The Britain’s oldest merchant bank, Barings bank, had financed the Napoleonic wars, the Louisiana purchase, and the Eire Canal and Queen Elizabeth’s personal bank. Once one of the biggest banks, it grabbed attention of the world in 1995 for the action of a single trader from the small office in Singapore.
Nick Leeson joined Barings bank after working with Morgan Stanley for short period. His work on clearing the mess in Jakarta was highly appreciated and he was made General Manager with authority to hire traders and back office staff in Barings Securities (Singapore) Limited (BSS). After joining BSS in 1992, Leeson soon took necessary exam to trade in SIMEX (Present Singapore Exchange) along with his team of traders. Leeson and his traders got authority for two types of trading –
1. Transacting futures and options orders for clients or for other firms within the Barings organization, and
2. Arbitraging price differences between Nikkei futures traded on the SIMEX and Japan’s Osaka exchange.
As a trader, Leeson had extremely hard luck. He started losing money since very beginning and increasing his bets made his position worse. By the end of 1992, he was losing GBP 2MM which increased to GBP 23MM in a year. By 1994 he had lost total of GBP 208MM and surprisingly Barings management was till unaware of this. For all such furtive trading Leeson used account number 88888. Generally neither trader, nor employer prefers to publicize the loss. But by the time the unauthorized speculative trading of Leeson was discovered, Barings bank was bankrupted after such a huge loss.
Such a staggering loss caused by Leeson speculation went unnoticed in the Barings management because of ongoing merger of two parts of Barings organisation. Barings had started forming risk management function, but Singapore went without having any risk controller. There was no single person within Baring responsible for supervision of Leeson’s activity. Baring had adopted Matrix structure in 1993 and lines of reporting were not clear most of the time.
Leeson tried every possible act to keep the management unaware of such mismanagement of funds. He falsified records, fabricated letters and concocted stories to deflect management attention, auditors and even SIMEX. A few concerns from other employee couldn’t attract attention of management and Leeson remained celebrity within Barings. He secretly kept making loss in 88888 account, but publicly recorded profit in three arbitrage accounts.
By February 1995, when the management discovered the fraud, the total loss of Barings had reached $1.4 billion. Barings was unable to meet SIMEX’s margin call and was declared bankrupt. On 3’rd March 1995, the Dutch bank, ING, purchased it for £1 and assumed all its liabilities.
While the Mutual Funds started selling in the initial days of the previous week, they started pumping in the money during the fall of the stocks. FIIs on the other hand were about neutral in the week before but they suddenly started selling off heavily each day and even on last few days of the week when the sensex gained significantly, FIIs were net sellers to the extent of more than 1000 crores of rupees. Though the last day selling was very less compared to previous three days in which they sold about 2500 crores worth of stocks each day.
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