Information about Barings Bank

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

• Leonard Ingrams, former Managing Director and founder of Garsington Opera.
• "High Speed Money", a movie about the bank the broker Leeson.
• Rogue Trader 1999 film starring Ewan McGregor.

References

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

• Nick Leeson Official Website of the Barings Rogue Trader
• http://www.numa.com/ref/barings/
• http://www.nytimes.com/books/first/f/fay-collapse.html