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Keywords
Banking, Fraud, Liability
Abstract
Recalls that the collapse of Baring's bank showed what may lie behind an apparently successful organization. Barings was destroyed by the unauthorised activities of a trader named Nick Leeson. For almost three years Leeson deceived the bank by appearing to earn phenomenal profits, while in reality incurring massive and ultimately catastrophic losses. A striking feature of the bank's collapse is that it was both sudden and total. No one had the least suspicion of impending catastrophe despite the emergence of clear signs of malfeasance. The article explains why Barings' management failed to respond effectively to those danger signs and considers the lessons to be learned.
On Thursday, 23 February 1995 the Directors of Barings' Bank hosted a lunch for City magnates. The conversation was animated, focusing upon Barings' new venture in Mexico.
The directors had good reason to be optimistic. For the last three years Barings had been enjoying a bubble of profit due mainly to the activities of Nick Leeson, their star trader in Singapore. "They had no idea", said a guest afterwards.
The Directors had no idea that Barings, one of the oldest and most respected banks in the City of London, was about to collapse. The alarm was raised in London later that afternoon, when Nick Leeson was reported missing.
In their gripping account of events Gapper and Denton reveal the horror, as Leeson's colleagues began to uncover the truth:
The loss was escalating by the second. The futures in the five eights account were so volatile that each point the index changed made 100,000 difference to the amount that Barings owed ... As the Nikkei fell again, the loss spiralled upwards at an almost dizzying speed. If these futures were not matched by others ... they were all in terrible trouble (Gapper and Denton, 1996, p. 27).
By next morning it was clear that Barings was insolvent. What shocked Barings' management most, however, was not Leeson's behaviour but the gap between what they had understood and believed to be true and the reality:
The daily reports they had received from him had been a complete fiction ... [Barings' managers] had met daily and had solemnly discussed the profits and supposedly any risks...