Monday, March 2, 2020

bank crash .. .. Barrings Bank's fall - Leeson, who ?


Heard of the saying ~ ‘let your first spending be Savings !’.  A couple of decades or so ago, elderly people would emphasize the need for savings and advise youngsters to start Saving the moment they started earning.

Once you make a small surplus over expenditure – there are multiple avenues for putting your money in .. .. it was always advised to go for safe-keeping – not to bury them in earthen pots but put them in Bank deposits.  For Southerners, it was ‘Sundaram Finance’ – the first choice investment option.  For those not venturing into shares, mutual funds and the like, it was traditionally banks.  Banks – be it Nationalised, or Cooperative or others – have enjoyed a high level of trust with depositors.  The safety perception is higher in PSU banks (called Govt banks).  There are many of big Private banks which would easily form part of the list. One would be surprised to see that people get attracted to Chit Funds not necessarily the famous, established and tried ones, but also the ones run in Office by employees / part-time employees.  In Triplicane, Balussery Chit Fund enjoys the confidence of investors.  Have also known some circumstances where the person running the Chit ran away, leaving those invested in lurch. There was one such famous Chit fund which came a cropper bringing its investors on the streets, because it financed a much-hyped trailer of a film, which never hit the screens.

Miles away, in UK, on 5 Apr 2007, The Guardian newspaper reported that KPMG, the liquidators of Barings PLC, had sold a trading jacket thought to have been worn by Nick Leeson while trading on SIMEX in Singapore. The jacket was offered for sale on eBay but it failed to reach its reserve price despite a highest bid of £16,100. It was subsequently sold for £21,000.  Sounds bizaree – and Leeson, who ?

Though people continue to paint it wrong stating that thousands stood in queue in front of Bank – the demonetization did not affect people like me a wee bit.  I never stood in any queue of more than 15 people and never spent time more than 30 mins in any Bank for any transaction.  People did wait outside the Bank anxiously – nay, not after demon – but after news / rumours of Bank crashing !   it has happened to some Banks and some financial institutions too.  A few months back, financial behemoth IL&FS created a crisis of confidence in India’s shadow banking sector, fresh skeletons once again tumbled out of India’s beleaguered financial sector. Officials at PMC bank admitted in an explosive letter that they had cooked their books to avoid recognizing bad loans to one of their major clients, trouble-ridden real estate developer, HDIL Ltd.

Around the same time, the Yes Bank stock was hammered, primarily on account of concerns relating to its exposure to another troubled shadow bank or non-banking financial company (NBFC), Indiabulls Housing Finance Ltd. Concerns over asset quality have since then spread to other parts of the financial system. The RBL Bank’s stock price slumped to a record low last week amid concerns over its corporate loan book. IndusInd Bank  also faced tough questions on its loan-book from analysts after it declared a higher-than-anticipated jump in provisions for bad loans .  There were to be more knockings -  news came that Punjab and Maharashtra Co-operative Bank (PMC) used more than 21,000 fictitious accounts to hide loans it made, according to a police complaint lodged by officials, in the latest banking fraud case to spook the country’s depositors and investors.

Do you remember Harshad Mehta, were you actively involved in share market those days ? – and most likely you would have lost some money too in early 1990s.  Harshad Mehta was an icon stock broker, then fell to disgrace, charged with numerous financial crisis in 1992 securities scam.   Of the 27 criminal charges brought against him, he was only convicted of four, before his death at age 47 in 2001. It was alleged that Mehta engaged in a massive stock manipulation scheme financed by worthless bank receipts, which his firm brokered in "ready forward" transactions between banks.

Away, the  Baring family is a German and British family of merchants and bankers. In Germany the family belongs to the Bildungsbürgertum, whereas in England it belongs to the aristocracy.  Bildungsbürgertum is a social class that emerged in mid-18th century Germany as an educated class of the bourgeoisie with an educational ideal based on idealistic values and classical antiquity.

Barings Bank was a British merchant bank based in London, and the world's second oldest merchant bank (after Berenberg Bank). It was founded in 1762 by Francis Baring, a British-born member of the German-British Baring family of merchants and bankers.  Francis Baring’s older brother John Baring was a silent partner. They were sons of John (né Johann) Baring, wool trader of Exeter, born in Bremen, Germany.   …. .. and after centuries of existence, the  bank collapsed in 1995,  suffering losses of £827 million resulting from fraudulent investments, primarily in futures contracts, conducted by its employee Nick Leeson, working at its office in Singapore.

In 1774, Barings started business in the US. By 1790, Barings had greatly expanded its resources, both through Francis' efforts in London and by association with leading Amsterdam bankers Hope & Co. In 1793, the increased business necessitated a move to larger quarters in Devonshire Square. In 1796, the bank helped to finance the purchase of about 1 million acres (4000 km2) of remote land that would become part of the state of Maine.  .. … they kept growing till that massive trading loss   caused by fraudulent trading by its head derivatives trader in Singapore, Nick Leeson. Leeson was supposed to be arbitraging, seeking to profit from differences in the prices of Nikkei 225 futures contracts listed on the Osaka Securities Exchange in Japan and on the Singapore International Monetary Exchange. However, instead of buying on one market and immediately selling on another market for a small profit, the strategy approved by his superiors, Leeson bought on one market then held on to the contract, gambling on the future direction of the Japanese markets. Under Barings Futures Singapore's management structure through 1995, Leeson was not only floor manager for Barings' trading on the Singapore International Monetary Exchange, but also the unit's head of settlement operations. In the latter role, he was charged with ensuring accurate accounting for the unit.   After the collapse, several observers, including Leeson himself, placed much of the blame on the bank's own deficient internal control and risk management practices.  By Dec 1994, Leeson had cost Barings £200 million.   In Feb 1995, Leeson left Singapore to fly to Kuala Lumpur. Barings Bank auditors finally discovered the fraud around the same time that Barings' chairman, Peter Baring, received a confession note from Leeson. Leeson's activities had generated losses twice the bank's available trading capital.

.. .. but the management could allow one man to cause its downfall, is too unbelievable to be true. .. .. back home in Madras - Arbuthnot & Co was a mercantile bank, founded as Francis Latour & Co in the late 18th century, then became Arbuthnot De Monte & Co and failed spectacularly on 22 Oct 1906.  Around that time, Madras was hit by the worst financial crisis the city was ever to suffer. Of the three best-known British commercial names in 19th century Madras, one crashed; a second had to be resurrected by a distress sale; and the third had to be bailed out by a benevolent benefactor. The agency house to close shop, Arbuthnot's, was considered the soundest of the three.  When it fell, thousands lost their savings and the good name of British stability was severely rocked.

With regards – S. Sampathkumar
26th Feb 2020.

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