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Baring Bank Collapse
Submitted to sir Zia-ur-Rehman
Prepared by: Urooj Asif Registration #: 54643 Program: MBA (morning)
In 1800. the increased business necessitated a move to larger quarters in Devonshire Square. but within a few years moved to larger quarters in Mincing Lane . Barings gradually diversified from wool into many other commodities. Barings had greatly expanded its resources. both through Francis' efforts in London and by association with leading Amsterdam bankers Hope & Co. however. and in the 1830s the leadership of new American partner Page 2 . 2nd Baronet) and son-in-law Charles Wall.the Louisiana Purchase. Francis' new partners were his eldest son Thomas (later to be Sir Thomas Baring. Then. Barings remained a powerful firm. Germany. above the offices. born in Bremen. By 1790. In 1793. This was accomplished despite the fact that Britain was at war with France and the sale had the effect of financing Napoleon's war effort.BARINGS BANK HISTORY 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. providing financial services necessary for the rapid growth of international trade. wool trader of Exeter. 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 & Sons. The company began in offices off Cheapside. in 1802. They were sons of John (née Johan) Baring. Francis and his family lived upstairs. Barings and Hope were called on to facilitate the largest land purchase in history . John retired and the company was reorganized as Francis Baring and Co.
S. Lacking sufficient reserves to support the Argentine bonds until they got their house in order.. until 1995. with the titles Baron Revelstoke. William Lidderdale. Barings was overtaken in size and influence by other banking houses. together with Thomas Baring. a Barings office was established in Liverpool specifically to capitalize on new North American opportunities. the bank had to be rescued by a consortium organized by the governor of the Bank of England. a position they held until 1871. COLLAPSE OF BARING BANK . Barings became exclusive agent to the U. 2nd Baronet. In 1890. In 1843. Later in the 1880s. Baron Ashburton. believing that greater opportunity lay in the West. son of Sir Thomas Baring. Bates advocated a shift in Barings' efforts from Europe to the Americas. During the Second World War. Baron Howick of Glendale and Earl of Cromer. In 1832. daring efforts in underwriting got the firm into serious trouble through overexposure to Argentine and Uruguayan debt. The resulting turmoil in financial markets became known as the Panic of 1890. government. Earl of Northbrook. Argentine president Miguel Juárez Celman was forced to resign following the Revolución del Parque. This crisis finally exposed the vulnerability of Barings position. began a turnaround. After the war. The descendants of five of the branches of the Baring family tree were elevated to the peerage.Joshua Bates. the British government used Barings to liquidate assets in the United States and elsewhere to help finance the war effort. and the country was close to defaulting on its debt payments. but remained an important player in the market.
After attending university. they not only accepted . not properly document or in physically unacceptable condition. When he applied for a position within BSS. At both firms. Barings was Britain's oldest merchant bank. Because the stock market had subsequently declined. The next step was to purchase a seat and hire traders. His first task when he arrived was working through a back-office mess in Jakarta. and the Erie Canal. Leeson worked his way through the certificates. Barings was the Queen's bank. Without a seat on the exchange. but its volume of futures trading on the SIMEX (today's Singapore Exchange) was growing. but shortly after joining Barings. Barings had maintained an office in Singapore since 1987. The failure was completely unexpected. he applied for and received a transfer to the Far East. BSS was having to pay commissions for all its transactions. The bank was sitting on GBP 100MM in stock certificates and bearer bonds that were not in deliverable form. Over a period of 10 months. it had originally focused on equities.The collapse of Britain's Barings Bank in February 1995 is perhaps the quintessential tale of financial risk management gone wrong. the clients trying to avoid taking delivery they complained that certificates were in the wrong denomination. addressing the problems and making delivery. It had financed the Napoleonic wars. What really grabbed the world's attention was the fact that the failure was caused by the actions of a single trader based at a small office in Singapore. Over a course of days. Many of the stocks had been purchased on behalf of clients. the Louisiana purchase. Leeson's accomplishments in Jakarta attracted the attention of Barings management. He had grown up in the Watford suburb of London. he worked briefly for Morgan Stanley before joining Barings. Called Baring Securities (Singapore) Limited (BSS). the bank went from apparent strength to bankruptcy. The trader was Nick Leeson. he worked in operations.
but they made him general manager with authority to hire traders and back office staff.him. . but he soon took the necessary exam so that he could trade on SIMEX along with his small team of traders. Leeson's job was not trading. Such an arrangement should have rung alarm bells. Leeson's 88888 account had lost a total of GBP 208MM. A year later. arbitraging price differences between Nikkei futures traded on the SIMEX and Japan's Osaka exchange. By the end of 1994. Leeson started actively trading in the 88888 account almost as soon as he arrived in Singapore. Leeson took unauthorized speculative positions primarily in futures linked to the Nikkei 225 and Japanese government bonds (JGB) as well as options on the Nikkei. this had mushroomed to GBP 23MM. head trader and. the 88888 account was under water by about GBP 2MM. On February 23. He hid his trading in an unused BSS error account. The sheer volume of his trading suggests a simple desire to speculate. 1995. and 2. Barings management remained blithely unaware. de facto head of the back office. Leeson and his traders had authority to perform two types of trading: 1. due to his experience in operations. transacting futures and options orders for clients or for other firms within the Barings organization. However. but no one within Barings' senior management seemed to notice the blatant conflicts of interest. number 88888. Exactly why Leeson was speculating is unclear. He was now general manager. By the end of 1992. He lost money from the beginning. Perhaps it was the inherent lack of risk in such trading that prompted people to not be concerned about Leeson wearing multiple hats. Leeson arrived at BSS in 1992 and started hiring local staff. Increasing his bets only made him lose more money. He claims that he originally used the 88888 account to hide some embarrassing losses resulting from mistakes made by his traders. As general manager.
Baring Securities (Japan) Limited (BSJ) BSL's Japan office. Even if the claim were true. a few are able to cover their tracks. What is amazing about Leeson's activities is the fact that he was able to accumulate such staggering losses without Barings' management noticing. For example.Nick Leeson hopped on a plane to Kuala Lumpur leaving behind a GBP 827MM hole in the Barings balance sheet. and he gave a technical argument related to how the SIMEX collected margin as justification. Most of this came from three companies within the Barings organization: Baring Securities Limited (BSL) securities arm of parent Barings Plc. Instead. Publicity was unavoidable. he had to pay those losses to SIMEX in the form of margin. Presumably. By the time he was discovered. Usually. By falsifying accounts and making various misrepresentations. . Baring Securities (London) Limited (BSLL) BSL's London office. This claim was false. and their employer eats the loss. His misrepresentations were flimsy at best. Exhibit 1 tracks the funding of BSS by these three companies in the months leading up to Barings' collapse. Leeson made headlines precisely because he was so unlucky. Leeson needed cash. he claimed that he needed funds to make margin payments on behalf of BSS clients. neither the trader nor his employer has any interest in publicizing the incident. It was actually against SIMEX rules for a broker to post its own money as margin for a client. he was able to secure funding from various companies within the Barings organization and from client accounts. the funds would have been needed only temporarily until the client could make payment. they are fired. Leeson continued to ask for ever more funding.. Traders sometimes speculate without authorization. he had bankrupted his employer. When they are caught. Others are caught. As Leeson lost money.
. Despite his having to fund millions of GBP in losses. This exhibit tracks their funding of BSS in the months leading up to the failure of Barings. Barings Organization Prior to Merging the Banking and Securities Businesses Exhibit 2 An abbreviated organizational structure for Barings . there were various factors that allowed Leeson to avoid discovery.Sources of Funding for BSS During Early 1995 Exhibit 1 Funding for Baring Securities (Singapore) Limited (BSS) came primarily from three companies within the Barings organization.
In November 1993. The merger was not easy because the two firms had markedly different cultures. and BSL became part of the new BIB. Tokyo and Hong Kong during 1994. BSL was merged into BB&Co. and BSL. and BSL. Barings Organization Following the 1993 Merger of the Banking and Securities Businesses Exhibit 3 An abbreviated organization structure for Barings following the 1993 merging of BB&Co. In 1994. BSL also had offices in New York and Hong Kong. For example. Risk controllers were appointed in London. BB&Co. in anticipation of a subsequent initiative to form a Barings Investment Bank (BIB).prior to the 1993 merging of BB&Co. Barings was just starting to form a risk management function. Entities not relevant to this article have been omitted. but not in . It was a distraction right in the middle of Leeson's tenure at BSL. The new organizational structure following the merger is indicated in Exhibit 3.
Some people did raise concerns about Leeson's activities. head of Global Futures and Options Sales. There was one reporting structure based upon products that cut across all offices. who was Regional Operations Manager for South East Asia. Another was based upon operations. He falsified records. fabricated letters and made up elaborate stories to deflect questions from management. who managed derivatives. During 1994. Leeson effectively controlled the front and back offices. Employees complained that lines of reporting were not always clear. In a January 1995 internal e-mail. Leeson was involved with two "products" futures arbitrage and trade execution for clients or other companies within the Barings organization. his "product" line of reporting could arguably have been to either Ron Baker. who was head of the Singapore office. Also. As part of the 1993 reorganization. controls. There was no middle office. there was no single person within Brings responsible for supervising Leeson. Barings had adopted a "matrix" approach to management of its offices. auditors and even representatives of SIMEX. or Mike Killian. In BSS. or to Simon Jones. Head of Futures and Options Settlements in London stated Awaiting breakdown from my buddy Nick numbers). settlement and accounting.Singapore. (once they creatively allocate the . Locally. Leeson could have reported to James Bax. Leeson actively played on people's insecurities. Brenda Granger. ensuring local management of such items as systems. Another issue was that Leeson was an accomplished liar. He notes in his (1996) book Rogue Trader that: People at the London end of Barings were all so know-all that nobody dared ask a stupid question in case they looked silly in front of everyone else.
he was publicly recording profits in three arbitrage trading accounts. While there. he was released from prison early in July 1999. By performing futures transactions at off-market prices. Leeson booked GBP 28. During 1994. Leeson was able to achieve profits in the arbitrage accounts while placing offsetting losses in the 88888 account. which he survived. and was divorced by his wife. he was sentenced to six and a half years in Singapore's Changi prison. Convicted of fraud. For good behavior. Peter Baring.5MM in false profits. leaving Barings to conclude that it was not actually terribly difficult to make money in the securities markets. Six days after fleeing Singapore. but it ensured that Barings employees earned bonuses that year. Director of the Bank of England that the recovery in profitability has been amazing following the reorganization. numbers 92000. He was returned to Singapore to stand trial. . In a famous 1993 quote. 98007 and 98008. Leeson was arrested in Frankfurt trying to make his way back to London. Chairman of Barings. This was accomplished through cross-trades with account 88888.Such concerns went largely unheeded. Leeson was somewhat of a celebrity within Barings. commented to Brian Quinn. While he was secretly accumulating losses in account 88888. he contracted cancer. This was a staggering profit to earn from futures arbitrage.