THE BARINGS CRISIS : City reels as rescue collapses
Monday 27 February 1995
More than 4,000 jobs in Barings' offices worldwide will be at risk.
Barings' corporate finance operation, which is advising Glaxo's £9bn bid for Wellcome and Lloyds Bank's £1.8bn bid for Cheltenham & Gloucester will be supervised by the administrators Ernst & Young.
New corporate advisers will probably be brought in to act in tandem with the existing teams for Barings.
Ernst & Young's Nigel Hamilton, Margaret Mills and Alan Bloom will start the perilous task of untangling Baring's outstanding positions in the derivatives markets.
The total losses will be far higher than the current £500m - one participant in the talks yesterday said they could be "one hell of a lot of money".
The administrators will be appointed by the courts today and seek to ring fence the viable parts of Barings. Safest is the asset management side, one of the leading pension and charity fund managers in the City. Also safe will be the 40 per cent stake in Wall Street firm Dillon Read. Sources said last night that the American partners in Dillon Read, who own most of the remaining 60 per cent, may be wise to buy the 40 per cent stake `on the cheap'.
The development capital operation is also seen as "viable."
"The fact is that a 230 year old merchant bank right at the heart of the system has been allowed to fail," said on of the bankers in the talks.
The Bank of England was forced to plump for administration as the midnight deadline for the opening of the Tokyo stock market loomed.
Administration is the same rescue procedure used when the Bank closed down BCCI in 1991.
British banks, including the four high street clearers, had been willing to supply "substantial funds" to replace Barings' lost equity, but they finally concluded after 36 hours of crisis talks that the open-ended nature of possible future losses was just too hard to justify.
At 9.30 last night members of all the UK's leading clearing and merchant banks agreed with Bank of England officials in Threadneedle Street that there was no option for Barings but administration - "after looking at every alternative very carefully".
At 10.20 the Bank put out the following statement: "Barings has been the victim of losses caused by massive, unauthorised dealings by one of its traders in South-East Asia. It is now apparent that the losses caused by these dealings were in excess of £500m by the close of business last week. The contracts concerned are still open, exposing Barings to unquantifiable further losses until the contracts expire or are otherwise closed out.
"The British banks were committed to supplying all the capital needed to recapitalise Barings, provided it was possible to cap the potential liability on its contracts. In the event, it did not prove possible to meet this essential pre-condition for the injection of new capital into the firm.
"As a result, Barings cannot continue trading and is applying for administration.
"These circumstances are unique to Barings and should have no implications for other banks operating in London. The London markets will open as normal tomorrow. The Bank of England stands ready to provide liquidity to the banking system to ensure that it continues to function normally," the statement said.
After previous bank rescues such as Johnson Matthey, yesterday's action is virtually unprecedented. Today Barings' bankers will be attempting to continue their current activities while being under the control of three outside appointed insolvency experts. As one source said last night, under the new circumstances "it's quite difficult to keep that kind of franchise in one piece". The news of failed talks is expected to ravage London's stock market today, and the pound fell to a record low against the market in early trading in Sydney. London's FTSE 100 index of leading shares was expected to fall anything up to 100 points following the news.
"This is a real shock. The bottom of the recent range is around 2,950 points and [the market] should test that now," said Kleinwort Benson strategist Trevor Laugharne. The FT-SE 100 index closed down 11.6 points at 3,037.7 on Friday.
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