The rise and fall of the Barings banking dynasty

Barings Bank was one of the most prominent and oldest merchant banks in the world, with the family even earning the nickname 'the sixth great power'. Then it all came crashing down.

The 250-year-old Barings banking dynasty is best remembered nowadays for the bank's spectacular implosion in 1995, when rogue trader Nick Leeson incurred £800 million worth of unauthorised trading losses -- close to the total of its assets.

However, few remember that Barings bank was one of the most prominent banks in the world for two centuries. The Barings family founded not only the oldest investment house in Britain, but also financed the wars against Napoleon Bonaparte.

At the zenith of the Barings’ power, they were seen by many as a world power in their own right and had earned the nickname "the sixth great power". The other five were Britain, Russia, Prussia, Austria and France at the Congress of Vienna, which re-drew the European map after Waterloo.

Before we examine the rise and fall of this great family dynasty, it is necessary to say a few words about banking and family business. For all the modern gadgetry and imposing physical facades, in its essence, banking boils down to relationships and connections. Can we trust these people to honour their debts?

The 19th century popular economic journalist Walter Bagehot wrote that "the banker’s calling is hereditary; the credit of the bank descends from father to son; this inherited wealth brings inherited refinement."  Harvard economic historian David Landes argues that character and connections count foremost in banking, while technical knowledge also matters somewhat.

The banking industry is a fertile breeding ground for famous family businesses, including the Barings, Rothschilds and Morgans. Family Business will look at each of these in the coming weeks, but we will start with the Barings, the first modern banking family in Britain’s history.

In the 15th century, the Barings were Dutch wool millers from Groningen. In 1717, Johann Baring -- who had subsequently anglicised his name to John -- moved to Exeter, England to take up an apprenticeship at a major wool-exporting house. He set the wheels of the dynasty in motion by working hard and marrying assiduously.     

By the time he died, John had left a small fortune of about $US10 million in today’s money to his five children and his widow. Soon after his death, the Barings were already facing one of the great dangers of running a family business -- diversions and temptations of fortune.

How did the Barings deal with this problem? They were philoprogenitive, meaning they had a lot of kids. The idea is simple, enough kids ensure that there would at least be some talented offspring who wanted the chance of fortune in the family business. Outside talent was brought in when needed until some 'good' Barings turn up.

John, the eldest son, who had inherited the largest amount of money, was least interested in trade and only aspired to the easy-going life of a gentleman in the English countryside. It was the younger son Francis who leapt at the opportunity of international trade in London and became a merchant banker.

At the time of Francis’ death in 1810, he was “the first merchant in Europe: first in knowledge and talents, and first in character and opulence,” according to Philip Ziegler, who chronicles the family fortune in his book, The Sixth Great Power.        

Francis became the first merchant of Europe by financing Britain’s wars against a revolutionary France and then the Corsican upstart Napoleon Bonaparte. It must be noted that European monarchs loved their wars but often found their state coffers unable to support their oversized ambitions. Lending to kings was rewarding as well as a dangerous business. Many royal bankers became bankrupted or even worse, were killed by their creditors.

“Loans to kings were intrinsically risky. Sovereigns can delay, equivocate, repudiate, while business people are held to punctuality,” writes Landes. Fortunately for the Barings, Francis had backed the right horse in Britain, which had the most modern and powerful economy in Europe and arguably the world.

The Barings not only financed Britain’s war, but also France’s reparations after the defeat of Napoleon at Waterloo. The family made a spectacular £720,000 or $150 million in today’s money. Once again, the success caught up with the family, with more money and influence than ever, the Barings preferred country estates, titles and seats in the House of Commons than the drudgery of finance. Francis’ son Alexander became Lord Ashburton and brought in outsiders to manage the business.

The last notable Baring of the 19th century was Edward Baring, who was a senior partner at the firm. He brought the family to the verge of bankruptcy.  Thanks to Argentine revolutionaries, the bank’s loans to the country turned sour. At the time of the crisis, disparate branches of Baring circled their wagons around the family business.

Even estranged family members like Thomas Charles from New York withdrew bags full of notes, gold coins and securities from the Bank of England to see the family through the crisis. There was a tantalising story that Thomas Charles haggled with a coach driver over six pence! The Bank of England formed a syndicate to save the Barings family, one of the first modern case studies of being too big to fail.

The Argentine crisis was a turning point in the Barings banking dynasty. The firm was forced to abandon its private partnership structure with unlimited liability into Baring Brothers and Company Limited.  Even after the re-organisation, the Barings remained central to the bank’s management, and outside talent was largely responsible for the daily operations. 

In the decades that followed, family and outsiders alternated in the seat of power. It was during the leadership of Andrew Tuckey that the bank boomed in Asia and got into the highly lucrative but risky business of derivatives trading. That was the beginning of the end for the 250-year-old Baring dynasty.

When Nick Leeson’s folly was uncovered, the bank was on the verge of collapse. But unlike the Argentine crisis, members of the Baring family didn’t feel the need to rescue the bank bearing the name of their ancestors.