Barings PLC

Barings bank was founded in 1762 by John and Francis Baring, sons of wool merchant

johann Baring who had immigrated to England from Breman, Germany in 1771. The bank

financed the U.S purchase of the Lousianna Territory from france in 1803. It also helped

finance Britain’s wars against Napoleon. The bank was acquired by the Baring Foundation, a

charitable founadation, in 1970. Barings PLC, Britain’s oldest and most prestigious merchant

bank, counted Queen Elizabeth II as a customer.

Baring PLC consisted Barings Brothers & Co., the firm’s banking, capital markets, and

corporate finance arm; Baring Asset Management Ltd., its asset-management company; and

Barings Securities Ltd., which handled the banks international equities business. Baring was

knonw as client-driven frim, making money on trades for clients while doing little trading

using its own money to not compete with its clients.

In 1992, Australian Ron Baker was hired to built a global fixed-income derivatives operation.

The unit, based in London opened offices in new York and Asia. Within 18 months, it had

grown to 150 people. In early 1992, Baker sent Nicholas W. Leeson a settlements clerk in the

back office in London, to Singapore to resolve some backroom problems with the apparent

understanding that he would report directly to the derivatives unit in London. On March 25,

1992, James Bax, head of securities operations in Singapore, sent a letter to Andrew Fraser,

head of equities departement in London, cautioning the London office against allowing

Leeson to develop the futures operations single-handedly. Bax also argued that leeson should

report direcly to his office, not to london.

Soon after arriving in Singapore, Leeson began setting up a settlements system for Baring

futures. Within a year, Leeson became a member of Barings Trading team on the floor of the

Singapore International Monetary Exchange (Simex) and went on the become the firms chief

trader. He headed Barings future Singapore Pte Ltd. , but still reported to London.

Leeson’s primary job was to arbitrage Nikkei futures contracts in Singapore and Osaka Japan.

He would make relatively small amounts of money by buying contracts for his clients in one

market and then selling similar contracts for a higher prices in the other. He became so

successfull that in 1994 the firm dicided to let him trade for his own account, enabling the

bank to profit directly from his arbitrage abilities. Leeson was instructed to exploid the

differences in contract prices but not to take risk position. He earned more than $1 millionin

bonuses that year.

A report issued in July 1994 by an internal audit team from Barings Brother and co. Warned

of loose control in singapore. It indicated that the chief trader, leeson, was in charge of both

trading and settlement operation and recomended that separate individuals be assigned to

these two function for control purposes. Barings securities agreed to the recomendation but

never implemented it because executives in the unit did not like the other side of the house

telling them what to do.

There apparently was considerable tension between the bankers and securities units within

barings due to culture differences and personal rivalries. The banking unit was a blue blooded

united kingdom merchant bank with strong establishment connection. Thus, it was a

conservative, low risk operation. The securities unit had developed into a major international

trading power in the past decade with operation in Asia and Latin amerika. It was a very high

risk business concentrated on highly as-oteric emerging markets.

Sometimes in the late fall of 1994, leeson began taking risk position for the bank, switching

from an arbitrager to a speculator. He bought contract without hadging them by selling

corresponding contracts. The size of this position increase dramatically as 1995 began.

Apparently he was counting on selling the contracts at even higher prices in the future based

in the believe that the distruction from the recent Kobe earth quake would stimulate the

economy and thus drive up the Nikkei stock indeks. However in the meantime, he left the

bank uncovered using account 88888 as a claimed account to cover inquiries. It should be

noted that during January and February 1995, barings in London transferred approximately

$900 million to Singapore to cover margin requirements.

The Osaka stock market did not cooperate, so leeson sold put and call option to raise cash to

meet margin calls. The market continued to declaim. Leeson finally left his office and never

came back. He cellebrated his 28th birthday two days later. Leeson faxed a letter of

resignation to Barings from Malaysia. On his way back to England, leeson was detained in

frankfurt. He fought ekstradition to singapore, preferring to be sent to England to stand trial

in an English court. However, the german goverment dicided to ekstradite him to Singapore.

A singapore corp found him gulty and sentenced him to six and a half years in prison.

On february 26, 1995, Barings PLC was forced into administration, a legal proceeding similar

to chapter 11 in the united Stated. It had incured loses in excess of $1 billion from lesson

speculation. Fortunately, Barings clients where in no danger because the loses involved

Barings own trading accounts. The dutch bank internationale netherlanden groep NV

subsequently purchased Barings.

1. Who are the stakeholders in the case?

2. What priority rank do you give to each stakeholders?

3. What wrong would the political struggle within Barings have played in its failure?

4. Where any ethical norms or principles violetted ?

5. Who where the winners ?

6. Who where the loses ?

7. Would the outcome have been different if the japanese stock market had not fallen

?

8. What action could barrings have taken to prevent its failure ?