How Did Nick Leeson Contribute to the Fall of Barings Bank?

Nick Leeson is a former derivatives trader who became notorious for bankrupting Barings Bank, the United Kingdom's oldest merchant bank, in 1995. After opening a Future and Options office in Singapore, Leeson became a rogue trader, eventually losing over $1 billion of Baring's capital as its head of operations on the Singapore Exchange (SGX).

Nick Leeson and the Fall of Barings Banks

Leeson began his career at Barings at age 28. Initially, he was very successful in making speculative trades, which resulted in huge profits for Barings. After moving to Singapore to execute and clear transactions on the Singapore Exchange (SGX), Leeson began making unauthorized trades. At first, these risky positions made large profits for the bank: as much as £10 million, accounting for 10% of Barings' annual profit in 1992.

On behalf of his clients, Leeson was primarily trading futures on the Nikkei 225 Stock Average, the primary index in Tokyo. Leeson should have been managing a cash-neutral business. This strategy entails managing an investment portfolio without adding any capital. In Leeson's case, if money was made or lost on the trades it would have belonged to the clients. Barings' only compensation on the trades should have been a commission, and only a small amount of the trades were meant to be proprietary, or on behalf of the bank itself. In fact, Leeson was actually using the bank’s money to make bets on the market in an attempt to recoup his trading losses.

Because Barings had given him the responsibility of double-checking his own trades, rather than reporting them to a superior, Leeson was able to hide the losses from his bad trades in a secret account. In an attempt to recover lost money, Leeson began taking increasingly bigger odds. In late 1993, the losses in the secret account that Leeson was maintaining exceeded £23 million. By the end of 1994, the amount had increased to £208 million.

On January 16, 1995, Leeson placed a short straddle on the Singapore and Tokyo stock exchanges, guessing that the exchange would remain stable overnight, neither going up nor down by a significant margin. Normally, this would have been a conservative position, especially for Leeson. But on January 17, 1995, an earthquake with an epicenter in Kobe, Japan caused a sharp drop in the Asian markets.

Faced with huge losses, Leeson attempted to offset the losses with a series of increasingly risky trades that were based on the rate of recovery of the Nikkei. Leeson ended up fleeing Singapore on February 23, 1995. In the end, his losses accounted for £827 million (or $1.4 billion), twice Barings's available trading capital.

Leeson was arrested in Germany and, after a failed bailout attempt, Barings went bankrupt on February 26, 1995. Leeson was charged with fraud on the grounds that he had deceived his superiors about the riskiness of his activities and the scale of his losses. He was sentenced to six and a half years in prison in Singapore. While he was in prison, Leeson wrote his book, "Rogue Trader." In 1999, Leeson's book was made into a film of the same name and starring Ewan McGregor and Anna Friel.

Up until the year 2008, Leeson held the record for the most losses due to unrestricted trades. In 2008, the French bank Société Générale announced that a rogue trader named Jerome Kerviel had lost more than seven billion dollars by conducting a series of unauthorized and false trades.