Nick Leeson and Barings Bank Incident Analysis

Events leading to Barings Bank’s collapse Barings Bank’s activities in Singapore between 1992 and 1995 enabled Nick Leeson to operate effectively without supervision from Barings Bank in London. Leeson acted both as head of settlement operations (charged with ensuring accurate accounting) and as floor manager for Barings’ trading onSingapore International Monetary Exchange, or SIMEX. This placed Leeson in the position of reporting to an office inside Barings Bank which he himself held.

Because of the absence of oversight, Leeson was able to make seemingly small gambles in the futures market and cover for his shortfalls by reporting losses as gains to Barings in London. Specifically, Leeson altered the branch’s error account, subsequently known by its account number 88888 as the “five-eights account”, to prevent the London office from receiving the standard daily reports on trading, price, and status. Using the hidden “five-eights account,” Leeson began to agressively trade in futures and options on SIMEX.

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His decisions routinely lost substantial sums, but he used money entrusted to the bank by subsidiaries for use in their own accounts. He falsifed trading records in the bank’s computer systems, and used money intended for margin payments on other trading. Barings Bank management in London at first congratulated and rewarded Leeson for what seemed to be his outstanding trading profits. After two years of steady losses covered up by the unknown “five-eights” error account, Barings Bank auditors finally discovered the fraud, but it was too late. Nick Leeson’s activities had generated losses totaling ? 830 million. 2] Barings collapsed on February 26,1995. Barings was purchased by the Dutch bank/insurance company ING for the nominal sum of ? 1 along with assumption of all of Barings liabilities. Barings Bank therefore no longer has a separate corporate existence, although the Barings name still lived on as Baring Asset Management. BAM was split and sold by ING to MassMutual and Northern Trust in March 2005. Nick Leeson’s autobiography, covering the events leading up to the collapse, was dramatised in the movie Rogue Trader. From http://www. statemaster. com/encyclopedia/Barings-Bank Biography :: from www. nickleeson. com

The Build Up To 1995 The week before Nick Leeson disappeared he had kept throwing up at work. Colleagues did not know why but were soon to find out. The ego of a 28-year-old trader on the Singapore Monetary Exchange and the greed and stupidity of a 233-year-old bank had combined to destroy an investment empire and in the process stunned the world… A Young Nick Leeson Nick Leeson’s life started as a classic rags-to-riches tale. Born on 25th February 1967, he was the working class son of a plasterer from a Watford council estate, who failed his final maths exam and left school with a mere handful of qualifications.

Nonetheless, in the early 1980s, he landed a job as a clerk with royal bank Coutts, followed by a string of jobs with other banks, ending up with Barings, where he quickly made an impression and was promoted to the trading floor. Before long, he was appointed manager of a new operation in futures markets on the Singapore Monetary Exchange (SIMEX) and was soon making millions for Barings by betting on the future direction of the Nikkei Index. His bosses back in London, who viewed with glee his large profits, trusted the whizzkid. Leeson and his wife Lisa seemed to have everything: a salary of ? 0,000 with bonuses of up to ? 150,000, weekends in exotic places, a smart apartment and frequent parties and to top it all they even seemed to be very much in love. The job of a derivatives trader is akin to a bookie once removed, taking bets on people making bets and Leeson started by buying and selling the simplest kind of derivatives futures pegged to the Nikkei 225, the Japanese equivalent to the UK’s FTSE 100. At the time the trader only had to put down a small percentage of the amount that was being traded, it was therefore easily possible for the money on the table to be exceeded many times by losses.

However Leeson seemed to be infallible to Barings Chief Executives, by the end of 1993, he had made more than ? 10m – about 10% of total profit that year. Barings believed that it wasn’t exposed to any losses because Leeson claimed that he was executing purchase orders on behalf of a client. What the company did not realise was that is was responsible for error account 88888 where Leeson hid his losses. This account had been set up to cover up a mistake made by an inexperienced team member, which led to a loss of ? 20,000. Leeson now used this account to cover his own mounting losses.

In a fatal mistake, the bank allowed Leeson to remain Chief Trader while being responsible for settling his trades, a job that is usually split. By December 1994 the red ink hidden in account 88888 totalled $512 million. Getting increasingly desperate Leeson bet that the Nikkei index would not drop below 19,000 points. At the time this seemed reasonable as the Japanese economy was rebounding after a 30-month recession. Then on the 17th January 1995, a devastating earthquake measuring 7. 2 hit the Japanese city of Kobe. The previously stable Nikkei index plummeted by 7% in a week.

As the losses grew, Leeson requested extra funds to continue trading, hoping to extricate himself from the mess by more deals. Leeson was counting that there would be a post quake rebound and the Nikki would stabilise at 19,000. There was no hedges, no bets the other way to protect Barings’ huge exposures. There was no rebound. Over three months he bought more than 20,000 futures contracts worth about $180,000 each in a vain attempt to move the market. Some three quarters of the $1. 3 billion he lost Barrings resulted from these trades.

When Barings executives discovered what had happened, they informed the Bank of England that Barings was effectively bust. Two days before his 28th birthday Nicholas William Lesson went missing from Singapore on his desk he left a hurriedly scribbled not saying “I’m Sorry. ” He guessed he would be jailed for the fraud and in the hope of being locked up in the UK rather than the Far East; the couple went on the run. He went first to an exclusive resort in Borneo, and then to Frankfurt. The worlds most wanted man on the cover of every newspaper checked in on his flight to Europe using his own name and hiding beneath a baseball cap.

The German authorities were alerted and the Police were there to greet Leeson as he touched down. On the news of Leesons arrest cheers erupted in the worlds futures markets. In his wake he had wiped out the 233 year old Baring investment Bank, who proudly counted HM The Queen as a client. The $1. 3 billion dollars of liabilities he had run up was more than the entire capital and reserves of the bank. Investors saw their savings wiped out, and some 1,200 of Leeson’s fellow employees lost their Jobs. Dutch bank ING agreed to assume nearly all of Barings’ debt and acquired the bank for the princely sum of ? . Who was to blame? Leeson definitely. He pleaded guilty to forging documents and misleading SIMEX, but as the dust settled from the Barrings collapse, the famous line from the Watergate prosecution was asked; “What did the President know, and when did he know it? ‘ Although there is no doubt about Leesons deeds, could senior bank officials not have known of the rogue trader’s actions? The Bank of England in its report concluded, that the hot shot trader had acted alone managing to pull the wool over his superiors eyes until it was too late to save the bank.

It was certainly a fact that most of the old school really never understood or cared to master the complexities of derivatives trading. But Barings could not totally escape blame, an internal memo dated in 1993 had warned the London headquarters about allowing Leeson to bce both trader and settlement officer “We are in danger of setting up a system that will prove disastrous. ” Nothing was done. In January 1995 SIMEX expressed concern to the bank about Leesons dealings, but to no avail as the bank still wired him $1 billon to continue his trading.

A report by the Singapore authorities into the collapse regards with disbelief, the protestations by Leeson’s superiors, all of who were forced to resign, that they knew nothing of error account 88888. After his arrest in Germany he spent a few fraught months trying to escape extradition to Singapore. He failed and in December 1995 a court in Singapore sentenced him to six and a half years after pleading guilty to two counts of deceiving the bank’s auditors and of cheating the Singapore exchange. Having served nearly nine months in Germany awaiting extradition, his sentence was backdated to March 2, 1995.

In jail, he is said to have exercised vigorously, ‘found God’ and spent his days pacing away the time. The fortunes of Leeson’s personal life also seemed to mirror the peaks and troughs of his career. Lisa his wife got a job as an airhostess to be able to visit him regularly. She even helped him write his book, Rogue Trader. Their marriage at first survived the strain of being apart. But what Lisa could not abide were his revelations of his infidelity with Geisha girls, and she divorced him. Her remarriage — to another City trader served to further knock his spirit and he grew very depressed at losing his once-devoted wife.

Within months, Leeson was diagnosed as suffering from cancer of the colon, the disease that had killed his mother when he was only 20. From being a partying, good-time youngster who could abuse his body with heavy drinking, he was reduced to a ghost of a man. His weight plummeted and most of his hair fell out from chemotherapy. His father, a plasterer, has myeloma, diagnosed after Nick himself fell ill. Prison itself was not exactly kind to the immune system; it was a hard existence, Nick being locked up with two others in a tiny cell 23 hours out of 24.

Cellmates belonged to rival gangs, and when fights broke out you inevitably got drawn in. Nick slept on the rough concrete floor; breakfast was three slices of bread and the other meals, monotonous rice with a bit of chicken or vegetables. The worst period — worse even than cancer, Nick insists — was the seven months between March and October 1996, when Lisa’s visits and daily letters dried up: “In prison you really need something to hang on to. That something was my relationship until suddenly I didn’t know what was going on between Lisa and me.

Eventually I wrote offering a divorce and after two weeks she replied, saying yes. ” Time in prison passed so slowly that sometimes Nick retreated into the pages of crime thrillers to speed it up. In his exercise hour he ran round the prison basketball court. For Nick, the first indication that something was wrong came early in 1998: “I would get dizzy standing up and have to lean against the wall. The prison doctor just said I was getting old – I was 30 at the time! I then spent a month in solitary having refused to change cellmates yet again, just when the men in with me were getting on.

When I came out people started to say how much weight I’d lost: for the first time in my life I could see my stomach muscles. I thought I looked pretty healthy! ” A blood test revealed Nick was anaemic. He also started to have stomach pain, which his doctor put down to the iron tablets. It took a minor mutiny, risking more time in the punishment cells, before the doctor acknowledged he didn’t know what more to do, and sent Nick to New Changi Hospital. David Frost Interview for the BBC Nick’s never going to be feted for services to banking: he’s the first to own that the Rogue Trader tag will stay with him lifelong.

But he deserves due recognition as a master of endurance: coping with cancer is hard enough when you are supported by gentle nursing, soothing surroundings, friends, family, flowers and tic. Nick had none of these — chained to the bed, with nothing to read, he had to appeal to slow-responding armed guards whenever he needed the bathroom. Surgery was scheduled for August 11th. Ten days later he was back in his cell, sleeping on concrete and struggling to sit up as 38 staples had just been removed from his lengthy incision and his stomach muscles had been severed during surgery.

However, his surgeon was one of the best in Singapore and his oncologist had studied at Cornell in New York and reportedly looked after President Lee Kuan Yu. Nick was told that there was a 60 per cent chance of him surviving for five years. Chemotherapy — Nick was assured — would increase his chances by a further 10 per cent. Chemo lasted six months — five days on, three weeks off — and although he’d been warned he might feel very poorly, Nick weathered it well.

Finally released in the summer of 1999, and despite his return to the UK bringing a realisation that the high life had been swept away — he was effectively homeless and without a job — Nick enjoyed a fairly hedonistic first year seeing friends and family but also continuing his cancer treatment. Nick actually ran the 2000 Marathon against medical advice. But he was determined to raise money for both Colon Cancer Concern and the Linda Jackson MacMillan Centre in Middlesex where his father’s myeloma is treated.

Nick Leeson has proved his resilience and has been able to capitalise on his experiences. He was paid a substantial fee for the newspaper serialisation of his book in The Mail. The story was then turned into a film, Rogue Trader, starring Ewan McGregor and Anna Friel (Executive Produced by Sir David Frost). During 2001 he could be found at Middlesex University where he undertook a Psychology degree and Nick now spends most of his time presenting talks to companies on Risk Management and undertaking after-dinner and conference speaking based on his unique life experiences.

In 2005 Nick was appointed Commercial Manager of Galway United FC and June that year saw the release of his latest book Back from the Brink, Coping with Stress, published by Virgin Books. With a psychology degree and a second marriage to Irish beautician Leona Tormay, (with her own children Kersty (8) and Alex (4)) after trying for a baby they were delighted when, in 2004, Leona gave birth to a baby boy.

Nick comments; “I’m of the mindset that cancer must not take you over and control your life. I do believe that the more positive you are, the greater your chance of survival. ” his advice to others is never to bottle up stress as he himself did: “You need to talk and express yourself as I now do to Leona. With cancer as with other problems, it’s amazing how adaptable human beings are, and you will be able to cope provided you keep a strong frame of mind. “

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Nick Leeson and Barings Bank Incident Analysis. (2018, Jun 10). Retrieved from