Bankers' Acceptances, Federal Reserve Bank, Warehouse Receipts
Federal Reserve Authorization for Bankers' Acceptances
Banks have many tools for financing international trade, but one of the lesser known ones is the Bankers’ Acceptances (B/A’s). This financing arrangement, authorized by the Federal Reserve Bankin 1913, allows U.S. banks to compete with London banks in the international financing arena. B/A’s have several advantages. Considered short-term, each 180 days or less, each B/A ties to a specific self-liquidating transaction. Once the bank creates the B/A, they can sell it into the secondary market and thus maintain liquidity.
Bankers' Acceptances used for Financing Goods in a Warehouse
The Federal Reserve Bank specified certain transactions which qualify for B/A financing. The transactions must relate to a shipment of goods, or be secured with readily marketable staples stored in independent warehouses.
The warehouse receipt financing arrangement used by “Tino” DeAngelis in the early 1960s bilked banks and investors out of $219 million. DeAngelis falsified warehouse receipts for the alleged storage of salad oil in tanks. His tanks had false or hollow bottoms which allowed only a portion of the tank to be filled with oil. The swindler then used these receipts to pledge as collateral to borrow millions of dollars, which he used in an attempt to corner the cottonseed and soybean markets on the commodities exchange. Apparently, he intended to make a killing in those markets, and then use the profits to buy salad oil to legitimately fill the tanks.
DeAngelis made heavy margin purchases of soybean oil and cottonseed oil futures with the expectation that the USSR would buy vegetable oils in the U.S. However, the prices of the futures began to drop, and DeAngelis failed to come up with the money to cover the decline in the value of the contracts.
Officials discovered the truth when they examined his fake warehouse receipts. DeAngelis was charged with fraud in 1965, convicted, and given a twenty-year prison sentence. The Feds recovered all but $1 million from the so-called “Great Salad Oil Swindle.”