ANALYSIS - As derivative deals go bad, banks in firing line

By Jonathan Leff and Michael Flaherty

SINGAPORE/HONG KONG (Reuters) - Investment banks already under fire for risky lending practices in Western markets face another barrage of criticism over selling a raft of currency and commodity derivatives that have now turned toxic.

Companies from Chinese power generators to Mexican tortilla makers, some already reeling from the global financial crisis, are being hit a second time by these trades, including complex products that seemed to offer easy money or zero-cost hedges.

Now that many of those deals are coming back to bite them, some companies are lashing out at their bankers. Such attacks may be unfair, but the reputational damage to an industry already a scapegoat for global woes may not be easy to undo.

At the core of the issue is the companies' intent: Were these firms lured into instruments they thought would effectively protect them against downside risks? Or did company executives take a punt on the market by exploiting the grey area between a hedge and a speculative bet, circumventing risk controls?

Caveat emptor -- buyer beware -- goes only so far, and some experts say this may only be the beginning of a parade of a accusations, and potential lawsuits, as volatile forex markets and a sharp dive in commodities roil corporate trades.

Still, investment bankers point out that many buyers were perfectly aware of what they were getting into.

"If people were not properly informed of the risks they were taking by a person selling the product, then I think the seller should be responsible," said Beijing-based Philip Partnow, a managing director at UBS.

"If people were properly informed then the buyer made a decision made on appropriate information and the buyer has to be responsible."