The Bank of England's failure yesterday to put together a rescue package for Barings, the stricken merchant bank, sent shock waves through financial markets around the world this morning. The Tokyo stock market plunged in early trading today, just hours after the Bank of England abandoned frantic efforts to construct a lifeboat of financial support. A roll call of the City's most powerful financial institutions refused to sign what amounted to a blank cheque to keep Barings, one of the oldest and most distinguished of City names, alive.
The illustrious merchant bank's 233 years as one of the pillars of Britain's financial establishment were extinquished by the illegal dealings of a junior trader, understood to be Nick Leeson, 28, in the bank's Singapore office. His unauthorised speculation in high-risk derivative contracts, which had run out of control, engulfed the previously highly profitable Barings, in losses quantified yesterday to have already reached £600m.
Tokyo's Nikkei index of leading stocks plummeted more than 500 points to below the 17,000 barrier for the first time in over a year. Share prices on the London Stock Exchange were expected to be sent reeling, as analysts predicted a fall in the FTSE index of 100 points or more. The Bank of England, shocked by this first annihilation of a bank by derivatives trading, moved quickly to calm frayed nerves in the market, saying Barings was an isolated, tragic case brought about by one maverick individual. The pound touched a new low against the German mark in early Far East trading. This further pressure on sterling will add to the Government's difficulties this week as it faces a crucial Commons vote on Europe.
The Bank of England said the still-open derivatives contracts expose Barings to "unquantifiable further losses". The inability to set a limit on the losses inherent in such high-risk financial instruments was the main reason Barings was allowed to collapse into administration. The losses were expected to soar as soon as the stock exchanges opened for trading in the Far East, and the full force of the markets turned on the derivatives contracts.
The elite of British banking, hurriedly assembled by Eddie George, the governor of the Bank of England, in a series of crisis meetings yesterday, had agreed to supply all the money necessary to recapitalise Barings. But the proposed lifeboat sank when it proved impossible to cap the potential liability.
Amid warnings that the Barings collapse would send alarm throughout the world's financial markets, and risked doing untold damage to London's reputation as a financial centre, the Bank pledged to take calming action. "The circumstances are unique to Barings, and should have no implications for other banks operating in London," it said in its statement. "The London market will open as normal. The Bank of England stands ready to provide liquidity to the banking system to ensure that it continues to function normally."
Unable to continue trading, Barings applied last night for administration, in the same way the Bank of Credit and Commerce International was wound up. Ernst and Young, the accountancy firm, was appointed administrator, and will seek to recover as much as possible from the debris by selling off the assets. The Bank said yesterday it had received strong interest, both from domestic institutions, and powerful American, Swiss, German and Dutch banks, in parts of the Barings operation. Barings is renowned for its prowess in opening up emerging markets, and particularly its skills in the Far East. It also has a lucrative asset management operation with £30bn in funds, but most of this was thought not at risk because this operation is separate from Barings' securities dealings. Barings did, however, say any cash deposited with the bank, by corporate or individual clients, was at risk. Barings employs 4,000 people worldwide, of whom almost 2,000 work in London. The collapse of the bank also spells the demise of one of Britain's most active charities. The Baring foundation, which owns 100 per cent of the Baring bank holding company, last year spent £13.5m on charitable causes out of money from the bank's dividends.
Michael Marks, chairman of Smith New Court, the stockbroker, warned that the failure of Barings would damage the whole fabric of the City. "For the credit rating of the City, it will be disastrous should Barings be left to go to the wall," he said.
The illegal trades, which were essentially bets against the future performance of the Nikkei, Tokyo's index of leading shares, were made without the knowledge of senior Barings executives, the bank said yesterday. The whereabouts of Mr Leeson, believed to come from Watford, were unknown yesterday. Barings could not say how risky positions of this magnitude were built up, circumventing its normal controls. The bank suggested there could have been some collusion inside its Singapore office. Alastair Darling, Labour's spokesman on the City and financial services, said his party would today urge the Government to review the derivatives supervisory structure. "Even if this was a rogue trade, a rogue trader should never be in a position to ruin an entire bank," he said.
The intense debate about derivatives trading, fuelled at regular intervals by new scandals, the latest of which was the huge losses at Orange County in California, has led in recent years to a great deal being done to improve supervision and control. Central banks, among them the Bank of England, have taken a relatively relaxed view of derivatives, saying it is up to the institutions themselves to get a grip on the risks of their actions.Reuse content