Nick Leeson And Barings Bank Incident

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. 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 £50,000 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