Barings Bank Collapse

The Barings Bank Collapse case is a classical example of the capability of one individual to completely destroy an organization. The Barings Bank was a 233 year old organization in 1995, when it was declared bankrupt. Nicholas 'Nick' Leeson, now famous(or infamous!) as 'The Rogue Trader', used the bank's money to involve in what is known as 'derivatives futures trading' and ended up causing a massive loss of about USD1.4 billion to the bank.

If we drill down, we realize that the key issues which caused this financial catastrophe were

1. A bad Organizational structure

2. Careless Empowerment

3. Cultural differences within the organization

4. Greed

Analysis of the issues

1. Organizational structure

The snapshot of the organizational structure from 1992 to 1995 shows us the deficiencies of the system. In 1995, Nick Leeson was effectively reporting to three people -

- locally to Simon Jones

- co-ordinated with Fernando Gueler in Tokyo

- Mary Walz

This non-clarity of reporting hierarchy continues as we move up the organization, where we have Simon Jones reporting to James Bax and also Geoffrey Barnett. As a result of this 'fuzziness' in reporting structure, we have a situation where no single manager is accountable to the actions of the sub-ordinate (in this case - Nick Leeson). Each of the bosses assumes that the other boss is validating the actions of the sub-ordinate. This lack of accountability is compounded when the bosses themselves do not have a single boss to report to. The lack of a proper hierarchical structure seems to have played the most important role in the collapse of the bank.

2. Empowerment

'Careless Empowerment' (though the phrase sounds a paradox) seems to be the second most important reason for the collapse of the bank. Nick Leeson started off as a back-office staff, and to his credit, he was good at his job and set right the mess in the back offices of Jakarta and Hong Kong. But, the fact that he was successful in Jakarta and Hong Kong should not have blinded the eyes of the management that he was applying to a front office position (a trader's position) in Singapore. The front office and the back office operations are essentially complimentary jobs and one needs to be cross-verified with the other. Giving both these operations to the same person was an invitation to trouble.

3. Cultural differences

The root of the cultural differences goes back to the merger of Barings Brothers with Barings Securities Ltd. Barings Brothers was a 'conservative and risk-averse bank' whereas Barings Securities was a 'free-wheeling enterprise with an aggressive, proactive approach'. As a result of this basic difference in the cultures