Nick Leeson: biography and career in Barings Bank

We have all had a bad day trading on the stock market or messed up at work, but you have probably never had a day like the one Nick Leeson had on February 23, 1995.

How did a 28-year-old who had failed his Maths exam to get into university manage to bankrupt a bank with over 200 years of history?

Do you want to know how? Proceed on this piece to know who Nicholas William Leeson his and how he bankrupt the Baring Bank.

Nick Leeson and Barings history

Nicholas William Leeson was born in Watford, Herfordshire on February 25, 1967. And after finishing his secondary school studies he was employed by several investment firms such as Coutts, Baring, and Morgan Stanley instead of attending college.

He was employed as a clerk at the Coutts Bank and he continued to advance his knowledge in financial services and was opportuned to work in several positions for Morgan Stanley and Baring Bank.

With his knowledge, he became a derivative trader at the age of 27 in the Singapore office of the Baring Banks

In 1989 he signed with Barings Bank and in 1992 he became the general manager of a new futures market, the International Monetary Market of Singapore. His primary role is to involve in arbitrage trading on the Nikkei 250, Tokyo's main index, on behalf of the Baring investors.

Barings Bank was founded in 1762. It was one of the oldest merchant banks in England and one of the oldest banks in the world, with over two centuries of history. It was the Queen of England's preferred bank for her accounts, and had financed, among other things, the Napoleonic wars.

When Barings began to expand its trading business in Asia, it entrusted Nick Leeson with the mission of creating a trading team and starting to operate in the area. Nick Leeson, in addition to being a trader, managed to take control of the Back Office and the Risk Manager, in other words, Nick Leeson had absolute control over his operations in Asia. Nick Leeson had to report directly to London about his actions.

How did Leeson bankrupt Barings Bank?

At first, Nick Leeson began trading Nikkei futures in a traditional way, but seeing how well he was doing, he decided to increase his leverage. His positions began to be much more important and of greater magnitude.

At 28, he had achieved great success and his superiors in London blindly trusted his operations without any supervision. With a salary of 50 thousand pounds and more than 150K in bonuses, he seemed to be living a success story for any professional trading career.

In time, one day the market went against Nick and he had losses. They weren't too important, but he didn't want to report them to the Barings headquarters so they wouldn't worry. He created the famous “account 88888” qualifying it as “Back Office errors”.

After some time, Nick Leeson's position began to increase exponentially, with his entries into the market, the market began to move. Nick Leeson moved the prices of the Nikkei. But the losses began to arrive in the form of a bad streak. Of course, Nick Leeson sent all the bad operations to the 88888 account.

When the loss was so strong that it began to be significannt, one day when he was “long” bought of the future Nikkei, the market fell sharply, he tried to hold it by buying more, but he couldn't. When Nick Leeson had no more money in the treasury, he decided to sell “Put Options” and collect the premium. With all these premiums that Nick Leeson collected, he was able to pay the guarantees of more future Nikkei, the market began to rise. Nick Leeson made a lot of money, he recovered all the losses of the 88888 account.

Nick Leeson seeing how well the operation had gone, thought:

“If it has gone well once, I may have discovered a way to make me rich.”

Of course, Nick Leeson began to operate super-leveraged in this way, at that time it was the most important position in Asia, buying and selling contracts to himself. Nick was the market.

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The Kobe earthquake

In one of these operations, Nick lost a lot of money, because the Great Kobe Earthquake came, destroying much of Japan's infrastructure and sinking the Nikkei market, the Yen and much of the Japanese economy. The Nikkei fell more than 1,000 points in one morning.

As in any natural disaster, a normal person feels scared and sad. But Nick Leeson was not normal, what Nick Leeson saw was the greatest opportunity to see the great business that was offered: loans, reconstructions, contracts, large infrastructures…

Nick Leeson leveraged “to the beast” in currency derivatives and Nikkei futures, selling millions of Puts to finance even more futures. Betting on the Singapore International Monetary Exchange (SIMEX) that the Nikkei would remain stable after the earthquake, through short straddles.

Nick Leeson came to have fifty percent of the Nikkei futures market in his pocket.

However, something went wrong for Nick Leeson. Shortly afterwards, the Bank of Japan (BOJ) decided that no one would do business with its ruin, and that all reconstruction would be financed with state bonds. Quickly the Nikkei sank, and Nick Leeson lost £800 Million.

barings bank nick leeson

The outcome of Nick Leeson strategy

Faced with the great disaster, Nick Leeson was writing a note asking for forgiveness, just when he received a call from the headquarters. Nick was very scared, but the call was to congratulate him on his results and reward him with a vacation.

When the auditors of the Barings Bank finally discovered the fraud, it was too late. Leeson's activities had generated losses totaling £827 million (1.4 billion US dollars), double the available trading capital of the bank. The Bank of England attempted a weekend rescue but was unsuccessful. Barings was declared insolvent on February 26, 1995. The collapse was dramatic, as the bonds of its employees around the world had been suddenly withheld.

Nick Leeson, with false documents, fled from Singapore, but the police were waiting for him at the German airport. There was no place in the world where he could hide.

nick leeson barings bank

Barings sold for 1 Pound

Following the disaster of Nick Leeson's strategy, Barings was bought by the Dutch bank and insurance company Internationale Nederlanden Groep (ING) for the nominal sum of £1.00, taking on all of Barings' liabilities.

Therefore, Barings Bank no longer exists as an independent corporation, although the name Barings still lives on as Baring Asset Management (BAM). BAM was split and sold by ING to MassMutual and Northern Trust in March 2005.

Nick Leeson was extradited to England and sentenced to 6 years in prison for fraud. After his release, he wrote an autobiography, titled Rogue Trader, where he recounts the events that led to the collapse. The book was adapted to the cinema in 1999 and starred by Ewan Mcgregor. The movie about Nick Leeson was titled “Rogue Trader”, or “The Big Bluff”. His life is not alien to curious facts

– He has written a new book: Back from the Brink: Coping with Stress.

– He was General Manager of a Premier League Football Club

– His trader jacket was auctioned for 21,000 pounds

Today Nick Leeson has his own website and lives giving lectures around the world for thousands of Euros.

How was a trader able to break a Bank?

Beyond the disaster we must analyze what failed for a trader to make a bank of such magnitude go bankrupt.

Lack of supervision

It can be said that Nick had no supervision because his superior believes he's an expert already and can manage the affairs of the bank's branch. This was the main cause of the bankruptcy. Any stock market operation with the own capital of an entity must be supervised and approved by a team that analyzes the maximum acceptable loss.

Leveraged trading

Futures contracts have become very popular because they allow trading by only depositing a guarantee to buy and sell an underlying product.

Imagine that every time you invested in oil you had to send the barrel from one side to the other in each transaction.

Futures speed up all this by having a maturity and defining whether the underlying (gas, oil, gold, etc.) is settled by differences or by deliveries.

However, leverage has a risk since it multiplies your profits but also your losses and in case of volatile markets against you, you can liquidate your account and suffer a margin call.

Can Leeson's case happen again?

The case of Leeson is not unique. The investment banking industry has perverse incentives in many cases.

In the case of Archegos Capital we have a family office that invested through several investment banks in a basket of US and Chinese companies.

The problem lies in that 5 of the big investment banks due to its success allowed it to leverage more and more through derivatives. Everything exploded when, in the face of a fall in several companies, the treasury desks of these banks began to request guarantees (margin call) and this could not assume the loss due to the leverage.

Here panic broke out in the banks and Morgan Stanley and Goldman Sach were the smart ones in the class and executed the sale of the shares quickly, which caused the share prices of the companies to plummet and caused large losses to the rest of the Investment banks with which Archegos negotiated. Credit Suisse and Nomura have assumed millions in losses and have taken measures such as the dismissal of several risk management executives.

You might be interested:

FAQs about Nick Leeson

What Happened to Nick Leeson?

Nick Leeson was a derivative trader and the general manager of the Baring Bank Singapore branch. He's the ‘rogue trader' who broke Baring bank and was imprisoned for six year for fraudulent practice.

Does Baring Bank Still Exist?

The old British merchant bank collapsed in 1995 and was acquired by the Dutch bank and insurance company Internationale Nederlanden Groep (ING) for one pound.

Did the Queen lose Money in the Barings Bank?

The Queen of England use the Baring Bank and at the time of bankrupcy she had £40 million on deposit in her account. The bank is unable to refund customer and hence the Queen lose her money.

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