The strangest thing about ING Barings is not the offices now closed in far-flung emerging markets. It's not the excesses that battered the bank's P&L. It's that its sober Dutch parent, ING Bank Europe's sixth largest financial institution by market capitalization has been prepared to keep the investment banking unit afloat for so long. While ING's other key businesses, asset management, insurance and retail banking, performed creditably, the investment banking group has bombed.
The heart of ING's investment-banking operation is ING Barings, best known for its high profile in emerging markets. This entity comprises the corporate financiers of the venerable Baring Brothers, as well as ING's own institutions, ING Capital and ING Bank International.
ING Group's recent grim results largely reflect the problems of its investment-banking operation. Group net profits fell by 22% and operating profits by 48%. The annual report published at the end of March 1999 reported gloomily: "This decrease can be entirely attributed to the non-recurring strong decline of the trading results and the extra additions to the debt provisions." Corporate and investment banking was the worst performer in ING's portfolio of businesses. Brokerage and advisory fees fell 34.5%, and results from the securities trading portfolio fell by 115%. ING Bank was forced to more than double its provision for loan losses as a result of the crisis.
Clearly it was time for a rethink. And so in February 1999 two new managers presented their strategic review for a revamped ING Barings. If they succeed, the investment bank many had given up for dead will be back on the street.
The new-look ING Barings is slimmer in numbers and aspirations. "We have learnt the lessons of the last two years," claims David Robins, the newly-appointed chief executive. With old UBS colleague Malcolm Le May at his side as head of corporate and institutional finance, Robins is coming out fighting. From now on, he believes, everything will be different. The new men have sought to put a cap on their involvement in proprietary trading that has caused them so many losses. They have withdrawn from those emerging markets that hurt them most.
And they have detected profitable niches in new markets. They see corporate finance in Europe booming as companies become more acquisitive and raise money through the capital markets rather than through house banks. They want to target their efforts on growth sectors such as telecommunications and media.
None of this is original and scepticism about the new plans is widespread. What is more, many doubt whether ING Group's culture focused on European retail and insurance is equipped to understand or play in a market-driven business dominated by much bigger, primarily American, investment banks. "ING has the luxury of these huge domestic businesses in Holland which keep producing the growth," says one banker. "If that group had been a UK or an American company, the board would have been out by now because of the mistakes they have made. But the Dutch way of doing things protects incumbent management from these sorts of sanctions. I am amazed that having made so many mistakes that they have been allowed to carry on with it."
One thing is certain. ING Barings' Dutch proprietors understand more about the riskiest forms of investment banking today than they did when they began to bankroll them. The efforts of two ING bankers above all made sure of that.
One was Marinus Minderhoud, the board member responsible for investment banking. Minderhoud was seen by some in the bank as a solid Dutch retail banker of the old school. But he was entranced by the prospect of ING Bank's expansion into emerging markets. He was seen by colleagues as impulsive and thick-skinned to the point of hubris.
While Minderhoud was a willing convert to the emerging-markets philosophy, the chief architect of ING's strategy in emerging markets was a debt trader, Peter Geraghty, with whom Minderhoud had a turbulent relationship. It was a fearsome combination.
Geraghty had worked for ING Capital in New York and London since the early 1980s. His style typified that of the high-rolling prop trader in emerging-market bonds. He would have been noticed in New York; in the Netherlands he was notorious.
He made a lot of money for the bank in the early 1990s when emerging markets were storming ahead, and the bank acknowledged his success by giving him responsibility and influence. ING allowed Geraghty to increase his empire, adding global equity to his responsibilities for fixed income and making him overall head of markets.
But Geraghty made many enemies. "He took us for a big ride", say colleagues in Barings corporate finance at the time who regard Geraghty's approach to traditional bankers as unnecessarily antagonistic. When in early 1998 trading losses consumed much of the bonus pot, Geraghty wanted to pay full bonuses to his old colleagues in fixed income, and leave out the global equity team, say his ex-colleagues. "He sacked a lot of people in the Latin American equities department without authorization," recalls one. "It caused an absolute furore."
But others praise Geraghty as a pioneer of emerging-markets debt trading and point out that he played a key role in taking ING to within a whisker of the big league in global investment banking. He was only held back, say his supporters, by the ambivalent attitude of Minderhoud and the rest of the Dutch board.
Geraghty was sacked for going out on a limb in March 1998. But the casino culture lived on in the bank. In August 1998 ING traders moved into Russian government bonds, GKOs, believing that Russia would not devalue the rouble and would continue to service its debts. On the other side of the world, in São Paulo, their colleagues did the same with Brazilian Brady bonds. This was a game of double or quits and ING ended up doubling its losses. It is estimated the bank lost some $500 million from the bond activities, and a further $500 million from loans to Asia and to Russian banks. The result was bound to savage the bottom line even of such a powerful institution as ING, and in September 1998 the bank issued a profits warning blaming poor business in emerging markets for its problems.