Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 6, 1995 TAG: 9503080022
SECTION: EDITORIAL PAGE: A6 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Medium
The ad is bogus (we made it up) but the particulars are true. An investment bank that financed the Napoleonic Wars and the Louisiana Purchase and serves the queen of England today - a conservative British institution with a 233-year history - was brought down by a 28-year-old futures trader in Singapore.
Is no one watching the young 'uns?
Nicholas Leeson incurred more than $1 billion in losses through unauthorized derivatives trading, bringing Barings to the point of collapse. A Dutch financial services group has offered to buy it for 1, or $1.59 - a steal, perhaps, even with the hundreds of millions of dollars in liabilities. Yet the deal would keep the failed bank intact, while allowing its Dutch savior to acquire Barings' rare, if not unique, global trading network in emerging-markets stocks.
When Barings first realized the depth of the calamity it was facing, financial analysts predicted a new push for tighter regulation of derivatives, the returns of which are linked to returns on other financial assets, such as stocks or commodities. This is high-risk investment of the kind that drove Orange County, Calif., into bankruptcy.
But derivatives also are used to hedge bets - to stabilize risk, in other words. And Barings, for all its history and tradition, clearly suffered from lax internal controls. In the United States, regulators have assured Congress that surveillance of U.S. derivatives markets makes a similar trading disaster unlikely - but not impossible.
It would be unreasonable, though, to expect any amount of government regulation to eliminate high-stakes gambles in risky ventures. Whether your financial value is measured in the thousands, millions or billions, you shouldn't bet more than you can afford to lose. It's that simple.
Barings management presumably knew that, of course. Perhaps the new lesson here is: Don't trust anyone under 30. With the power to lose all your money, anyway.
by CNB