Baring Brothers was Britain’s oldest merchant bank, founded in 1762. It collapsed when a single employee committed the bank to losses of roughly £830 million, which it could not cover. Embarrassingly, Barings had only itself to blame. Its culture had evolved from the collision between its own illustrious history and the contemporary, ruthless avarice typified by its rival, Morgan Stanley (whose president, on discovering that big names were hemorrhaging losses from trading derivatives, told his team ‘There’s blood in the water. Let’s go kill someone.’).
Snobbery flourished: as long as the profits rolled in, Barings’ old-money merchant bankers tolerated the new breed of securities traders… but not enough to actually talk to them or try to understand what they did. Barings’ culture meant that 28-year-old Nick Leeson in the Singapore office could trade securities without direct supervision. Staggeringly, he was in charge of both buying and selling (‘trading’ and ‘settlement’). The temptation was biblical. Leeson was uniquely placed to commandeer huge sums of cash from London; to gamble them; and to report the results to his best advantage.
In 1993 (the year known by Barings’ staff as ‘The Turbulence’), what was effectively an internal takeover created the unworkable situation of investment bankers supposedly overseeing investment traders. Leeson began trading between Singapore’s Simex and Japan’s Nikkei, feeding a steady stream of profits to London, and hiding losses in what became the notorious account 88888. By December 1994 the file hid losses of SS373.9 million. Leeson kept doubling his bets on the Nikkei staying above 19,000 points during January 1995 – but on January 17, the Kobe earthquake sent the Nikkei crashing. Desperate, Leeson doubled and redoubled until on February 23 he fled Singapore leaving losses of S$2.2 billion to be revealed by the auditors in his wake. Three days later Barings went into administration.
When: February 27 1995
Where: London, UK; Singapore; and Osaka, Japan – then globally
Toll: Nick Leeson surrendered voluntarily. In December 1995 he was sentenced to six-and-a-half years in prison, and was released on July 3 1999. Barings was sold to the Dutch company ING for a token £1. Immediate steps were taken to toughen both internal and international company law – but as history shows, fraud was already endemic at every level of the financial services industries. More than a decade after Leeson’s release, fresh reforms continue to be framed at national and international levels.
You should know: In The Army, if one soldier steals from another man’s locker, it used to be not the thief, but the victim who was punished – for leaving temptation in the other man’s path. Barings may have saved Britain by financing the Napoleonic Wars, and much else, but they also brought disaster on themselves in 1995. It’s all in Leeson’s book, now filmed, called Rogue Trader.