Britain Probes Causes of Barings Collapse
THE collapse and rescue of Britain's prestigious Barings Bank by a giant Dutch financial group have triggered acute soul-searching in the ``Square Mile'' - London's equivalent of Wall Street.
Eight days after going into receivership with trading losses of 860 million British pounds ($1.42 billion), Internationale Nederlanden Groep NV (ING), an international banking and insurance company, purchased Barings March 5 for the nominal price of 1 ($1.66). British pounds ING will inject 660 million, British pounds or slightly more than $1 billion, into the bank to bring it back to financial health.
Although the future of the 233-year-old British merchant bank appears assured, a thorough house-cleaning of London's banking and securities arrangements seems inevitable.
Leading financial analysts have accused the Bank of England and Barings' managers of complacency in letting Nick Leeson, the young trader for Barings in Singapore, provoke the Barings crash by his reckless trading. Working with little supervision, Mr. Leeson built up derivatives contracts based on the Tokyo Stock Exchange Nikkei index worth $7 billion before fleeing Singapore when the Tokyo market turned against him. Barings also sat on $22 billion in Japanese government-bond futures contracts and yen-denominated interest-rate futures.
The Labour opposition party is pressing Kenneth Clarke, chancellor of the exchequer, to mount a thorough-going probe of the control systems that failed to save the bank. Leeson is now in custody in Frankfurt pending extradition to Singapore.
``The failure of Barings has implications for deposit-taking and merchant banks operating in London,'' says William Keegan, a banking analyst. ``Investors now know that their money is not necessarily safe even in a blue-blooded institution like Barings.''
Leeson'S German lawyers say he was not personally responsible for Barings' huge losses and claim attempts are being made to make him a fall guy.
Before Leeson was apprehended, Eddie George, governor of the Bank of England, and Chancellor Clarke both called him a ``rogue trader'' and suggested that he had acted alone in building up huge debts.
But accounting firm Price Waterhouse & Co., which is investigating the affair for the Singapore government, said that in January and February, Barings in London transmitted 550 million British pounds ($913 million) to Singapore to meet payments on Leesing's contracts.
``If controls had been operating correctly, Barings' London management would have received warning signals that something was adrift in Singapore,'' a London merchant banker said. ``Equally, the Bank of England should have been exercising supervision of Barings' London managers. Neither appears to have happened.''
Clarke has ordered an investigation of the Barings collapse by the government-appointed Board of Banking Supervision. But Alistair Darling, the Labour Party's banking spokesman, says Mr. George and other Bank of England officials are on the board. Mr. Darling wants a fully independent inquiry ``so we can get to the bottom of the problems that made this crisis possible.''
Darling suggests that one possible reform would be to appoint a single regulator to keep a close eye on both banks and securities markets. At present they are monitored separately.
A manager from one of Barings' merchant bank rivals said the Barings collapse was likely to prompt a sweeping review of management structures in many financial institutions. He noted that Leeson had ``three separate bosses, all in London.'' In effect he ``operated out of control.''
``That kind of set-up exists in other finance houses, and it is obviously dangerous,'' the manager said.