26 February 1995
On this day in 1995 Barings Bank, Britain’s oldest Merchant Bank, called in the receivers and shut its doors.
Barings Bank was established in Cheapside London in 1762 by the Baring brothers Francis and John. It financed the Napoleonic wars. It was no stranger to risk. It was no stranger to volatility.
The demise of Barings is a tale of fraud and incompetence and fraud and concealment.
Nick Leeson is blamed for the demise of Barings but alone Nick Leeson could not have brought the fine old dame undone. It was a combination of Nick Leeson making decisions he was unqualified to make and dealing in a market he wasn’t competent to deal in combined with a need to conceal his incompetence and a fundamentally flawed system of checks and balances which allowed Leeson to represent his failures as successes on the highly risky and incompletely understood derivative futures markets.
The problem for Barings is that it had established a subsidiary in Singapore to trade on the asian markets. Barings UK was of course responsible for the exposure of its child company and that responsiblity is what ultimately brought Barings undone.
Leeson was able to falsify computer records to keep his activities from being discovered by his superiors and made speculative purchases on the futures market without the security of hedging. These unhedged gambles spiraled and Leeson had to take bigger and bigger risks in order to prevent discovery and in the hope of recovering his rapidly growing exposure.
When his activity was discovered his activities had resulted in a $1.3Billion exposure. The exposure was not hedged and there were no funds to cover the exposure. Barings was bankrupt.