Bank of England offloads blame for Barings collapse

JOHN EISENHAMMER, COLIN BROWN

and JOHN WILLCOCK

A 28-year-old derivatives trader from Watford and a 51-year-old middle- ranking official from the Bank of England yesterday bore the brunt of blame for last February's collapse of Barings, Britain's oldest merchant bank.

The official Bank of England report said Nick Leeson, the Singapore-based futures trader, ran up losses totalling pounds 827m which he covered up in secret accounts and false accounting. He was allowed to do so by Christopher Thompson, a senior Bank of England official who gave Barings a special waiver to fund hundreds of millions of share deals in the Far East and who resigned last week.

Eddie George, Governor of the Bank of England, said last night there would be no prosecutions of the 23 former Barings top executives, and that he could not rule out that they would take new jobs in the City.

Kenneth Clarke, the Chancellor, denied in the Commons that the banking regulatory system was at fault and blamed Mr Thompson, number four in the Bank's banking supervision division, for making "an informal concession" to Barings, allowing it to breach the safety margin imposed on all banks.

Mr Clarke, who faced Labour allegations of complacency, said the Board of Banking Supervision, which carried out the report, found a "number of shortcomings" and a "lack of rigour" by the Bank. MPs hooted in derision as he said: "The arrangements are as good as the people who carry them out."

Charging Mr Leeson with overwhelming responsibility for the collapse, Mr George said: "This was a premeditated thing, developed over a long period of time and with great care. The law will take its course."

The report could not determine Mr Leeson's motives nor could it rule out the possibility that he may have been acting with others. But Mr George said there would be no further resignations and sought to confine the blame within the bank to Mr Thompson.

However, the Chancellor's statement widened the damaging rift between the Bank and the Treasury over who should be responsible for regulating Britain's financial services. The 337-page Report of the Board of Banking Supervision inquiry into the circumstances of the collapse of Barings was the result of five months of investigation. However, the investigators did not have access to the key player, who is still in a Frankfurt jail awaiting a decision on an extradition request to Singapore. Nor did the inquiry receive much assistance from the authorities in Singapore, where Mr Leeson's ruinous derivatives speculation was carried out.

Mr Leeson's wife, Lisa, broke down and wept when told that her husband was the key focus of blame in the report. "I don't suppose we expected anything different," she said at Elizabeth's Tea Rooms in Maidstone, Kent, where she works as a part-time waitress. "We just feel as if we are in a deep, dark tunnel."

The report stated: "The Barings collapse was due to the unauthorised and ultimately catastrophic activities of, it appears, one individual [Leeson] that went undetected as a consequence of a failure of management and other internal controls of the most basic kind."

In considerable detail, the report traces how Mr Leeson used a secret account, 88888, to carry out trades for which he had no authority, and to hide the steady mounting losses. All this time his superiors in London and Singapore believed he was one of Barings' star traders.

He was due a bonus worth pounds 450,000 as reward for the profits he earned for the bank in 1994. In reality, however, by the end of 1994 the secret account already hid losses amounting to pounds 208m. After his double or quits gamble to extract himself from this ruinous derivatives speculation, Mr Leeson brought the bank crashing down in February.

Senior management, from Peter Baring, the former chairman, downwards, are castigated for running a global securities operation with hopelessly inadequate controls, and for failing to heed warning signs. "We consider that those with direct executive responsibility for establishing effective controls must bear much of the blame."

Labour and Tory MPs said Mr Leeson and Mr Thompson were being made scapegoats for the catastrophic losses and said they did not believe it could be blamed on one "rogue trader".

In spite of Mr Clarke's relaxed Commons performance, he was given a rough ride by his own side. Whitehall sources said he had briefed a hand-picked group of Tory MPs before the statement and had made clear in private that he had been deeply embarrassed by the failures at the Bank. "There was a great deal of embarrassment over this. He found little he could say that was good about it," said one source.

Mr George angrily rejected suggestions that the collapse of Barings had resulted from a breakdown in the City's old boys' network, or that the report had been soft on the Bank. "If you regard this report as old boy nod and wink I don't think you will find that the people out there do," he said.

How it happened, page 4

Leeson's battle, page 5

Leading article, page 14

Business comment, page 17

WHAT THEY SAID

'Barings' collapse was due to the unauthorised and ultimately catastrophic activities of, it appears, one individual (Leeson) that went undetected as a consequence of a failure of management and other internal controls of the most basic kind' Inquiry report 'The report must by its very nature be flawed since it was compiled without speaking to the central character in the collapse of Barings' Stephen Pollard, Nick Leeson's lawyer 'The report has provided a damning indictment of the Bank of England's whole approach to supervision of the banking system' Gordon Brown, Shadow Chancellor 'If you regard this report as an old boy nod and wink, I don't think that you will find the people out there do' Eddie George, Governor of the Bank of England