Nick Leeson & the Collapse of Barings Bank | Nick Leeson & the Collapse of Barings Bank By Jesse Colombo (This article was written on March 15th, 2005) In February of 1995, one man single-handedly bankrupted the bank that financed the Napoleonic Wars, Louisiana Purchase and the Erie Canal. Founded in 1762, Barings Bank was Britain’s oldest merchant bank and Queen Elizabeth’s personal bank. Once a behemoth in the banking industry, Barings was brought to its knees by a rogue trader in a Singapore office. The trader, Nick Leeson, was employed by Barings to profit from low risk arbitrage opportunities between derivatives contracts on the Singapore Mercantile Exchange and Japan’s Osaka Exchange. A scandal ensued when Leeson left a $1.4 billion hole in Barings’ balance sheet due to his unauthorized derivatives speculation, causing the 233-year-old bank’s demise. How Nick Leeson Became Barings Bank’s Superstar Nick Leeson grew up in London’s Watford suburb and worked for Morgan Stanley after graduating from university.

Shortly after, Leeson joined Barings and was transferred to Jakarta, Indonesia to sort through a back-office mess involving £100 million of share certificates. Nick Leeson enhanced his reputation within Barings when he successfully rectified the situation in 10 months (Risk Glossary). In 1992, after his initial success, Nick Leeson was transferred to Barings Securities in Singapore and was promoted to general manager, with the authority to hire traders and back office staff. Leeson’s experience with trading was limited, but he took an exam that qualified him to trade on the Singapore Mercantile Exchange (SIMEX) alongside his traders. According to Risk Glossary: “Leeson and his traders had authority to perform two types of trading: 1. Transacting futures and options orders for clients or for other firms within the Barings organization, and 2. Arbitraging price differences between Nikkei futures traded on the SIMEX and Japan’s Osaka exchange.

Arbitrage is an inherently low risk strategy and was intended for Leeson and his team to garner a series of small profits, rather than spectacular gains.” As a general manager, Nick Leeson oversaw both trading and back office functions, eliminating the necessary checks and balances usually found within trading organizations. In addition, Barings’ senior management came from a merchant banking background, causing them to underestimate the risks involved with trading, while not providing any individual who was directly responsible for monitoring Leeson’s trading activities (eRisk). Aided by his lack of supervision, the 28-year-old Nick Leeson promptly started unauthorized speculation in Nikkei 225 stock index futures and Japanese government bonds (Risk Glossary). These trades were outright trades or directional bets on the market. This highly leveraged strategy can provide fantastic gains or utterly devastating losses – a stark contrast to the relatively conservative arbitrage trading that Barings had intended for Leeson to pursue. How Nick Leeson Caused the Failure of Barings Bank Nick Leeson opened a secret trading account that was numbered “88888” to facilitate his surreptitious trading. Risk Glossary says of Leeson: He lost money from the beginning. Increasing his bets only made him lose more money.

By the end of 1992, the 88888 account was under water by about GBP 2MM. A year later, this had mushroomed to GBP 23MM. By the end of 1994, Leeson’s 88888 account had lost a total of GBP 208MM. Barings management remained blithely unaware. As a trader, Leeson had extremely bad luck. By mid February 1995, he had accumulated an enormous position—half the open interest in the Nikkei future and 85% of the open interest in the JGB [Japanese Government Bond] future. The market was aware of this and probably traded against him. Prior to 1995, however, he just made consistently bad bets. The fact that he was so unlucky shouldn’t be too much of a surprise. If he hadn’t been so misfortunate, we probably wouldn’t have ever heard of him. Betting on the recovery of the Japanese stock market, Nick Leeson suffered monumental losses as the market continued its descent.

In January 1995, a powerful earthquake shook Japan, dropping the Nikkei 1000 points while pulling Barings even further into the red. As an inexperienced trader, Leeson frantically purchased even more Nikkei futures contracts in hopes of winning back the money that he had already lost. Most successful traders, however, are quick to admit their mistakes and cut their losing trades. Surprisingly, Nick Leeson effectively managed to avert suspicion from senior management through his sly use of account number 88888 for hiding losses, while he posted profits in other trading accounts. In 1994, Leeson fabricated £28.55 million in false profits, securing his reputation as a star trader and gaining bonuses for Barings’ employees (Risk Glossary).

Despite the staggering secret losses, Leeson lived the life of a high roller, complete with a $9,000 per month apartment and earning a bonus of £130,000 on his salary of £50,000, according to “How Leeson Broke the Bank.” The horrific losses accrued by Nick Leeson were due to his financial gambling as he placed his trades based upon his emotions rather than through taking calculated risks. After the collapse of Barings, a worldwide outrage ensued, decrying the use of derivatives. The truth, however, is that derivatives are only as dangerous as the Nick Leeson was placed on trial in Singapore and was convicted of fraud. He was sentenced to six and a half years in a Singaporean prison, where he contracted cancer (Risk Glossary). He survived his cancer, and, while imprisoned, wrote an autobiography called “Rogue Trader,” detailing his role in the Barings scandal. “Rogue Trader” was eventually made into a movie of the same name. Nick Leeson was released from prison in July 1999 for good behavior.

Other Barings Bank Collapse & Nick Leeson Resources: Nick Leeson - Official Website Photo by David Cantwell ( Welcome to the official website of Nick Leeson – the original Rogue Trader whose unchecked risk-taking caused the biggest financial scandal of the 20th century. The collapse of Barings – personal bank to HM The Queen – in 1995 and Nick Leeson's role in it, is one of the most spectacular debacles in modern financial history. How could one trader bring down the banking empire that had funded the Napoleonic Wars? Curiosity, intrigue and sympathy have been the various reactions to this man's incredible life story. Following Barings' collapse, Nick Leeson was sentenced to six and half years in a gang-ridden Singaporean jail, in conditions that defy belief, while at the same time, his wife left him and he was diagnosed with colon cancer. Against all odds, Nick Leeson survived and now fully recovered from cancer, lives happily in Ireland with second wife Leona and three children. In 2006 Nick was appointed CEO of Galway United FC.

Having stepped down as CEO in January 2011, Nick Leeson continues to be in-demand around the world for conference and after-dinner speaking. Timeline: How Nick Leeson brought down Barings Bank at the age of just 28 Timeline: How Nick Leeson brought down Barings Bank at the age of just 28 The original rogue trader’s ten minutes of infamy happened 20 years ago today Feb 26th 2015, 1:20 PM 22,836 Views 21 Comments Source: AP/AP/Press Association Images HIS NAME HAS become iconic, and these days Nick Leeson is a celebrity of sorts. The man who brought down one of England’s oldest merchant banks single-handedly now works as an after-dinner speaker and routinely criticises financial institutions for having diligence structures not fit for purpose. Read More: Nick Leeson writes exclusively for TheJournal.ie on the Barings Bank collapse – and the lessons it taught him to pass to his sons. He makes his home with his second wife in Barna, Co. Galway, and was even chief executive of Galway United for a time if you can fathom that one.

Source: Guardian In a a world made numb by sub-prime scandals and the likes of Jerome Kerviel , Leeson was the original. 20 yrs ago,I was making a run for the airport.The plan was to get to Thailand and see how the dust settled.Didnt realise i'd set off a bomb But how did his saga unfold? TheJournal.ie takes a look July 1989 22-year-old Nick Leeson joins the settlements’ department of Barings Bank in London having learned the art of trading in futures (buying or selling a commodity with a contract to purchase or sell it back at a specific price at a future point in time) in Japan. The famed merchant bank had been on the block for 227 years and was very much part of the City of London furniture. Video ( Source: nmpmanagement /YouTube Early 1990 Leeson is dispatched by Barings to their office in Jakarta, Indonesia. His goal? Sorting through £100 million worth of back office contracts that are in such a complete mess none of them are being settled.

September 1991 Having succeeded in his mammoth task, Leeson returns to London to investigate an apparent fraud in Barings’ derivatives trading. This mission completed successfully, his reputation at the bank swells. The infamous trading jacket Source: Nick Leeson February 1992 Leeson applies for a City of London trading licence but the application falls through over concerns regarding an outstanding county court case against him, something which is held back by Barings when he later passes his trading exam in Singapore. March 1992 25-year-old Leeson marries fellow Barings employee Lisa Sims whom he met while working in Jakarta. Lisa Leeson in 1995 Source: PA Archive/Press Association Images April 1992 Leeson is posted to Barings Futures Singapore (BFS) to run the back office of Barings’ derivatives operation at the Singapore International Monetary Exchange (SIMEX). July 1992 An accounts technician creates Account 88888 for Leeson at SIMEX, an ‘error account’. Initially intended for inexperienced traders to report their losses, the account is eventually appropriated by Leeson for his own use and excluded from general reporting lines.

Leeson in the early 1990s Source: PA Archive/Press Association Images September 1992 Leeson passes the SIMEX trading exam, thus entitling him to trade on the exchange floor for the first time. Almost immediately, he begins to make large-scale unauthorised trades on the Japanese Nikkei futures index. By end-September he has accumulated losses of about £6 million in Account 88888. Ewan McGregor as Leeson in Rogue Trader December 1992 At year end, Leeson reports profit-earnings to Barings of some £10 million. He is rewarded with a £150,000 bonus to supplement his £50,000 salary. In truth Account 88888 is covering for roughly £2 million in losses. The template for the next two years is set. Source: Time March 1993 Barings’ senior management is restructured with long term chief executive Christopher Heath replaced by Peter Norris. In June, Leeson is appointed both as head of trades for Barings in Singapore while also maintaining responsibility for his own trades, making the concealing of losses all the easier.

The trader as a school prefect circa 1984 Source: PA Archive/Press Association Images July 1994 Over the following year, Leeson accumulates massive losses in betting wildly on Nikkei futures, all of which he conceals, all of which he tries to recoup in ever more outlandish trades. An internal audit at end summer 1994 reveals to BFS the extent to which they are exposed by Leeson’s dual status. They choose to trust in their star trader’s judgement and consistent results and leave things as they are. December 1994 Leeson has accumulated trading losses of £208 million in the 88888 account. Officially, he is massively in profit. Video ( Source: Guardian February 1995 On 23 February, Leeson and his wife flee Singapore for Kuala Lumpur. Investigating, Barings officials finally discover the 88888 account and the losses it contains, for which the bank is liable. Following a frantic failed bailout attempt the bank ceases trading for the last time on 26 February.

Leeson following his extradition in November 1995 Source: PA/Patrick Lim March 1995 Leeson is apprehended in Frankfurt on 2 March having fled via Brunei. He remains in custody in Germany until his extradition to Singapore in November. On 6 March, Barings is officially acquired by Dutch investment group ING for the nominal sum of £1. About 1,200 employees in Singapore lose their jobs with the bank’s collapse. Leeson in 1999, the day after his release Source: PA Archive/Press Association Images Leeson is sentenced to prison for six years on two charges of fraud and forgery. BFS is criticised heavily by Singaporean authorities for the failure of their internal controls. While in prison Leeson publishes his autobiography ‘Rogue Trader’ and is divorced by his wife. July 1999 Suffering from colon cancer (which he subsequently recovers from), Leeson is released from prison early for good behaviour. He now lives in Barna, Galway. We’ll leave the last word to the man himself: Thank god there was no twitter in 1995 when I went on the run - wouldn't have got very far!!

Collapse of Barings | Infopedia Collapse of Barings Hon Sui Sen Benedict Hon Sui Sen (b. 16 April 1916, Balik Pulau, Penang–d. 14 October 1983, Singapore), widely known as Hon Sui ... Founded in 1762, Barings was the oldest merchant bank in Britain before its collapse in 1995.1 The 233-year-old bank was brought down single-handedly by its employee, Nicholas William Leeson,2 better known as Nick Leeson, a derivatives trader.3 After landing the bank with a debt of S$1.4 billion – largely through futures trading contracts – Leeson fled for Malaysia.4 By the time of the bank’s collapse on 26 February 1995, it had accumulated losses amounting to S$2.2 billion.5 Leeson was sentenced to six-and-a-half years’ imprisonment in Singapore for two charges of fraud and forgery.6 Background Baring Futures (Singapore) (BFS) was incorporated in Singapore on 17 September 1986.

Leeson joined the settlements department of Baring Securities (London), an investment arm of Baring Group, as a clerk in July 1989. He was transferred to Singapore three years later.7 Leeson arrived in Singapore in April 1992 as a derivatives operations manager of Baring Securities (Singapore) (BSS). He became a trader after passing the Institute of Banking and Finance's Futures Trading Test in June that year. When BFS started trading on the Singapore International Monetary Exchange (SIMEX, which has since merged with the Stock Exchange of Singapore to form the Singapore Exchange) in July 1992, Leeson was of one of two traders at the time.8 On 3 July, Leeson opened an error account, 88888, for BFS.

The account was originally opened to report error trades made by inexperienced staff of BFS.9 However, Leeson used the account for his unauthorised trading.10 By the end of September 1992, the losses in the 88888 account had amounted to S$8.8 million.11 Unauthorised trading and losses Leeson was appointed assistant director and general manager of BFS on 28 June 1993. He took charge of not only the front office, which conducted the trading, but also the back office, which processed the paperwork. This enabled him to hide his losses and unauthorised trading using the 88888 account. In 1994, Leeson started dealing in Japanese government bonds, and also dabbled in Nikkei 225 futures and options.12 An internal audit of BFS was conducted for the period 19 July 1994 to 1 August 1994.13 The audit report, which was circulated to Barings' senior management in London, revealed that BFS was exposed to great risks with Leeson taking charge of both the dealing and settlement operations.

However, the bank chose to retain Leeson's position because of his experience and the profits he generated. They did not know at the time that Leeson had already incurred big losses, which were hidden in the 88888 account. By the end of December 1994, the losses had risen to S$373.9 million.14 In January 1995, a senior auditor found a discrepancy in the BFS accounts.15 Leeson managed to convince the auditors by fabricating a story about a trade transaction between Barings and US investment firm Spear, Leeds & Kellogg. He even showed them a doctored payment statement to support his explanation.16 Despite the enormous losses accumulated in the 88888 account, Leeson continued to bet heavily in the Nikkei index in January 1995 hoping that it would not fall below 19,000 points.17 However, the Nikkei plunged after an earthquake hit Kobe, Japan, on 17 January.

Leeson started feeling the heat when the Nikkei 225 dropped to 17,785 points on 23 January.18 He continued to raise the stakes, hoping for the market to spring back, but luck was not on his side.19 The market continued to slide further to a low of 17,580 on 23 February.20 Knowing that he could not recover the cumulative losses of S$1.4 billion, Leeson fled to Kuala Lumpur, Malaysia, with his wife on 23 February.21 The total losses amounted to S$2.2 billion at the time of Barings’ collapse on 26 February.22 On 23 February 1995, a senior settlements clerk on secondment from the Barings head office in London spotted a discrepancy in Leeson's account. He tried to get an explanation from Leeson but to no avail.23 Leeson said he had to visit his wife at the hospital, and left the office.

Soon, he was on the run to Malaysia with his wife.24 Several attempts made to contact Leeson were futile.25 The London Barings office was apprised of the situation, and the BFS office started to check their accounts for unauthorised transactions. Their initial fear was that Leeson may have embezzled money and disappeared. On 24 February, BFS officials found out about the 88888 account and linked the discrepancy to that account.26 Barings in London did not have sufficient funds to continue trading, and was forced into administration on 26 February 1995. The Bank of England attempted to rescue the bank, but failed and BFS was placed under interim judicial management the next day.27 Leeson and his wife left Kuala Lumpur for Sabah on 24 February 1995.

The couple then left Sabah for Brunei to take a flight to Frankfurt on 1 March.28 They were detained at the Frankfurt airport on 2 March.29 Leeson was jailed by the German court while waiting for the decision for Singapore's request for his extradition.30 Dutch finance group Internationale Nederlanden Groep (ING) completed the Barings takeover proceedings on 6 March.31 Leeson was extradited to Singapore on 23 November 1995.32 He pleaded guilty to two charges of fraud and forgery on 1 December, and was sentenced to six-and-a-half years in prison in Singapore. Leeson was released early on 3 July 1999 for good behaviour, after having served only three-and-a-half years of his sentence.33 Impact To prevent another similar incident from happening, amendments were made to the Futures Trading Act, which enabled the Monetary Authority of Singapore to monitor the activities of traders selling futures contracts more closely.34 The Futures Trading (Amendment) Act commenced on 1 April 1995.35 Timeline 17 Sep 1986: Baring Futures (Singapore) is incorporated.

Jul 1989: Nick Leeson joins Baring Securities (London). Apr 1992: Leeson joins Baring Securities (Singapore). 3 Jul 1992: Leeson opens account 88888. Sep 1992: Losses in account 88888 reach S$8.8 million. Dec 1994: Losses balloon to S$373.9 million. Jan 1995: Leeson bets heavily on Nikkei 225 index. 17 Jan 1995: Nikkei 225 plunges due to the Kobe earthquake. 23 Feb 1995: Leeson flees to Malaysia with his wife. 24 Feb1995: Discovery of 88888 account. 26 Feb 1995: Barings London is forced into administration. 27 Feb 1995: BFS is placed under interim judicial management. 2 Mar 1995: Leeson is arrested in Frankfurt. 6 Mar 1995: Barings takeover by Dutch finance group ING Group.

1 Apr 1995: Futures Trading (Amendment) Act 1995 comes into force. 23 Nov 1995: Leeson is extradited to Singapore. 1 Dec 1995: Leeson pleads guilty to two charges and is sentenced to six-and-a-half years’ imprisonment in Singapore. 3 Jul 1999: Leeson is released from prison. Author Kong Yoke Mun References 5. Chan, S. M. (1995, November 24). Leeson saga, and key role of 88888 account. The Straits Times, p. 49. Retrieved from NewspaperSG; Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50) . Singapore: Ministry of Finance, p. 155. (Call no.: RSING 332.632 LIM) 6. Leeson, N. W., & Whitley, E.

(1997). Rogue trader . London: Warner, p. 357. (Call no.: RSING 332.632092 LEE); Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank . London: HarperCollins, p. 190. (Call no.: RSING 332.60941 RAW) 14. Lim, M. C. S., Tan, N. N. K., & partners of Price Waterhouse. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50) . Singapore: Ministry of Finance, pp. B ii, B vi, 12 (Call no.: RSING 332.632 LIM); 'Leeson had too much power'. (1995, March 5.) The Straits Times, p. 1. Retrieved from NewspaperSG. 15. Chan, S. M., Lim, L.

H., & Wong, D. (1995, December 2). Audit made Leeson cook up deal to hide activities. The Straits Times, p. 28. Retrieved from NewspaperSG. 16. Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50) . Singapore: Ministry of Finance, pp. B viii, B ix. (Call no.: RSING 332.632 LIM); Chan, S. M. (1995, November 24). Leeson saga, and key role of 88888 account. The Straits Times, p. 49; Chan, S. M., Lim, L. H., & Wong, D. (1995, December 2). Audit made Leeson cook up deal to hide activities. The Straits Times, p. 28. Retrieved from NewspaperSG. 17. Beckering, L.

(1995, July 30). The fall of the house of Barings . The Straits Times, p. 4; Nick and the Nikkei. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG; Leeson, N. W., & Whitley, E. (1997). Rogue trader . London: Warner, pp. 220–221. (Call no.: RSING 332.632092 LEE) 19. Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank . London: HarperCollins, p. 169. (Call no.: RSING 332.60941 RAW) 20. Nick and the Nikkei. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG. 21. Leeson on the run . (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG. 34. Chan, W. C.

(1996, April 8). Investors better protected with changes to futures trading rules . The Straits Times, p. 36; Leo, P., & Siow, L. S. (1996, March 21). Law tightened to prevent another Barings . The Business Times, p. 1. Retrieved from NewspaperSG; Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50) . Singapore: Ministry of Finance, p. 117. (Call no.: RSING 332.632 LIM) 35. Republic of Singapore. Government Gazette. Acts Supplement. (1995, March 24). Futures Trading (Amendment) Act 1995 (Act 9 of 1995).

Retrieved 2016, August 4, from the Attorney-General’s Chambers website The information in this article is valid as at 2009 and correct as far as we are able to ascertain from our sources. It is not intended to be an exhaustive or complete history of the subject. Please contact the Library for further reading materials on the topic. The History Behind The Barings Bank Finance Essay The History Behind The Barings Bank Finance Essay Published: Last Edited: 23rd March, 2015 This essay has been submitted by a student. This is not an example of the work written by our professional essay writers. Barings Bank was one of the oldest and established merchant bankers in London, dating back to 1762; the bank had also managed to penetrate a number of foreign markets. Barings Bank was widely known as the 'Queen's bank,' as Queen Elizabeth II regularly used the bank's services. The collapse of this reputable bank in February 1995 is perhaps the most damning of warnings for the failure financial risk management. The bank's bankruptcy was totally unexpected. Over a few days, the bank went from strength to insolvency. Barings was Britain's oldest merchant banker.

The bank had historically financed both Britain and France in the Napoleonic wars, managing the Louisiana Purchase, [ 1 ] and the building of the Erie Canal. The world's attention was grabbed because the collapse was caused by the deals of a single trader, Nick Leeson, based at a small office in Singapore. Leeson was born in Watford, a suburb of London, England in February 1967. After finishing Sixth Form, Leeson began work as a clerk with a select private banker, Coutts, then moving to Morgan Stanley in 1987. After two years, Leeson eventually ended up at Barings in 1989. By 1992, three years later, Leeson was chosen as a general manager of a new Barings operation dealing with futures markets on the Singapore International Monetary Exchange (SIMEX). Barings had been holding a seat at SIMEX for a number of months, but it did not trade in futures there until Leeson was sent over. Leeson's previous accomplishments at Barings while in Jakarta had attracted the attention of the bank's management.

Upon applying for a position within Barings Securities (Singapore), management not only accepted his application, but placed him as general manager charged with hiring traders and back-office staff. Leeson arrived at Barings Securities (Singapore) in 1992, and began hiring local staff. As general manager, Leeson's was not responsible for trading - however he did take the necessary exam, in order to trade on the SIMEX along with a small team of Barings traders. Leeson was now general manager, head trader and, due to his experience in operations, head of the back office. Such an arrangement should have caused alarms, but no Barings senior manager seemed to notice the evident conflicts of interest. Possibly, the inherent lack of risk in the trading being done prompted management not to be concerned about Leeson's multiple positions. In the trades on the futures market, Leeson was not only responsible for the trades but, at the same time was in charge of booking and reporting. In a normal day, Leeson would work at the Singapore Money Exchange until trading ended at 2pm; he then would go to the office (or 'back room') where all the records of the day's trades were stored.

This meant that Leeson would be the only individual to check and to know whether the records matched the actual sales. Usually, a different person would do the back office accounting, to detect any dubious deals. However this was not the case at Barings; Leeson thus had the power to cover his tracks in case of any substantial loss or illicit trades. Back offices are tasked with the recording, confirmation and settlement of trades done by the front office, as well as their reconciliation with the details sent by bank counterparties. Back offices also carry out assessments on the accuracy of the prices used for internal valuations. A back office also releases and accepts securities, as well as billing for trades. Back offices may also provide any reports to regulators and the necessary management accounting. Thus the back office provides the necessary controls to prevent illicit dealing and to lower the chances of fraud and misappropriation. As Leeson was responsible for the back office, he was nominally in charge of all the payments, both ingoing and outgoing trade confirmations as well as contracts, reconciliation statements between trades, the accounting entries which showed which trades were carried out, and reports on the branch financial position.

Leeson can be considered to have been in a perfectly placed position to relay false information back to London, hiding all his tracks and losses. Leeson and the other Barings traders had the authority to perform two types of trading: Carrying out options and futures deals both for clients and for internal Barings subdivisions, and Taking advantage of arbitrage opportunities because of differences in Nikkei futures traded on the SIMEX and Japan's Osaka exchange. The illicit trades began in earnest in 1992, when Leeson started to make unauthorised speculative trades that initially made large profits for Barings; these profits amounted to £10 million, and accounted for ten-percent of Barings' annual income for that year. For these trades, Leeson earned a bonus of £130,000 on a yearly salary of £50,000. However, the trades soon went against Barings, and Leeson used one of Barings' trading error accounts (which was usually used to correct mistakes made in trading) to cover the mounting losses. The infamous account was numbered 88888 - a number believed to be lucky in Chinese and oriental numerology.

Leeson stated that this account was initially used to hide an error made by one the traders. Instead of buying twenty contracts as the customer had ordered the trader had sold them, costing Barings £20,000. However, Leeson began to use this account to cover more bad trades. He insisted that this account was never used for personal gains; however in 1996 the New York Times quoted 'British press reports' had showed that investigators had found around $35 million in a number of bank accounts linked with Leeson. Senior management at Barings had also allowed Leeson to remain 'chief trader,' while remaining responsible for the settlement of his own trades. These tasks are usually done by different employees. This gave Leeson as simpler way to hide losses from the London head office. The beginning of the end for Barings Bank started on January 16, 1995. Leeson placed a short straddle [ 2 ] in the Tokyo and Singapore stock market, betting that Japanese shares would remain unchanged overnight. However, an earthquake centred on the town of Kobe struck the country early on January 17, sending many Asian markets and Leeson's trades along with them, into a tailspin.

Leeson attempted to recoup these losses by making a number of increasingly risky new trades (using long-long future arbitrage). This time the trader was betting that the Nikkei Stock Average would make a rapid recovery. However, this recovery failed to materialise. Before the earthquake, the Nikkei Stock Exchange traded in a range of between 19,000 and 19,500 contracts. Leeson had traded long futures positions of around 3,000 contracts on the Osaka Stock Exchange. Some days after the earthquake struck, Leeson began an aggressive buying programme, culminating in a high of 19,094 contracts about a month later. The huge Futures position of Nick Leeson was simply part of his trading mandate, and no one could suspect any suspicious trading loss behind them. Leeson's position on the Osaka Stock Exchange was publicly known, as the exchange reported such positions every week. Barings London thought this long position was matched by a short position of the same nominal value. This implied being short twice as many contracts, as the Singapore International Monetary Exchange contracts have a notional value twice as small as the one of Osaka's contracts.

But contrary to what senior management was thinking, Leeson was in fact long by the same amount on the Singapore International Monetary Exchange. Nick Leeson managed to hide the real position in a secret account known as an 'Error account,' with the number 88888. Leeson was able to hide this position because he was responsible both for front and back office. Leeson had bought a substantial number of contracts, 11,000 on the January 20, 1995 - just three days after the earthquake in Kobe. Probably, he believed the market had overreacted and that the fall in the Nikkei-225 from 20,000 to 18,950 was only temporary. However, the Nikkei-225 dropped even further and by January 23, 1995, it was around 17,950. By the end of February 1995, Leeson had leveraged his position to seven billion dollars, holding about 61,000 contracts (55,000 in March contracts and 6,000 in June contracts).

His position on the Singapore International Monetary Exchange was eight times larger than the next position. Although the position could have been hidden for some time, since the margin called was only a small proportion of the notional value, Leeson position was too big not to be discovered. As the margin calls began to increase, Barings Tokyo London had to transfer urgently a massive $835m to Barings Singapore in January and February, just to cover the margin calls on the Singapore International Monetary Exchange. The calls made bankrupted Barings, as its reported capital was only $635m. While Leeson stated that the 88888 account had been initially used to hide embarrassing deals resulting from mistakes by one of his traders, the reality is that Leeson had begun trading using the 88888 account almost immediately upon arriving in Singapore. The volume of his trading suggests a desire to run risks and speculate. Money was lost from the beginning. Increasing the bets only lost Barings more money, as the margins were too small.

For example, futures contracts can be bought on the Nikkei Exchange worth â‚¬50 million on one day, and at the same time sell it in Singapore for â‚¬50,001,000. Though a trader would have bought and sold more than â‚¬100 million, the profit was only â‚¬1,000 - â‚¬1,000 for a 50 million euro investment. However, instead of hedging these deals, Leeson bet on the future direction of the Japanese markets. Using the previous example, one could buy â‚¬50 million worth of Nikkei futures contracts, and then hope that its price rises in future. Thus even a small percentage change in the price would create one million euro worth of profit or loss. By December 1992, the 88888 account was hiding about £2 million in losses. A year later, this had mushroomed to £23 million. By December 1994, Leeson's 88888 account had a total loss of £208 million. Barings management remained completely unaware.

By performing futures transactions at off-market prices, Leeson was able to earn profits in the arbitrage accounts - while placing offsetting losses in the 88888 account. During 1994, Leeson 'earned' £28.5 million in false profits. This was a staggering profit to make from futures arbitrage, but it ensured that Barings employees earned bonuses for that year. Obviously, there was little incentive for employees to question the unusually high arbitrage profits. If anything, Leeson was viewed as a star trader who was never to be interfered with. A confounding point is that Leeson had managed to sell 70,892 Nikkei-225 options worth roughly $7 billion without the knowledge of the London head office. Leeson earned commission fees from selling these 37,000 straddles over a fourteen month period. Such premiums on the transactions can very profitable provided the Nikkei-225 remains trading at the options' strike choice on its day of expiry, since otherwise both the puts and calls would expire and be worth nothing.

If the Nikkei keeps trading at the options' strike on the expiry of the future, the trade can still be profitable because the premium earned on it can offset the comparatively small loss experienced on a put (if the Nikkei had fallen) or a call (if the Tokyo market had risen). The striking price of most of these straddle positions ranged from between 18,500 to 20,000. Leeson thus needed the Nikkei-225 to keep trading at its pre-Kobe earthquake range of 19,000 - 20,000, if the bank was to profit on his option trades. The earthquake completely shattered this options strategy. On that day, January 17, the Nikkei-225 stood at 19,350. It ended the week slightly lower, at 18,950, with Leeson's straddle positions beginning to look unsteady. The call options Leeson sold appeared worthless in an environment of a falling market, but the put options obviously became valuable to their buyers who expected the Nikkei to continue to fall.

The losses on these put options were unlimited, since they were totally dependent on the level at which the Nikkei closed. On the other hand, any of the profits made on calls options were limited to the premium they earned. When the Nikkei fell by 1000 points to 17,950 on January 23, 1995, Leeson showed losses on his two day old futures position, (which were 'long'), as well as unlimited damage from the sale of put options in a falling market. Leeson attempted to reverse the negative sentiment flooding the Japanese stock market single-handedly. On January 27, account 88888 had a long position of 27,158 March 1995 contracts. Over the next three weeks, this position was doubled to reach a high of 55,206 March 1995 contracts and 5640 June 1995 contracts on February 22. The question remains how Leeson managed to deceive everyone around him. The use of cross trades allowed the trader to post profits on the 'switching' activity, while in reality losses were being made.

A cross trade is any deal executed on the trading floor of an stock exchange by a member who is acting both as buyer and as a seller. Since the member has matching buy and sell orders from two different accounts for the same contract and at the same price, the transaction can be crossed out (thus executing the deal) by matching both client accounts. A cross trade has to be made at market price. Leeson began trading a significant volume of options in cross transactions between account 88888, account 92000 (which was Barings Securities Japan - Nikkei and JGB Arbitrage), account 98007 (Barings London - JGB Arbitrage) and account 98008 (Barings London - Euroyen Arbitrage). After concluding these many cross trades, Leeson ordered the settlements staff to divide the contracts into a larger number of different trades, and to change their prices: causing profits to be credited to 'switching' accounts, with losses charged to account 88888.

Thus, while the cross trades with the stock exchange appeared to genuine, the books and records of Barings Securities Singapore, reflected different pairs of trades adding up to the same number of lots at prices different from those actually executed on the floor. Thus Barings was the counterparty to many of its own deals. Leeson bought options from one hand and sold them to another, and in so doing did not remove any of the transactions' market risk. Barings was thus not taking arbitrage advantages between the SIMEX and Japanese exchanges, but opening unsecured (and large) positions, buried in the secret account 88888. Only the profit and loss statement on this account represented correctly the revenue earned (or unearned) by Leeson. The details of this secret account were not transmitted to the central treasury or to risk control offices in Londo. This omission led to catastrophic consequences for Barings shareholders and bondholders. Barings senior management broke an important rule of trading operations, by letting Leeson settle own trades since he was in charge of both the dealing desk and the back-office. Despite having to fund millions of pound sterling in losses, there were various factors that allowed Leeson to avoid immediate discovery.

At the time, there was a merger in process between two parts of the Barings organisation. Barings had bought the stockbrokers Henderson Crosthwaite in 1984, which became Barings Securities Limited. In November 1993, Barings Securities Limited was merged into Baring Brothers & Co., in order to later form a 'Barings Investment Bank.' The merger was uneasy as the firms had markedly different cultures. This was a distraction at the time of Leeson's tenure at Barings Securities Limited. Barings was just starting to build up its own risk management function. Thus, risk controllers were appointed at the London, Tokyo and Hong Kong offices during 1994 - but not in Singapore. At Barings Securities (Singapore), Leeson effectively controlled the front and back offices, with no middle office. Also, there was no one at Brings responsible to supervise Leeson. As part of a 1993 reorganisation, Barings began using a "matrix" approach in the management of its offices. There was one reporting structure based upon products in all offices. Another was based upon operations, ensuring local management of systems, controls, settlement and accounting. Employees complained that lines of reporting were unclear.

Furthermore, Leeson was an accomplished deceiver: Records were falsified, letters fabricated and sotires made up to deflect queries from management, auditors and representatives of SIMEX. Leeson also actively played on people's insecurities. On February 23, 1995, Leeson fled Singapore, leaving for Kuala Lumpur. Barings Bank auditors finally discovered the fraud at roughly the same time that Peter Baring, Barings' chairman, received a confession from Leeson. His activities had generated losses amounting to £827 million, double the bank's available trading capital. The unexpected collapse cost another £100 million. The Bank of England attempted a weekend bailout of the bank, but it was unsuccessful. As employees around the world failed to receive their bonuses, Barings was declared insolvent on February 26, 1995; appointed administrators began to managing the finances of Barings Group and its subsidiaries, while on that same day, the Board of Banking Supervision at the Bank of England started an investigation on these events. Their report was released on July 18, 1995. The loss to Barings' shareholders amounted to an estimated £1 billion.

After learning of Barings' collapse (and realising he faced imprisonment his actions), Leeson tried to flee to London, intending to surrender to British authorities in the hope of serving his eventual sentence in the United Kingdom, and not in Singapore. However, Leeson was stopped and apprehended by German authorities when landing in Frankfurt, six days after leaving Singapore. Nick Leeson spent the several months in German custody, unsuccessfully trying to fight his extradition to Singapore. British authorities declined to pursue his extradition to England. Convicted of fraud, Leeson was sentenced to a term of six and a half years imprisonment in Singapore. He was released early in 1999 after being diagnosed with colon cancer, and for good behaviour. Despite very bleak forecasts, he remains alive to this day. Leeson is now the CEO of the Irish football team, Galway United. As a result of Barings Bank's collapse and insolvency, ING, an international Dutch-owned bank, bought Barings Bank in 1995 for the symbolic sum of £1, taking over all of Barings' liabilities, and forming a new subsidiary, ING Barings.

By 2001, ING had sold the bank's American based operations to ABN-Amro for $275 million, folding the rest of ING Barings into its European banking division. This left only the asset management division, Baring Asset Management, in operation under the original name. In March 2005, BAM was split and sold by ING to MassMutual (which acquired BAM's investment management activities, as well as the right to use the Barings Asset Management name) and Northern Trust (which bought BAM's Financial Services Group). Barings Bank thus ceased to operate a separate corporate existence, although the MassMutual subsidiary, Baring Asset Management, still uses the original name. Trading in derivatives is not as easy as perceived. Barings is a clear case, showing how risky dealing in derivatives can be for financial institutions. The whole sequence of events leading to the bankruptcy of Barings, shows how banks should not manage a subsidiary operation in derivatives if proper controls are not in place. The risk management, control and responsibility lessons to be learnt from this number of failures relate as much to normal banking operations as well as to the more exotic derivative ones.

While bad loans or failing cash investments take years to choke an institution, the leverage and the depth of liquidity offered by futures contracts will break a bank over a very short period, sometimes in a matter of hours. Study On The Collapse Of Barings Bank Finance Essay Study On The Collapse Of Barings Bank Finance Essay Published: Last Edited: 23rd March, 2015 This essay has been submitted by a student. This is not an example of the work written by our professional essay writers. Barings Bank established in 1762 was one of the oldest merchant banks in Britain until its collapse in 1995. The official banker to the Queen, Barings Bank has been a pivotal part of world history funding the Nepoleanic wars, purchase of Alaska by US from Russia, The trade agreements with South America and many import trade agreements as part of the East India Company (D). In 1880s the bank ran into some trouble regarding Argentina's loans which were said to have defaulted to the tune of 21 million pounds post which the bank was not allowed to partake of any major financial decisions, which led the bank to offer financial service and consulting to wealthy clients.

In the 1950s the bank was elected by Her Majesty as one of the guardians of the royal fortune (B). Towards the late 1980s and early 90s the bank became aggressive in re-entering international finance, getting into the brokerage business and consulting on merger and acquisitions outside Britain. The Barings Future group was set-up which looked into brokerage and trading facilities provided by the bank. Since 1987, the bank maintained an office in Singapore called Barings Security Singapore limited (BSS) which focused on equity, but time saw the volumes of futures being traded on the SIMEX increase. BSS had to pay large commissions as they themselves did not have a trading seat on the exchange. In an expansion frame of mind Barings needed to employ traders and purchase a seat on the exchange and to head this operation they were looking for someone. In came Nick Leeson, whose recent success in the Jakarta operations where he converted about 100 million pounds worth of bearer bonds and certificates deliverable had made him well known with the management at Barings (A). In 1992 Leeson was made head of General Manager and was allowed to employee back office staff and traders.

Soon Leeson acquired a trading license, making him head trader, general manager and in charge of the back office operations. Nick was involved in derivatives trading and hedged long and short term positions on the Singapore and Japanese exchanges. In February of 1995, Leeson has lost $1.4 bn on derivatives trading while the bank's reported capital was only about $600 m (Fay, 2006). These losses were hidden in account '88888' which was initially created to cover the loss made by one of his traders of the amount of 20,000 pounds, but later Leeson undertook cross trading activities and used the same account to conceal his losses. Leeson entered into a significant volume of cross transactions between account '88888' and account '92000' (Barings Securities Japan - Nikkei and JGB Arbitrage), account '98007' (Barings London - JGB Arbitrage) and account '98008' (Barings London - Euroyen Arbitrage). Table 1 illustrates the values for various futures as actuals vs. declared by Leeson while reporting back to management in London.

Table 1 Fantasy versus Fact: Leeson's Positions as at End February 1995. Â nominal value in US$ amounts Actual position in terms of open interest of relevant contract2 Â 32967 puts $3100 million 1. Expressed in terms of SIMEX contract sizes which are half the size of those of the OSE and the TSE. For Euroyen, SIMEX and TIFFE contracts are of similar size. 2. Open interest figures for each contract month of each listed contract. For the Nikkei 225, JGB and Euroyen contracts, the contract months are March, June, September and December. 3. Leeson's reported futures positions were supposedly matched because they were part of Barings' switching activity, i.e. the number of contracts on either the Osaka Stock Exchange, the Singapore International Monetary Exchange or the Tokyo Stock Exchange. 4. The actual positions refer to those unauthorized trades held in error account '8888'.

Source: The Report of the Board of Banking Supervision Inquiry into the Circumstances of the Collapse of Barings, Ordered by the House of Commons, Her Majesty's Stationery Office, 1995 Once the cross-trades were carried out, Leeson would ask the settlements staff to break down the total number of contracts into several different trades. The trade prices were then changed and profits were credited to 'switching' accounts and losses were charged to account '88888' (C). Hence, for a long time Leeson was able to fool the management by showing profits for BSS and evaded declaration of the huge losses he was amounting. Leeson continued to bet that the Japanese stock exchange would rise, but it plummeted after the Kobe earthquake of January 17, 1995. Leeson's positions went in the opposite direction to the Nikkei - as the Japanese stock market fell (E). The Barings Bank filed for insolvency in 1995 as it could not meet the enormous trade obligations established by Leeson.

The impact on affected parties was huge as 25,000 employees of Barings around the world did not receive their bonuses and In June 1995 Barings was taken over by one of the largest Dutch financial services companies, ING for a first sale price of just $1bn. 21 of the top officials at Barings were fired. Leeson was arrested and sentenced to 6 years in the Changi Prison in Singapore from where he was release in 1999. Q 2 Use the agency theory framework to identify the main reasons the company had failed its shareholders and stakeholders. The Agency theory framework suggests that there is a basic conflict of interest between the individual serving a firm and the firm serving a shareholder(textbook). This conflict of interest in an imperfect market situation gives rise to unethical behaviours and corporate mishaps endangering the interest so of the principals (shareholders) by the agents (firm managers) (Eisenhardt, 1989). Barings underwent a major re-organisation in 1993and the bank's management, undergoing disturbance in London. The Risk management function was just being introduced and was not traditionally present.

The lines of control and reporting were not clearly established as a matrix-like structure was adopted where there were two kinds of reporting channels, products based and operations based. (Barings Scandal, 1996). Also, BSS was recording profits and hence money flowed there from London without too much concern or control. Leeson was both, Head of trading and Head of settlements. Traditionally as head of trading he would be reporting to head of settlements who should have been another person, but the absence of this structure suggests lack of audit and risk control mechanisms. Leeson could trade however he wanted and (fudge) cock the books to reflect desired results (Ross, 1997). Agency theory emphasises on two things, an information mechanism like the board of directors and a risk management/ evaluation control mechanism (Eisenhardt, 1989) both of which were absent at Barings. Senior management involvement was almost absent and Leeson was given a freehand for operating the way he saw fit only because he was recording profits which highlights the agency theory principle that self interest is different from maximizing an organisation's value and therefore shareholder wealth.

Leeson was acting to make a personal fortune neglecting all his duties towards the stakeholders or shareholders (Schachler, Juleff , & Paton, 2007). Lack of official reporting relationships, lack of separation of Leeson's duties, lack of differentiation of amounts for client trading and house trading, lack of sufficient balance in the firm's balance sheet, unrealistic profit expectations of managers by senior management (Greener, 2006), tendency to take extraordinary risks in lieu of graining extraordinary benefits by generating high profits, circumventing the computerized financial reporting system by Leeson and negligence on the part of internal and external audit agencies form the reasons for the Barings collapse of 1995. Maybe in dot points? Q3 In hindsight, what measures could have been instituted to prevent the collapse of the company you have chosen to profile? The biggest hole in the governance strategy of Barings Bank about their Singapore operations was the concentration of front office and back office controls with one person, Nick Leeson. This diluted any financial, risk and/or ethical controls of the operations and the individual Leeson (Drennan, 2004).

Had a formal reporting structure been in place and the management more stringent and involved in deciding monetary trading caps for Leeson, they might have become aware of the disastrous 88888 account in time to save the bank's collapse. Also, maintaining enough capital in the organizations' books to withstand adverse market changes could have helped Barings, but Barings' senior managers continued to fund Leeson's activities because they thought they were paying margins on hedged positions whereas in reality they were losing money on outright bets on the Tokyo stock market. Presence of poor market, credit and funding control procedures also let to Leeson manipulating the situation to his advantage as there were no limits set on trading activities by senior management (Greener, 2006). Hence, separation of Leeson's responsibilities, a more responsible reporting structure, stringent financial trading controls, and absence of ego-defensiveness (Why your organisation could be the next Barings Bank, 2002) and therefore investigating into the jarring mistakes of Leeson are some of the measures that could have flagged off warning signs at least.

Lenient auditing from internal and external agencies alike that are either part of in on the scam or just too afraid to lose a big client was also one of the reasons for the Barings Bank collapse. Also the lack of knowledge of non-banking businesses for banks when they venture into such ventures is also one of the reasons that causes negligence and teething problems, causing some high flying executives to search for their moment of glory in these situations. Q 4 There has been significant effort in the past 10 years to develop a framework for corporate accountability. Provide a summary of these efforts, and explain how such changes could help change the landscape of corporate governance. The Board of Banking supervisions conducted an inquiry on the Barings collapse and came up with plausible causes of the debacle and who were the entities to blame. Top and senior management, excessive bonuses to be won by high performers (Drennan, 2004), and a cut-throat competitive, plus the pressure to succeed in a new business were some of the cause as they have been enumerated in detail throughout this paper. These concerns have lead to increased focus on changes in corporate setup, formation and control of boards and the role of risk and audit functions.

The collapse of Barings Banks was the single most import event in business history that has shaped many of the regulatory frameworks today. These include regulatory consolidation, reduced risk of collapse, improved communication between lines of authorities, and the creation of the Financial Services Authority that brought 9 different regulators under one roof. (Rae, 2005). The Department of Trade and Treasury has laid down conditional stipulations against CEO remunerations and distribution of obscene amounts of bonuses. The Company's Bill looks to solidify Directors roles and responsibilities and give more control to the board rather than to the individuals (Drennan, 2004). The Securities Commission has also laid down certain revised rules for derivatives trading making the caps for client and house trading compulsory for trading firms. Hence the landscape of corporate governance has become more stringent and starker where fudging is no longer as easy as it seemed and hiding large sums of money in concealed accounts no longer an invisible trick to pull. NaÃ¯ve management and clever rogue traders like Leeson may have had their tryst with fame and tragedy alike, but the business landscape in their wake is a more controlled and responsible environment. ????? financial crisis a few years later shows that it is still happeningâ€¦..

Question: In which country was Nick Leeson when his unauthorised trades on the futures market brought about the collapse of Barings Bank?
Answer: SINGAPORE