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The Collapse of Barings
Finance 443International Finance
Jay YooAlan Yeung
Stuart SuttonJennie Kretchmar
Contents Background of Barings Nicholas Leeson How Leeson Broke Barings Barings Inadequate Controls
Background of Barings Founded in 1762.
Rapid growth during Napoleonic Wars (1798 – 1814)
Concurred as the sixth great European power at the Congress of Vienna in 1815
During the years of 1830s and 1840s, Barings became the most influential financial house in U.S.
Background of Barings A Financial Crisis in 1890
Provided loans to Argentina in 1824
Debt crisis in Argentina in 1888
Reported company’s liabilities of over 21 million pounds sterling
Rescued by the British government and the Bank of England
Background of Barings Impact of Argentine Debt Crisis
Withdrew all transaction in North American continent
Firm’s management was relegated to consulting small firms and wealthy people, which includes British Royal family
Background of Barings Repair of Company’s Reputation
Success in consulting the royal family asset management
Success in giving advice for stock and bonds for small British firms
Moved back into American finance scene in 1980s
Background of Barings Expansion to Asia
Opened a stock brokerage operation in Tokyo during the mid 1980s
Expanded its operation by establishing offices in Singapore
Background of Barings Leeson Crisis in 1995
Nick Leeson, a lone manager in the company’s Singapore office made speculative trades on future market, which broke the company
ING, Dutch financial service company, bought Barings at the fire sale price of just £1 in June 1995
Nicholas Leeson The son of a plasterer from the London suburb of Watford
Described as a loner by the people that he worked with
Competent soccer player
Nicholas Leeson 28-year-old trader who never graduated
from college
Gained knowledge through numerous investment establishment positions
Nicholas Leeson An investment officer at Barings L.P.C.
Working at the Singapore International Monetary Exchange
In charge of both making deals and overseeing the paperwork on these deals
Nicholas Leeson Accused of losing the $1.3 billion
Charged with forgery and cheating on December 1, 1995
Sentenced to six and a half years
How Leeson Broke Barings? Arrived in Singapore in 1992
Arbitrage opportunities of Nikkei 225 futures between SIMEX and OSE
Leeson’s Singapore office is terribly understaffed – errors frequently occurred
Error account “88888” created by a new phone clerk: Loss of £20,000
How Leeson Broke Barings? Unauthorized: Sold options, took positions
on SIMEX on both futures and options contracts
Fantasy: Leeson is a genius – Created 50% of Barings’ 1994 profits
Reality: Leeson is a loser – Loss of $296 million in 1994 alone
How Leeson Broke Barings? How did he do that?
Cross-trade technique with a real account “92000” and the error account “88888”
In November and December 1994 Sold 34,400 options (straddles)
Year Reported (Million) Actual (Million)
1993 +£ 8.83 -£ 21
1994 +£ 28.53 -£ 185
1995 +£ 18.57 -£ 619
How Leeson Broke Barings?
Straddles: Profitable (Premium) if Nikkei traded
within or near strikes between 18,500 – 20,000
How Leeson Broke Barings?
4Q 1994 - January 1995 Nikkei in a range of 19,000 – 19,500 Leeson held long futures of 3,000 Nikkei
225 equity contracts
Nikkei 225日経平均株価
How Leeson Broke Barings?
January 17, 1995 Kobe Earthquake Nikkei dropped sharply as people took cash out
How Leeson Broke Barings?
January 20 – February, 1995 Leeson launched aggressive buying
program: (3,000) 55,206 March contracts and 5,650 June contracts
How Leeson Broke Barings?
Barings collapsed – could not meet huge trading obligations
Outstanding futures positions of $27 billion (Barings’ capital was $615 million)
Barings Inadequate Controls
Lesson controlled both the dealing desk and the back office
Leeson removed account “88888” from daily accounts sent to Barings
Barings ignored internal auditor’s reports
Barings Inadequate Controls Problems with Senior management
Showed little interest in the Singapore Branch
Had only a vague understanding of derivatives
Did not have a precise breakdown of Leeson’s profits
Failed to question capital requests by Leeson to fund margin accounts
Barings Inadequate Controls Problems with Barings Funding
Control Measures
No distinction between proprietary and customer trades
Ignorance to credit risks
Barings Inadequate Controls Supervision Problems
Leeson’s superiors did not accept responsibility over him
No one investigated a default in account “88888”
Conclusion Barings collapse could have been prevented
through a series of controls to monitor Leeson
Why couldn’t others duplicate Leeson’s strategy
Any Questions?
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