On this day: The collapse of Barings Bank
On 26 February 1995, 31 years ago today, Baring Bank, one of the City’s most venerable institutions, was declared insolvent after a massive fraud by one of its employees, Nick Leeson, recalls Eliot Wilson
In the 1990s, following the wake of Big Bang and the influx of brash but wealthy, “Greed is good, greed is right, greed works” American corporates, no financial institution in the City was more blue-blooded and old-school than Barings Bank.
It had been founded in 1762 – when British America still included 13 colonies along the Atlantic seaboard and London was scandalised by the satirical newspaper The North Briton – by a young Exeter apprentice, Francis Baring, with his elder brother John as senior but largely silent partner.
Barings moved around the City a number of times in its first 40 years as it grew, but in 1806 acquired 8 Bishopsgate, which would remain its formal address until 1995. Having started in the textile sector in which the main family business operated, it diversified rapidly with that frantic commercial energy of the long eighteenth century: financing imports and exports, moving into the transatlantic slave trade and servicing governemnt debt. The brothers joined the political elite, John Baring sitting as MP for Exeter 1776 to 1802 and Francis Baring representing several constituencies between 1784 and 1806.
By 1803, Francis Baring and Co. was an established financial powerhouse, and the company was asked to arrange the largest property deal in history: the Louisiana Purchase. The French Colony of Louisiana extended from the Great Lakes to the Gulf of Mexico, 828,000 square miles, most of which was inhabited by Native Americans. The United States paid the French Republic $15m for the territory, $18 per square mile, and effectively doubled its own size. Barings, together with Hope & Co. of Amsterdam, bought $11.25m of the total in US Treasury bonds, which enabled France to receive cash and the deal to be expedited.
By 1818, Barings was so eminent that the French Prime Minister, the Duc de Richelieu, risked no hyperbole in remarking, “There are six great powers in Europe: England, France, Russia, Austria, Prussia and the Baring brothers”. The dynasty’s impeccable standing only seemed to grow; even today there are five separate hereditary peerages, each held by a Baring: the earldom of Cromer and the baronies of Ashburton, Northbrook, Revelstoke and Howick of Glendale.
Nick Leeson’s downfall
In 1989, a reticent 22-year-old from a Watford council estate joined the settlements department of Barings Securities. Nick Leeson had held back office roles at Coutts and Morgan Stanley, but when Barings decided to open a Futures and Options division in Singapore in 1992, Leeson, regarded as reliable, competent and stable, was appointed general manager.
Leeson began making unauthorised speculative trades, a process eased by loose management and his responsibility for back office services and a presence on the trading floor. By the end of 1993, he had seemingly earned Barings £10m, a tenth of its overall profits. But the official trading figures didn’t tell the full story. Because he managed the back office he was able to use an error account, with the somehow-ominous number 88888, to conceal any losses he made, and they were mounting. In his memoir, Rogue Trader: How I Brought Down Barings Bank and Shook the Financial System, he admitted the thrill: “I was probably the only person in the world to be able to operate on both sides of the balance sheet. It became an addiction.”
Like most addictions, it was expensive and potentially ruinous. While Barings believed he had generated a £10m profit, the error account masked a loss of £23m. Leeson’s strategy was that of the reckless gambler who can see no other way out, and whenever he made a loss, he doubled down. It had saved him in the middle of 1993, but 18 months later the £23m loss had grown to £208m.
Leeson’s reputation had made the London headquarters supply him with injections of cash with extraordinarily little scrutiny, but the most lackadaisical oversight could not be insensible forever. His explanations were becoming more elaborate and unlikely. He needed a miracle.
On 16 January 1995, he made a short straddle in the Singapore and Tokyo stock exchanges. It was an aggressive and risky bet, essentially predicting that the Tokyo Stock Exchange would be broadly stable overnight. The act of God he received was not the miracle he needed: at 5.46am the next day, a huge earthquake measuring over seven on the seismic intensity scale struck the southern part of Hyōgo Prefecture on Honshu, the largest of the Japanese home islands. It destroyed or irreparably damaged 400,000 buildings, caused 300 fires and killed more than 6,400 people.
Asian markets tumbled, and the Tokyo Stock Exchange, which Leeson had bet would be stable, dropped eight points in five days. To try to recoup his losses, he made ever-riskier trades predicated on the Nikkei Index making a swift recovery. It didn’t. The Nikkei had opened at 19,322 on 17 January, and would not close higher than that until 7 December.
That was too late for Neeson. On 23 February, he fled Singapore leaving a note which read “I’m sorry”. So was Barings. Its losses reached £827m, twice its available trading capital.
On 26 February, 31 years ago today, Barings, Britain’s oldest merchant bank, was declared insolvent. On 5 March, it was bought by Dutch banking corporation ING for £1. Neeson had been detained at Frankfurt Airport three days before and would be extradited back to Singapore, where he was convicted on two counts of misleading Barings’ auditors and defrauding the stock exchange. Sentenced to six and a half years’ imprisonment in Changi Prison, he was released after four years and four months for good behaviour and suffering from colon cancer.
The asset management division of Barings lives on as a subsidiary of the Massachusetts Mutual Life Insurance Company.
Leeson survived his cancer and now lives in Galway, where he investigates corporate fraud and advises on managing liquidity. Do as he says, not as he did.
Eliot Wilson is an author an historian