Second crisis hits bankers to the great and the good
Barings served kings and emperors, it has had a hand in the creation of the US and financed Russia, but its luck may have run out
Tom Baring, grandson of the founder of Baring Brothers put his expensive Classical education to good use to equate the crisis with the lot of the wealthy, and last, King of Lydia: "A great Nemesis overtook Croesus."
By 1890, the Lutheran family from north Germany had come a long way. The first Baring Johann, arrived in England from Bremen in 1717, the year Andrew Drummond started Drummonds Bank. He set up with £500 in Exeter and passed money to his sons, Francis and John, who formed Baring Brothers in London on Christmas Day 1762.
Francis Baring was the friend of Jeremy Bentham, the political philosopher, and advisor to a string of Prime Ministers and foreign Secretaries in the 1780s.
As merchants and bankers, Barings worked on an international scale; arming the US in the war with France, and advancing credit line for the suppliers of the French fleet fighting the Americans. In 1803, Barings were instrumental in the sale of the French territory of Louisiana to the United States.
They made the deals and then kept the business - from 1803 until 1871, Barings were the London financial agents of the US government. The bank funded British government loans to finance the Napoleonic wars, and Spanish and Portuguese loans to pay war levies to Napoleon.
Francis Baring died in 1810 leaving £625,207 and the most powerful bank in Europe.
In 1818 Barings raised F315m for the French government. Its Foreign Minister, Cardinal Richelieu, was impressed: "There are six great powers in Europe: England, France, Austria, Prussia, Russia and Baring Brothers." The profits, £720,000, were enormous. Barings bankrolled its way down the century with loans for foreign governments. Lord Byron wrote in Don Juan the same year: "Who holds the balance of the world? Who reign O'er congress, whether royalist or liberal? Who rouse the shirtless patriots of Spain (That make old Europe's journals squeak and jabber all)? Who keep the world both old and new, in pain Or pleasure? Who makes politics run glibber all? The shade of Bonaparte's double daring? Jew Rothschild and his fellow, Christian Baring."
Throughout the nineteenth century, the Baring family garnered a clutch of peerages: Ashburton, Northbrook, Cromer and Revelstoke. Like the family's great rivals the Rothschilds, Hambros and Morgans, the Baring family piled into overseas development - shipping, railways, foreign loans and government bonds, particularly for the US, Canada and Russia. Then came Latin America. Which is where it went wrong.
The culprit was La Sociedad Obras de Salubridad de Buenos Aires (The Buenos Aires Water Supply and Drainage Company) formed in 1888 and destined to send Barings down the tubes.
At first, South America looked sweet. Barings had arranged government loans in Chile and Uruguay; they tested the water in Mexico, Venezuela and Peru; but Brazil - Rothschild territory - was off limits. Then Barings discovered Argentina. At first, it was small war loans, a million or so here and there. But by 1889 Argentina was absorbing nearly half of the funds invested outside the UK.
Barings' Nemesis arrived in the form of CH Sanford, an American quack who had come to London selling Florida Water, and who had transformed himself into a director of the finance house SB Hale. With Hales, he lured Barings into a joint finance of Buenos Aires Water and Drainage.
For $21m, payable in three installments, Hales bought the water works lease and building contracts from the Argentine government. Hales the formed Buenos Aires Water Supply and Drainage to run the works, fulfil the management and construction contracts and make the three payments. Perfect privatisation,
Barings agreed with Hales to buy all the BAWSD debentures and to sell them in London. The shares were offered by Hales and Barings on joint account. But response was poor, and Barings was left as the largest equity shareholder in the company.
There was no profit in the drains of Buenos Aires. The construction was awry, and the situation was compounded by a financial crisis looming in Argentina during the mid-1890s. Barings was stretched by withdrawals of large sums on deposit from the Russian government. The bank took loans from Glyn, Mills and Martin , and sold large batches of securities in order to stay liquid.
In November 1890 another payment fell due on the water works account. Barings could not pay. Humiliation loomed. The City gathered itself. The great Everard Hambro was seen with Lord Rothschild an St Swithins Lane at 8.O0am on a Saturday. Hambro had called on Lord Revelstoke at Barings the day before. Now he called in the Bank of England.
Hambro, Revelstoke and the Governor met that afternoon, 8 November 1890.
The Bank stepped in with a loan to take care of Barings' liquidity problems, supported by a fund raised from City banks and institutions to "guarantee the advances which the Bank of England have agreed to make to Messers Baring Brothers & Co. to enable them to discharge at maturity their liabilities on the night of 15 November 1890, to make good any loss which might appear on the final liquidation". The fund amounted to more than £17m.
Now a company with limited liability, Baring Brothers & Co. Ltd, was formed with £lm share capital from family and friends; this company took over the business of the old banking house.
Another company, the Baring Estate Co. Ltd, was formed in 1894 to pay off the debts of the old business. There was a £1.5m debenture issue, oversubscribed by £2.5m, the proceeds of which went to the Bank of England in final settlement of the loan.
The crisis affected the entire City. Many banks, accountants and lawyers were involved in the protracted negotiations to extricate Barings from the mess of SB Hale: Hambro & Son, Brown Shipley, Price Waterhouse, investment trusts, bondholders' associations and the great law firms Norton, Rose & Co, Freshfields & Williams, and Ashurst, Morris, Crisp & Co were all involved in the 1890s. A storm of litigation followed as Barings and the Bank of England defended themselves against irate creditors.
After l894, Barings resumed business as usual.
The Imperial Russian government banked with Barings until it ceased to be Imperial in March 1917. Elsewhere, Barings financed London tramways, the London Underground, Cunard's ships, Vickers armaments, and investment in the American Telephone & Telegraph Company.
Barings survived two wars and the Big Bang in 1986. By the end of the 1980s, Barings were managing £IO.7bn for clients in London, Boston, Tokyo and Hong Kong.
Now, after over 250 years, this second crisis may make business as usual impossible. Perhaps Barings' most famous client was the fictitious figure, Phileas Fogg, of Around the World in Eighty Days. Maybe he invested in Singapore along the way.
The author is writing a history of Norton Rose, the law firm.
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