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| | Not Just One Man - Barings |
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Case Studies
Not Just One Man - Barings
The chain of events which led to the collapse of Barings, Britain's oldest merchant bank, is a demonstration of how not to manage a derivatives operation. The control and risk management lessons to be learnt from the collapse of this 200 year-old institution apply as much to cash positions as they do to derivative ones, but the pure leverage of derivatives makes it imperative that proper controls are in place. Since only a small amount of money (called a margin) is needed to establish a position, a firm could find it facing financial obligations way beyond its means. The leverage and liquidity offered by major futures contracts - such as the Nikkei 225, the S&P 500 or Eurodollars - means that these obligations, once in place, mount very quickly; thus bringing down an institution with lightning speed. This is in stark contrast to bad loans or cash investments whose ill-effects takes years to ruin an institution as demonstrated by the cases of British & Commonwealth Bank or Bank of Credit and Commerce International (BCCI).
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