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FAILURE : Barings' Failure: A Case of 'Upstairs, Downstairs'

March 05, 1995|John Micklethwait | John Micklethwait is the business editor of the Economist

LONDON — It was rather as if, right before the release of "The Lion King," a rogue illustrator had added an unprintable large appendage to the film's leonine star. The next day, mothers and children across America were outraged and a $30-billion class-action suit was launched against Disney--enough to wipe out its capital. Hollywood's studio heads met to see if anybody would take over the firm, but nobody wanted to write a blank check for the litigants. By Monday morning, Disney was in Chapter 11, the illustrator was last heard of in Acapulco--and most of Los Angeles didn't know whether to laugh or cry. Everything--Uncle Walt, Michael D. Eisner, the studio lot in Burbank, those irritating lines in Anaheim--all finito . In a single weekend.

The house of Baring, which collapsed so spectacularly last weekend after 233 years of banking in the City of London, was not as rich as Disney, but it was considerably older and, dare one say it, classier. This is not mere British snobbery. In the rough-tough world of international finance, Baring Brothers & Co. seemed to stand for older values. It had a reputation for looking after its employees well. Indeed, the eponymous family, which still controlled the bank, was famous for paying its staff better than its own members.

Given its age and influence, there were relatively few skeletons in Barings' closet. True, a professor of Politically Correct Finance might have noticed that the number of Old Etonians in the bank was out of all proportion to the private school's place in Britain. However, even Barings' toffs tended to be of the understated, efficient sort. There was notably less aristocratic dead wood at Barings than in other British upper-class vessels.

This assurance came from longevity. Back in 1820, when the bank was a mere 58 years old, it was described by a Frenchman as "Europe's sixth great power." Over the centuries, the Baring family has managed to pick up five different peerages--something English families had hitherto only managed to do by beating up foreigners or sleeping with royalty. The only blot on the bank's copy book was in 1890, when Barings almost went bust after losing millions in dud Argentine loans--and had to be bailed out by the Bank of England.

From a modern viewpoint, Barings seemed to be doing all the right things. Rather than trying to be all things to all people, it was a classic case of a company "sticking to its knitting"--picking out niches where it could make money and trusting its people to get on with it. Quietly, it became perhaps the world's leading merchant bank in emerging markets. It built up a presence in places like South America and Asia long before it was fashionable; similarly, it showed no sign of wanting to desert them after the recent falls in emerging stock markets. This long-term view was linked to its managers' sense of security. With most of its shares owned by a charitable institution, Barings was safe from takeover.

It was not, however, safe from Nicholas W. Leeson. If Tom Wolfe had been born British (and thus even more obsessed about class than he already is), he would have written "Bonfire of the Vanities" about Nick Leeson rather than Sherman McCoy. Leeson grew up in a council house in Watford (a sort of soggier version of Pomona). Ambitious, quick-witted but not particularly clever (he failed his maths exam), it was only a matter of time before Leeson found his way to a dealing-room floor.

It is easy to caricature a City of London bank as a sort of "Upstairs, Downstairs" arrangement--with the chinless corporate financiers gliding around the Old-Mastered corporate dining rooms, while the Cockney barrow boys lark around the subterranean dealing rooms. Like most generalizations, it is factually inaccurate (there are plenty of public schoolboys hiding behind the tabloids in the dealing rooms; and many--perhaps most--of the svelte pin-striped creatures in the dining rooms came from modest backgrounds) but spiritually correct. Everyone upstairs tries to give the impression they have just had tea with the queen; everybody downstairs fancies himself (there aren't many "herselves") as bit of "a wide boy."

Leeson, who was wide indeed, did well in the city and was sent to Singapore. He does not seem to have made much effort to get on with the locals--there was an incident where he got into trouble for "mooning" in a bar. He played for a local soccer team, where he bragged not only that he could have been a professional soccer player but also that he was the highest-paid derivatives trader in Asia. The second boast, unlike the first, may well have been true.

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