The incredible story of Nick Leeson & the Barings Bank
In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) looks back at the bank fraud of Nick Leeson, a trader at Barings, which led to the collapse of the UK’s oldest investment bank…
History of Barings and Nick Leeson’s background
Barings was founded in 1762 in the UK, making it the oldest British bank, so renowned and prestigious that even the Queen of England was a client. It is therefore in this renowned institution that Nick Leeson will pursue his career after a spell at Morgan Stanley as an operations assistant. Ambitious and ready to do anything to make a name for himself within this prestigious institution, Nick Leeson multiplies risky operations and gradually climbs the ladder, greeted by a management admiring his results considering his young age.
The great fraud
In 1990, Barings chose Nick Leeson to head up the management of its Singapore subsidiary. Having spotted a flaw in the system for monitoring the compliance of traders’ market operations, Nick Leeson carried out speculative operations that were normally unauthorised and that brought in a lot of money for Barings. Nick Leeson was therefore engaged in a series of successful speculative trades, which is why management did not look into the matter. However, the day comes when the trader’s luck runs out: he makes bigger and bigger losses, as he hopes to make up for previous losses with each new trade.
With the trade tracking loophole still in use by Nick Leeson, he hides the losses from the failed trades in an error account, 88888. Nick Leeson also concealed documents from the bank’s auditor and continued to trade with losses accumulating over time. By the beginning of 1995, these losses reached £210 million, which represented half of Barings’ capital.
Eager to wipe out these very large losses, on the evening of January 16, 1995 Nick made a colossal trade – $7 billion – betting that the Nikkei would not fall overnight. Normally this would be considered a low-risk trade, but on the evening of 16 January an earthquake struck Kobe. On the morning of January 17, the Nikkei price collapsed and so did the trader’s positions.
Nick Leeson tried to make up for it by trying to make a quick recovery in the Nikkei, but this did not happen. Nick’s losses reach an abysmal $1.4 billion, which is twice the bank’s capital. Despite Nick’s ability to circumvent the bank’s internal controls, the level of losses is such that his entire scheme is uncovered. And the bank, faced with such losses, is forced to declare bankruptcy.
Conclusion
In conclusion, it was a major error in the compliance system that caused the Barings bankruptcy. Nowadays, enforcers can no longer supervise the tasks entrusted to them, and this is all the more true in banks where brand new departments have been created since the 2000s with the rise of compliance and banking regulation.
Useful resources
Mousli M. (2015) Quand un trader fait sauter une banque : Nick Leeson et la Barings L’Économie politique 68(4) 89-101.
Comprehensive history of the Barings bank
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About the author
The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).