Thoughts On The Collapse Of Baring Bank

пЃ¬ Events leading to Barings Bank's collapse

Barings Bank's activities in Singapore between 1992 and 1995 enabled Nick Leeson to operate effectively without supervision from Barings Bank in London. Leeson acted both as head of settlement operations (charged with ensuring accurate accounting) and as floor manager for Barings' trading on Singapore International Monetary Exchange (SIMEX), though the positions would normally have been held by two employees. This placed Leeson in the position of reporting to an office inside Barings Bank which he himself held. Several observers (and Leeson himself) have placed much of the blame on the bank's own deficient internal auditing and risk management practices.

Because of the absence of oversight, Leeson was able to make seemingly small gambles in the futures market and cover for his shortfalls by reporting losses as gains to Barings in London. Specifically, Leeson altered the branch's error account, subsequently known by its account number 88888 as the "five-eight account", to prevent the London office from receiving the standard daily reports on trading, price, and status. Leeson claims the losses started when one of his colleagues bought contracts when she should have sold them

Using the hidden "five-eight account," Leeson began to aggressively trade in futures and options on SIMEX. His decisions routinely lost substantial sums, but he used money entrusted to the bank by subsidiaries for use in their own accounts. He falsifed trading records in the bank's computer systems, and used money intended for margin payments on other trading.

Barings Bank management in London at first congratulated and rewarded Leeson for what seemed to be his outstanding trading profits. However, his luck ran out when the Kobe earthquake sent the Asian financial markets into a tailspin. Leeson bet on a rapid recovery by the Nikkei Stock Average which failed to materialize.

By this time, Barings Bank auditors finally discovered the fraud, around the same time that Chairman Peter Barings had received a confession note from Leeson, but it was too late. Leeson's activities had generated losses totaling Ð'Ј827 million (US$1.4 billion), twice the bank's available trading capital. The Bank of England attempted a weekend bailout but it was unsuccessful. [2] Barings was declared insolvent February 26, 1995. The collapse was dramatic, as employees around the world were supposed to have received their bonuses that were suddenly withheld.

Barings was purchased by the Dutch bank/insurance company ING for the nominal sum of Ð'Ј10 along with assumption of all of Barings liabilities. Barings Bank therefore no longer has a separate corporate existence, although the Barings name still lived on as Baring Asset Management. BAM was split and sold by ING to MassMutual and Northern Trust in March 2005.

пЃ¬ Personal thoughts on this event

Perspective on the entire incident, we have the following revelation: to strengthen the internal management of financial institutions. In the financial history, it was a common place that a bank broken down. Generally speaking, a bank’s collapse is often due to its distempered company mechanism, and the accumulated problems come from the operators to the managers. Bahrain Bank Group as a company which has a long financial history in the United Kingdom and has played an important role to the United Kingdom’s economic, it was supposed to be operated under an efficiency regulation system, but in fact there were some serious abuses existed in its internal management. Baring bank allows Risen to play concurrently dual roles, both as head of settlement operations (charged with ensuring accurate accounting) and as floor manager for Barings' trading on Singapore International Monetary Exchange (SIMEX). It actually shows that the bank's management system is not serious enough. This event reminds people the importance and necessity to strengthen internal management. We should use derivatives more scientifically and establish the risk prevention measure.

Thoughts on the collapse of the Bear Stearns

пЃ¬ Review of the event

On June 22, 2007, Bear Stearns pledged a collateralized loan of up to $3.2 billion to "bail out" one of its funds, the Bear Stearns High-Grade Structured Credit Fund, while negotiating with other banks to loan money against collateral to another fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund.[3] The funds were invested in thinly traded collateralized debt obligations found to be worth less than their mark-to-model value. Merrill Lynch seized $850 million worth of the underlying collateral but managed to auction only $100 million of them. The incident has sparked concern of contagion as Bear Stearns may be forced to liquidate its CDOs, prompting a mark-down of similar assets in other portfolios.[4][5] Richard A. Marin, a senior executive at Bear Stearns Asset Management responsible for the two hedge funds, was replaced on June 29 [6] by Jeffrey B. Lane, a former Vice Chairman of rival investment bank, Lehman Brothers.

During the week of July 16, 2007, Bear Stearns disclosed that the two subprime hedge funds had lost nearly all of their value amid a rapid decline in the market for subprime mortgages.

On August 1, 2007 investors in the two funds finally took action against Bear Stearns and its top management, including the funds' manager, Ralph Cioffi. The law firms of Jake Zamansky & Associates and Rich & Intelisano both filed arbitration claims with the National Association of Securities Dealers alleging that Bear Stearns misled investors about its exposure to the funds. This was the first legal action made against Bear Stearns, though there have been several others.[7] On August 5, 2007 Co- President Warren Spector was forced to resign as a result of errant trades that led to the collapse of two hedge funds backed primarily by subprime loans.

On September 20, Wall Street Joural reported "Bear Stearns posted a 61% drop in net, hit by hedge-fund losses".

пЃ¬ The reason for this crisis

On the side of the external financial environment, it can be concluded to these two main reasons. The one is of course due to the Subprime mortgage hedge fund crisis, which had made Bear Company involved in a huge lost. And the other reason is because of the disaster of liquidity. As Bear Stearns adopted a high ration leverage, when