THE NICK LEESON CASE
PRESENTED BY: -
- AMIT DEWADIGA
- NEELESH SINGH
- RAVIN KAPADIA
- SATISH MOHITE
- SHIVKUMAR VERMA
- TRUSHALI GAIKAR
- VINEET NADKARNI
NICK LEESON & BARINGS
BANK
• The rogue trader whose unchecked risk-taking caused
the biggest financial scandal of the 20th century.
• The collapse of the “Barings Bank”, which proudly
called the Queen, its customer.
• “I think rogue trading is probably a daily occurrence
amongst the financial markets. Not enough focus goes
on those risk management areas, those compliance
areas, those settlement areas, that can ultimately save
them money.” – Nick Leeson.
About the man – Nick Leeson
• Son of a Plasterer from Watford
• Failed his final maths exam and left school
• In early 1980’s joined as a clerk with Royal Bank
Coutts
• Thereafter undertook several other jobs with
various banks
• Finally, settled at Barings and managed to make an
impression in his early days and got promoted to
the trading floor.
The performance story
• Appraising his performance, the bank appointed
him as a manager in futures market on “SIMEX”
• The gains made by him started to speak for him as
he managed to blindfold his seniors.
• By the end of 1993 he single handedly contributed
for nearly 10% of the total profits of the bank.
• He manipulated, showed only profits and managed
to hide all the losses made by him.
The man behind the scene
• The actual picture was different from what Nick Leeson presented.
• How did he manage to do so?
• He had gained the faith of his seniors to such an extent that, Barings broke the
cardinal rule of trading operations - they made him in-charge of both the dealing
desk and the back office.
• Leeson changed software so that trades were not reported.
• This allowed him to manipulate all records and the real one’s did not reach the
authorities.
• He went to an extent to open an error a/c “88888” where he hid all his losses.
Cross Trades – A/c 88888
• The error A/c was not known to the seniors in UK.
• He then engaged into a significant volume of cross trading between account
88888 and other accounts
Cross trading = matching the positions of two accounts belonging to the same
client
Ex: If Barings owed US$500m to Daiwa Bank from one type of transaction but also
expected to receive US$300m from Daiwa from another type of transaction, it
could net the two amounts through a cross trade.
• After executing these cross-trades, Leeson would instruct the settlements staff
to break down the total number of contracts into several different trades, and to
change the trade prices to cause profits to be credited to account 92000, while
charging losses to account 88888 account
• What appeared to be an arbitrage was in fact a speculation disguised with the
help of account 88888.
Leeson and his Game
• Arbitrage between “SIMEX” and “OSE” – correct way was to go long in
one market and short in the other.
• Leeson went short on Osaka - (His position was public knowledge since the OSE
publishes weekly data)
• Leeson should have gone short in Singapore; instead - he went long,
approximately the number of contracts he should have been short.
• These were unauthorized trades which Leeson managed to hid in the
error account “88888” along with all the losses which he made.
The Game Continues
• In industry parlance, Leeson sold straddles, i.e.
• he sold put & call options at the same strike and maturity
• Leeson earned premium income from selling well over 37000
straddles over a 14month period.
• Such trades are very profitable provided the exchange is
trading at the same strike on expiry date since both call and
put would end worthless.
The seeds were sown
• His straddles position strikes were in the range of 18500 to 20000.
• On 17th Jan’ 1995, devastating earthquake hit kobe city in Japan.
• Within a week the Nikkei plummeted 1000pts down to 17950.
• Leeson managed to do nothing but to accumulate huge losses over his
long futures positions of 27158 March’95 contracts.
• He requested extra funds to continue trading and managed to get them.
• Leeson continued to trade and put in more money on his long positions
and tried single handedly to change the market sentiment.
• Over the next 3 weeks he doubled his long positions and reached
55206 March and 56 40 June open contracts.
Greed showed its way
• The gamble became un-manageable
• Leeson had accumulated losses to the extent of £827 million or $1.4
billion.
• The bubble burst when Barings felt the heat and failed to meet it’s
obligations from SIMEX towards margin call.
• In February 1995, England’s oldest and most reliable bank was
declared bankrupt.
• On 3rd March 1995, Leeson and his wife were arrested in Frankfurt,
and
• that same day, the Dutch bank, ING, purchased Barings for a mere £1
and assumed all its liabilities.
Management’s Role in the Collapse
• Management failed to follow up on the internal audit
• Managements response to the internal auditors report for a suitable
experienced person to run Singapore’s back office was that there was
not enough work for a full-time treasury and risk manager.
• Barings senior management had superficial knowledge of derivatives
and did not want to probe too deeply into an area that was bringing in
profits.
• Management failed to understand the risks of the business
• Management failed to supervise properly.
• Never even knew the breakdown of the profits. They accepted that
this business was a gold mine with little risk.
Five Step Process
