This is my discussion and summary of the Nick Leeson’s role on the death of Barings Bank, which was a former British investment bank based in London. It was the world’s second oldest investment bank when it was still operating (after Berenberg Bank of Germany). It was founded by brothers, John Baring and Francis Baring. In 1803, the bank changed its name to Baring Brothers and Company when Francis Baring withdrew from active management, and the firm became a limited liability company. At the height of its operation, Barings Bank is a key player in the financial market from the 1940s until 1995. The bank collapsed in 1995 after suffering major losses amounting GBP827 million pounds (around USD1.3 billion dollars during that time’s conversion) resulting from poor and unethical speculative investments, primarily in futures contracts, conducted by a lone employee working at the bank’s office in Singapore named Nick Leeson. Take note, the bank went bankrupt just because of only one employee. So what really happened? We’ll find out in a short while.
The objective of this case is to illustrate how a risky, unmanage and unethical investment strategy can bring down an entire corporation, even a longstanding one like Barings Bank. This discussion will also show how an individual can get through loopholes in the system, and carryout trading abuses through the so-called error account. An account allowed by exchanges to provide flexibility to floor traders. As a whole, this summary explains how the lack of proper guidance and supervision on employees could result in the damage of reputation by a firm, and much worse, the catastrophic downfall of a company.
Now, let’s focus our attention to the main man of this case, Nicholas William Leeson or popularly known simply as Nick Leeson. He was born on February 25, 1967. After finishing school in 1985, Leeson’s first job was as a clerk in Coutts Bank, which is now a subsidiary of the Royal Bank of Scotland. He then moved to Morgan Stanley in 1987 for two years, and then to Barings Bank in 1989. In 1992, Barings Bank appointed Leeson as the general manager of a new operation in Singapore, with the main job of trading and speculating in the future markets of the Singapore International Monetary Exchange (or SIMEX). But, the primary reason why Leeson was sent over to Singapore was that, he was denied of a broker’s license in the UK; and to continue his career, he was forced to move to Singapore. What’s this, throwing away a trash from the UK? So, with the help of Barings Bank, he acquired his license in Singapore without any disclosure of previous broker’s license rejection.
During that year, Leeson gained the respect of the bank when he was able to make huge profits from some unauthorized speculative trades, which accounted for 10% of the overall Barings’ annual profits. Take note, these are allegedly unauthorized trades by the parent bank, but since he was making money for the firm, turning a blind eye is an easier thing to do. Because of his trading success, he earned a bonus of GBP130,000 thousand pounds (around USD204,350 dollars), on top of his salary of GBP50,000 thousand pounds (around USD78,590 dollars) for that year. However, the luck of Leeson ran out. He was unable to sustain this high level of profit, and also started making losses. Initially, Leeson used an error account to cover up his losses. He claimed that it was used to hide an error of his colleague, costing Barings a total of GBP20,000 thousand dollars (around USD31,440 dollars). Also, Leeson gave specific instructions in July 1992 to Barings’ Futures Securities to change the bank’s software to exclude Account 88888 (or five 8s, a series of very luck numbers) from all market activity reports, while on the other hand, SIMEX knew that this was a customer account having huge losses.
So what’s an error account? An error account is actually a trading account, which is used to store or save monetary value to compensate for an error in trading. For example, there is a transaction that was posted incorrectly due to some typographical error. The money in the error account will be used in order to solve the minor human error so that payments can be made correctly.
This is the end of this discussion’s first part. See you on the second part.