On this day in economic and financial history...
Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B) was formed on Feb. 26, 1907 from the merger of Royal Dutch Petroleum and "Shell" (the quotations were part of its corporate name) Transport and Trading Company. It was formed near the height of Standard Oil's power as an effort to better compete against John D. Rockefeller's behemoth. Royal Dutch Petroleum, which, as you might expect, was born in the Netherlands, took a 60% stake, and the British "Shell" assumed the remaining 40%. The origin of the Shell name and branding came from the British founders, who had run a seashell import business with their father in their youth.
Shell owed much of its early success to early CEO Henri Deterding, the head of Royal Dutch. Once referred to as "Napoleon and Cromwell rolled into one," Deterding was as worthy a European counterpart to J. D. Rockefeller as can be found in the history of oil. His ambitious plans for a fleet of oil tankers helped Royal Dutch become a European powerhouse and arose partly out of a need to compete with Marcus Samuel's "Shell," which was one of the European pioneers of dedicated tanker fleets. "Shell" had gotten off to a better start but had suffered growing pains when its sources of oil proved inconsistent. Thus the merger was an ideal way to combine the strengths of each company at a time when Standard Oil had more production, more scale, and far more reserves -- at the time, little oil had been discovered in continental Europe, and none was to be found in Britain.
Deterding built his combined company into a global force second only to Standard Oil, which remained a powerful force in the industry even after its 1911 antitrust breakup. The outbreak of World War I prompted the Dutch Deterding to prove his alignment with the British by putting Shell at the service of the British. The company's service during the war earned Deterding a knighthood. By the end of the war he was indisputably the most powerful oilman in the world, as Rockefeller had retired years before Standard Oil's breakup. However, Deterding fell out of favor before the outbreak of World War II after becoming a Nazi sympathizer. He died in 1939, two years after his resignation from a company that had grown into an international conglomerate of some 200 subsidiaries with a combined 40,000 employees. His fortune, estimated at $200 million at the time of his death, would be worth more than $3.3 billion today.
Royal Dutch Shell has since grown to become the largest company in the world by revenue, a mark it reached in 2011 by surpassing ExxonMobil (NYSE:XOM), the largest of the Baby Standards and Shell's most persistent global nemesis. That year, Shell produced some 3.2 million barrels of oil equivalent (of which nearly half was natural gas), operated 43,000 branded service stations, and employed more than 90,000 people around the world.
The end of a storied bank
On Feb. 26, 1995, the oldest merchant bank in England went bankrupt. Since 1762, Barings Bank had helped finance the Louisiana Purchase, had been a key investor in the American railroad boom, and had been at the focal point of one of the earliest bank bailouts. Yet all it took was one rogue trader making one spectacularly bad trade to bring the bank to its knees. Singapore-based Barings trader Nick Leeson lost $1.4 billion while trading derivatives of the Nikkei 225 at a time when Barings held only $600 million in capital.
Leeson's rapid rise and substantial hold on the strings of power in Barings' Singapore office had allowed him to cover his tracks, leaving the bank completely in the dark as to the true nature of his financial bets. Leeson's failure to hedge a massive long bet on the Nikkei left Barings exposed, and as many investors are now aware, the Nikkei has mostly been in decline since 1989, even in 1995 as the Dow Jones Industrial Average (DJINDICES:^DJI) took off during the dot-com bubble. The Kobe earthquake of Jan. 17 sent Asian markets plunging, and that was the end of Leeson's extremely risky bet. The Bank of England rejected efforts to secure a bailout days before Barings declared bankruptcy, assuring its demise. This would have been Barings' second bailout, had it been approved -- the bank nearly went bust in the 1890s over bad bets on Latin American bonds.
With no other options for making its debts whole, the toppled bank accepted a 1 pound offer (about $1.40, give or take a few pennies) from Dutch banking leader ING (NYSE:ING). The Barings collapse sent Asian markets to fresh lows, and the Nikkei lost nearly 4%. The Dow, on the other hand, barely flinched when it opened the following day and would wind up doubling within two and a half years.
Leeson, who tried to turn himself in to British authorities, was instead detained in Germany and deported back to Singapore, where he served four years in prison before being released due to good behavior and illness. Leeson later became CEO of Galway United, an Irish football club, but resigned in 2011 due to budgetary concerns. He has also been active on the speaking circuit, getting paid to talk about risk and corporate responsibility -- strange, given that he's the poster boy of catastrophic failures on both accounts.
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