Barings Bank was the oldest
merchant bankA merchant bank is a financial institution which provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they lend to....
in
LondonLondon is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
until its collapse in 1995 after one of the bank's employees,
Nick LeesonNicholas "Nick" Leeson is a former derivatives broker whose fraudulent, unauthorized speculative trading caused the collapse of Barings Bank, the United Kingdom's oldest investment bank, for which he was sent to prison...
, lost £827 million ($1.3 billion) due to speculative investing, primarily in
futures contractIn finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
s, at the bank's
SingaporeSingapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
office.
History
1762–1890
Barings Bank was founded in 1762 as the
John and Francis Baring Company by Francis Baring, with his older brother John as a mostly silent partner. They were sons of
John (né Johan) BaringJohn Baring came to England in 1717 as a German immigrant, apprenticed to a wool merchant. His decision to settle permanently in England started the Baring family on the road to becoming one of the leading family banking firms in the world....
, wool trader of
ExeterExeter is a historic city in Devon, England. It lies within the ceremonial county of Devon, of which it is the county town as well as the home of Devon County Council. Currently the administrative area has the status of a non-metropolitan district, and is therefore under the administration of the...
, born in
BremenThe City Municipality of Bremen is a Hanseatic city in northwestern Germany. A commercial and industrial city with a major port on the river Weser, Bremen is part of the Bremen-Oldenburg metropolitan area . Bremen is the second most populous city in North Germany and tenth in Germany.Bremen is...
,
GermanyGermany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
. The company began in offices off
CheapsideCheapside is a street in the City of London that links Newgate Street with the junction of Queen Victoria Street and Mansion House Street. To the east is Mansion House, the Bank of England, and the major road junction above Bank tube station. To the west is St. Paul's Cathedral, St...
and within a few years moved to larger quarters in
Mincing LaneMincing Lane is a one-way street in the City of London linking Fenchurch Street southward to Great Tower Street.Its name is a corruption of Mynchen Lane - so-called from the tenements held there by the Benedictine 'mynchens' or nuns of St Helen's Bishopsgate .It was for some years the world's...
. Barings gradually diversified from wool into many other commodities, providing financial services necessary for the rapid growth of international trade. By 1790, Barings had greatly expanded its resources, both through Francis' efforts in London and by association with leading Amsterdam bankers
Hope & Co.Hope & Co. is the name of a famous Dutch bank that spanned two and a half centuries. Though the founders were Scotsmen, the bank was located in Amsterdam, and at the close of the 18th century it had offices in London as well.-Early days:...
In 1793, the increased business necessitated a move to larger quarters in Devonshire Square. Francis and his family lived upstairs, above the offices.
In 1800, John retired and the company was reorganized as
Francis Baring and Co. Francis' new partners were his eldest son Thomas (later to be
Sir Thomas Baring, 2nd BaronetSir Thomas Baring, 2nd Baronet , was a British banker and MP.He was the eldest son of Sir Francis Baring, 1st Baronet, founder of Barings Bank. His grandfather John Baring had emigrated from Germany and established the family in England. Thomas became a partner in Baring Brothers & Co. in 1804,...
) and son-in-law Charles Wall. Then, in 1802, Barings and Hope were called on to facilitate the largest land purchase in history - the
Louisiana PurchaseThe Louisiana Purchase was the acquisition by the United States of America of of France's claim to the territory of Louisiana in 1803. The U.S...
. This was accomplished despite the fact that
BritainThe United Kingdom of Great Britain and Ireland was the formal name of the United Kingdom during the period when what is now the Republic of Ireland formed a part of it....
was at war with
FranceThe French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
and the sale had the effect of financing Napoleon's war effort. Technically, the United States purchased Louisiana from Barings and Hope, not from Napoleon. After a $3 million down payment in gold, the remainder of the purchase was made in U.S. bonds, which Napoleon sold to Barings through Hope and Company of Amsterdam at a discount of 87½ per $100. Francis' second son
AlexanderAlexander Baring, 1st Baron Ashburton PC was a British politician and financier.-Background:Baring was the second son of Sir Francis Baring, 1st Baronet, and of Harriet, daughter of William Herring...
, working for Hope & Co., made the arrangements in
ParisParis is the capital and largest city in France, situated on the river Seine, in northern France, at the heart of the Île-de-France region...
with
François Barbé-MarboisFrançois Barbé-Marbois, marquis de Barbé-Marbois was a French politician.-Early career:Born in Metz, where his father was director of the local mint, Barbé-Marbois tutored the children of the Marquis de Castries. In 1779 he was made secretary of the French legation to the United States...
, Director of the Public Treasury. Alexander then sailed to the United States and back to pick up the bonds and deliver them to France.
In 1803, Francis began to withdraw from active management, bringing in Thomas' younger brothers
AlexanderAlexander Baring, 1st Baron Ashburton PC was a British politician and financier.-Background:Baring was the second son of Sir Francis Baring, 1st Baronet, and of Harriet, daughter of William Herring...
and Henry to become partners in 1804. The new partnership was called
Baring Brothers & Co., which it remained until 1890. The offspring of these three brothers became the future generations of Barings leadership. In 1806, the company relocated to 8
BishopsgateBishopsgate is a road and ward in the northeast part of the City of London, extending north from Gracechurch Street to Norton Folgate. It is named after one of the original seven gates in London Wall...
, where they stayed for the remaining life of the company, the property undergoing several expansions and refurbishments, and finally putting up a new high-rise building in 1981.
A fall off in business and a lack of good leadership in 1820s caused Barings to cede its dominance in the City of London to the rival firm of
N M Rothschild & SonsN M Rothschild & Sons is a private investment banking company, belonging to the Rothschild family...
. Barings remained a powerful firm, however, and in the 1830s the leadership of new American partner
Joshua BatesJoshua Bates was an international financier who divided his life between the United States and the United Kingdom.Bates was born in Commercial St., Weymouth, Massachusetts. Early in his career he worked for William Gray, owner of Gray's Wharf in Charlestown. A merchant and a banker, in 1828 Bates...
, together with
Thomas BaringThomas Baring was a British banker and Conservative Party politician.-Background and education:Baring was the second son of Sir Thomas Baring, 2nd Baronet, and Mary Ursula, daughter of Charles Sealy. Francis Baring, 1st Baron Northbrook, was his elder brother and the Right Reverend Charles Baring...
, son of
Sir Thomas Baring, 2nd BaronetSir Thomas Baring, 2nd Baronet , was a British banker and MP.He was the eldest son of Sir Francis Baring, 1st Baronet, founder of Barings Bank. His grandfather John Baring had emigrated from Germany and established the family in England. Thomas became a partner in Baring Brothers & Co. in 1804,...
, began a turnaround. Bates advocated a shift in Barings' efforts from Europe to the Americas, believing that greater opportunity lay in the West. In 1832, a Barings office was established in Liverpool specifically to capitalize on new North American opportunities. In 1843, Barings became exclusive agent to the U.S. government, a position they held until 1871.
Barings was next appointed by Sir Robert Peel with supplying 'Indian corn' or
MaizeMaize known in many English-speaking countries as corn or mielie/mealie, is a grain domesticated by indigenous peoples in Mesoamerica in prehistoric times. The leafy stalk produces ears which contain seeds called kernels. Though technically a grain, maize kernels are used in cooking as a vegetable...
to Ireland as a famine relief foodstuff between November 1845 and July 1846 following the failure of the staple potato crop. The company declined to act beyond 1846 when the government instructed them to restrict purchases to within the
United KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. Baring Brothers refused any commission for work performed in the cause of Famine relief. Their position as prime purchasers of Indian corn was assumed by Erichson, a corn factor of Fenchurch St, London.
In 1851, Baring and Bates brought in another American,
Russell SturgisRussell Sturgis was a Boston merchant active in the China trade, and later head of Baring Brothers, London.Sturgis was born in Boston, Massachusetts in 1805, a grandson of the noted merchant Russell Sturgis , went to Harvard College at twelve, and in 1828 first sailed abroad...
as partner. Despite the embarrassment to his partners caused by his sympathies for the South in the
American Civil WarThe American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
, Sturgis proved a capable banker and, following the death of Bates in 1864, gradually assumed a leadership role in the firm. In the 1850s and 1860s, commercial credit business provided the firm with its 'bread and butter' income. Thomas Baring's nephew Edward, son of
Henry BaringHenry Baring , of Cromer Hall, Norfolk, was a British banker and politician. He was the third son of Sir Francis Baring, 1st Baronet, the founder of the family banking firm that grew into Barings Bank His grandfather John Baring emigrated from Germany and established the family in...
, became a partner in 1856. By the 1870s, under the emerging leadership of "Ned" Baring, later the 1st
Baron RevelstokeEdward Charles Baring, 1st Baron Revelstoke , was a British banker.-Biography:A member of the famous Baring banking family, "Ned" Baring was the second son of Henry Baring from his second marriage, to Cecilia Anne . Sir Francis Baring, 1st Baronet, was his grandfather and Evelyn Baring, 1st Earl of...
, Barings increasingly involved in international securities, especially from the United States, Canada, and Argentina. Barings cautiously and successfully ventured into the North American railroad boom following the Civil War. A new railroad town in British Columbia was renamed
RevelstokeRevelstoke is a city in southeastern British Columbia, Canada. It is located east of Vancouver, and west of Calgary, Alberta. The city is situated on the banks of the Columbia River just south of the Revelstoke Dam and near its confluence with the Illecillewaet River...
, in honor of the leading partner of the bank that enabled the completion of the Canadian-Pacific Railway.
Later in the 1880s, daring efforts in
underwritingUnderwriting refers to the process that a large financial service provider uses to assess the eligibility of a customer to receive their products . The name derives from the Lloyd's of London insurance market...
got the firm into serious trouble through overexposure to Argentine and Uruguayan debt. In 1890, Argentine president Miguel Juárez Celman was forced to resign following the Revolución del Parque, and the country was close to defaulting on its debt payments. This crisis finally exposed the vulnerability of Barings position. Lacking sufficient reserves to support the Argentine bonds until they got their house in order, the bank had to be rescued by a consortium organized by the governor of the
Bank of EnglandThe Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
,
William LidderdaleWilliam Lidderdale PC was a British merchant, and governor of the Bank of England between 1889 and 1892.Lidderdale was born to British parents at the British Chaplaincy in Saint Petersburg, Russia, and was educated at Birkenhead in Cheshire.After working for the Russian merchants Heath and Co, he...
. The resulting turmoil in financial markets became known as the
Panic of 1890The Panic of 1890 was an acute depression, although less serious than other panics of the era. It was precipitated by the near insolvency of Barings Bank in London. Barings, led by Edward Baring, 1st Baron Revelstoke, faced bankruptcy in November 1890 due mainly to excessive risk-taking on poor...
.
1891–1929
Although the rescue avoided what could have been a worldwide financial collapse, Barings never regained its dominant position. A
limited liability companyA limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
-
Baring Brothers & Co., Ltd. - was formed, to which the viable business of the old partnership was transferred. The assets of the old house and several partners were taken over and liquidated to repay the rescue consortium, with guarantees provided by the Bank of England. Lord Revelstoke and others lost their partnerships along with their personal fortunes, which were pledged to support the bank. It was almost ten years before the debts were paid off. Revelstoke did not live to see this accomplished, dying in 1892.
Barings did not return to issuing on a substantial scale until 1900, concentrating on securities in the United States and Argentina. Its new, restrained manner, under the leadership of Edward's son
JohnJohn Baring, 2nd Baron Revelstoke PC , was senior partner of Barings Bank from the 1890s until his death. John was the eldest surviving son of Edward Baring, 1st Baron Revelstoke, and a great-grandson of the firm’s founder, Sir Francis Baring.-Career at Barings:At the age of twenty, John left...
, made Barings a more appropriate representative of the British establishment. The company established ties with King
George VGeorge V was King of the United Kingdom and the British Dominions, and Emperor of India, from 6 May 1910 through the First World War until his death in 1936....
, beginning thus a close relationship with the
British monarchyThe monarchy of the United Kingdom is the constitutional monarchy of the United Kingdom and its overseas territories. The present monarch, Queen Elizabeth II, has reigned since 6 February 1952. She and her immediate family undertake various official, ceremonial and representational duties...
that would endure until Barings' collapse in 1995.
Diana, Princess of WalesDiana, Princess of Wales was the first wife of Charles, Prince of Wales, whom she married on 29 July 1981, and an international charity and fundraising figure, as well as a preeminent celebrity of the late 20th century...
, was a great-granddaughter of a Baring. Descendants of five of the branches of the Baring family tree have been elevated to the
peerageThe Peerage is a legal system of largely hereditary titles in the United Kingdom, which constitute the ranks of British nobility and is part of the British honours system...
:
Baron RevelstokeBaron Revelstoke, of Membland in the County of Devon, is a title in the Peerage of the United Kingdom. It was created in 1885 for the businessman Edward Baring, head of the family firm of Barings Bank...
, Earl of Northbrook,
Baron AshburtonBaron Ashburton, of Ashburton in the County of Devon, is a title that has been created twice, once in the Peerage of Great Britain and once in the Peerage of the United Kingdom.-History:...
,
Baron Howick of GlendaleBaron Howick of Glendale, of Howick in the County of Northumberland, is a title in the Peerage of the United Kingdom. It was created in 1960 for Sir Evelyn Baring, the former Governor of Kenya. A member of the famous Baring family, he was the third and youngest son of Evelyn Baring, 1st Earl of...
and
Earl of CromerEarl of Cromer is a title in the Peerage of the United Kingdom. It was created in 1901 for Evelyn Baring, 1st Viscount Cromer, the long-time British Consul-General in Egypt...
. The company's restraint during this period cost it its pre-eminence in the world of finance, but later paid dividends when its refusal to take a chance on financing
GermanyGermany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
's recovery from
World War IWorld War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
saved it some of the most painful losses experienced by other British banks at the onset of the
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
.
1929–1995
During the Second World War, the British government used Barings to liquidate assets in the United States and elsewhere to help finance the war effort. After the war, Barings was overtaken in size and influence by other banking houses, but remained an important player in the market until 1995.
1995 collapse
Despite surviving the
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
and both World Wars, Barings was brought down in 1995 due to unauthorized trading by its head
derivativesA derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
trader in
SingaporeSingapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
,
Nick LeesonNicholas "Nick" Leeson is a former derivatives broker whose fraudulent, unauthorized speculative trading caused the collapse of Barings Bank, the United Kingdom's oldest investment bank, for which he was sent to prison...
.
At the time of the massive trading loss, Leeson was supposed to be
arbitragingIn economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
, seeking to profit from differences in the prices of
Nikkei 225The , more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average , is a stock market index for the Tokyo Stock Exchange . It has been calculated daily by the Nihon Keizai Shimbun newspaper since 1950. It is a price-weighted average , and the components are reviewed once a year...
futures contracts listed on the
Osaka Securities Exchangeis the second largest securities exchange in Japan, in terms of amount of business handled. As of 31 December 2007, the Osaka Securities Exchange had 477 listed companies with a combined market capitalization of $212 billion. The Nikkei 225 Futures, introduced at the Osaka Securities Exchange in...
in Japan and the
Singapore International Monetary ExchangeThe Singapore International Monetary Exchange was a futures exchange in Singapore.It was founded in 1984. On 1 December 1999, SIMEX merged with the Stock Exchange of Singapore to form the Singapore Exchange ....
. Such arbitrage involves buying futures contracts on one market and simultaneously selling them on another at a higher price. Since everyone tries to take advantage of a price difference on a publicly traded futures contract, the margins on arbitrage trading are small or even wafer thin. Consequently, the volumes traded by arbitrageurs must be very large to gain any meaningful profit. In arbitrage, one is buying something at one market while selling the same goods in another market at about the same time. Consequently, almost all risks are hedged and the strategy is not very risky. Certainly it would not have bankrupted the bank. For example, one could buy a futures contract on Nikkei worth $100 million on one day and at the same time sell the same product in Singapore for say $100,001,000. Though a person would have bought and sold nearly 200 million, their profit is only $1,000, that is 1,000 dollars for a 100 million dollar investment. However, instead of buying on one market and immediately selling on another market for a small profit, the strategy approved by his superiors, Leeson bought on one market then held on to the contract, gambling on the future direction of the Japanese markets. If one uses the above example, one could buy $100 million worth of Nikkei futures contracts then hope that the contract price goes up in future. In this instance, even a percentage change of the price would create 1 million dollar worth of profit or loss.
According to
Eddie GeorgeEdward Alan John George, Baron George, GBE, PC, DL , known as Eddie George, or "Steady Eddie", was Governor of the Bank of England from 1993 to 2003 and sat on the board of Rothschild.-Personal life:...
, Governor of the
Bank of EnglandThe Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
, Leeson began doing this at the end of January 1995. Due to a series of internal and external events, his unhedged losses escalated rapidly.
Internal auditing
Under Barings Futures Singapore's management structure through 1995, Leeson doubled as both the floor manager for Barings' trading on the
Singapore International Monetary ExchangeThe Singapore International Monetary Exchange was a futures exchange in Singapore.It was founded in 1984. On 1 December 1999, SIMEX merged with the Stock Exchange of Singapore to form the Singapore Exchange ....
and head of settlement operations. In the latter role, he was charged with ensuring accurate accounting for the unit. The positions would normally have been held by two different employees. By allowing Leeson, as trading floor manager, to settle his own trades, Barings short-circuited normal accounting and internal control/audit safeguards. In effect, Leeson was able to operate with no supervision from London—an arrangement that made it easier for him to hide his losses. After the collapse, several observers, including Leeson himself, placed much of the blame on the bank's own deficient internal
auditThe general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation.- Accounting...
ing and
risk managementRisk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
practices.
Some people raised eyebrows about Leeson's activities but were ignored.
Corruption
Because of the absence of oversight, Leeson was able to make seemingly small gambles in the futures
arbitrageIn economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
market at Barings Futures Singapore 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, costing Barings £20,000.
By December 1994, Leeson had cost Barings £200 million. He reported to British tax authorities a £102 million profit. If the company had uncovered his true financial dealings then, collapse might have been avoided as Barings still had £350 million of capital.
Kobe earthquake
Using the hidden five-eights account, Leeson began to aggressively trade in futures and options on the Singapore International Monetary Exchange. His decisions routinely resulted in losses of substantial sums, and he used money entrusted to the bank by subsidiaries for use in their own accounts. He falsified trading records in the bank's computer systems, and used money intended for margin payments on other trading. As a result, he appeared to be making substantial 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, which failed to materialize.
Discovery
On 23 February 1995, Leeson left Singapore to fly to
Kuala LumpurKuala Lumpur is the capital and the second largest city in Malaysia by population. The city proper, making up an area of , has a population of 1.4 million as of 2010. Greater Kuala Lumpur, also known as the Klang Valley, is an urban agglomeration of 7.2 million...
. Barings Bank auditors finally discovered the fraud around the same time that Barings' chairman, Peter Baring, received a confession note from Leeson. Leeson's activities had generated losses totalling
£The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
827 million (US$1.3 billion), twice the bank's available trading capital. The collapse cost another £100 million. The Bank of England attempted an unsuccessful weekend bailout. Employees around the world did not receive their bonuses. Barings was declared insolvent on 26 February 1995 and appointed administrators began managing the finances of Barings Group and its subsidiaries. The same day, the Board of Banking Supervision of the Bank of England launched an investigation led by Britain's
Chancellor of the ExchequerThe Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
and their report was released on 18 July 1995. Lord Bruce of Donington, in the
House of LordsThe House of Lords is the upper house of the Parliament of the United Kingdom. Like the House of Commons, it meets in the Palace of Westminster....
' debate on the report, said:
Even the provisional conclusions of the report are interesting. I should like to give them to the House so that we may be reminded what the supervisory body itself decided at the end of such investigation as it was able to make. It stated on page 250:
-
- "Barings' collapse was due to the unauthorised and ultimately catastrophic activities of, it appears, one individual (Leeson) that went undetected as a consequence of a failure of management and other internal controls of the most basic kind".
The words I venture to emphasise to your Lordships are these:
-
- "as a consequence of a failure of management and other internal controls of the most basic kind".
Noble Lords who have read through paragraph 14.2 of the report will be aware that it specifies these deficiencies. The report states:
-
- "Management teams have a duty to understand fully the businesses they manage".
Really! They really have to understand the businesses! I would have thought that it was an elementary assumption to make that the controllers should understand the nature of the businesses they are trying to control.
The next requirement is this:
-
- "Responsibility for each business activity has to be clearly established and communicated".
Hooray for that! I wonder how businesses in this country manage in their generality to continue without that qualification.
The third requirement is:
-
- "Clear segregation of duties is fundamental to any effective control system".
Tut, tut! We are now treating the real elementum of the whole art and science of management, and it needs to be repeated here.
The report continues:
-
- "Relevant internal controls, including independent risk management, have to be established for all business activities".
Hooray for that! These are matters of plain, ordinary common sense. One does not need to be an accountant or a management consultant to be aware of that.
Finally:
-
- "Top management and the Audit Committee have to ensure that significant weaknesses, identified to them by internal audit or otherwise, are resolved quickly".
Well, well, well! These are all respects which this control body finds were absent from Barings. Do noble Lords really know what is being said? It is being said that Barings ought not to have been authorised bankers from the beginning, because any business — I do not care whether it is a whelk stall (one must not insult whelk stall owners in the context of this catastrophe) or what — knows that these are the basic conditions for the continuance of the business. It seems to me that the Bank of England ought never to have authorised this concern without verifying that all these conditions were in place.
Aftermath
INGThe ING Group is a global financial institution offering retail banking, direct banking, commercial banking, investment banking, asset management, and insurance services. ING is the Dutch member of the Inter-Alpha Group of Banks, a cooperative consortium of 11 prominent European banks...
, a Dutch bank, purchased Barings Bank in 1995 for the nominal sum of £1 and assumed all of Barings' liabilities, forming the subsidiary ING Barings. In 2001, ING sold the U.S.-based operations to
ABN AmroABN AMRO Bank N.V. is a Dutch state-owned bank with headquarters in Amsterdam. It was re-established, in its current form, in 2009 following the acquisition and break up of ABN AMRO Group by a banking consortium consisting of Royal Bank of Scotland Group, Santander and Fortis...
for $275 million, and folded the rest of ING Barings into its European banking division. This left only the asset management division, Baring Asset Management. In March 2005, BAM was then split and sold by ING to MassMutual (acquiring BAM’s investment management activities and the rights to use the Baring Asset Management name) and
Northern TrustNorthern Trust Corporation is an international financial services company headquartered in Chicago, Illinois, USA. It provides investment management, asset and fund administration, fiduciary and banking services through a network of 85 offices in 18 U.S. states and 12 international offices in North...
(acquiring BAM’s Financial Services Group). Barings Bank therefore no longer has a separate corporate existence, although the
Barings name still lives on as the MassMutual subsidiary,
Baring Asset Management. Baring Private Equity International, which included investment teams in Asia, India, Russia and Latin America was acquired by its respective management teams, which today include
Baring Vostok Capital PartnersBaring Vostok Capital Partners is an independent private equity firm focused on investments in Russia and the Commonwealth of Independent States...
in Russia,
GP InvestmentsGP Investments is a private equity firm focused on emerging markets leveraged buyout and growth capital investments in Latin America...
in Brazil as well as Baring Private Equity Asia and Baring Private Equity Partners India.
With the failure of Barings,
N M Rothschild & SonsN M Rothschild & Sons is a private investment banking company, belonging to the Rothschild family...
is the only name remaining from the glory days of 19th-century British merchant banking.
After learning of Barings' collapse (and realizing he was certain to be jailed for his actions), Leeson booked a flight to London where he intended to surrender to British police in hopes of serving prison time in the United Kingdom as opposed to Singapore. However, he was apprehended by
GermanGermany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
authorities when he landed in
FrankfurtFrankfurt am Main , commonly known simply as Frankfurt, is the largest city in the German state of Hesse and the fifth-largest city in Germany, with a 2010 population of 688,249. The urban area had an estimated population of 2,300,000 in 2010...
. Leeson spent the next several months in German custody unsuccessfully fighting extradition back to Singapore. British authorities declined to pursue extradition of Leeson back to the United Kingdom.
Leeson was eventually sentenced to six and a half years in prison in Singapore, but was released early in 1999 after being diagnosed with colon cancer. Despite grim forecasts at the time, he did not succumb to the disease.
Leeson's Trading Jacket
On 5 April 2007,
The GuardianThe Guardian, formerly known as The Manchester Guardian , is a British national daily newspaper in the Berliner format...
newspaper reported that
KPMGKPMG is one of the largest professional services networks in the world and one of the Big Four auditors, along with Deloitte, Ernst & Young and PwC. Its global headquarters is located in Amstelveen, Netherlands....
, the liquidators of Barings PLC, had sold a
trading jacketA trading jacket is a garment worn by an individual who executes trades by open outcry in and around the trading pits of various financial exchanges...
thought to have been worn by Nick Leeson while trading on SIMEX in Singapore. The jacket was offered for sale on
eBayeBay Inc. is an American internet consumer-to-consumer corporation that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide...
but it failed to reach its reserve price despite a highest bid of £16,100. It was subsequently sold for £21,000. In October 2007 a similar jacket used by Leeson's team but not thought to have been worn by Leeson himself sold at auction for £4,000.
See also
- Re Barings plc (No.5)
Re Barings plc [1999] 1 BCLC 433 is a leading UK company law case, concerning directors' duties of care and skill. Some reporters and commentators call this case "No 5" while others refer to it as "No 6" in the saga of litigation concerning Barings Bank.-Facts:Nick Leeson was a dishonest futures...
[1999] 1 BCLC 433
- Leonard Ingrams
Leonard Victor Ingrams was a merchant banker and opera festival founder/impresario.Leonard Ingrams was the youngest of four sons. His parents were Leonard St Clair Ingrams and Victoria . His mother was very musical and he started to learn the violin at the age of six...
, former Managing Director and founder of Garsington OperaGarsington Opera is an annual open air summer opera festival founded in 1989 by Leonard Ingrams. For twenty one years it was held in the gardens of Leonard Ingrams' home at Garsington Manor in Oxfordshire. Since 2011 the festival is now held in Wormsley Park, the home of the Getty family near High...
.
- Rogue Trader
Rogue Trader is a 1999 drama film directed by James Dearden about former derivatives broker Nick Leeson and the 1995 collapse of Barings Bank...
1999 film starring Ewan McGregor.
- Jérôme Kerviel
Jérôme Kerviel is a French trader who has a pending appeal of his conviction in the January 2008 Société Générale trading loss incident for breach of trust, forgery and unauthorized use of the bank's computers, resulting in losses valued at €4.9 billion.Société Générale characterizes Kerviel...
, trader with Société GénéraleSociété Générale S.A. is a large European Bank and a major Financial Services company that has a substantial global presence. Its registered office is on Boulevard Haussmann in the 9th arrondissement of Paris, while its head office is in the Tours Société Générale in the business district of La...
who lost approximately €The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
4.9 billion.
- Galway United F.C., by whom Nick Leeson
Nicholas "Nick" Leeson is a former derivatives broker whose fraudulent, unauthorized speculative trading caused the collapse of Barings Bank, the United Kingdom's oldest investment bank, for which he was sent to prison...
, instrumental in Barings' collapse, is now employed.
- CITIC Pacific#2008 foreign exchange losses controversy
- List of trading losses
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
- Sir Miles Rivett-Carnac, Bt - Daily Telegraph obituary