In February 1995 Barings Bank, a staid British merchant bank, collapsed. Barings had financed the U.S. Louisiana Purchase from France in 1803, and by the early nineteenth century had become banker to the royal family. It had just reported record profits for 1994. The proximate cause of the Baring bankruptcy was that a futures trader, Nick Leeson, had purchased options contracts tied to the Japanese stock and bond markets for the Bank. When the Japanese stock and bond markets tumbled in 1994, Leeson bought more options in an attempt to prop up the market and recoup his losses. But stock prices continued to fall, interest rates continued to rise, and bond prices continued to fall. As a result, Leeson eventually lost more than $1 billion. Because Leeson was not authorized to make trades of this magnitude for the Bank, he had to disguise his trades from his superiors. In one particularly egregious instance of fraud, Leeson faxed Coopers & Lybrand, who was auditing Barings' Singapore office, a phony letter stating that 7.78 billion yen ($80 million) was owed to Barings Bank by Spear, Leeds & Kellogg, and would be paid shortly. For his part in the fraud, Leeson is currently serving a six-and-a-half year prison term in Tanah Merah prison, Changi, Singapore. But the question on everyone's mind, and the more important question, is not about proximate causes but about systemic causes: how could a young man from a small town in England, and without a college degree, deceive his employers and bring down one of the oldest and most conservative financial institutions in the world? This book provides one side of the story-an inside story, and indeed a very biased inside story. It all started when Barings Future Trading in Singapore hired Nick Leeson. Leeson had just spent a year or so in Jakarta, Indonesia at the Far East branch of Barings. To call it an office would be much too charitable. According to Leeson, he worked out of a hotel room and the bank's accounts were a total mess. Barings bought stock for its customers (primarily other banks), but had not been paid because certificate denominations were wrong and documentation about the trade was wrong. Through perseverance Leeson straightened out these problems, and then went around collecting the money owed to Barings. Leeson also points out (in a subtle attempt to demonstrate his honesty) that more than ?100 million worth of bearer bonds were just lying around the hotel room in Jakarta; anyone could have walked off with these bonds and cashed them. Leeson, however, fails to point out the true irony of the situation-had he walked off with those bonds, not only would he have been better off, but so too would Barings Bank. As a reward for straightening things out in Jakarta, Leeson was given responsibility for setting up and running the Barings operation in Singapore. It was here that the trouble began. In Singapore, Leeson was given responsibility for both making trading decisions and reconciling trading accounts. In essence, Leeson was responsible for keeping himself honest. It was as if you gave someone responsibility for making deposits into your checking account and paying your bills from the account. Then in an act of pure insanity you also gave the same individual responsibility for making sure that the checkbook balanced every month, that all deposits which should have been made were in fact made, and that no unauthorized expenditures were made. At that moment Barings Singapore became a disaster waiting to happen. Leeson's fall into purgatory began over a miscue on the trading floor. A trader bought shares when she should have sold them. In cases like this the trader is usually reprimanded and often fired, while the firm makes good to its customer and absorbs the difference. Barings thus paid its client for shares supposedly sold, and the Bank owned twice the number of shares involved in the trading error (the shares from the client plus the shares bought on the exchange in error). Established procedure is to put these shares temporarily into an error account and sell them as soon as possible. In most cases, error accounts wind up showing losses for brokers (although they can make money). These losses then get deducted from other trading profits.
Read full abstract
Jan 1, 2000
Carol C Bertaut + 1
Open Access
