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Barings Bank was founded in 1762 as the 'John and Francis Baring Company' by Sir Francis

Baring, the son of John Baring, originally from Bremen, Germany. They were initially based
in Cheapside[2]. The Baring family lives in both Germany and England.

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. Around this time they relocated to Bishopsgate, where their headquarters remained for
decades, undergoing several refurbishments.[3]

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, but from the Baring brothers and Hope & Co.. Payment was made in US bonds,
which Napoleon sold to Barings at a discount of 87 1/2 per $100. As a result, Napoleon
received only $8,831,250 in cash. Alexander Baring, working for Hope & Co., conferred with
the French Director of the Public Treasury François Barbé-Marbois in Paris and then went to
the United States to pick up the bonds before taking them to France.

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 relatively new firm of N M Rothschild & Sons.
Barings remained a powerful firm, however, and in the 1830s and 1840s its position in
financing trade led to the bank becoming heavily involved in marketing American securities.
With a marked decline in merchanting in 1850s and 1860s, a commercial credit business
provided the firm with its 'bread and butter' income. By the 1870s Barings was increasingly
specialising in trading international securities, especially from the United States, Canada, and
Argentina.

During the 1880s, daring efforts in underwriting (the bank often purchased stock outright to
sell later at a premium) 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. Although
recovery from the incident was swift, the bank lost its dominant position and a limited
company - Baring Brothers & Co., Limited - was formed to which the business of the old
partnership was transferred. The liquidity problems of the old house were settled by a loan
from the Bank of England.

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 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 elevated 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 pre-eminence 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.
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.[4]

NICK LEESON
Nick Leeson's life started as a classic rags-to-riches tale. Born on 25th February 1967, he was the
working class son of a plasterer from a Watford council estate, who failed his final maths exam and
left school with a mere handful of qualifications. Nonetheless, in the early 1980s, he landed a job as a
clerk with royal bank Coutts, followed by a string of jobs with other banks, ending up with Barings,
where he quickly made an impression and was promoted to the trading floor.

Before long, he was appointed manager of a new operation in futures markets on the Singapore
Monetary Exchange (SIMEX) and was soon making millions for Barings by betting on the future
direction of the Nikkei Index. His bosses back in London, who viewed with glee his large profits,
trusted the whizzkid. Leeson and his wife Lisa seemed to have everything: a salary of £50,000 with
bonuses of up to £150,000, weekends in exotic places, a smart apartment and frequent parties and to
top it all they even seemed to be very much in love.

The job of a derivatives trader is akin to a bookie once removed, taking bets on people making bets
and Leeson started by buying and selling the simplest kind of derivatives futures pegged to the Nikkei
225, the Japanese equivalent to the UK's FTSE 100. At the time the trader only had to put down a
small percentage of the amount that was being traded, it was therefore easily possible for the money
on the table to be exceeded many times by losses. However Leeson seemed to be infallible to Barings
Chief Executives, by the end of 1993, he had made more than £10m - about 10% of total profit that
year.

Barings believed that it wasn't exposed to any losses because Leeson claimed that he was executing
purchase orders on behalf of a client. What the company did not realise was that is was responsible
for error account 88888 where Leeson hid his losses. This account had been set up to cover up a
mistake made by an inexperienced team member, which led to a loss of £20,000. Leeson now used
this account to cover his own mounting losses. In a fatal mistake, the bank allowed Leeson to remain
Chief Trader while being responsible for settling his trades, a job that is usually split.

1995 COLLAPSE
At the time of the massive trading loss, Leeson was supposed to be arbitraging, seeking to
profit from differences in the prices of Nikkei 225 futures contracts listed on the Osaka
Securities Exchange in Japan and the Singapore International Monetary Exchange. Such
arbitrage involves buying futures contracts on one market and simultaneously selling them on
another at 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. However, in arbitrage, one is buying something at one market while selling the same
good at another market at 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 but 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 hedging his positions, Leeson gambled 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 George, the Governor of the Bank of England, Leeson began doing this
at the end of January 1995. Due to a series of internal and external events, his unhedged
losses escalated rapidly.[5]

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
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. As trading floor manager, Leeson reported to the head of settlement
operations, an office inside Barings Bank which he himself held, which short-circuited
normal accounting and internal control/audit safeguards. In effect, Leeson was able to operate
with no supervision from London.[6] After the collapse, several observers, including Leeson
himself, placed much of the blame on the bank's own deficient internal auditing and risk
management practices.

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.

—Nick Leeson, Rogue Trader (1996)

Some people did raise eyebrows about Leeson's activities but were ignored.

Awaiting breakdown from my buddy Nick … (once they creatively allocate the numbers).

—Brenda Granger, Head of Futures and Options Settlements in London, January 1995
internal e-mail

[edit] Corruption

Because of the absence of oversight, Leeson was able to make seemingly small gambles in
the futures arbitrage 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 he
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.[7]

[edit] 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, but 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.[8]

[DISCOVERY

On 23 February 1995, Leeson left Singapore to fly to Kuala Lumpur. 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
£827 million (US$1.3 billion), twice the bank's available trading capital. The collapse cost
another £100 million.[7] The Bank of England attempted a weekend bailout, but it was
unsuccessful.[9] 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 Exchequer and their report was released on 18 July 1995. Lord Bruce of Donington, in the
House of Lords' debate on the report, said:[10]

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.

[edit] Aftermath

ING, a Dutch bank, purchased Barings Bank in 1995 for the nominal sum of £1[8] and
assumed all of Barings' liabilities, forming the subsidiary ING Barings. In 2001, ING sold the
U.S.-based operations to ABN Amro for $275 million, and folded the rest of ING Barings
into its European banking division.[11] 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 Trust (acquiring BAM’s Financial Services Group).[12][13]
Barings Bank therefore no longer has a separate corporate existence, although the Barings
name still lives on as the MassMutual subsidiary, Baring Asset Management.

Leeson was 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.

Bibliography

www.wikipedia.org

www.nickleeson.com