derivatives perform a useful function. But they also contain a great deal of risk that must be carefully controlled. "Are derivatives here to stay?" asks Friedman of Goldman Sachs. "Certainly they are. Like many other instruments, they can be used to excess. But they can also be used for extremely beneficial purposes." It will be up to watchdogs in government and on Wall Street to ensure that the beneficial side of derivatives prevails, and that they do not follow pyramid schemes and savings and loan deals into the lexicon of American financial bubbles that burst.