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How Did Nick Leeson Contribute To The Fall of Barings Bank?

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

Key Takeaways

  • Nick Leeson is a quondam derivatives trader who became notorious for bankrupting Barings Bank, the United Kingdom’s oldest merchant bank.
  • After telling to Singapore to execute and clear transactions on the Singapore Exchange (SGX) in 1992, Leeson began making unauthorized trades, which initially made stout profits for Barings.
  • Although Leeson was supposed to be managing a cash neutral business, he was actually using the bank’s spondulix to make bets on the market in an attempt to recoup his trading losses.
  • Leeson’s losses accounted for £827 million, twice Barings’s within reach trading capital, and after a failed bailout attempt the bank declared bankruptcy in February 1995.

Nick Leeson and the Swallow of Barings Banks

Leeson began his career at Barings at age 28. Initially, he was very successful in making speculative interchanges, which resulted in huge profits for Barings. After moving to Singapore to execute and clear transactions on the Singapore Switch (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 customers, Leeson was primarily trading futures on the Nikkei 225 Stock Average, the primary index in Tokyo. Leeson should contain been managing a cash neutral business. This strategy entails managing an investment portfolio without supplementing 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 merchandises 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 the poop indeed, 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 specified 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 sells in a secret account. In an attempt to recover lost money, Leeson began taking increasingly bigger odds. In in 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 graded a short straddle on the Singapore and Tokyo stock exchanges, guessing that the exchange would remain stable overnight, neither thriving 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 fashionable drop in the Asian markets.

Faced with huge losses, Leeson attempted to offset the losses with a series of increasingly dangerous 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 harms accounted for £827 million (or $1.4 billion), twice Barings’s available trading capital.

Leeson was arrested in Germany and, after a disappeared bailout attempt, Barings went bankrupt on February 26, 1995. Leeson was charged with fraud on the grounds that he had misled 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 oubliette, Leeson wrote his book, “Rogue Trader.” In 1999, Leeson’s book was made into a film of the same rating and starring Ewan McGregor and Anna Friel.

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

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