Nick Leeson, the 28-year-old head of the bank's Singapore futures operation who is being sought by police, told colleagues that he had been promised the 2m Singapore dollars bonus at a lunch two weeks ago with Peter Norris, the chief executive officer of Barings Securities.
Mr Norris last night denied the offer, but confirmed he had been in Singapore for a management meeting. Mr Leeson, whose whereabouts are unknown, told colleagues his reward was because of his substantial contribution to the bank's profits. Peter Baring, the bank's chairman is reported to believe that Me Leeson's gamble was a deliberate attempt to ruin the bank with a criminal accomplice.
Kenneth Clarke, the Chancellor, yesterday announced a "full and urgent" inquiry into the events leading up to the Barings collapse and said that the banking regulatory system would be "thoroughly" reviewed in the light of the outcome. The Chancellor said that the bank's losses had amounted to more than £600m by the end of last week but it faced "further unquantifiable losses".
Mr Clarke told the Commons the investigation by the 10- person Board of Banking Supervision - which is chaired by Eddie George, Governor of the Bank of England and includes three of its officials - would cover "the circumstances under which such unauthorised transactions were able to take place and to remain undetected until it was too late".
It also emerged last night that Mr Leeson's trades, which Barings claims only came to light on Thursday, were common gossip among market traders as long as three weeks ago. Certain leading City houses took urgent steps to reduce their credit exposure to Barings. The £1.5bn belonging to 3,000 wealthy individual and corporate account holders is at risk, administrators warned yesterday as they moved to freeze deposits at Barings.
How much these depositors would eventually see of their money, most of them very substantial amounts, will depend on the efforts of Ernst and Young, the administrator, which was yesterday frantically searching for a buyer for Barings.
It also emerged that clients of funds belonging to Barings' asset management, previously believed to be secure from the collapse, could also lose any money deposited with Barings' bank if they were switching between investment funds.
The losses from the disastrous derivatives trading, blamed on Mr Leeson's actions, continued to mount yesterday, reaching £750m. Ernst and Young conceded it was still trying to understand the complexity and extent of the unauthorised derivatives trades made by Mr Leeson. It said it still could not place a limit on the potential losses, as the derivatives were still open and, therefore, at the mercy of the financial markets.
This unquantifiable risk, which had made it impossible for the Bank of England to mount a rescue for Barings over the weekend, remains the key obstacle to finding a buyer.
As British and foreign institutions expressed a continued keen interest in picking up all, or part of, Baring's well respected operations, Ernst and Young was engaged in a race against time to control the derivatives problem before the situation at Barings deteriorated too far and key staff began to desert. Nat West Group was yesterday believed to be the keenest among British clearing banks to take over Barings. But several foreign giants, notably from the Netherlands, Switzerland and the United States, were alleged to be jostling for position around the corpse.
Confounding warnings of armageddon, the financial markets yesterday took Barings' demise in their stride. After an initial sharp dip, the FTSE recovered to end 12.4 points down at 3025.3. Sterling dropped 2.5 pfennigs against the German mark, to DM 2.31.
But against this background of market sang-froid, the shock of the annihilation of Britain's oldest merchant bank by a rogue dealer, hung over the City. "Everybody is sad. The City is quite a small place and at lot of us have friends at Barings," said David Verey, chairman of Lazards, the merchant bank.
The Governor of the Bank of England, said the Barings disaster, which was an isolated, special case of fraud by a rogue dealer, should not provoke a witchhunt against derivatives. He blamed Barings' demise on a lack of control within the bank. "We need to be very careful in drawing conclusions from this episode. This was a failure to control a rogue dealer, it was not a specific derivatives problem," Mr George said.
The use of the Board of Banking Supervision to carry out the inquiry was sharply criticised by Gordon Brown, the shadow Chancellor, who complained in the Commons on a "culture of a complacency" and declared that a fully independent inquiry should examine the Bank's own role and that of the supervisory authorities. Mr Brown said last night the Bank would be acting as "judge, jury, expert witness and possible defendant".
Acknowledging that the failure was "of course" a blow to the City of London, the Chancellor added that "it appears to be a specific incident unique to Barings centred on one rogue trader in Singapore". Mr Clarke said in his statement that global markets would be able to absorb the current turbulence without "lasting damage".
The Chancellor disclosed that the Governor had not recommended "and I would not have agreed" the use of public funds to take on the unlimited liabilities of outstanding contracts left in the wake of the "unauthorised dealings."
The Bank stuck yesterday to the official line that Barings discovered only late last week the extent of the disaster that was to engulf it.
But doubts persisted in the City with this explanation, as senior executives from other houses said it had been common knowledge for two to three weeks that Barings was unusually exposed to very large deals in Japanese derivatives.
A major American investment bank said its credit risk managers had order dealers two weeks ago to reduce exposure to Barings "because of indications it had a big, problematic position in the market".Reuse content