The City of London, led by the Bank of England, was frantically engaged yesterday evening in an operation to save something from the calamity at Barings, Britain's oldest merchant bank, which was facing losses of some £600m, run up by a single dealer at its Singapore ofice.
With the deadline of midnight London time looming, when the Tokyo stock exchange opened and the full force of the financial markets was expected to tear into the gaping wounds caused by the disastrous foray into derivatives speculation by the rogue trader, the Bank of England was desperately searching for a holding position.
As City grandees warned of the potentially disastrous consequences to London's reputation as a financial centre should Barings be left to its fate, and the Labour Party called for a review of the controls on derivatives trading, Eddie George, the Governor of the Bank of England tried to win support from Britain's biggest clearing banks and a host of establishment investment banking houses for a collective show of support for Barings.
Before the Tokyo market opened, Barings was already facing losses of some £600mn, run up Nick Leeson, whose whereabouts were unknown last night, who had lost control of unauthorised speculation on the Nikkei index of the Tokyo stock exchange. A not very senior trader, only authorised to carry out simple deals, Mr Leeson had become heavily involved in three weeks, in complex financial futures in the expectation that the Nikkei index in Tokyo would rise. Instead, it fell, but by the time Barings' executives became aware of what was going on last Friday, it was too late.
The unparalleled potential of derivatives to magnify potential gains - and losses - out of all proportion to the initial investment had engulfed Mr Leeson, and the controversy about the dangers of derivatives exploded once again in international financial markets.
While Baring's role as an independent house was generally accepted last night to be over, yesterday's efforts were directed at finding a buyer, or at least putting together a holding consortium that would stabilise the situation until a more odered disposal could be arranged.
The problem facing the Bank of England and interested buyers, of which there were said to be many, was that no one had a clear idea of potential extent of the derivatives losses. Throughout yesterday, a derivatives crisis team assembled by the Bank of England from experts from several City houses was trying to ascertain Barings' exposure, while derivatives professionals were dispatched to Tokyo, Hong Kong and Singapore.
With fears that the crisis at Barings would send the London Stock Exchange and the pound reeling today if it was not contained, Michael Marks, chairman of Smith, New Court, the brokers, warned yesterday that the demise of Barings would put into question the whole fabric of the City of London. "For the credit rating of the City, it will disastrous if Barings goes to the wall," he said.
Alastair Darling, Labour's spokesman on the City and financial services, said his party would today urge the Goverment 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, opened at regular intervals by new scandals, the latest of which centred on the huge losses at Orange County in California, the United States, 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 that it is up to the insitutions themselves to get a grip on the risks of their actions.
Colin Munro, director of IBCA, the bank credit rating agency, said yesterday that this new disaster will make it very difficult for the Bank of England to continue its calm stance.
"You cannot have faith in a financial system when an important bank such as Barings can so rapidly run into problems on this sort of colossal scale," he said.
Leading article, page 14
Further reports, page 24