Question

What was the philosophy of Nick Leeson’s boss in terms of experience and compensation of employees hired to assist Nick on the trading floor. Why might this be a problem for Barings Bank?

Answer 1

Nick Leeson initially was very successful in speculative trades, making huge profits for Barings and ensuring his upward mobility. Unfortunately, Leeson lost his touch as his speculative range increased. Leading up to 1995, he had been hiding losses from bad trades in a secret account. Leeson was able to accomplish this because of a management flaw in Barings that gave him the responsibility of double-checking his own trades, rather than having him report to a supervisor. Instead of reigning in his speculative gambles, Leeson continued to play increasingly bigger odds in an attempt to recover lost money.

Ironically, the trade that undid Leeson and the 200-year-old bank was one of his more conservative positions. Leeson placed a short straddle on the Nikkei, guessing that the exchange would remain stable overnight, neither going up nor down by a significant margin. Normally, Leeson would have been safe in such a position, but the earthquake in Kobe caused a sharp drop in the Nikkei and other Asian markets.

Faced with huge losses, Leeson panicked and attempted to offset the losses with increasingly desperate, short-term gambles that were based on the rate of recovery of the Nikkei. Sadly, the severity of the earthquake squashed all hopes of a rapid recovery.

Leeson fled the country, but eventually he was arrested in Germany. Barings, having lost over one billion dollars (more than twice its available capital) went bankrupt. Following the trading debacle, Leeson wrote his aptly titled Rogue Trader while serving time in a Singapore prison. Up until 2008, Leeson held the world title for losses due to unrestricted trades, but he was eclipsed more than a decade later when French bank Société Générale announced that a rogue trader named Jerome Kerviel had lost more than seven billion by conducting a series of unauthorized and false trades.