Barings Bank, a British merchant bank, was on the verge of collapse in 1995 after reportedly having incurred losses of £827 million (£1.6 billion eqv. in 2019) resulting from fraudulent investments, primarily in futures contracts. It was bailed out by the Bank of England.
Baring Bank was founded in 1762 by Francis Baring, a British-born member of the German-British Baring family of merchants and bankers and was Britain’s oldest merchant bank, banker to royalty, and by the 19th century, one of the six big powers of Europe, alongside England, France, Prussia, Austria and Russia. In 1803 it had facilitated the purchase of Louisiana, doubling the area of USA through the biggest real estate deal in history and was then regarded as "one of the most historically significant trades of all time". The family also boasted of five separate hereditary peerages.
Barings initially traded on its own account, and later also traded on joint account with other merchants, buying and selling commodities and other goods in British and overseas markets. Barings diversified from wool into many other commodities, providing financial services for the rapid growth of international trade, including the lucrative slave trade which enriched the family and the business considerably and allowed significant expansion of the bank's activities and prestige.
It also acted as London agents for overseas merchants, arranging shipping and insurance, and making and collecting payments. This led on to financing the trading activities of these merchants through the provision of advances to them and by accepting their bills of exchange. This banking business was a mainstay of the firm’s work from the eighteenth until well into the twentieth century.
In the 1880s, reckless efforts in underwriting got Barings into serious trouble through overexposure to Argentine and Uruguayan debt. In 1890, Argentine was close to defaulting on its debt payments. This crisis finally exposed the vulnerability of Barings, who lacked sufficient reserves to support the Argentine bonds until they got their house in order. Through the organisational skills of the governor of the Bank of England, William Lidderdale, a consortium of banks was arranged, headed by former governor Henry Hucks Gibbs and his family firm of Antony Gibbs & Sons, to bail Barings out and support a bank restructuring.
Insolvency of Barings
Barings found itself to be insolvent in 1995 following discovery of a massive trading loss caused by the fraudulent trading by Nick Leeson, its head derivatives trader in Singapore. Contrary to the media coverage that the huge losses was only due to the unauthorised speculative trading of one of Barings’ employees, it came to light that under 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. One director famously declared that they did not understand derivatives, which contributed significantly to profits. This lack of understanding extended to not even knowing that higher profits come from higher risks. As long as the bank’s directors were getting bonuses upward of £1 million, they did not ask any questions.
Instead of placing Barings in liquidation, the Bank of England again attempted to bail out the bank but was unsuccessful this time because the derivative losses were quantifiable only on future dates. Barings was declared insolvent on 26 February 1995, and appointed administrators began managing the finances of Barings Group and its subsidiaries.
Barings bank was eventually acquired by the ING of the Netherlands for £1 and they also assumed all of Barings' liabilities, forming the subsidiary ING Barings. Some of Barings’ activities were integrated in ING’s business units, while other parts were closed down or sold.
Speculative investments continue
Barings has passed into banking folklore. It is also a landmark case in the history of banking supervision. But, were any lessons learnt? The Basel Committee on Banking Supervision issued guidelines on supervision of financial conglomerates, cross-border banking, and capital for market risk. It brought out its Core Principles for Effective Banking Supervision, followed by a framework for internal controls, and a new focus on operational risk while issuing a consultative paper on Basel-II in 1999.
However, key lessons remained unlearnt, resulting in the global financial crisis of 2008 - 2009. New risks, such as high leverage and global interconnectedness, emerged or became stronger. Many older risks remained unaddressed or ignored. Bankers continued to deal in complex products and their top managements ignored such practices as the financial gains appeared to be limitless. The asymmetry in risk got scaled up to sectoral and global levels, with bankers sharing huge speculative profits and taxpayers being forced to pick up huge tabs for losses of the banks that were otherwise technically insolvent.
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