Barings — A Culture of Greed?
| Date | 01 February 1996 |
| DOI | https://doi.org/10.1108/eb025741 |
| Published date | 01 February 1996 |
| Pages | 377-381 |
| Author | David Whitby |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 3 No. 4 — Banking Supervision
BANKING SUPERVISION
Barings — A Culture of Greed?
David Whitby
The collapse of Barings Brothers has been blamed
on the unsupervised activities of a single 'rogue
trader' in Singapore. This may have been the cause
but it is definitely not the reason. While greed and
complacency have played a part, the root of the
problem lay in the bank's inability to assimilate
and adjust to the widely different cultures within
the bank, that came with the acquisition of stock-
brokers Henderson Crosthwaite, back in 1984, in
what then became Barings Securities.
In the 'Big Bang' (September 1986), the banks
in London paid huge sums to buy absurdly valued
brokerage houses, and, often unwisely, pensioned
off seasoned stockjobbers and money market men
who could smell a rat a mile away. Amateurs
became players overnight, and brokers became tra-
ders.
Conflicting cultures were thrown together, like
a suspension of oil and water. In some cases, Bar-
clays Bank and BZW for example, the mixture has
held together. In Barings' case, there were three
different cultures that never mixed. First, there
was the elitist culture of Barings' directors that ran
the traditional merchant banking business. Second,
there was the stockbroker culture of Barings Secu-
rities'
senior management, imported from Hender-
son Crosthwaite, that came with Christopher
Heath.1 Lastly, there was the barrow-boy culture of
the foreign exchange money broker, and the
LIFFE pit-traders, on whom Barings' management
relied for providing their annual bonuses. Heath's
legacy, when he resigned from Barings' board in
1992,
was to leave behind the incompetent and
quarrelsome players, and to take all the best people
with him.
Among the London merchant banks, Barings
were slow off the mark in preparing for 'Big Bang'.
Most of the quality stockbroking firms, discount
houses, and gilt-market jobbers, had already been
snapped up. S.G. Warburg had bought Akroyd &
Smithers, the most profitable if not the largest firm
of gilt jobbers, together with Mullens (formerly
the government broker2) and Rowe & Pitman
(brokers to the royal family). Morgan Grenfell had
bought Pember & Boyle (a specialist gilt firm) and
Pinchin Denny (the third largest gilt jobber), but
found the new cultures hard to combine with their
own. Sensibly, Morgan's cut their losses, and
closed both firms down before any damage was
done. Lloyds Bank, who had missed the plum tar-
gets,
decided against paying premium prices for the
residue, and set up their own operation (LMB)
starting from scratch.
Lloyds Bank had learnt its lesson in 1975, when
another 'rogue trader'3 like Leeson lost £32m
taking unauthorised positions, and concealing
trades, in Lugano. In 1985, LMB recruited a
poacher turned gamekeeper from the discount
market to head up its risk management. The 'Red
Baron', as he was known, was not only an expert
in all the latest techniques of derivatives trading,
but also a qualified actuary with computer skills to
monitor global dealing positions. Alarm systems
were built into the on-line computer on his desk,
which gave instant warning when individual deal-
ers overstepped their limits. While most banks run
a separate 'back book' for the purpose of risk
management and offset trading exposures on the
'front book', this tends to shift realised cash market
profits into longer-term debt where discounted
Page 377
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