Barings Bank collapses from Nick Leeson's losses

On 26 February 1995, the United Kingdom's oldest merchant bank, Barings Plc., collapsed on the back of catastrophic losses suffered by its futures trader, Nick (Nicholas) Leeson.^[1] Leeson arrived in Singapore in March 1992 and by end May, he was appointed the Derivatives Operations Manager of Barings Futures (Singapore) (BFS). In July, Leeson successfully applied for a trading licence to trade on the Singapore Monetary Exchange (SIMEX) after passing the SIMEX exams.^[2] He became assistant director and general manager the following year, and started dealing in Japanese government bonds, then dabbling in Nikkei 225 futures and options.^[3]

Holding the positions of both chief trader and head of settlements, Leeson was able to conceal his losses and unauthorised trades in a secret account numbered 88888.^[4] This account, which was thought to be used to track bona fide trading mistakes and minor accounting discrepancies, was in fact used to hide Leeson’s losses.^[5] There have been contentions as to whether the Baring’s Group management had been aware of the existence of account 88888.^[6]

By December 1994, with undetected losses amounting to S$373.9 million, Leeson bet heavily against the Nikkei index falling below the 19,000 mark.^[7] However, the Nikkei plunged after an earthquake hit the Japanese city of Kobe on 17 January 1995.^[8] In a futile bid to claw back escalating losses, Leeson continued to raise the stakes.^[9] By the time Barings discovered the deficit in mid-February 1995, the losses had increased to S$1.9 billion, exceeding the bank's capital and reserves.^[10]

Realising that he could no longer conceal his trading losses, Leeson fled to Malaysia with his wife before catching a flight to London, but was arrested en route in Frankfurt.^[11] He was subsequently sentenced in December 1995 to six-and-a-half years in prison in Singapore, but was released in July 1999 for good behaviour.^[12]

The Futures Trading Act in Singapore was tightened after the Barings debacle, with the new regulations taking effect on 2 January 1997.^[13] Investigations into the collapse of the bank revealed that much of the blame lay in the bank management's failure to implement strong internal controls in audit and compliance matters.^[14] The absence of such safeguards eventually allowed a single employee – one who had failed his final mathematics exams in school – to bring down a 233-year-old financial institution.^[15]

In March 1995, the Barings group was sold for a token £1 to the Dutch ING Bank (owned by the Internationale Nederlanden Groep NV), which agreed to take over the bank's debt.^[16] Many of Barings top executives resigned or were dismissed. This included the resignations of  its chief executive officer, Peter Norris, and chairman, Peter Baring.^[17] The Nick Leeson story made newspaper headlines around the world, inspiring books and a film, Rogue Trader (1999), which starred Ewan McGregor.^[18]

References
1. Tan, T. (1995, February 28). Leeson – the man who broke the bank. The Straits Times, p. 1; Tan, L. E. (1995, October 7). Leeson engages S’pore law firm. The Straits Times, p. 48. Retrieved from NewspaperSG.
2. Beckerling, L. (1995, July 30). The fall of the house of Barings. (1995, July 30). The Sunday Times, p. 4. Retrieved from NewspaperSG; Tickner, P. (2012). Successful frauditor's casebook (p. 90). NJ, USA: Wiley. Retrieved September 17, 2013, from National Library Ebrary at: eresources.nlb.gov.sg; IFCI Foundation - International Financial Risk Institute. (n.d.). Extracts from the Report to the Board of Banking Supervision Inquiry into the Circumstances of the Collapse of Barings. Summary (1.37). Retrieved September 17, 2013, from: http://ifci.ch/135220.htm
3. The Straits Times, 28 Feb 1995, p. 1; Chan, S. M., & Wong, D. (1995, December 2). Audit made Leeson cook up deal to hide activities. The Straits Times, p. 28; S’pore extradition bid ‘difficult to fight’. (1995, March 9). The Straits Times, p. 39. Retrieved from NewspaperSG.
4. Leeson’s ‘bid to be star trader led to Barings crash’. (1996, September 19). The Straits Times, p. 52; Chan, S. M. (1995, November 24). Leeson saga, and key role of 88888 account. The Straits Times, p. 49. Retrieved from NewspaperSG.
5. The Straits Times, 24 Nov 1995, p. 49. Retrieved from NewspaperSG.
6. Lim, M. C. S., & Tan N. N. K. (1995). Barings Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 321 of the Companies Act (Chapter 50), the report of the inspectors appointed by the Minister for Finance (p. B v–B vi). Singapore: Ministry of Finance. Call no.: RSING 332.632 LIM.
7. Lim & Tan, 1995, p. B ii; The Sunday Times, 30 Jul 1995, p. 4; Leeson had $39b in unauthorised positions. (1995, March 1). The Straits Times, p. 40. Retrieved from NewspaperSG.
8. Lim & Tan, 1995, p. A xi; The Straits Times, 1 Mar 1995, p. 40.
9. The Straits Times, 1 Mar 1995, p. 40.
10. The Straits Times, 24 Nov 1995, p. 49; Leeson faces forgery and cheating charges if tried in Singapore. (1995, April 28). The Straits Times, p. 48. Retrieved from NewspaperSG.
11. The Sunday Times, 30 Jul 1995, p. 4; Extradition process begins. (1995, March 4). The Straits Times, p. 48; Soh, F. (1995, November 22). Leeson will get fair trial in S’pore. The Straits Times, p. 1; Bonn approves Leeson’s extradition. (1995, November 15). The Straits Times, p. 40. Retrieved from NewspaperSG.
12. Wong, D. (1995, December 31). Leeson decides not to appeal against 6 ½ -year sentence. The Sunday Times, p. 1; Vasoo, S., Chong, C. K., & Chua, C. H. (1999, July 4). Leeson free after 3 ½ years’ jail. The Sunday Times, p. 1; After four years in prison, Leeson arrives home and says… I’m sorry. (1999, July 5). The Straits Times, p. 2. Retrieved from NewspaperSG.
13. Tougher futures broking rules. (1996, August 9). The Straits Times, p. 59. Retrieved from NewspaperSG; Attorney-General’s Chambers (AGC). (2013). Futures Trading Act 1986 (No. 14 of 1986). Retrieved September 17, 2013 from Singapore Statutes Online: http://statutes.agc.gov.sg/aol/search/display/view.w3p;ident=cae4e709-8d9a-468c-8818-796f3f46c19a;page=0;query=Id%3A%226c8f8bb9-ac3a-469c-b5ce-1fac0f28d12a%22%20Status%3Apublished;rec=0#legis
14. Chan, S. M. (1995, October 18). Top Barings officials helped in cover-up. The Straits Times, p. 1. Retrieved from NewspaperSG.
15. The Straits Times, 28 Feb 1995, p. 1; The Straits Times, 18 Oct 1995, p. 1. Retrieved from NewspaperSG.
16. Chan, S. M. (1995, March 10). ING settles Barings deal, aims to restart units. The Straits Times, p. 47; The Straits Times, 28 Apr 1995, p. 48. Retrieved from NewspaperSG.
17. Barings heads roll all around the globe. (1995, May 2). The Straits Times, p. 1; Barings’ chairman and its vice-chairman resign. (1995, April 4). The Straits Times, p. 1. Retrieved from NewspaperSG.
18. Scramble for Leeson’s story. (1995, August 14). The Straits Times, p. 10; Bids for Leeson’s story hot up. (1995, October 14). The Straits Times, p. 14; Leeson sells his story to publisher for $1m. (1995, October 15). The Sunday Times, p. 1; Rogue Trader released soon. (1999, June 11). The Straits Times, Life!, p. 2. Retrieved from NewspaperSG.