The other night, I watched a movie called “Rogue Trader” based on an autobiography written by a man named Nick Leeson. If you were born in the late 80’s or early 90’s, you probably don’t remember him; however, to people of an older generation, he was infamously remembered as the man whose actions single-handedly brought down the oldest bank in the world.
Leeson, born in 1967 in the United Kingdom, went to work for Barings Bank in 1989. At the time, Barings was the oldest private bank in the world. It was founded in 1762 and served as financier to customers, corporations, and even kings and queens. Leeson had the ambition of being an investment trader for the bank, but was sent to the Singapore office after fraud was discovered on his application. Nevertheless, Leeson was authorized to open trading options in Singapore.
His main role was to make money for the bank through arbitrage. Investments called “futures” essentially bet on the future price of a certain security or exchange. Sometimes, futures have different prices on different exchanges around the world. This arbitrage is achieved when you can buy the same security on one market and sell it for a higher price on the other. However, since this is a common activity, price differences do not last for long and profit margins can be razor thin. For example, one might buy a $10 million worth of futures one on market and sell them for $10,000,100 on another, making only $100 in profit from $20 million worth of trading. In Leeson’s case, he was supposed to be profiting from buying Nikkei 225 (the main Japanese stock index) futures and reselling them between the Osaka Securities Exchange and the Singapore International Monetary Exchange.
Unfortunately, this situation was set up for failure from the beginning. Instead of quickly buying and selling futures, he would buy and hold them, betting that the Nikkei stocks would go one way or another. Initially, Leeson’s trading was very profitable, making over £10 million – about 10% of Baring’s annual income. However, he soon began making even more unauthorized and highly speculative trades. He set up an “error account” numbered 88888 (eight is a lucky number in China) to move money around and disguise his losses. Not only was Leeson in charge of trading operations on the floor of the Singapore Exchange, but he was also in charge of back-office settlement where the accounting takes place. This setup was highly unusual and it allowed him to hide his risky trading. By the end of 1992, his losses had exceeded £2 million. By the end of 1994, his losses had exploded to £208 million. Still, he was able to hide his losses, and even reported a profit of £102 million to British authorities.
On the morning of January 16th, 1995, Leeson placed one of his riskiest trades yet. Unfortunately, the next morning, the Kobe Earthquake hit Japan, sending the Nikkei into a tailspin. He again made riskier and riskier trades, betting that the Nikkei would quickly recover – but it didn’t. A month later, Leeson left a confession note and fled Singapore. His losses eventually exceeded £827 million ($1.4 billion), much more than Barings had available in capital. After a couple of failed bailout attempts, Barings was declared insolvent on February 26th, 1995. It was eventually sold to Dutch bank ING for £1.
Leeson was eventually caught and sentenced to six years in prison. He was released in 1999 after developing colon cancer, which he survived. Today, Leeson serves as a keynote speaker and somewhat of a poster-child for corporate responsibility and auditing oversight. As horrible as Nick’s actions were, his story has served as a sort of wake up call to corporations of the world, and has hopefully prevented many similar situations from happening again.