Barings PLC

Barings bank was founded in 1762 by John and Francis Baring, sons of wool merchant
johann Baring who had immigrated to England from Breman, Germany in 1771. The bank
financed the U.S purchase of the Lousianna Territory from france in 1803. It also helped
finance Britain’s wars against Napoleon. The bank was acquired by the Baring Foundation, a
charitable founadation, in 1970. Barings PLC, Britain’s oldest and most prestigious merchant
bank, counted Queen Elizabeth II as a customer.

Baring PLC consisted Barings Brothers & Co., the firm’s banking, capital markets, and
corporate finance arm; Baring Asset Management Ltd., its asset-management company; and
Barings Securities Ltd., which handled the banks international equities business. Baring was
knonw as client-driven frim, making money on trades for clients while doing little trading
using its own money to not compete with its clients.

In 1992, Australian Ron Baker was hired to built a global fixed-income derivatives operation.
The unit, based in London opened offices in new York and Asia. Within 18 months, it had
grown to 150 people. In early 1992, Baker sent Nicholas W. Leeson a settlements clerk in the
back office in London, to Singapore to resolve some backroom problems with the apparent
understanding that he would report directly to the derivatives unit in London. On March 25,
1992, James Bax, head of securities operations in Singapore, sent a letter to Andrew Fraser,
head of equities departement in London, cautioning the London office against allowing
Leeson to develop the futures operations single-handedly. Bax also argued that leeson should
report direcly to his office, not to london.

Soon after arriving in Singapore, Leeson began setting up a settlements system for Baring
futures. Within a year, Leeson became a member of Barings Trading team on the floor of the
Singapore International Monetary Exchange (Simex) and went on the become the firms chief
trader. He headed Barings future Singapore Pte Ltd. , but still reported to London.

Leeson’s primary job was to arbitrage Nikkei futures contracts in Singapore and Osaka Japan.
He would make relatively small amounts of money by buying contracts for his clients in one
market and then selling similar contracts for a higher prices in the other. He became so
successfull that in 1994 the firm dicided to let him trade for his own account, enabling the
bank to profit directly from his arbitrage abilities. Leeson was instructed to exploid the
differences in contract prices but not to take risk position. He earned more than $1 millionin
bonuses that year.

A report issued in July 1994 by an internal audit team from Barings Brother and co. Warned
of loose control in singapore. It indicated that the chief trader, leeson, was in charge of both
trading and settlement operation and recomended that separate individuals be assigned to
these two function for control purposes. Barings securities agreed to the recomendation but
never implemented it because executives in the unit did not like the other side of the house
telling them what to do.

There apparently was considerable tension between the bankers and securities units within
barings due to culture differences and personal rivalries. The banking unit was a blue blooded
united kingdom merchant bank with strong establishment connection. Thus, it was a
conservative, low risk operation. The securities unit had developed into a major international
trading power in the past decade with operation in Asia and Latin amerika. It was a very high
risk business concentrated on highly as-oteric emerging markets.

Sometimes in the late fall of 1994, leeson began taking risk position for the bank, switching
from an arbitrager to a speculator. He bought contract without hadging them by selling
corresponding contracts. The size of this position increase dramatically as 1995 began.
Apparently he was counting on selling the contracts at even higher prices in the future based
in the believe that the distruction from the recent Kobe earth quake would stimulate the
economy and thus drive up the Nikkei stock indeks. However in the meantime, he left the
bank uncovered using account 88888 as a claimed account to cover inquiries. It should be
noted that during January and February 1995, barings in London transferred approximately
$900 million to Singapore to cover margin requirements.

The Osaka stock market did not cooperate, so leeson sold put and call option to raise cash to
meet margin calls. The market continued to declaim. Leeson finally left his office and never
came back. He cellebrated his 28th birthday two days later. Leeson faxed a letter of
resignation to Barings from Malaysia. On his way back to England, leeson was detained in
frankfurt. He fought ekstradition to singapore, preferring to be sent to England to stand trial
in an English court. However, the german goverment dicided to ekstradite him to Singapore.
A singapore corp found him gulty and sentenced him to six and a half years in prison.

On february 26, 1995, Barings PLC was forced into administration, a legal proceeding similar
to chapter 11 in the united Stated. It had incured loses in excess of $1 billion from lesson
speculation. Fortunately, Barings clients where in no danger because the loses involved
Barings own trading accounts. The dutch bank internationale netherlanden groep NV
subsequently purchased Barings.

1. Who are the stakeholders in the case?

2. What priority rank do you give to each stakeholders?
3. What wrong would the political struggle within Barings have played in its failure?
4. Where any ethical norms or principles violetted ?
5. Who where the winners ?
6. Who where the loses ?
7. Would the outcome have been different if the japanese stock market had not fallen
?
8. What action could barrings have taken to prevent its failure ?