This project deals with the collapse of Barings Bank in the 1990s. The bank was one of the most prominent in the world before a series of financial indiscretions caused it to take on significant debt and collapse. This project will consider the circumstances surrounding that while breaking down the lessons that can be learned from the collapse.
There are many things that one can learn from doing this project that can helpful for the future. For instance, Barings and its collapse serve as harbingers of danger for other companies in the industry that may want to avoid the same fate. This particular project looks at the financial services industry at large while also considering the place of Barings within it. It considers the difficult question of why Barings collapsed and how other companies around it reacted at the time, and in doing so, it teaches lessons that when large financial institutions have a lack of control and proper culture in place, entire markets are in danger. On top of that, one can learn a lot about how the financial services industry used to operate in the 1990s. One can learn interesting things about how and why large firms collapse.
One gets to see the fact that despite the organization being faceless in many ways, there are actually many human actors who play a major role in the demise of companies when they collapse in this nature. Namely, the Barings situation brought to bear the reality that human beings making bad decisions will make it very difficult for a company to survive over the long run. The Barings situation is both a cautionary tale and an explanation of an industry that has sometimes been difficult to break down for those on the outside. It is a worthy study of one of the most prominent firm failures of the last three decades.
Barings was one of the most prominent financial services companies in the world prior to its collapse. The company had a long-established history of serving people and leading the industry, as well. However, things went sour for Barings in the 1990s, and the company went under with a major storm of negative attention to follow. In looking at why the company amassed such large losses and came up empty in so many ways, it is easy to understand how this would be an impactful case.
Barings was once a world leader and certainly a leading firm in England. It was based in London and served as one of the lynchpins of the world’s greatest financial city for an extended period of time. Founded in 1762, Barings was started by German bankers and merchants who needed the bank to help support many of their financial transactions. It eventually grew to become the second largest bank of its kind in London, and it was prominent not only in dealing with its own clients, but in setting the temperature for its particular industry. The company eventually was overtaken by other firms in the industry and had to take several measures to become more competitive.
One of those was global expansion. The other was more speculative investing. Trying to keep profits up, Barings attempted to take advantage of foreign markets, including the emerging Asian markets. It made very risky speculative trades, often using the money that it had on deposit from its customers. This blurring of the lines between deposit banking and speculative investment banking was one of the primary problems that ensured that Barings would be in danger if things went wrong.
The company expanded significantly into both Singapore and Malaysia, but it had a highly decentralized structure during this time. Rather than having strict controls from the company’s headquarters in London, there were people who were allowed to serve as “floor managers” in the emerging markets, giving them the ability to make their own calls and trades. One such figure was Nick Leeson, who would become known as the man who made a series of risky trades and brought the company down (Rawnsley). Its losses totaled more than one billion largely on the back of Leeson’s behavior, and this caused Barings to go bankrupt.
The industry at large during the 1990 was one in which investment banks could take great risks in a largely unregulated environment. There were several banks that had a major international presence. American banks like Bear Stearns and Lehman Brothers were among the world’s largest and most successful. Several European banks, including Deutsche Bank, had major presences in the market, too. Given the largely unregulated nature, the two sides of banking were allowed to blur over time.
In today’s more regulated environment, banks are not allowed to engage both in deposit taking and investment banking. They have to keep things separated with specific entities if they are going to do both. This is designed so that companies will not be able to get away with investing wildly with the money on deposit from customers. If they are going to take risks on the investment side, then they have to take risks with their own money rather than relying on that of their investors.
However, during the 1990s, things were difficult, and unstructured markets allowed firms like Barings to take wild risks on speculative investments. Perhaps most important were futures investments, which were akin to betting on how various commodities would do in the future. Several companies were able to amass great wealth with this approach, but Barings eventually saw its fortune collapse because of an uncontrolled environment. As mentioned previously, Leeson was the man who was mostly to blame for this, as he unleashed a series of risky and even reckless trades that threatened to harm the entire economy (Leeson & Whitley). Given how interconnected many of these firms happen to be, when a single firm falters, to can cause all of the firms in the market to suffer a negative fate. Barings and its situation demonstrated this quite clearly, and the behavior of Leeson showed just what problems could occur in an unregulated environment.
