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International Sales & Marketing
International Trade Finance: Understanding Banker's Acceptance
On: August 1, 2016 | By: 
Roy Becker |
2 min. read
The banker’s acceptance (BA) is one of several instruments used to finance international trade. The banker’s acceptance was created in 1913 by the Federal Reserve Bank to help U.S. banks compete with London banks in the international financing arena.
BA’s offer several benefits:
- They are short-term (180 days or less).
- Each is tied to a specific self-liquidating transaction.
- They can be sold on the secondary market (and still maintain liquidity).
The Federal Reserve Bank specified certain transactions that qualify for BA financing. The transactions must relate to a shipment of goods or be secured with readily marketable commodities stored in independent warehouses.
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The Great Salad Oil Swindle
In what turned out to be a gross distortion of the spirit of the bankers acceptance, commodity trader “Tino” DeAngelis used a warehouse receipt financing arrangement in the 1960s to bilk banks and investors out of $219 million.
DeAngelis falsified warehouse receipts (backed by banks through a BA) 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 the warehouse receipts to pledge as collateral to borrow millions of dollars, which he used to try and 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 20-year prison sentence. The Feds recovered all but $1 million from the so-called Great Salad Oil Swindle, the title of a best-selling book in 1963 that chronicled the scandal.
Ironically, BAs are relatively safe investments because both the bank and borrower are liable when the BA matures. Bottomline: it's one of several effective international trade terms.
