Barings Bank

Barings History

Founded by Sir Francis Baring in 1762, Barings Bank was Britain's oldest merchant bank and had financed the Napoleonic Wars, the Louisiana Purchase, and the construction of the Erie Canal; managed French reparations after Napoleon's defeat at Waterloo; acted as agents for Imperial Russia and the U.S. federal government; and issued bonds for the Chinese and Japanese governments. In 1890, Barings Bank narrowly avoided collapse due to over-exposure in Latin America. The bank was less fortunate in 1995 when it found itself in a similar position in the Far East.

During the late 1980s and early 1990s, Barings expanded its brokering operations in Asia, particularly in Singapore. In 1987, Barings Securities Limited (BSL), the brokering arm of Barings, established Baring Securities Singapore Limited (BSS), opening an office in Singapore. Initially, BSS focused on trading in equities, but its volume of futures trading on the Singapore International Monetary Exchange (SIMEX) grew quickly. As BSS did not have a seat on the exchange, the firm had to pay commissions on its transactions. A decision was made to cut out the middle-man, buy a seat on the exchange, and hire futures traders. Senior managers authorized the futures traders to carry out futures and options transactions on behalf of clients, or the Barings group, and trade in Nikkei-225 futures contracts listed on the Osaka Securities Exchanges (OSE) and SIMEX, in order to profit by small differences in the price of futures on the exchanges.

Rogue Trader

In 1992, BSS appointed Nick Leeson general manager of the new futures operation, granting him the authority to hire trading (front office) and settlements (back office) staff. Leeson had no experience in trading prior to his new appointment. His inexperience was deemed unimportant as the general manager's job did not involve direct trading. However, Leeson decided to take the necessary exams to qualify as a trader. Once Leeson passed his exams, he combined the roles of general manager and head trader. He was also de facto head of settlements as his inexperienced back office staff deferred to his greater back office experience. Assuming these three roles allowed Leeson to circumvent Barings' internal controls, as he could initiate a transaction and determine how it was recorded and settled.

In July 1992, Leeson used his control of front and back offices to open Error Account 88888. This was the account that he used to conceal trading losses and exaggerate his earnings, thus boosting his bonus. In his autobiography, Leeson claims that he used the account to hide embarrassing mistakes made by his inexperienced staff. However, Leeson was soon using the account to conceal his massive losses on unauthorized trading in Nikkei futures. At the end of 1992, the account showed a loss of £2 million increasing to £23 million at the end of 1993. Leeson's losses grew massively in 1994. Shortly before the Kobe, Japan, earthquake on January 17, 1994, Leeson sold put options (right to buy) and call options (right to sell) on the Nikkei simultaneously. The Nikkei fell slightly after the earthquake and Leeson panicked. He bought a vast amount of Nikkei futures in a vain attempt to stop the index from falling, further racking up the losses that broke Barings a year later.

...