On February 26, 1995, Barings Bank, the world’s oldest commercial bank with a history of 233 years, declared bankruptcy. Just three days earlier, Nick Leeson, the protagonist of this issue and the bank’s chief trader in Singapore, left a note in his office that read “I’m sorry” and then fled. In the same year, ING Group acquired Barings Bank for a symbolic one pound.
Nick Leeson and the course of events.
In 1967, Leeson was born in Hertfordshire, England. His father was a bricklayer and his mother was a nurse. There were also two younger sisters and a younger brother in the family. In 1985, Leeson finished his high school with a grade of C in English, D in history and failing in mathematics. Subsequently, Leeson joined a local private bank. For two years, Leeson just sorted countless checks every day and packed them and put them in the storage room. The work was extremely boring.
In July 1987, Leeson switched jobs to the futures and options department of Morgan Stanley and was responsible for the clearing work of derivative transactions. With the experience of this job, two years later Leeson joined Barings Bank.
Barings Bank was founded in 1763 by Sir Francis Baring. In 1803, when the newly born United States purchased the southern state of Louisiana from France, the funds used came from Barings Bank. As of the end of 1993, the total assets of Barings Bank were 5.9 billion pounds, and the pre-tax profit in 1994 was as high as 1.5 billion US dollars. Its core capital ranked 489th among the world’s 1,000 largest banks.
Shortly after joining the company, Leeson helped the Jakarta office of Barings Bank sort out the chaotic back-end tickets and eliminated liabilities of 100 million pounds. The success in Jakarta and the experience gained at Morgan Stanley earlier made Leeson quickly become an expert in futures and options settlement at Barings Bank.
In the second half of 1991, Barings Bank established a branch in Singapore, and Leeson smoothly became the general manager of the bank’s futures and options trading department. At that time, Leeson’s job was only to conduct clearing transactions in cooperation with Barings Bank’s Osaka exchange at the Singapore International Monetary Exchange (SIMEX), with very little risk, and he himself did not have the authorization for direct trading.
But Leeson’s strong speculative desire was irresistible. Since 1992, Leeson has conducted a large number of unauthorized speculative transactions. At first, Leeson’s speculation brought huge profits to Barings Bank, accounting for as much as 10% of its annual profit at one point. In that year, his annual salary was only 50,000 pounds, but he received a bonus of 130,000 pounds alone. When the company saw that Leeson was also a talented person, it adopted an attitude of turning a blind eye to his unauthorized trading behavior.
In any transaction, mistakes are inevitable. But the key lies in how you deal with these mistakes, especially in futures trading. For example, someone may mistakenly interpret a “buy” gesture as a “sell” gesture. Some may purchase contracts at the wrong price. Some may not be cautious enough. Some may have intended to buy June futures but ended up buying March futures, and so on. Once a mistake occurs, it will cause losses to the bank. After these mistakes happen, the bank must deal with them quickly and properly. If the mistake cannot be undone, the only feasible way is to transfer the mistake to an account called the “error account” in the computer and then report it to the bank’s headquarters.
Barings Bank originally had an “error account” with the account number “99905” in Singapore, which was specifically used to handle mistakes caused by negligence during the trading process. This was originally a normal error account in the operation process of the financial system. In the summer of 1992, the London headquarters asked Leeson to set up another error account to record smaller mistakes and deal with them on his own. For good fortune, the error account named “88888” was thus created.
Soon after, the London headquarters called again and asked the Singapore branch to follow the old rules and all error records should still be directly reported to London through the “99905” account. The “88888” error account was just established and then shelved. However, this provided Leeson with an opportunity to create false records in the future.
In July 1992, a trader under Leeson mistakenly regarded a customer’s purchase of 20 Nikkei index futures contracts as a sale of 20 contracts, resulting in a loss of 20,000 pounds. Subsequently, as the Nikkei index rose by 200 points, the loss reached 60,000 pounds. Leeson did not report upward but used the 88888 account to cover up this serious mistake. This was the first time he used this account, but who could have thought that this was just the beginning.
Later, Leeson’s friend and trader George also made the same mistake, creating a huge mess of 8 million pounds. To keep his job, Leeson again used the error account and racked his brains to make up for the loss, even putting in all his commissions, and finally managed to make this account positive.
If he had stopped here, perhaps none of the subsequent events would have happened. But at that time, Leeson was both the person in charge of the clearing department and the person in charge of the trading department. In his own words, “I may be the only person in the world who is responsible for both sides of the income statement at the same time.”
In addition, Leeson’s immediate superior in Singapore, Simon, had no interest in his futures and options trading. Another superior, Mike, was in Tokyo and only cared about the profits Leeson earned. The London headquarters was extremely excited by the profit figures reported by Leeson. Although some people had raised doubts, Barings Bank’s loose management and the attitude of the senior management, as well as Leeson’s trading reputation all along, made him not subject to strict scrutiny.
As a result, Leeson became more and more indulged in it, and the trading risks he engaged in became greater and greater. And according to the law of conservation of character, a person’s luck will not always be so good. And Leeson’s “doubling” strategy, that is, doubling the amount of loss and continuing to invest after each loss, further magnified his mistakes.
By the end of 1992, Leeson’s error account had a loss of 2 million pounds. By the end of 1993, this figure had increased to 23 million pounds. Under the pressure of huge losses, Leeson’s operations became more and more distorted and he could only be led by the market, resulting in a vicious circle. By mid-1994, the loss of the error account 88888 had reached 50 million pounds.
On the evening of January 16, 1995, Leeson made a transaction worth as high as 4 billion pounds, betting that the Nikkei index would not fall overnight. Under normal circumstances, this is a low-risk transaction, but the next morning, the Kobe earthquake in Japan mercilessly shattered everything.
In the following period of time, Leeson used various reasons to ask for money from the London headquarters at a speed of 10 million pounds per day, betting on the Nikkei index to rebound after the earthquake and trying to make up for the deficit, but this effort ultimately failed. On February 23, Leeson left a note with the words “I’m sorry” in his office and fled Singapore. Behind Leeson’s hasty departure was a loss of 830 million pounds, while at that time, the total share capital of Barings Bank was only 470 million pounds. Three days later, this major bank with a history of 223 years announced bankruptcy and was successfully brought down by a 28-year-old young man.
Rogue Trader
Leeson fled to Malaysia and Thailand and finally came to Germany. Then he was arrested in Frankfurt and extradited back to Singapore on November 20, 1995. The court sentenced Leeson to six and a half years in Changi Prison in Singapore on charges of forgery of documents and fraudulent trading. After four and a half years, Leeson was released early in July 1999 due to colon cancer. While still serving his sentence, Leeson published his autobiography “Rogue Trader” (also known as “How I Brought Down Barings Bank”). After his release from prison, this book was also adapted into a movie of the same name.
Later, Leeson completed his university studies and obtained a degree in psychology. At one point, he even served as the CEO of an Irish football team. Nowadays, his main job is to be invited to business dinners and give speeches. The speech topics are usually related to financial risk management.
Looking back, would the senior management of Barings Bank really not know that the business Leeson was engaged in was speculation? It was nothing more than unrestrained indulgence of his behavior under the stimulation of high profits. Even without Leeson, Barings Bank would very likely be ruined by someone else. Also after this incident, risk management gradually became a top priority in the financial industry, and internal compliance supervision became increasingly strict.
Reproduction Notes：InvestFancy » Rogue Trader:How Nick Leeson Toppled Barings Bank