Treasury Today Country Profiles in association with Citi

Nick Leeson: the original rogue trader

House of cards on green casino table

This is the story of how one ambitious investment broker singlehandedly bankrupted one of the oldest and most important banks in Britain – and how this episode taught the banking industry the need for proper internal controls and channels of accountability.

When senior executives from Barings Bank arrived at the Singapore branch one February morning in 1995 to talk to Nick Leeson about the gaping hole which had suddenly emerged in the bank’s balance sheet over the past several days, their star trader was nowhere to be found.

Unbeknownst to his bosses, Leeson had already fled the city and was now holed up, with his wife Lisa, in the five-star Regent Hotel in Kuala Lumpur. A short note left on his desk must have made for very ominous reading for his colleagues. “I’m sorry,” it simply read.

Little by little, the reasons behind Leeson’s apparent remorse began to emerge. Since 1992 Leeson had been hiding trading losses. As the bad bets he made on the Nikkei Index began to stack up in the first few weeks of 1995, Leeson followed a strategy that has been the ruin of many a gambler and doubled up. It was dangerous. It was against the bank’s rules. And he lost. By the time he absconded less than a month later, his losses totalled more than $1bn and Barings Bank, the oldest merchant bank in Britain and one of the country’s most reputable financial institutions, was on the brink of collapse.

In the city

There was very little in the early years of Leeson’s professional career that would indicate this was a man who would one day rise to eminence in the world of investment banking nor, moreover, cause the demise of one of Britain’s most famous banking institutions.

Leeson first landed a job in finance in the late 1980s, when he was hired to work as a clerk for Morgan Stanley, arriving in the City of London in the immediate aftermath of the ‘Big Bang’. London’s Stock Exchange had not long been deregulated, an event which coincided with the advent of screen trading, and the City of London was beginning to emerge as a leading centre of international finance. It was the era of young, ambitious traders in red braces; of Gordon Gekko and “greed is good.” In this world, Leeson looked very much like the others who occupied it at the time; just another unremarkable young man from the suburbs who, despite a modest background and a markedly average academic record, believed he could make a successful career (and fortune, of course) as a trader in the financial markets.

The realisation of that ambition did not come immediately. In his two years at Morgan Stanley he moved from the position of clerk to an operations assistant which had allowed him to acquire some familiarity with the workings of financial markets. But after his application to move to the trading desk was declined, he decided to pursue his ambition elsewhere.

He went to work at Barings Bank, a bank of considerable regard principally because of a client list which included the very cream of British society (even the Queen is said to have held an account with them). By the time of Leeson’s arrival, however, a sweeping transformation was taking place within the walls of this venerable old institution.

The influence of the old guard of conservative-minded merchant bankers who had long controlled the bank had been diminished by the Big Bang. As was the case nearly everywhere else, investment banking was now very much the vogue. Six years earlier Barings Securities had only a small team of stockbrokers. But when Leeson walked through its doors the investment arm accounted for nearly half of the bank’s revenues. This brought about a cultural change of some significance at the bank. Controls and good bookkeeping were no longer considered to be of fundamental importance; in the eyes of many of the young traders now building careers at Barings Securities these sorts of things were deemed a nuisance, a mere hindrance in the quest for greater and greater returns.

The 88888 Account

Barings made Leeson a trader and sent him to Singapore to oversee the bank’s futures trading activities at what was then called the Singapore International Monetary Exchange (SIMEX), located in the heart of the city’s financial district. It was a dream job. However, in this highly pressurised environment, it didn’t take long before Leeson began to feel the strain. During the summer of 1992, the futures markets began to fluctuate wildly, and Leeson and his team began to make mistakes. Trades were incorrectly executed. Sell orders were confused for buy orders.

But there was no way that Leeson, having worked so hard to fulfil his ambition of becoming a trader, was now going to quietly go back to his old job as a clerk. So he made a decision which was breathtaking in its recklessness. Instead of informing head office, he hid the trades.

Doing so was surprisingly easy. Leeson used an obscure error account – Account 88888 – in the bank’s antiquated back office system, which went to different managers from the house account. He then altered the software so nobody in London could see what it was he was doing. There he began to hide the worst losses he and his team had begun to make. His only remaining problem after that was making the margin payments on the futures in his possession. To settle these margin payments he had to take a gamble. He called head office in London and told them he needed money for other future contracts he had bought on behalf of clients, which his bosses accordingly sent to him without further question. In reality, the futures didn’t exist, and the years of deception that would eventually culminate in Barings’ collapse had begun.

“The first time I do anything, I’m not expecting to survive more than two days,” he later recounted. But head office kept sending the funds needed to cover margin payments and Leeson began to understand that he could successfully hide his mistakes. “As you get past the two day period, then you start to get more confidence because it isn’t being found. To me it’s obvious, if they can’t see it after two days then they are not going to see it after 200 days, 500 days, 1,000 days. It’s easy.”

Leeson has always maintained that the initial reason for his deception was to conceal, and ultimately recoup, the losses he was making (not for personal gain). And he did in fact succeed in doing that, at one point. In the space of a few months he had, by doubling up his trades, turned a £6m loss hidden in Account 88888 into profit. “I was so happy that night that I didn’t think I’d ever go through that kind of tension again,” he wrote in his autobiographical best-seller ‘Rogue Trader’. He was wrong. In fact, as soon as he returned to work the following Monday morning he began using the error account again. This time around though he was not so fortunate. Now he had entered into something of a vicious circle. As he declared more profits, he became an ever bigger star at Barings and in the investment banking community more broadly. Each time he did that though, his losses grew. He had become trapped by his own fake success.

“The first time I do anything, I’m not expecting to survive more than two days. As you get past the two day period, then you start to get more confidence because it isn’t being found.”

The truth would eventually out. By 1994 a series of chaotic global events, including an earthquake in Japan, were pushing the markets against him (see Chart 1). Like before, he doubled up. But this time, it didn’t work and the losses continued to grow. By the end of the year the deficits hidden in the 88888 account amounted to around £160m and, finally, his bosses in London were beginning to grow suspicious.

Chart 1: Leeson and SIMEX Nikkei futures
Chart 1: Leeson and SIMEX Nikkei futures

Source: SIMEX tick database and Leeson (1996)

The blame game

That Leeson was able to successfully hide such substantial losses for the length of time he did was one of the immediate questions raised in the post-mortem following the collapse of Barings. By his own, naturally self-serving, account, Leeson said it was the mistake of management in allowing him to remain chief trader while also being responsible for settling his trades that made the deception possible. “I was in a bizarre situation, in that I had one foot on the dealing floor,” Leeson recalled. “But I was also in charge of the girls in the back office, who would carry out any of my requests. I was probably the only person in the world to be able to operate on both sides of the balance sheet. It became an addiction.”

“People were focusing on the money that was being masde. It was never about control systems… Barings had risk managers and compliance officers, but they were never in a position of authority to challenge ‘The Untouchables’.”

Some blame might also be apportioned to the state of the bank’s IT systems. It is well documented that in the early 1990s Barings operated on a mishmash of systems, heavily reliant on manual processes and, by consequence, was all but incapable of assessing risks accurately. Had there been effective IT systems in place allowing information to be shared across the organisation, together with proper internal controls and channels of accountability to ensure such information is acted on, some commentators argue the opportunity for Leeson to ‘go rogue’ might never have arisen.

Of course, it is difficult to separate these shortcomings from the cultural change spreading through both Barings and global banking more broadly during that era. As Leeson himself later noted, it was that “failure is not an option” mind-set, in which all considerations were subordinate to profits that had brought Barings to this point. “People were focusing on the money that was being made. It was never about control systems… Barings had risk managers and compliance officers, but they were never in a position of authority to challenge ‘The Untouchables’. People in those compliance positions needed to understand the business and what really went on. They clearly didn’t at Barings.”

Crime pays

Corporate failings of this magnitude do make the concept of individual accountability something of a grey area. But whatever pressures drove Leeson to commit his crime, whatever the failings at Barings that allowed him to get away with it, the bank’s collapse nevertheless resulted from a choice he made personally and one that could have been made differently. Whether this truth has ever been fully acknowledged by Leeson remains a matter of some debate.

On the one hand, Leeson has always seemed at great pains to demonstrate he is not shirking the responsibility, stating recurrently in interviews that he believes nobody other than himself should be accountable for the Barings collapse. His public protestations of regret have not convinced everybody, however, former colleagues especially. Nicholas Edwards, who worked as a senior investment banker in the London office of Barings in the same era, and met Leeson again as part of a BBC radio programme three years ago, is among those who have doubts. “I was rather struck by his lack of remorse,” he said. “He was resolute – yes, he was sorry it had happened but it was very matter of fact. He seemed to blame the system, as opposed to the fact that he is a ruthless, unscrupulous cheat and liar. That’s what it boils down to.”

Such sentiment is not discouraged by Leeson’s behaviour subsequent to serving time in a maximum security prison in Germany. Just months after his release from prison in 1999 he delivered his first after dinner speech. It would be the first of many. Since then he has been regaling after-dinner audiences – for a handsome fee of course – with his honest reflections on the world of finance and the behaviour and misbehaviour of finance professionals.

He’s not done too badly from the media either. Every time there is a financial scandal of some kind (be it Libor manipulation, the London Whale, or the so-called ‘Flash Crash’) Leeson is always on call, ready to offer journalists the wisdom of his unique experience to an ever obliging press. He has also authored two books; one of which, the autobiographical ‘Rogue Trader’ was made into a film of the same name starring Ewan McGregor and Anna Friel. Liquidators personally chased him for £100m and, for a while, he was limited to earning no more than £3,000 a month, after which they would start to take a cut. They stopped chasing him in 2005, however, and now his after-dinner speaking and other various activities earns him around £80,000 a year.

To some, all of this leaves a rather unpleasant taste in the mouth. After all, is this not a man whose greed and mendacity contributed heavily to the downfall of a famous banking institution and, in doing so, cost ordinary honest professionals their jobs, their pensions and fortunes? Is it right that he be allowed, after his crime, to make a decent living out of the notoriety it brought him? Or should we accept that this is now a man who has served his time, and not let his actions distract from the factors that allowed him to get away with it in the first place?

Perhaps there is something to be said for the latter. Vilifying individuals, whether it be Nick Leeson or another figure of notoriety like Bob Diamond, often does have the tendency to mask underlying problems that may exist within an institution or even an industry. It must only be natural, however, for former colleagues and everyone else who lost jobs or money because of Leeson’s crime to wish to see a greater display of public penitence, beyond the short note he left on his desk that February morning in Singapore. But all the while he is travelling the after-dinner speaking circuit, picking up big cheques, it is difficult to know just how ‘sorry’ Leeson is or ever was.

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