The 1995 Barings bank collapse – a failure we might learn from.

Not much remains to remind us of Barings Bank, which collapsed nearly a quarter of a century ago, after having done pretty well for the Baring family for around 250 years. Technically, it was KO’d by the actions of just one man, but really, it probably couldn’t have happened without the unwitting culpability of just about every director and senior manager in the organization.

Barings was founded in 1762 by the Baring family. It began as a merchant house, and expanded to offer financial services to other merchant houses. The next step was a fully-fledged merchant bank. With the growth and spread of capitalism in Britain, Barings was able to transit from merchant banking into the commercial sector, and while it had its ups and downs, it did very well. By the 1980’s it was a giant.

Barings acquired a Japanese securities business in 1984, and built on that with the 1991 purchase of an investment bank.

Enter Nick Leeson. He had joined Barings in 1989, and just  few years later, in 1992, he was appointed to manage a division which looked after Futures – out of Singapore. He was just 22 years old.

The mandate was low-key. But Leeson found himself in a structure where he had carte blanche to police his own transactions. He was effectively reporting to himself. Quite early, James Bax, a senior manager at Barings, put on the record a warning that this deficiency in separation of authority was a potentially disastrous policy. On another occasion, management was warned that Leeson was enjoying an excessive concentration of power. Despite that, the system remained the same. Leeson continued to police himself, and then, suddenly, over a very short period of time, his trades started showing massive losses. He started cooking the books, thinking he’d be able to sort out the damage. No-one was watching, no systems were in place to run checks and balances and so, in a couple of months, the proverbial dirt hit the fan. They were hit with a bill for around BP1 billion, about twice their overall capitalization. It brought down the bank.

Here’s an interesting thing or two:  When Leeson was appointed GM of Barings operations on the Singapore International Monetary Exchange, he was brought over from the UK where the authorities had denied him a broker’s licence because of application fraud. Barings took him on anyway.

Then, right from the start, Leeson began making unauthorised, highly speculative trades. The results were spectacular profits for Barings. So they looked the other way as long as he was raking it in.

Problem is that he was employing a simple gamblers routine – doubling – and when his luck ran out he began to hide the losses. It was really fraud 101, but with a totally inadequate risk management system, no-one noticed it until it was too late.

We rightly suppose that this was Leeson’s fault, and of course, he was culpable. Went to jail, actually. Yet it’s not as if there weren’t an ample array of tools and procedures available to manage the risks: lazy governance, failure to separate transactional responsibility, zero external auditing, skirting compliance regulations….! If ever a business was setting itself up for failure, Barings was it. 250 years down the drain.

There were more than a few people in leadership positions who were faulted for their roles in the collapse of Barings. I think only Nick Leeson was found criminally culpable, but many others were heavily censured and penalized for their negligence as managers or directors. Sad thing is, it probably wouldn’t have happened if management was paying attention. Well and truly sloppy.

Author: Kevin Abraham