Barings Nearly Failed in 1890 Too, and That Time It Was Rescued
A century before Nick Leeson, the same bank was brought close to collapse by Argentine investments and was saved by a coordinated rescue that established a template.
The First Crisis
Barings Brothers was among the most prestigious merchant banks in London when it came close to failure in 1890, roughly a century before the trading losses that finally destroyed it.
The cause was exposure to Argentina. The bank had underwritten substantial quantities of Argentine government and municipal securities during a period of heavy British investment in the country. When Argentina experienced a financial and political crisis and defaulted, Barings was left holding securities it could not sell and obligations it could not meet.
The Underwriting Risk
The mechanism is worth understanding because it still applies. An underwriter commits to purchase a securities issue and then resell it to investors. Between those two events, the underwriter holds the entire issue on its own balance sheet.
If investor appetite disappears in that window, the underwriter owns securities it intended only to pass through. Barings had underwritten heavily and was left holding the inventory when the market closed.
An underwriter is a temporary owner. When distribution fails, temporary becomes indefinite, and the position was never sized to be held.
The Rescue
The Bank of England, under Governor William Lidderdale, concluded that a Barings failure would threaten the wider London market given the bank's interconnections.
Rather than lending directly on its own, it organised a guarantee fund subscribed by other banks and financial houses, who collectively agreed to cover losses arising from the orderly liquidation of Barings' position. The Bank of England also obtained support from the Bank of France and Russian sources to bolster its own reserves.
The arrangement worked. Barings was reconstituted as a limited company and continued operating, and the market avoided a broader panic.
Why It Is a Template
Several features recur in later interventions. A central bank coordinated rather than simply funding, which spread the cost across the institutions that benefited from stability. The intervention was organised over a short period, before markets could react to uncertainty. And the failing institution's shareholders bore losses while the system was protected.
That combination, protect the system and impose losses on the owners, is the stated principle of modern resolution frameworks. It was being practised in 1890.
The Uncomfortable Symmetry
The same institution failed a century later through a single trader's unauthorised positions, and that time no rescue was organised. It was sold for a nominal amount.
The difference reflects changed judgment about systemic importance. In 1890 Barings was central to London's financing of international trade. By 1995 it was a mid sized institution whose failure could be absorbed, and authorities concluded that a rescue was neither necessary nor appropriate.
The same name, two failures, two opposite decisions, driven by what the institution meant to the system at the time rather than by any principle about rescuing banks.
The Bottom Line
Barings was saved in 1890 because it mattered to the system and abandoned in 1995 because it did not. Whether an institution is rescued depends on its interconnections rather than on its history or its name.