Breaking a Bank

Breaking a Bank

For the unofficial kickoff of summer I thought I’d share a crazy/sad story about the collapse of one of the oldest banks in the world.  No lessons this week, just an interesting story about how a few very bad bets can bring a centuries old institution to its knees.  Enjoy…


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Barings Bank was a British bank based in London and the second oldest bank in the world.   Its history included facilitating and financing a few small projects most of you are probably familiar with.  Have you ever heard of the Louisiana Purchase or the Canadian-Pacific Railway?  That’s Barings.

Barings was around during the American revolution.  It helped finance the Napoleonic wars, survived two World Wars and the Great Depression.  Over the years it took some punches and lost a bit of clout as other banks came on the scene, but Barings maintained its position as a well respected and powerful player in global banking.

Enter Nick Leeson

In 1992 Barings sent a young whizkid to head up a new operation in futures markets on the Singapore International Monetary Exchange.  Lesson came out of the gates on fire, making millions.  Leeson’s trades are credited with accounting for 10% of Baring’s profits in his first years in Singapore.  He was making big directional bets on the markets and he was right…for a while anyway.

Leeson’s luck soon turned.  His trades were starting to go against him.  It happens.  Nobody can be right all the time.  Good traders accept cold streaks as part of the game.  Leeson couldn’t though.  Leeson began hiding his losses and continued reporting profits to the bank’s headquarters in London.  How did he manage to hide losses?  Well fortunately for Leeson, not only was he in charge of trading, but he was also in charge of clearing his own trades.  These tasks are usually delegated to two different people just to avoid this exact problem.

Leeson began using an “error” account to hide his mistakes.  His staff had initially set up the “88888” account to track small bad trades until they could be reconciled (8 is a lucky number in Singapore).  As Leeson began losing, he repurposed the 88888 account to mask his large losses.  Even as losses mounted, Barings continued funneling money to Leeson because he claimed to be making trades for a large client and was still reporting profits.

By the end of 1994, Leeson’s losses exceeded $300 million.  Instead of coming clean, Leeson upped the ante.  In mid-January 1995, Leeson put on a large position that would pay handsomely if the Tokyo stock market didn’t move much overnight.  Now, imagine the pit in Leeson’s stomach when he woke up the next day to this headline…

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Yup, earthquake.  Just about the worst thing that could happen.  Asian markets tumbled overnight.  Leeson’s hole got a lot deeper.  But, like any true gambler, rather than eat his losses and admit defeat, he went on tilt.  If one big bet doesn’t pay off, bet bigger right?  Over the next month Leeson placed large bets that Tokyo’s stock market would quickly recover.  When it didn’t, Leeson fled Singapore and left a note that said, “I’m sorry.”

Leeson was eventually arrested and spent almost seven years in a Singapore jail for fraud.  On February 23, 1995, three days  after Leeson fled, facing losses of $1.4 billion (twice the amount of capital they had available), Barings declared themselves insolvent.  After an unsuccessful attempt by the Bank of England to save the bank, the Dutch bank ING purchased Barings for $1.

Poof.

Gone.

Three hundred years of history, up in smoke because of one rogue trader.

 

Further Reading…

Rogue Trader

How rogue trader Nick Leeson broke the Bank

Nick Leeson Official Website


Tim Brennan

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