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

About the author

The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Bruno Iksil: background of a French trader based in London

Bruno Iksil, known as “The Whale”, is a French trader well known in London financial circles. A former student of Centrale Paris, this former Natixis employee built a reputation at JP Morgan for the size of the orders he placed. Bruno Iksil worked on the Credit Default Swaps (CDS) market, financial products that provide insurance against the non-repayment of loans.

Iksil’s activities at JP Morgan

Bruno Iksil’s reckless trading initially made JP Morgan Chase a lot of money, almost $100 million. His ability to succeed brilliantly in times of crisis and his boldness in business were praised and rewarded on numerous occasions by management, which made Iksil the highest paid trader in London. According to the Wall Street Journal, in recent years Bruno Iksil earned around $100 million a year at JPMorgan’s chief investment office (CIO).

And his nickname, linked to the enormity of the commitments he was making, was regularly on the front page of all the newspapers, along with the new positions taken by ‘The Whale’.

JP Morgan’s losses

Bruno Iksil was suspected of being involved in a colossal loss by JP Morgan Chase. According to the latest estimates, the risky bets of the Frenchman and his colleagues cost JP Morgan Chase 5.8 billion dollars. This triggered a real storm in the life of the trader who, according to the British journalist The Guardian, left the company.

Following the losses incurred by the American bank, Jamie Dimon – the Chief Executive Officer – had announced losses amounting to 2 billion dollars. In fact, nearly 4.4 billion dollars were lost as a result of the Whale’s operations.

Following these announcements, the bank’s market capitalization plunged by 25 billion dollars as the stock dived by 9%.

Conclusion and aftermath of the affair

The whale affair brought to light accusations of negligence against the bank, particularly in its internal controls. The risky positions in credit derivatives that Bruno Iksil and many other banks regularly took contributed to the subprime crisis. As a result, JP Morgan was fined $1 billion by the British and American authorities, on behalf of its management that enable the Whale to invest so much on financial markets.