The Collapse of Barings Bank and Lehman Brothers Holdings INC: An Abridged Version

Bank crisis can mostly be traced to a decrease in the value of bank assets. Banks are vulnerable to a number of risks. This happens in one or a combination of the following incidences; when loans turn bad and cease to perform (credit risk), when there are excess withdrawals over available funds (liquidity risk) and rising interest rates (interest rate risk). Bad credit management, market inefficiencies and operational risk, among a host others can trigger panic withdrawals by depositors with a sense of insecurity emanating from the fear of loss of investment. In fact, the failure of Barings Bank and Lehman Brothers Holdings Inc was attributable to varied factors spanning from non-monitoring of employee activities, management’s involvement in dubious accounting practices, unethical business practices by management, over indulging in risky and unsecured derivative trade. To guide against similar bank collapse in the near future, there should be an enhanced communication among international regulators and authorities that exercise oversight responsibilities on the security market. National bankruptcy laws should be invoked to forestall liquidity crisis so as to prevent freezing of margins and positions of solvent customers.


INTRODUCTION Background Information
Events chronicling firm failure globally have become those of case studies, especially in the risk financial institutions (Howells & Bain 2000). It is clear that bank crises occur when there is excess expenditure on investment due to low generated income emanating from bad credit management, market inefficiencies and operational risk. These undoubtedly trigger panic withdrawals by depositors for fear of bank collapse. Indeed, it constitutes a half baked discussion on global bank collapse without a mention of Barings Bank, Enron and Lehman Brothers Holdings Inc as central points of reference to emerging financial malfeasance. History identifies the year 1995, 25 February as a period that witnessed the unfortunate and unbaillable collapse of Barings bank of England. The root cause of the collapse of this pioneer merchant bank (Barings bank ) was the over ambitious engagement in a secret derivative trade by one of its employees ( Nick Leeson). He diverted funds for derivative bets and to hide losses from his nefarious futures / options trade activities, Nick Leeson created a hidden account known as the Error Account with number 99905 and later 88888 to shield losses with trade reconciliations (Drummond 2008).
With an asset base of $639billion and $619billion in debt, the bankruptcy proceedings of Lehman Brothers Holdings Inc were initiated in 2008 September 15, forming the largest initiated proceedings in the history of the US. Wiggins, Piontek and Metrick (2014) reveal that at the time of Lehman 2 Brothers' Bank failure, it was the fourth largest investment bank with an estimated employee strength of 25,000. Lehman Brothers rose to dramatic heights but thereafter witnessed a dizzying distressful situation when it filed for bankrupt in the 3 rd quarter of 2008. In fact, the fated financial institution's bankruptcy had a toll on its employees as they were seen mostly clothed in office suits leaving the bank's global branch offices in anguish. Equally engaged in derivative commercial activities, Lehman Brothers held an estimated 5 percent outstanding of the world's derivative engagement (Wiggins et al 2014;Sarno & Martins 2018). Unfortunately, many are still caught up in abeyance of how such powerful institution could go bankrupt.
What however escaped the puzzling public was that, Lehman Brothers' balance sheet figures did not reveal the type of business entered into, although it showed a concentration of most important instruments.

Empirical Evidence from Barings and Lehman Brothers' Banks
Barings Bank was, as at then (1890)

Similarities in Causes
How were the causes of collapse similar in both cases? First, there was a firm commercial trust in potential gains in derivative trade. Both Banks' management held the believe that by engaging in derivative transactions aside the core business function was an assuring way to harvesting profits to make for losses in other commodity trading. While Barings engaged in options and  (Minsky 2016). Prior to their collapse, Lehman Brothers ventured into numerous risky unproductive investments besides taking huge residential loans, these undoubtedly played roles in its failure (Murphy 2008;Kimberly 2011). One other revealing cause that appeared similar in the collapse of these banks was liquidity crisis. Inability of the two giants to oblige to claims by creditors with immediacy was central in their distress (Vlukas 2010). For instance, Lehman lost its market confidence as most banks refused them credit facilities in spite of their asset base (D' Arcy 2009). In fact, to this end, the confidence of customers and investors alike got eroded due to high debt to equity ratio (Mensah 2012). As were the case with Lehman Brothers, Barings Bank equally had serious challenges with liquidity credit risk. They failed to meet counterparty financial obligations.
It is apparent that, in the quest to attain expansion strategy and independent organisational aims, these two banks resorted to imprudent corporate governance practices, dubious mechanisms and unacceptable accounting

• Barings Bank
Unnecessary adherence to bureaucratic procedures of accomplishing daily task of the institution culminated into their failure. Notwithstanding the usage of excessive bureaucracy, management of Barings Bank were notoriously inefficient. This conspicuously led to their inability to detect the nefarious 6 activities of Leeson over such a long time (Samuelson 1996). Actions of employees were not monitored. For instance Leeson had no operational licence and independently worked without oversight supervision. Besides there was no segregation of duties among employees.

Lessons Learnt from the Bankruptcy
Being a painful crisis, the bankruptcy of both banks provided traders and regulators with the sense of anxiousness. Stake holders now understand that creating a marketplace and a regulatory system better prepares every player to withstand external shocks in the future. It is also learnt that capital adequacy is a basic must have to deter banks from engaging in excessive risk activities. It is now obvious that regulators of foreign exchanges need rigorous market surveillance and protection of customer funds. Improved mechanisms that serve to detect and address power concentration held in these markets threatens the market stability. It is clear that there was insider trading going on but shielded with pretence. Management should have adhered to advice given by the audit team on Leeson's activities.

Conclusion and Recommendation
Barings Bank's collapse together with the failure of Lehman Brothers' Bank serve as memorable bank crises in the history of Britain and US respectively.
It is clear that their collapse had a contagion effect on the global bank sector. Similarly, there should be enhancement of communication among international regulators and authorities that exercise oversight responsibilities on the security market. National bankruptcy laws should be promoted to forestall liquidity crises so as not to freeze the margins and positions of solvent customers.