Barings, founded in 1762, was the oldest merchant bank in Britain before its collapse in 1995. The 233-year-old bank was brought down single-handedly by its employee, Nick Leeson - a derivatives trader. After landing the bank with a debt of S$1.4 billion, Leeson fled for Malaysia. By the time of the collapse, the banks accumulated losses amounted to S$2.2 billion. Leeson was sentenced to six-and-a-half years jail in Singapore for two charges of fraud and forgery.
Background
Background
Barings, founded in 1762, was the oldest merchant bank in Britain before its collapse in February 1995. .It was a well-established bank with clients that included Queen Elizabeth. When the news of the collapse broke out, the financial world was shaken. The 233-year-old bank was brought down single-handedly by its 28-year-old employee, Nicholas William Leeson, better known as Nick Leeson, in 1995. He fled after landing the bank with a debt of S$1.4 billion largely through futures trading contracts. By the time of the collapse on 27 February 1995, the losses amounted to S$2.2 billion.
Description
Description
Baring Futures Singapore, (BFS) was incorporated in Singapore on 17 September 1986. Nick Leeson, the trader who brought the bank down, joined the settlements department of Barings Securities (London), an investment arm of Baring Group, as a settlement clerk in July 1989. Leeson had learned about setting futures-and-options trades in Japan and it was this experience that helped him clinch the job at Baring Securities. Three years into joining the bank, Leeson was transferred to Singapore.
Leeson arrived in Singapore in April 1992 as a derivatives operations manager of Baring Securities Singapore (BSS). He became a trader after passing the Institute of Banking and Finance's Futures Trading Test in June 1992. When BFS started trading on the Singapore International Monetary Exchange (Simex) in July 1992, Leeson was of one of two traders at that time. In July 1992, Leeson was instructed to open an error account for BFS. The account was originally opened to report errors made by inexperienced staff of BFS. However, Leeson used the account for his unauthorised trading.By the end of September 1992, the losses on the 88888 account amounted to S$8.8 million.
Leeson started dealing in Japanese Government bonds, and dabbling in Nikkei 225 futures and options in 1993. In June 1993, Leeson was appointed as Assistant Director and General Manager. He was not only placed in-charge of the front office, which conducted the trading, but also the back office, which processed the paperwork. This position enabled him to hide his losses and unauthorised trading in the 88888 account.
An internal audit of BFS was conducted for the period 19 July 1994 to 1 August 1994. The audit report was circulated to Barings' senior management. The report revealed that BFS was exposed to great risks with Leeson in-charged of both the dealing and settlement operations. However, the bank chose to retain Leeson's position because of his experience and the profits he generated. This later proved to be a grievous mistake. They did not know that by this time, Leeson had already incurred big losses that were hidden in the 88888 account. By the end of December 1994, the losses grew to S$373.9 million in the 88888 account.
A audit senior found a discrepancy in the BFS account in January 1995. Leeson managed to convince the auditors by cooking up a story about a trade brokered by two clients. He even showed them a doctored payment statement to support his explanation. Despite the enormous losses accumulated in the 88888 account, Leeson continued to bet heavily in the Nikkei index hoping that it would not fall below 19,000 points in January 1995. However, the Nikkei plunged after an earthquake hit Kobe in 17 January 1995. Leeson was feeling the heat when the Nikkei 225 dropped to 17, 785 points. He continued to raise the stakes, hoping for the market to spring back. Luck was not on his side. The market continued to slide further to a low of 17,580. Knowing that he could not recover the cumulative losses of S$1.4 billion, Leeson fled to Kuala Lumpur, Malaysia with his wife on 23 February 1995. The total losses amounted to S$2.2 billion at the time of the collapse of Barings.
On 23 February 1995, a senior settlements clerk from Barings head office spotted a discrepancy in Leeson's account. He tried to get an explanation from Leeson but to no avail. Leeson had fled to Malaysia with his wife in the evening of the same day. Several attempts were made to contact Leeson but failed. The Baring office in London was informed of the situation, and BFS office started to check the account for unauthorised payments. Their initial fear was that Leeson may have embezzled money and disappeared. On 24 February 1995, BFS officials found out about the 88888 account and linked the discrepancy to that account.
Barings did not have sufficient funds to continue trading and was forced into administration on 26 February 1995. The Bank of England had attempted to rescue the Barings but failed and BFS was placed under interim judicial management on 27 February 1995.
Leeson and his wife left Kuala Lumpur for Sabah on the 24 February 1995. The couple then left Sabah for Brunei to take a flight to Frankfurt on 1 March 1995. They were detained at the Frankfurt airport on 2 March 1995. Leeson was jailed by the German court while waiting for the decision for Singapore's request for his extradition.
Dutch finance group Internationale Nederlanden Groep (ING) completed the Barings takeover proceedings on 6 March 1995.
Leeson arrived in Singapore in April 1992 as a derivatives operations manager of Baring Securities Singapore (BSS). He became a trader after passing the Institute of Banking and Finance's Futures Trading Test in June 1992. When BFS started trading on the Singapore International Monetary Exchange (Simex) in July 1992, Leeson was of one of two traders at that time. In July 1992, Leeson was instructed to open an error account for BFS. The account was originally opened to report errors made by inexperienced staff of BFS. However, Leeson used the account for his unauthorised trading.By the end of September 1992, the losses on the 88888 account amounted to S$8.8 million.
Leeson started dealing in Japanese Government bonds, and dabbling in Nikkei 225 futures and options in 1993. In June 1993, Leeson was appointed as Assistant Director and General Manager. He was not only placed in-charge of the front office, which conducted the trading, but also the back office, which processed the paperwork. This position enabled him to hide his losses and unauthorised trading in the 88888 account.
An internal audit of BFS was conducted for the period 19 July 1994 to 1 August 1994. The audit report was circulated to Barings' senior management. The report revealed that BFS was exposed to great risks with Leeson in-charged of both the dealing and settlement operations. However, the bank chose to retain Leeson's position because of his experience and the profits he generated. This later proved to be a grievous mistake. They did not know that by this time, Leeson had already incurred big losses that were hidden in the 88888 account. By the end of December 1994, the losses grew to S$373.9 million in the 88888 account.
A audit senior found a discrepancy in the BFS account in January 1995. Leeson managed to convince the auditors by cooking up a story about a trade brokered by two clients. He even showed them a doctored payment statement to support his explanation. Despite the enormous losses accumulated in the 88888 account, Leeson continued to bet heavily in the Nikkei index hoping that it would not fall below 19,000 points in January 1995. However, the Nikkei plunged after an earthquake hit Kobe in 17 January 1995. Leeson was feeling the heat when the Nikkei 225 dropped to 17, 785 points. He continued to raise the stakes, hoping for the market to spring back. Luck was not on his side. The market continued to slide further to a low of 17,580. Knowing that he could not recover the cumulative losses of S$1.4 billion, Leeson fled to Kuala Lumpur, Malaysia with his wife on 23 February 1995. The total losses amounted to S$2.2 billion at the time of the collapse of Barings.
On 23 February 1995, a senior settlements clerk from Barings head office spotted a discrepancy in Leeson's account. He tried to get an explanation from Leeson but to no avail. Leeson had fled to Malaysia with his wife in the evening of the same day. Several attempts were made to contact Leeson but failed. The Baring office in London was informed of the situation, and BFS office started to check the account for unauthorised payments. Their initial fear was that Leeson may have embezzled money and disappeared. On 24 February 1995, BFS officials found out about the 88888 account and linked the discrepancy to that account.
Barings did not have sufficient funds to continue trading and was forced into administration on 26 February 1995. The Bank of England had attempted to rescue the Barings but failed and BFS was placed under interim judicial management on 27 February 1995.
Leeson and his wife left Kuala Lumpur for Sabah on the 24 February 1995. The couple then left Sabah for Brunei to take a flight to Frankfurt on 1 March 1995. They were detained at the Frankfurt airport on 2 March 1995. Leeson was jailed by the German court while waiting for the decision for Singapore's request for his extradition.
Dutch finance group Internationale Nederlanden Groep (ING) completed the Barings takeover proceedings on 6 March 1995.
Leeson was extradited to Singapore in November 1995. Leeson pleaded guilty to two charges of fraud and forgery. He was sentenced to six-and-a-half years in prison in Singapore and was released early on 3 July 1999 for good behaviour.
Impact
To avoid another Barings saga, amendments were made to the Futures Trading Act, which enabled the Monetary Authority of Singapore (MAS) to monitor the activities of traders selling futures contracts more closely.
Highlights
17 September 1986 : Baring Futures (Singapore) was incorporated
July 1989 : Nick Leeson joined Baring Securities (London)
April 1992 : Leeson arrived in Singapore
July 1992 : Account 88888 is opened
End September 1992 : Losses of S$8.8 million from Leesons trade was hidden in account 88888
End December 1994 : Losses ballooned to S$373.9 million
January 1995 : Leeson bet heavily on Nikkei 225 index
17 January 1995 : Nikkei 225 plunged due to the Kobe earthquake
23 February 1995 : Leeson fled to Malaysia with his wife
24 February 1995 : Discovery of 88888 account
26 February 1995 : Barings was forced into administration
27 February 1995 : BFS placed under judicial management. Barings went bust with a loss of S$2.2 billion
2 March 1995 : Leeson arrested in Frankfurt
6 March 1995 : Barings takeover by Dutch finance group ING Group
April 1995 : Amendments to the Futures Trading Act came into force
23 November 1995 : Leeson was extradited to Singapore
December 1995 : Leeson pleaded guilty to two charges and was sentenced to six-and-a-half years in prison in Singapore
3 July 1999 : Leeson released from prison
Author
Kong Yoke Mun
References
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(Call no.: RSING 332.632 FAY)
'Leeson had too much power'. (1995, March 5.) The Straits Times, p. 1. Retrieved February 16, 2011, from NewspaperSG.
Leeson, N. W., & Whitley, E. (1997). Rogue trader. London: Warner.
(Call no.: RSING 332.632092 LEE)
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Leo, P., & Siow, L. S. (1996, March 21.) Law tightened to prevent another Barings. The Business Times, p. 1. Retrieved May 14, 2009, from Factiva database.
Lim, M. C. S., Tan, N. N. K., & partners of Price Waterhouse. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance.
(Call no.: RSING 332.632 LIM)
Nick and the Nikkei. (1995, March 4.) The Business Times, p. 3. Retrieved May 14, 2009, from Factiva database.
Ong, C. (1995, December 2.) Trial is over for Leeson as he pleads guilty to 2 charges. The Business Times, p. 1. Retrieved May 14, 2009, from Factiva database.
Raj, C. (1995, December 2.) Crimes were acts of desperation. The Business Times, Singapore At Home & Abroad, p. 2. Retrieved May 14, 2009, from Factiva database.
Rawnsley, J. H. . (1995). Going for broke: Nick Leeson and the collapse of Barings Bank. London: HarperCollins.
(Call no.: RSING 332.60941 RAW)
The information in this article is valid as at 2009 and correct as far as we are able to ascertain from our sources. It is not intended to be an exhaustive or complete history of the subject. Please contact the Library for further reading materials on the topic.
The information in this article is valid as at 2009 and correct as far as we are able to ascertain from our sources. It is not intended to be an exhaustive or complete history of the subject. Please contact the Library for further reading materials on the topic.
