Unauthorized gambling in the Asian futures market has forced one of Britain's oldest and most prestigious investment banks into bankruptcy.
A trader at Baring Brothers made unauthorised deals exposing the historic bank to losses of at least 800 (M)million dollars. That trader reportedly has fled Singapore.
The bank's collapse has triggered a major sell - off on the Tokyo stock exchange.
The Bank of England - the U.K.'s central bank - worked hard over the weekend to prepare a rescue package for Barings - England's sixth largest merchant bank.
Deadline for the deal was 2100 GMT Sunday night when the first financial market opened in Tokyo. But, as the minutes ticked by, a last-minute reprieve for Barings became unlikely.
Finally, a Bank of England statement indicated that all rescue attempts had failed and the bank - which boasts Queen Elizabeth II as one of its customers - would go into receivership.
The statement said that contracts concerning "unauthorized dealings" remained open, exposing Barings to unquantifiable further loss.
The central bank, which put the trading losses at more than 500 million British pounds, or $780 million, stands ready to provide money to the banking system to ensure that it functions normally and that London markets open as usual this morning (Monday).
Meanwhile, the hunt is on for one of Baring's key traders who's disappeared from the bank's trading arm in Singapore.
Twenty-eight year old British derivatives trader, Nick Leeson, is thought to have left Singapore for Malaysia.
Before his unexpected departure, Mr Leeson was involved in buying and selling financial contracts in a way which offers high rewards, but high risks. Under such contracts a trader guarantees investors an agreed cash return on the value of the markets at some future date, even if the market has actually fallen by then.
The derivatives market is thought to be worth up to 14 trillion U.S. dollars. Had the markets risen in recent trading, a trader would have made millions, because he would only have had to pay clients the previously agreed, lower return.
It was because the markets fell that the dealings came to light last Thursday.
Financial experts are questioning just how much similar dealing could be going on behind the scenes of other financial institutions.
Derivatives have also be tied to recent bankruptcies in the United States.
The Bank of England confirmed that Barings has been the victim of losses from unauthorized dealing by a trader in Southeast Asia.
"As a result," the central bank said, "Barings cannot continue trading and is applying for administration."
Alex Brummer, Financial Editor of the Guardian newspaper, explains the possible implications for Asia's financial markets.
"Well I think in Asia clearly there's going to be tremendous worries about the kind of financial controls and the regulation of derivatives markets in that part of the world. Although the Bank of England is the lead regulator in this particular case, because Barings is a British bank and the Singapore monetary authorities are actually responsible for watching the affairs of a trader in Singapore, and there are going to be questions there about whether these monetary authorities which are relatively new to this particular game, are strong enough and know enough about the trades in which they are supervising, to act as effective regulators, so I think that's a question which is going to have to be asked".
SUPER CAPTION: Alex Brummer - Financial Editor, The Guardian
The Bank of England stressed that Barings problems were "unique to Barings" and should not have implications "for other banks operating in London."
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