City panic changed to disbelief

JOHN EISENHAMMER

Financial Editor

The Barings catastrophe provoked panic among City investment banks. But they were less worried that others would be brought low by the contagion of collapse, than suffering an eruption of the fear that stalks every high-risk taking financial business - are we next?

Barings collapsed not just because a young trader halfway across the world bet more than twice the capital of the bank on hare-brained derivatives speculation, but because Barings' entire risk-management system failed to spot what was going on.

The big trading houses spend fortunes on sophisticated computer technology and specialist departments whose vital daily task is to monitor and control the risks involved, as billions of pounds change hands, and to ensure that no single trader steps out of line.

Suddenly, every bank felt terribly vulnerable. "Just days after the Barings collapse we had to present ourselves to the Barclays board and explain how this just could not happen here," says Graham Newall, chief executive of futures at BZW, Barclays investment bank. "We really believed that, but when we came back, we had to put our hands on our hearts and say, how can we be so sure?"

"Nobody slept well in the days immediately following Barings," said the head of risk management at another City investment bank. "There was a frenzied rush to make sure that every banker's worst nightmare could not happen here."

As more details seeped out about how Barings collapsed, the less threatening it appeared for other finance houses. Even to this day, senior bankers in the City shake their heads in utter disbelief at how Britain's oldest merchant bank managed to run a securities business with such a total lack of the most rudimentary checks. The reports by both the Bank of England's investigators and those of the Singapore authorities painted a garish picture of rampant managerial arrogance and incompetence, which Nick Leeson exploited with apparent ease.