This guide will delve into the life and trading career of the man who brought down Barings Bank– Nick Leeson. It will dissect his rogue trading techniques and the particular circumstances that led to the spectacular downfall of one of England’s longest-standing financial institutions.
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Who is Nick Leeson?
Leeson was convicted in Singapore for forging documents, falsifying records, and hiding losses. After being sentenced to six-and-a-half years in prison, Leeson was released early in 1999 because of a cancer diagnosis. He has since become an author, public speaker, and consultant.
In 1996, Nick Leeson released his gripping autobiography ‘Rogue Trader,’ recounting his experiences at Barings. Three years later, the story was immortalized on film with an adaptation of the same name starring Ewan McGregor as Leeson himself.
Recommended video: The trailer for “Rogue Trader”
Nick Leeson’s early life
Nick Leeson was born in Watford, England, in 1967 to a plasterer father and a nurse mother. Rather than attending college after secondary school, Leeson started work as a clerk at Coutts Bank, where he settled paper cheques, crediting and debiting client accounts.
He continued to forge ahead in the financial services industry, starting at Morgan Stanley (NYSE: MS)– eventually settling at Barings Bank. Before long, Nick was appointed the head of Baring’s new venture in futures markets on the Singapore Monetary Exchange (SIMEX), accumulating millions for the company by predicting the direction of Nikkei 250– Tokyo’s main index.
After only one year in Asia, Leeson had brought in a whopping £10m for Barings, roughly 10% of the company’s total profits in 1992. So naturally, his superiors in London reveled in the immense profits, putting absolute trust in the trading whiz kid. Meanwhile, Nick and his wife Lisa luxuriated in the opulence that the hefty £200,000 salary supplied.
Recommended video: How a 28-year-old man destroyed England’s oldest bank
Nick Leeson at Barings Bank
Since Barings had given Leeson the power to monitor his own transactions instead of disclosing them to a supervisor, he could hide the losses of his disastrous trades in a secret 88888 error account (an account used to correct mistakes made in trading). According to Leeson, the account had initially been set up to hide a blunder made by a subordinate that resulted in a £20,000 loss. Crucially, however, Leeson kept using the account to cover additional bad trades by himself and others.
Leeson claims he first crossed the line into criminality when he forgot to settle a discrepancy of 500 contracts, costing Barings $1.7 million. Then, realizing the gravity of his mistake, he knew that if he wanted to keep his job, the only option was to bury it in the error account. Leeson has vehemently denied that he had ever utilized the account for his personal benefit, but in 1996 investigators discovered approximately $35 million stashed away in various bank accounts connected to him.
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Nick Leeson’s trading strategy
By 1992, the error account’s losses had surpassed £2 million and reached an astounding £23 million in 1993. And by the end of 1994, this figure had ballooned to a staggering £208 million. As a result, Leeson began relying on a risky doubling strategy, i.e., every time he lost money on a trade, he would bet double the lost amount in hopes of recouping it.
Interestingly, the risky method had worked for him before, including once in 1993, when he was able to recover a £6 million negative balance in the error account. Though he had vowed never to use the account again, his reputation as a trading genius had to be kept intact, and Leeson was soon forced into hiding the losses that were beginning to amass.
As the losses accumulated, Leeson spun increasingly creative narratives to ask for more money from London- his impeccable reputation shielding him from scrutiny.
His fervent endeavors to offset his losses came to a crashing halt in early 1995. On January 16, Leeson took a bet on the Singapore and Tokyo stock exchanges with a short straddle (the selling of a call and put option at the same exercise and expiration on the same asset to profit on the lack of movement), assuming that the exchange rate would stay stable overnight without any significant changes. Typically, this would have been a conservative position, especially for Leeson.
However, an earthquake with an epicenter in Kobe, Japan, hit early in the morning on January 17, sending Asian markets, and Leeson’s trading positions, into a tailspin. In an effort to balance his vast losses, Leeson resorted to a series of increasingly dangerous trades (employing long-long future arbitrage) contingent on the rate of recovery of the Nikkei. Unfortunately, the much-needed rally never materialized.
On February 23, 1995, Leeson left behind a note reading simply, “I’m sorry,” and made his escape from Singapore. In the end, Barings suffered a loss of £827 million (or $1.4 billion), double Barings’s available trading capital.
Recommended video: Nick Leeson discusses his escape from Asia on Celebrity Big Brother
The Downfall of Nick Leeson
After escaping to Malaysia, Thailand, and eventually, Germany, Leeson was arrested in Frankfurt and extradited to Singapore on November 20, 1995.
In December 1995, Leeson pled guilty to two charges of deceiving bank auditors and cheating the Singapore exchange. He was convicted and sentenced to over six years in a Singapore prison, of which he served four after being granted early release for good behavior and having been diagnosed with colon cancer, which he survived despite the bleak prognosis at the time.
While serving time in prison, Leeson penned his autobiography titled ‘Rogue Trader.’ In 1999, the same year Nick Lesson was released from prison in Singapore, his book was adapted into a movie starring Ewan McGregor and Anna Friel.
He has since remarried and moved to Ireland. He now spends his time delivering conference and keynote talks at various events, and continues to trade (independently). Nick Leeson’s net worth is reportedly around $3 million.
Barings Bank collapse
After a failed bailout attempt, Barings Bank went bankrupt on February 26, 1995, and was purchased by the Dutch bank ING for the nominal sum of £1, taking over all of Barings’ liabilities and forming the subsidiary ING Barings.
Nick Leeson’s legacy
Leeson’s story compelled banks to reassess their internal processes and trading audit protocols. Notably, it was noticed that when traders desperately need to recoup losses, they become inclined to risk additional funds to return to profitability.
In conclusion
Nick Leeson’s name is synonymous with the catastrophic collapse of Barings Bank, one of Britain’s oldest and once most prominent financial institutions. Gifted with unparallel financial savvy, he quickly rose through the ranks to become Barings’ sweetheart trader, yet his fraudulent behavior propelled by greed brought about a swift downfall.
On the other hand, thanks to his actions, bolstered by lax regulation at the time, banks now have advanced internal controls that protect them from similar threats.
Ultimately, Nick Leeson has demonstrated his unwavering strength and resilience and has been able to capitalize on his experiences, spending his time delivering conference and keynote talks to corporations and higher academic institutions on how to recognize risks and examine governance structures.
FAQs about Nick Leeson
Who is Nick Leeson?
Nick Leeson is an English former derivatives trader most famous for his time at Barings Bank – one of the oldest financial institutions in the United Kingdom – where his fraudulent and unauthorized speculative trading led to the 1995 collapse and bankruptcy of the bank.
How much money did Nick Leeson lose?
Through his shameless trading activity, Nick Leeson caused Barings Bank to incur losses totaling an estimated $1.4 billion.
What was error account 88888?
The error account 88888 (the number 8 is considered lucky in Chinese culture) was initially established to hide losses resulting from his coworker’s error. It was subsequently used to cover further bad trades by himself and others.
What does Nick Leeson do now?
Nick Leeson has been able to successfully capitalize on his experiences. He now works as an international business speaker, providing consulting services to companies and academic institutions on an array of topics, including risk management, compliance protocols, corporate governance issues, and mental well-being. He has also written two books, of which his first – “Rouge Trader,” recounts his time at Barings Bank.
What is Nick Leeson’s net worth?
According to Celebrity Net Worth, Nick Leeson’s net worth is reportedly around $3 million.
What was the Barings Bank scandal about?
The Barings Bank scandal occurred due to unauthorized and speculative derivative trading by Nick Leeson, an employee at the bank’s Singapore office. His activities, primarily in futures contracts, led to massive losses totaling an estimated $1.4 billion. The scale of these losses was enough to bankrupt the 233-year-old Barings Bank in 1995.
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