COMMENT : Barings can't heap all the blame on `Mr Simex'

Barings' plight was already known about or guessed at by rival market players, who were prepared to hammer it for all it was worth

As the dust begins to settle on the Barings collapse, what emerges is a tale of greed, overweening ambition, incompetence and regulatory failure on a grand scale. To blame the debacle on the antics of a rogue trader who stupidly overreached himself, as the top brass at Barings and the Bank of England were yesterday, is simply not credible. It doesn't stack up. As our reports show, Nick Leeson, the Singapore trader whose wild transactions sunk the bank, was a young man whose hubris, ego and belief in himself should have sent out a siren warning to any responsible financier.

But instead of confining and limiting him, his superiors in both the Far East and London encouraged and flattered him. Dazzled by his reputation as Mr Simex, the man who made and moved markets, and hypnotised by his money-making powers (more illusory than real), they gave him all the head he needed to take everyone for a gigantic ride. Mr Leeson and his five other Singapore International Monetary Exchange (Simex) traders, were allowed to run amok. So long as he was making money, which apparently he did in large quantities, nobody much cared what he was doing. Until things went so badly wrong, colleagues believed that Mr Leeson's bet on the Japanese market was in the money to the tune of $40m.

There was fraud involved, undoubtedly, but there was also a failure of management control which, even in the most unprofessional of financial institutions, would have been hard to explain or comprehend. As it was, this was one of the oldest and most venerable banks in the City, one, moreover, with the Bank of England's official stamp of supervisory approval. Not in their wildest dreams would the 3,000 Barings depositors whose £1.5bn is now at risk have believed that the bank would have dabbled in markets it neither understood nor was properly qualified to operate in.

And there is worse. Mr Leeson plainly took elaborate steps to convince everyone that he was playing safe but the scale of what he was up to should have set alarm bells ringing. As long as three weeks ago, the vast Barings positions in Japanese futures were common gossip. Far from worrying about the position, which Mr Leeson told colleagues would make the bank a fortune, or attempting to close him down, one of the bank's top executives flew over from London to offer him a near £1m bonus. That is what Barings' Singapore office believes, anyway. So huge and unusual was Barings' exposure, that rival traders found it hard to believe the bank was trading on its own account. Sensing blood, they moved in for the kill, betting against Barings in increasing numbers. "We're going to bust that bank", one trader is reported to have told a select luncheon group in London two weeks ago. Fraud or no fraud, you would have thought that even those as soundly asleep as the Barings people plainly were would have been awoken by gossip of this sort.

In the week before Mr Leeson's sudden disappearance on Thursday, an elaborate but fruitless attempt was made to hedge and limit the trader's ruinous losses using other derivative instruments. It is not clear at this stage whether this operation was undertaken by Mr Leeson or other bank officials. Either way, it was by then too late. Barings' plight was already known about or guessed at by rival market players, and they were prepared to hammer it for all it was worth.

"Error account 8888", through which some of Mr Leeson's transactions were booked, never appeared on any of the compliance or financial reports being sent to London and outside regulators. Furthermore, fictitious transactions were created in the name of non-existent customers in an attempt to show that the risk was being hedged or spread. But the idea that nobody knew about the massive positions is so much tosh. Certainly colleagues knew about it and it can only be presumed that London would have been kept abreast of the huge profits they all thought Mr Leeson was making.

From the outside at least, it appears there is no defence for the people who run Barings Securities, or for the board of the main plc. The Bank of England's position is less easy to judge. As the central bank responsible for supervising Barings, it might be argued it must bear ultimate responsibility. No amount of supervision, however, can guard against a management determined to ignore or tolerate what is going on under its nose.

Most supervision relies on the information that management provides. Furthermore, it may be well nigh impossible to regulate adequately the activities of traders in far-off places dealing in highly complex global markets. It would require a level of international co-operation so far undreamt of. It might also be so costly as to make these new markets largely redundant.

So far the Bank seems largely to have got away with it. Nobody much blames it for what happened at Barings, nor has there been much comment or adverse market reaction on the extraordinary about-face that took place over the weekend. The message coming out of the Bank on Sunday, as it desperately tried to persuade bankers of the need for a lifeboat, was that it would be calamitous for the City and world markets for Barings to be allowed to go to the wall. That message changed dramatically when it became apparent that bankers would not fall into line. By yesterday morning this was a tragic but isolated incident whose knock-on effects were containable. Judging by the subdued reaction of markets yesterday that may be the right analysis. For rival bankers, the upshot was the demise of a competitor, not the financial Armageddon some predicted.

We don't yet know what the long-term effects will be. The Japanese futures positions do not expire until 10 March; it is by no means clear at this stage who is going to meet or fund the losses, which are escalating exponentially. Japanese equity strategies talk of the need for potentially dramatic action by the Japanese authorities, possibly a cut in interest rates, to prevent the market being further undermined. Certainly the Barings administrators are in no position to pay the losses.

Ultimately they may have to be paid by the 37 institutions who underwrite Simex. In these circumstances, the Bank of England, as the central bank responsible for supervising Barings, would be under strong pressure to contribute.

In its own interests, therefore, the Bank needs to take swift and effective action to prevent similar calamities. Barings may well prove just the hors d'oeuvre. The main course, when it comes, really could herald the Armageddon the doomsters predict.