presentation of case

8/13/2019 Presentation of Case

1/26

SHAFAHAD M SHAHZEB KHAN Hashmatullah

BARRINGS BANK


2/26

What is a Bank???


3/26

Barings Bank

Barings Bank(1762 to 1995) was the oldest bank in London until itscollapse in 1995.

The bank was established in 1762 by two sons of German

1995 Was the end of 233 years old bank

4,000 employees

Assets of $10 billion in 1994,

Market of Asia, Latin America and Eastern Europe Its moneymanagement arm managed about $46 billion

Customers, Queen of England.

Talented corporate finance team

Good connections in British industry.

Re opening of trade with America.

Helped US.


4/26

1995 the chairman was PeterBaring


5/26

COUNT.. Barings concentrated on the old-fashioned business.

Securities trading arm (1984).

Clash of cultures.

Investment banking and securities operations.


6/26

Count.. Barings joined a growing list of organizations that had lost

vast sums of money on derivatives trading, includingMetallgeSellschaft

AG of Germany (lost $1.3 billion), Procter &Gamble (lost$102 million), Kidder Peabody & Co.(lost $350 million), andOrange County of California(lost $1.7 billion).


7/26

DerivativesA security whose price is dependent upon or derived from

one or more underlying assets. The derivative itself is merelya contract between two or more parties. Its value isdetermined by fluctuations in the underlying asset. The mostcommon underlying assets include stocks, bonds,commodities, currencies, interest rates and market indexes.


8/26

Conti

Currency.

Commodity.

Stock.

Forward contract.

Future contract.


9/26

Example of a derivative contract for a

currency

Derivatives are generally used as an instrument to minimize

risk, but can also be used for planning purposes. Forexample, a European investor purchasing shares of an

American company of an American exchange (using U.S.dollars to do so) would be exposed to exchange-rate riskwhile holding that stock. To hedge this risk, the investor could

purchase currency futures to lock in a specified exchangerate for the future stock sale and currency conversion backinto Euros.


10/26

Example of a derivative contract for acommodity

Consider A Company That Knows It Will Need To Purchase 1 Million

Barrels Of Oil In Six Months. Imagine that the current price of oil is $15 per barrel, but the company

fears that the price may rise substantially over the next six monthsbecause of turmoil in Saudi Arabia, the worlds largest oil exportingnation.

The company can either wait or bear the risk that the price of oil mightraise in six months, or it can enter into a futures contract today.

Under this contract, it might agree to purchase the price of oil in sixmonths at $16 per barrel. The $1 difference between the price of oiltoday and the price specified in the contract represents an insurance, orhedge, against a possible rise in the future price of oil. By entering intothe contract, the company has reduced its exposure to future rises in oilprices; it has reduced its risk.


11/26

Example of a derivative contract for

a stockA stock option is a contract that gives the owner the right to

purchase or sell a specific number of shares at a fixed pricewithin a definite time. For example, imagine that you hold 1,000 shares of Compaq

Computer, which is trading at $50 per share (the market value ofyour holding is $50,000). You fear that due to a temporaryslowdown in the growth rate of personal computer sales, theprice of Compaq might fall in the near future, but you dontwant

to sell the stock because you like Compaqs long-termprospects. You know that it is by no means a sure thing that sales are

slowing, and Compaq could continue to do well even if sales doslow. You might decide to take out insurance against thepossibility that the stock will fall by purchasing a put option.


12/26

NICK LEESON

27-year-old Englishman.

Employed at the Singapore office of Britains oldest bank,Barings.


13/26

He was your average English guy who likes to go out for abeer after work, and sometimes has a few too many. Iwouldnt have said anything negative about him.


14/26


15/26


16/26

PUT OPTION SELLING ORIENTED


17/26

CALL OPTION BUYING, PURCHASING


18/26

RESIGNATIONS Things came to ahead. ($20 million loss)

Christopher Heath, the head of Barings Securities in 1992.

Andrew Tuckey, the deputy chairman of Barings.


19/26

YOU MAY THINK?????

How is it possible that this one man

was able to cripple a financial giant?

What was the role of senior management in this situation anddid they contribute to the demise?

How effective were the internal control systems and was theSingapore operations managed effectively?


20/26

Nicholas LeesonThe Rogue Trader

Worked for Morgan Stanley after graduating university. Hired as a relatively young clerk, he went to Barings' Singapore

office in 1992.

He was put in charge of operations for Barings Singapore Later in1992 many Japanese institutional

Leeson alone made about 10 million Pounds that year, which wasabout 10% of the bank profits of that year.


21/26

BARING BANK COLLAPSE The financial collapse in 1995 of one of the World oldest

banks Baring Bank which had been the Banker to the British royal

family

Nick leeson a Singapore based trader for the bank made aseries of bad trades over a several year period and produced

the Baring failure


22/26

AFTERMATH ING a Dutch bank purchased Barings bank for nominal sum

of one pound and assumed all of Barings' liabilities In 2001 ING sold the U.S based operation to ABN Amro for

$275 million

In March 2005 Baring Asset Management was sold by ING toMass Mutual


23/26

INTERNATIONAL

Baring private Equity International which includes investment teamswere acquired by respective by its respective management teams

In following countries

Asia

India

Russia

Latin America


24/26

LEESON IN JAILAfter Barings' collapse Leeson booked a flight to London to

surrender In German prison for several months

In Singapore prison for six and half year

Released early in 1999 after being daignosed with coloncancer


25/26

NICK LEESON IN IRELAND Nick Leeson now living in Barna County Galway in the west

of Ireland Occasional guest lecturer

Commercial manger

General manger

CEO Released a new book


26/26

Discussion Quest ions

1. Why do you think critics are worried that the rapid

growth in the use of derivatives might destabilizeglobal financial markets?

2. Do you think derivatives are risky and speculative financialinstruments or instruments that can be used to reduce aninvestors risk?

3. Does the collapse of Barings expose a fundamental flaw inthe global financial system? If so, how might this flaw befixed?

4. What is your view on the basic causes of the collapse ofBarings Bank?

presentation of case

Documents