Barings Bank was the world’s second oldest merchant bank and was founded in 1762 by the Baring family of merchants and bankers. From its Cheapside and Mincing Lane offices in London’s Square Mile, the bank oversaw and financed the rapid growth of international trade as the major world powers jostled over the spoils of their respective imperial conquests.
A single employee named Nick Leeson single-handedly crippled the two-century year old financial institution in 1995 after a series of fraudulent investments in futures markets that saddled it with losses amounting to £827 million ($1.3 billion).
The bank had been involved in some of the most significant financial transactions in history namely: The Louisiana Purchase which doubled the geographical size of the United States, the funding of the Napoleonic wars, the funding of the United States government during the War of 1812, the supply of maize to Ireland during the potato famine and the North American railroad boom following the Civil War. Barings had become so powerful during its heyday that by 1818 it had become knows as “the sixth great European power” after England, France, Prussia, Austria and Russia.
In 1992, Nick Leeson, a young banking wunderkind that had enjoyed a stellar career at the private bank Coutts and Morgan Stanley, was sent to work in Singapore on behalf of Barings after he was denied a broker’s licence in the UK because of fraud on his application – a fact that was never disclosed by him or Barings when he applied for his licence in Singapore.
Leeson was soon making unauthorised speculative trades that initially generated large profits for Barings. In 1992 for example, he made £10 million for the bank which accounted for 10% of its annual profit and earned him a bonus of £130,000 on top of a basic salary of £50,000 for that year.
Leeson’s good run of fortune soon took a negative turn however, so he used one of the bank’s error accounts that were used to correct mistakes to hide his losses. The account was numbered 88888 and Leeson claimed that it was first used to hide an error made by a colleague who had incurred losses of £20,000.
As time passed, Leeson continued to use the 88888 account to cover up bad trades and by the end of 1992, the account was in the red to the tune of £2 million, which had increased to £208 million by the end of 1994.
The management structure that the Barings Futures Singapore division had up until 1995 was such that Leeson was not only the floor manager for the bank’s trades on the Singapore International Monetary Exchange (SIMEX), but he was also the head of settlement operations meaning he was responsible for ensuring the accurate accounting for the business unit. Both these positions would normally have been held by separate individuals, so in allowing Leeson to settle his own trades as floor manager, the normal accounting safeguards were easily circumnavigated making it easy for him to hide his losses from the London office.
A number of people at the bank had raised concerns over Leeson’s activities but were ignored, so Leeson was able to cover his trading shortfalls by reporting losses as gains to the Barings London office by continually altering the Singapore office’s error account.
Even though Leeson had lost over £200 million by December 1994, he was still able to report a £102 million profit to the UK tax authorities and some say that if he had been stopped at this point, the bank may have been able to avoid a collapse as it still had £350 million in capital.
Leeson’s game was finally up when the Kobe earthquake struck, sending the Asian financial markets into a fierce downward spiral. Leeson attempted to make one last ditch attempt at recovering his losses by betting on a rapid recovery of the Nikkei, but this ultimately proved fruitless.
Leeson fled Singapore for Kuala Lumpur on 23rd February 1995 and left a confession note for Peter Baring, the bank’s chairman which simply said, “I’m sorry.”
Leeson’s activities had generated total losses of £827 million (US$1.3 billion), twice the amount of trading capital the bank had available. The bank’s employees around the world did not subsequently receive their bonuses and Barings was declared insolvent on 26th February 1995.
After fleeing to Malaysia, Thailand and Germany, Leeson was finally apprehended at Frankfurt airport where he was extradited back to Singapore and charged with fraud for deceiving his superiors about the riskiness of his activities and the scale of his losses. He pleaded guilty to two counts of “deceiving the bank’s auditors and cheating the Singapore exchange” and forging documents. Leeson was sentenced to six and a half years in Changi Prison in Singapore, but was released early in 1999 after being diagnosed with colon cancer.
Observers placed much of the blame on the bank’s own deficient internal audit system and risk management practices. A subsequent report by the Singapore authorities on the collapse was scathing about Barings’ management and claimed that senior officials knew or should have known about the “five eights” account.
Whilst still in prison in 1996, Leeson published an autobiography called ‘Rogue Trader,’ detailing his acts which was made into a film of the same name starring Ewan McGregor and Anna Friel.
In our opinion the Barings management shouldn’t be too heavily criticised for not keeping a closer eye on Nick Leeson. Here at The W1nners’ Club we are often criticised for not trusting our staff at all simply because we employ private investigators to secretly follow them around after work and bug their homes – it just goes to show how tricky it is to get the balance right when it comes to managing employees!