Barings Bank (1762 to 1995) was the oldest merchant banking company in London [1] until its collapse
in 1995 after one of the bank's employees, Nick Leeson, lost
$1.4 billion in speculation primarily on futures contracts.
History
Barings Bank was founded in 1762 as the 'John and Francis Baring Company' by Sir
Francis Baring. In 1806 his son Alexander Baring joined the firm and they renamed it Baring Brothers &
Co., merging it with the London offices of Hope & Co., where Alexander worked
with Henry Hope.
Barings had a long and storied history. In 1802, it helped finance the Louisiana Purchase, despite the fact that Britain was at war with France, and the sale
had the effect of financing Napoleon's war effort. Technically the United States
did not purchase Louisiana from Napoleon. Louisiana was purchased from the Baring brothers and Hope & Co.. The payment for the purchase was made in US bonds, which Napoleon sold to Barings at a
discount of 87 1/2 per each $100. As a result, Napoleon received only $8,831,250 in cash for Louisiana. Alexander Baring, working for Hope & Co., conferred with the French Director
of the Public Treasury François Barbé-Marbois in Paris, went to the United States to pick up the bonds and took them to France.
Later daring efforts in underwriting got the firm into serious trouble through
overexposure to Argentine and Uruguayan debt, and the bank had to be rescued by a consortium organized by the governor of the
Bank of England, William Lidderdale, in the
Panic of 1890. While recovery from this incident was swift, it destroyed the company's
former bravado.
Its new, restrained manner made it a more appropriate representative of the British establishment, and the company established
ties with King George V, beginning a close relationship with the
British monarchy that would endure until Barings' collapse (Diana, Princess of Wales was the great granddaughter of one of the Barings family). The
descendants of the original five male branches of the Baring family were all appointed to the peerage with the titles Baron Revelstoke, Earl of Northbrook, Baron Ashburton, Baron Howick of Glendale and Earl of Cromer. The
company's restraint during this period would cost it its preeminence in the world of finance, but would later pay dividends when
its refusal to take a chance on financing Germany's recovery from World War I saved it the painful losses experienced by other British banks at the onset of the
Great Depression.
Events leading to Barings Bank's collapse
Barings Bank's activities in Singapore between 1992 and 1995 enabled Nick Leeson to operate effectively without supervision from Barings Bank in London. Leeson acted both as
head of settlement operations (charged with ensuring accurate accounting) and as floor manager for Barings' trading on
Singapore International Monetary Exchange (SIMEX), though the
positions would normally have been held by two employees. This placed Leeson in the position of reporting to an office inside
Barings Bank which he himself held. Several observers (and Leeson himself) have placed much of the blame on the bank's own
deficient internal auditing and risk management
practices.
Because of the absence of oversight, Leeson was able to make seemingly small gambles in the futures market and cover for his
shortfalls by reporting losses as gains to Barings in London. Specifically, Leeson altered the branch's error account,
subsequently known by its account number 88888 as the "five-eights account", to prevent the London office from receiving the
standard daily reports on trading, price, and status. Leeson claims the losses started when one of his colleagues bought
contracts when she should have sold them
Using the hidden "five-eights account," Leeson began to aggressively trade in futures and options on SIMEX. His decisions routinely lost substantial sums, but he used money
entrusted to the bank by subsidiaries for use in their own accounts. He falsifed trading records in the bank's computer systems,
and used money intended for margin payments on other trading.
Barings Bank management in London at first congratulated and rewarded Leeson for what seemed to be his outstanding trading
profits. However, his luck ran out when the Kobe earthquake sent the Asian
financial markets into a tailspin. Leeson bet on a rapid recovery by the Nikkei Stock Average
which failed to materialize.
By this time, Barings Bank auditors finally discovered the fraud, around the same time that Chairman Peter Barings had
received a confession note from Leeson, but it was too late. Leeson's activities had generated losses totaling £827 million (US$1.4 billion), twice the bank's available trading capital. The Bank of England attempted a weekend bailout but it was unsuccessful. [2] Barings was declared insolvent February 26,
1995. The collapse was dramatic, as employees around the world were supposed to have received their
bonuses that were suddenly withheld.
Barings was purchased by the Dutch bank/insurance company ING for the nominal sum of £10 along with assumption of all of Barings liabilities. Barings Bank therefore no longer has a separate corporate existence, although the Barings name
still lived on as Baring Asset Management. BAM was split and sold by ING to MassMutual and Northern Trust in
March 2005.
Nick Leeson attempted to flee Singapore but was arrested in Germany and extradited back, where he was convicted of fraud and
imprisoned for six years. Upon release, he wrote an autobiography, entitled Rogue
Trader, covering the events leading up to the collapse; it was dramatised in the movie Rogue Trader.
See also
References
- ^ Reason, James: Managing the Risks of Organizational Accidents, page
29. Ashgate Publishing Limited, 1997.
- ^ Reason, James: Managing the Risks of Organizational Accidents, pages
28 - 34. Ashgate Publishing Limited, 1997.
Further reading
- Rogue Trader (1996, hardcover) ISBN 0-316-51856-5; (1997, softcover) ISBN
0-7515-1708-9, Book by Nick Leeson giving his account of the Barings Bank collapse.
External links
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