A banking tragedy that calls for some purges

COMMENT The more evidence that emerges, the clearer it becomes that the crisis was one from which Barings' management will find it hard to emerge with any credit
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For most of its 233-year history, Barings has pursued the traditional banker's policy of saying as little as possible outside the sanctity of its own or its clients' offices. Peter Baring, the chairman of the bank, could be forgiven yesterday for wishing he had stuck to that policy and kept his mouth firmly shut.

Yesterday's reaction to his public comments on the origins of the calamitous crash that wiped out the family bank demonstrated that it is not just the bank's net worth that has vanished in the past three traumatic days. The credibility of the Baring name has also taken a terrible pasting, amid mounting incredulity about its explanations of what happened and why.

In the words of one jaundiced banker yesterday, if Mr Baring had wanted to demonstrate that the senior figures at the top of the bank were out of touch with how today's sophisticated financial markets really work, his comments were precisely the way to do it. The markets were virtually united in saying that Mr Baring's theory that the bank was the victim of a giant financial sabotage simply does not hold water.

That there was fraud involved - in the later stages of the huge speculative operation in Singapore, if not before - is not in question. But the kind of scenario sketched out by Mr Baring looks at best implausible and at worst disingenuous. In any case, even if true, it completely begs the more important questions about the way that Barings itself allowed a situation that threatened the very existence of the bank to develop.

The more evidence that emerges, the clearer it becomes that the crisis was one from which Barings' management will find it hard, if not impossible, to emerge with any credit. Far from stopping the build-up of the huge and potentially destabilising futures position, the bank in effect fuelled it by providing additional finance for the positions that its Singapore trader was accumulating.

Of course the bank's senior management may have been ignorant of the real exposure that they were accumulating. Alternatively, they may have been too willing to trust a man who had, by all accounts, made them huge amounts of money in the previous year.

There are, alas, too many cases in investment banking history of senior managements being ready to turn a blind eye to the behaviour of those who are coining it in, only to be forced to repent at leisure later. Until now, nobody seriously believed that such a charge could or would ever be levelled against a bank as reputable as Barings.

We may not know for certain how justified such an allegation is until the outcome of the official inquiry. Mr Baring's view is that the missing trader Nick Leeson simply "bought massive amounts of futures contracts, which he hid. Everybody is vulnerable to that sort of action". When half the trading fraternity in the Far East seems to have known about these positions, this is a point of view that will, to put it mildly, take some substantiation.

Once the bank has been sold, there will be plenty of time for staff and managers at Barings to repent at leisure for the errors that brought their once-proud institution down. What can be said already is that Eddie George's decision to let Barings fall looks - whether intended or not - more sensible with every day that passes.

The tragedy for Barings is a real one. The crash should never have happened. But now that it has, the management failings inside the bank need to be purged, as they would be for any industrial company that self-destructed in this way.

Carelessness at BPB

BPB must wonder what it can do to please the market. When the plasterboard maker sacked its chief executive 18 months ago because he wanted to diversify, the City pilloried the company for being blinkered. Now the new regime is spending its enviable cash flow to expand its core business, the red pens are out again.

The market has a point, however. There are times when incurring debts worth 120 per cent of your shareholders' funds makes sense, but doing so 18 months away from the peak of the construction cycle hardly looks like one of them. The fact that National Gypsum, America's second-largest plasterboard maker, is also involved in apparently open-ended litigation in the emotive area of asbestosis is hardly guaranteed to garner support for the deal.

The company line is plausible enough. The US is the world's biggest market for plasterboard, but not yet completely mature, having grown at an average of nearly 4 per cent a year for the past decade and a half. As a long- term strategic move, it makes sense for the company to reduce its dependence on Europe, where its market share is as good as it is going to get. If the deal goes through, BPB will control 23 per cent of the whole world market for one of the fastest-growing building products.

But Caradon, another building group, received a pasting from analysts for moving into the US in late 1993, 18 months too late to ride the cycle. Early 1995 looks a further year and a half off beam and the price BPB is paying as a result is hardly a steal.

Nearly two times sales is a chunky price for a company which enjoyed margins in the last quarter of last year of 30 per cent as capacity constraints allowed prices to rise. Paying 13 times earnings does not seem excessive but nor should it when profits are more likely to fall than rise.

But the real worry, and the reason BPB's shares were marked down so sharply yesterday, is the fact that the company is even considering acquiring a company with an unquantifiable exposure to personal injury compensation claims.

Jean Pierre Cuny, BPB's new chief executive, is as safe a pair of hands as shareholders could want and he promises not to go ahead without a convincing solution to the legal threat. In the world's most litigious society, however, such a promise might not be worth a row of beans.

The trouble with quoted companies is that they tend to do things they shouldn't because short-term investors tell them they have to - if you don't do something with all your cash, we'll de-rate your shares.

But sometimes nothing is the right thing to do. National Gypsum fell into Chapter 11 insolvency protection after its own management staged a highly leveraged buyout in 1990 believing that the boom would go on for ever. Being bought out at the top of the market once looks like misfortune. Twice could prove to be carelessness.

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