Fall of the House of Barings

March 01, 1995

The failure of Barings merchant bank through losses of more than $1 billion by a trader in its Singapore office betting on Japanese futures, is a City of London counterpart to the Orange County, Calif., bankruptcy.

Both failed on speculation in the derivatives market. Both involved investment supervisors who didn't understand these new techniques, and traders without wisdom about markets. Both raise questions about regulation catching up with practice -- in the U.S., London and in Asian markets.

Francis Baring founded the merchant bank in 1762. President Jefferson used its services to buy Louisiana in 1803. Barings financed British imperialism and went broke in 1890 on bad loans to Argentina. The Bank of England set it back on its feet under the control of the Baring family, which was still there until Sunday, when a British judge appointed three accountants from the London office of an American-based accounting firm to administer it. Among the customers whose assets are frozen is Queen Elizabeth II.

Barings was undone by a 28-year-old Englishman running the Asian futures trading in Singapore. Nicholas Leeson bought $7 billion of Japanese share futures and sold $20 billion of Japanese government bond futures contracts and lost more than $1 billion, which the firm did not have capital to cover. He was betting that Japanese shares would go up.

After the Jan. 17 Kobe earthquake, they went down. Mr. Leeson tried to cover his losses by upping the ante, which after Jan. 26 became the talk of Singapore. After another firm confronted Barings with a margin call, demanding more of the money Barings had borrowed to make the bets, Mr. Leeson vanished and Barings collapsed.

The governor of the Bank of England, seeking to restore confidence in merchant banking, called Mr. Leeson a rogue trader who exceeded his authority within Barings, with collusion of back office personnel. Some wondered whether trades of that magnitude could have been made without home office knowledge. This must be sorted out. Mr. Leeson was an acknowledged master of trading on the Singapore International Monetary Exchange (Simex), which finds itself a Barings creditor.

This is not only a second hit for derivatives trading, after the Orange County disaster. It is a second hit, after the Mexican peso collapse, for investments in emerging markets, in which Barings pioneered. In the long run, many of these markets will indeed emerge. Investment means risk. There are losers as well as winners, sometimes spectacular losers. Even, as in the case of Barings, with 232 years of respected experience.

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