Treasury Markets and Operations

CHAPTER 9 Case Studies

  Learning  objectives  

After studying this chapter, you should be able to:

1. Understand and explain specific examples of risk including risks associated with segregation of duties, settlement risk, liquidity risk, and concentration risk.
2. Know and discuss the events that led to the failure of Barings Bank, Herstatt Bank, Metallgesellschaft AG and Lehman Brothers, and Long-Term Capital Management.
3. Explain what went wrong at Metallgesellschaft AG and how the company managed to come back from the brink of bankruptcy.

Introduction

Theoretical discussions of risk are useful exercises but they are not, in and of themselves, of much use if they do not help institutions prevent or mitigate risk. It is often up to the treasury to translate these theoretical discussions into practical terms and implement the strategies needed to limit it. This chapter examines four instances in which the treasury failed to do that.

The first case study may be the freshest in people’s minds and probably the most famous. It is the failure of Barings Bank. This is also maybe the most spectacular of all the case studies. Weak management and confused lines of reporting combined together to bring down a venerable institution. From the time management discovered something was amiss, it took less than 72 hours for Barings Bank to be declared insolvent ending more than two centuries of history.

The second case is very well known among bankers as it led directly to the creation of the ...