The Barings Collapse
WHEN they took a young man into Tellson's London house,'' Charles Dickens wrote in ''A Tale of Two Cities'' of the bank that figures in the novel, ''they hid him somewhere till he was old. They kept him in a dark place, like a cheese, until he had the full Tellson flavour and blue-mould upon him. Then only was he permitted to be seen .''
This was evidently not the policy at another London bank, Barings. But top officials there, and at the Bank of England, could be forgiven for wishing it were. Barings is the venerable British institution brought down by a 28-year-old rogue trader in Singapore who gambled away its capital on derivative investments.
The problem, however, seems not to have been the age of Nicholas Leeson, taken into police custody with his wife in Germany Thursday after a week on the lam, but the degree of oversight of his activities. Globally networked information transfer is no substitute for managerial scrutiny.
Had Leeson succeeded in his $1 billion gamble, he would have been hailed as a genius. Observers are finding it hard to believe that his activities were not known within Barings. Some point to a pattern here: A single ''rogue'' (the inevitable term) individual causes problems for a financial house whose management gets aggressive about asking questions only after things begin to unravel.
From the Barings episode, it has to be assumed that other banks may be allowing the same kind of unsupervised gambling to go on. The Bank of England decided to let Barings go under, in part because Barings' losses remain open-ended, and in part to teach the banks a lesson.
Derivative investments are not for everybody, but neither are they just financial horseraces. They help the liquidity of capital markets, to everyone's economic benefit.
Paradoxically, a high degree of trust can produce a large capacity to do damage if trust is abused, whereas the suspicion accorded the less ''trustworthy'' may keep them honest. Barings' much-vaunted ''venerability'' might have been its vulnerability.
Some organizations understand better than others that they must earn trust daily, in the face of each technological or regulatory change. They know that trust is not an asset to be stored in a vault and carefully aged, like a clerk at Tellson's.
