Barings PLC

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Barings PLC

8 Bishopsgate
London
Greater London EC2N 4AE
England
(011) 71 280 1000
Fax: (011) 71 283 2633

Wholly Owned Subsidiary of ING, B.V.
Incorporated: 1762
Employees: 1,728
Operating Revenues: £307 million
Stock Exchanges: London
SICs: 6790 Miscellaneous Investing

Barings PLC, sometimes referred to as the “Queen’s Bank,” has one of the most illustrious and dramatic histories in the banking industry. The company grew to importance during the Napoleonic Wars by financing Britain’s military campaigns, and after Napoleon’s downfall, Barings helped arrange France’s financial recovery. Known as the sixth great European power during the 19th century, the company was also involved in the American purchase of Louisiana from France in 1803, the refinancing of the Bank of England in 1839, and the reconstitution of the Banque de France in 1849. Barings faced a crisis in 1890 when speculative expansion brought the company’s liabilities to more than 21 million pounds Sterling, and while the bank was rescued by the Rothschild family and the Bank of England, Barings never again reached the pre-eminent position it once held. The latest dramatic chapter in Barings’ history was written in 1995 when investment speculations by a lone manager in the company’s Singapore office led to losses of over £1 billion, frantic but unsuccessful attempts by the British banking community to save the bank, and ultimately the acquisition of the firm by a Dutch financial services group, ING.

The great financial house of Barings was founded in 1762 by two sons of an English country gentleman who had made a fortune in the wool manufacturing trade. The younger son, Francis, soon rose to leadership of the firm and began to arrange some of the most important financial transactions of the period. As Governor of the East India Company, Francis Baring underwrote many imports to Britain from all over the world, including such new and highly sought-after items as coffee, cocoa, tea, and tobacco. From the Far East, the bank financed the importation of porcelain artifacts for the aristocracy. In Russia, Francis Baring was active in arranging trade agreements between the rising merchant class and businessmen from Western Europe. When the American colonies revolted against British rule in 1776, Baring was at the forefront of the prominent and influential individuals who advocated peace with the colonists.

Francis Baring’s second son, Alexander, succeeded him in the business. Alexander traveled to the newly independent United States and purchased large amounts of land in Maine and Pennsylvania which eventually brought millions to the firm. On his journey he also married Anne Bingham, the daughter of Senator William Bingham of Pennsylvania. Bingham was at that time the richest man in the United States, and Anne’s dowry amounted to $900,000, a staggering figure in those days. The marriage also brought with it important connections in the American banking industry.

Under the leadership of Alexander, Barings bank was involved in one of its most important and far-reaching transactions: sustaining the British effort to defeat Napoleon. From 1898 through 1814 Alexander Baring gave repeated assurances to William Pitt the Younger, Britain’s prime minister during the lengthy struggle with France, that money would continue to be available for the country’s military campaigns. At the same time, Alexander Baring also conducted business with Napoleon, arranging the sale of France’s Louisiana Territory to the United States in 1803. While he was criticized in Britain for helping Napoleon raise money to continue war with England, Baring’s primary intent was to assist President Thomas Jefferson expand the boundaries of the newly formed United States. Following the in tradition of his father, Alexander Baring protested against the measures the British government brought against the United States during the War of 1812.

After Napoleon had been defeated at the battle of Waterloo by the Allied forces under the command of Wellington, Baring thought that the future of Europe was dependent upon a French economy that was financially healthy. In consultation with British diplomats, the Barings bank therefore decided to provide an enormous indemnity loan to France. The French prime minister, Richelieu, and the French foreign minister, Tallyrand, regarded this loan as having guaranteed the peace of Europe. When the British, French, Austrian, Prussian, and Russian representatives met at the Congress of Vienna in 1815 to draw up the peace treaty for Europe that remained in force until World War I, they all concurred that Barings bank was the sixth great European power and without its assistance no peace treaty would have a lasting effect.

For his service to the British nation, Alexander Baring was knighted by the royal family and dubbed Lord Ashburton. As Lord Ashburton, he continued arranging important financial transactions not only in Europe, but in Asia and the United States as well. One of his last acts before he retired was arranging the settlement, in association with the renowned American orator and New Hampshire senator Daniel Webster, of the disputed boundaries between Maine, New Brunswick, and Quebec. Upon his retirement, he brought into the firm two men who he thought would maintain its reputation, honesty, and credibility. Thomas Baring, Alexander’s nephew, became head of the bank’s international operation, while Joshua Bates of Massachusetts was placed in charge of the company’s American and Canadian interests.

During the early and mid-nineteenth century, under the direction of the new leadership, Barings bank enhanced its reputation in international finance. In Europe, during the financially unstable years of the late 1830s and 1840s, Barings was the strongest bank operating on the Continent. In 1839, when the Bank of England ran into difficulties, Thomas Baring was there to shore up the fortunes of Britain’s national bank. In 1847, under similar circumstances, the firm came to the rescue of the Banque de France. Yet Barings was most influential in its transactions involving the United States. Barings functioned as the agent and banker for the federal government and numerous state governments. Barings assisted the Bank of the United States and an untold number of private firms, and was one of the major financial backers of the burgeoning American railroad industry. In 1848, after the Mexican War, Barings arranged and financed the purchase of Texas by the U.S. government from Mexican officials. During the American Civil War, Barings underwrote the purchase of Alaska from Russia by the U.S. government. Although the transaction was ridiculed at the time as “Seward’s Folly,” in mockery of Abraham Lincoln’s secretary of the interior, William H. Seward, Barings had the foresight to see the enormous potential of this acquisition.

Barings ran aground financially in 1890, but the seeds of disaster were planted in 1824. Barings had collaborated with Adrian Hope and Company, a Dutch banking firm, to provide loans to the new nation of Argentina. This transaction was the first of many between Barings and the South American country. Over the years, Barings became more and more involved in the economy of Argentina, financing a wide variety of projects, including railway lines, harbor construction, grand hotels, and even bathhouses. Nothing seemed too small or too large for Barings to finance. In fact, the company had developed such strong ties to the Argentine government that at one point managers from England were actually running the Argentine National Bank. By 1888, however, exclusively through Baring bank activities and transactions, Argentina had run up a debt in an amount that began to cause concern within the British financial community. In 1890 it was discovered that Barings was responsible for almost all Agentinian loans, which totaled a staggering figure of 38 million pounds Sterling. Argentina defaulted on the loans, and Barings reported over 21 million pounds sterling in liabilities. Government ministers decided that if Barings failed, English credit would be damaged along with the company; as a result, the Bank of England initiated a bond sale to Russia and arranged a loan from the Banque de France. Called the Baring Guarantee Fund, the financing saved the historic banking firm from ruin.

Although Barings was rescued from the ignominious fate of liquidation, from the time of the debacle in the 1890s the bank never regained its pre-eminent status in the international financial community. In 1906 the company withdrew from all transactions on the North American continent and did not conduct any activities in the United States for eight decades. Under the watchful eye of industry regulators and the management at the Bank of Britain, Barings was no longer trusted to handle large financial transactions, either domestically or internationally.

The bank’s influence as a major global financier had been completely undermined by the problems in Argentina, and the firm’s management was relegated to looking after relatively small accounts of London businesses and wealthy country gentlemen.

During the 1920s and 1930s, Barings continued to labor under the stigma of its past mistake. The lack of opportunity to make or arrange large financial transactions led the bank’s management into the only field it could pursue—financial advice and consulting. Since the company was only involved in stock and bond consulting to a limited degree, the worldwide depression of the 1930s, which damaged many banks, did not significantly affect Barings. This backhanded stroke of good fortune led to the gradual repair of the company’s reputation, and during the late 1930s, and throughout the decade of the 1940s, Barings developed its financial consulting services.

With its reputation nearly rehabilitated after 50 years, and with the approval of ever-watchful English banking industry regulators and the management of the Bank of Britain, Barings was chosen by the newly crowned Elizabeth II in 1952 as one of the guardians of the royal fortunes. Her Majesty and the royal family had always been impressed with the prestige and tradition of one of the pillars of Britain’s long-lost mercantile empire, and the choice of Barings seemed natural to many people. In addition to the Queen’s fortune, a significant amount of the royal family’s assets, including those of her son Charles and Princess Anne, were place under the control of management at Barings. Barings advised the Queen well, and soon the royal fortune was increasing dramatically during the 1960s and 1970s. Members of the royal family were so pleased with the consulting services at Barings that Prince Charles decided to establish his own charity with the bank. Called the Prince’s Trust, the money was used to create programs for economically deprived teenagers.

By the 1980s, Barings was considered one of the models of merchant management in Britain and was given greater and greater opportunity by the Bank of Britain and industry regulators to pursue more profitable ventures. Corporate finance, convertible bonds, and fund management were stable but not very lucrative business activities for the bank, so management at Barings decided to re-enter the international banking arena. For the first time in 80 years, the company moved into American finance scene and began to advise medium-sized U.S. firms on restructurings, partnerships, and mergers. One of the company’s most important transactions during this time involved the arrangement of a joint venture between SmithKline Beckman and Nova Pharmaceuticals. In addition, management decided to expand its financial services, and opened a stock brokerage operation in Tokyo to take advantage of the highly profitable bull market in Japan during the mid-1980s. Not long afterward, Barings Securities Ltd. was established to use the gains from its Tokyo office to set up operations around the Pacific Rim, Latin America, and continental Europe. Barings PLC was once again playing upon the international stage as it had done during the 18th and 19th centuries.

During the early and mid-1990s, Barings quickened the pace of its international brokerage operations. Offices in Tokyo, Singapore, London, and the rest of the world expanded dramatically, with new employees hired and promoted rapidly. One of these newcomers was a young man named Nick Leeson. Leeson, the son of a plasterer who was raised in one of the public housing projects of north London, dropped out of high school and took his first job as a bank clerk. His rise within the financial services industry was nothing less than meteoric. Later he worked for Coutts & Company, a prestigious London bank, and then took a job with the American investment firm of Morgan Stanley. The position Leeson held at Morgan Stanley helped him win a job at Barings in 1989. By 1992 Leeson had accepted a promotion to the Singapore office where Barings was expanding its trading operations.

In 1993 approximately 20 percent of the firm’s total profits were brought in by Barings Futures group, of which Leeson was a major participant. The young man had developed a reputation for spotting small differences in the value of futures on the Osaka and Singapore exchanges, and made millions for his company by taking advantage of the spread. Barings was so pleased with Leeson’s performance that his salary was increased to $350,000. He soon became manager of the Singapore office and grew used to living the luxurious lifestyle of an international financier, driving a Mercedes, owning a yacht, and taking advantage of an unlimited travel expense account. As he reported more profits, the company managers in London granted him more authority. Leeson became so powerful that London managers allowed him to assume total control over the trading desk and the settlement operation, which meant that he not only made the trades but kept the books.

During late 1994 and early 1995, Leeson immersed himself in the highly speculative world of buying and selling futures contracts. He began to lose enormous amounts of money but, because of his control over the Singapore office, was able to keep the figures from being accurately reported to London headquarters. On Tuesday, February 21st, the unimaginable happened. Due to reckless trading on the futures market, Leeson had gambled away over $1 billion, more than twice the total capital available at Barings. Suddenly, the venerable 233-year-old bank of Britain’s glorious imperial days was insolvent. Leeson hopped on a flight to Malaysia and then traveled to Germany, where he was arrested. Losses at Barings soared to $1.3 billion by the end of the debacle.

The international financial community reeled, and both the British government and private sector looked frantically for a savior for the bank. Barings was the most important of all the Queen’s banks, and its failure would result in a loss of $100 million for the royal family. Fortunately, in June 1995, ING, one of the largest Dutch financial services companies, bought Barings at the fire-sale price of just over $1 billion. Not content to wait for publication of an investigative report by the Bank of Britain, ING immediately fired 21 high-ranking managers at Barings who were believed to be aware of Leeson’s trading activities.

Under the direction of ING, Barings will be reorganized into a much more efficient and streamlined investment services firm. Not surprisingly, ING’s strategy includes a comprehensive evaluation of the operations and accountability systems Barings has in place, and will alter those if necessary. The once-proud bank will undoubtedly survive, but only ING management knows in what shape or form. Once again, the history of Barings has come full circle.