A Nefarious Gambler Who Singlehandedly Broke a Bank

Nicholas William Leeson, a British 28-year-old trader of The Barings Bank, who led this venerable bank to its financial collapse in 1995. Credit: rankia.com

“It’s very easy for me to get along with people, but I don’t necessarily have to like you or any of the people who I work with to get along with them. So I come in and do my job, do it to the best of my ability, and then at the end of the day if you’re going to ask me out for a drink, I’m not going to go out for a drink with you because I don’t like you, but I’m not going to tell you that, there’s no reason for there to be any animosity during the day. I just didn’t like the people who I worked with and so I would go and do the work, be very friendly, everybody would probably say that they thought they were my best friend and if they have the knowledge, then I will attempt to get the knowledge through whichever way is best, and if a friendship is that method, then friendship is the method that I would use.” –Nick Leeson

Greed is a powerful evil.  This malignant sin will make rational and prudent people to do the most abominable actions you can think of.  Nothing is out of reach in the search of money.  Nothing.  Such was the case of Nicholas William Leeson. 

Nick Leeson’s life started as a classic rags-to-riches tale. Nick, as he was called, was born in on February 25, 1967 in the humble town of Watford.  His father was a hard-working plasterer who wanted his son to be somebody other than an ordinary manual worker.

Like many in the 1980’s, Nick Leeson wanted to be rich and successful, but Nick Leeson was also a very strange man with an extraordinary ability to manipulate and deceive those around him. His victims willingly entered into a dream he wove, lured by the prospect of vast sums of money and together they lost 830 million pounds.

In the early 1980s, he landed a job as a clerk with royal bank Coutts, followed by a string of jobs with other banks, ending up with Barings, where he quickly made an impression and was promoted to the trading floor.  In a relatively short period, he was appointed manager of a new operation in futures markets on the Singapore Monetary Exchange (SIMEX) and was soon making millions for Barings by betting on the future direction of the Nikkei Index.

Before I go on, I would like to highlight the historic value and prestige of the Barings Bank.  The iconic bank was founded in 1762. It was the oldest bank in England, and one of the oldest banks in the world, with more than two centuries of history.  It was the bank of choice for the Queen of England to handle her accounts, and had financed, among other things, the Napoleonic wars. It is claimed that the royal family had invested 40 million pounds in Barings.  Some pundits say that former Lady Diana had her account on this venerable bank.

Having said that, allow me to continue with the story.  Management at Barings Bank allowed Leeson to remain Chief Trader while also being responsible for settling his trades, jobs usually done by two different people.  This tragic breach of financial security permitted Leeson to hide his gargantuan losses from his superiors in London.

The tragic events started when Leeson opened a fake error 88888 account where he hid his losses. This account had been set up to cover up a mistake made by an inexperienced team member, which led to a loss of £20,000. Leeson now used this account to cover his own mounting losses.

The losses escalated to enormous amounts without the knowledge of Senior Management in London who were outdated and were unaware of how the derivatives’ markets worked.  The Barings bank was still living in the economy of the eighties when financial transactions were very traditional and with strict risk controls.  They had no idea of the casino gambling transactions being made by Leeson in the very heart of the cut-and thrust empire of SIMEX (Singapore International Money Exchange).  It was absolutely unbelievable that London had not done a basic reconciliation of the position held by the Baring Bank in Singapore.  Had they done this simple audit routine, the box of worms would have been discovered and the bank would have been saved.  But there’s no use crying over spilled milk.  Let me go on with the story.

“By December 1994 the red ink hidden in account 88888 totaled $512 million. Getting increasingly desperate Leeson bet that the Nikkei index would not drop below 19,000 points. At the time this seemed reasonable as the Japanese economy was rebounding after a 30-month recession. Then on the 17th January 1995, a devastating earthquake measuring 7.2 hit the Japanese city of Kobe. The previously stable Nikkei index plummeted by 7 percent in a week. As the losses grew, Leeson requested extra funds to continue trading, hoping to extricate himself from the mess by more deals. Leeson was counting that there would be a post quake rebound and the Nikki would stabilize at 19,000.

There was no hedges, no bets the other way to protect Barings’ huge exposures. There was no rebound. Over three months he bought more than 20,000 futures contracts worth about $180,000 each in a vain attempt to move the market. Some three quarters of the $1.3 billion he lost Barrings resulted from these trades. When Barings executives discovered what had happened, they informed the Bank of England that Barings was effectively bust.”

Leeson hurriedly resigned and flew to Malaysia, Thailand and finally Germany, where he was arrested and extradited back to Singapore on November 20, 1995, though his wife Lisa was allowed to return to England.  Trusted with the finances of royalty and aristocracy for over two hundred years, the Barings Bank had been brought down by the covert trading activities of just one man, leaving the entity with losses of around £850 million.

Sentenced to six and a half years in Changi Prison in Singapore, Leeson was released in 1999, having been diagnosed with colon cancer, which he survived despite grim forecasts at the time.  While in prison, in 1996, Leeson published an autobiography, Rogue Trader, narrating his acts.  In 1999, the book was made into a film of the same name starring Ewan McGregor and Anna Friel.

Nick Leeson presently lives in Ireland with his second wife Leona and three children.  He has his own Web page and spends most of his time delivering talks to companies on risk management, compliance and corporate responsibility, also undertaking after-dinner speaking engagements recounting his unique life experiences and struggles against adversity.

This astounding story took place in Singapore and England in 1995.  Little did we know that thirteen years later the same series of events would take place.  Only this time it brought the world on its proverbial knees. It was the global financial meltdown of September 2008.  Giant financial entities like Salomon Brothers, Long-Term Capital Management, Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch, and Lehman Brothers bit the dust or were taken over by the Federal Government.  Even entire countries like Iceland, Ireland, Portugal, and Greece also went bust. The dust provoked by the financial catastrophe of 2008 has not cleared yet.

Once more, greed, excess, and high-stakes gambling turned the world upside down.  The effects are still reverberating across the globe.  When will it ever end?  When will we learn that money is only a reference of value, and not an end in itself?  When will we realize that investment banking is not a global casino where anything goes?  I’m afraid I don’t have the answer to these questions. It’s a tough cookie.

If you are interested in viewing the captivating story of Nick Leeson, I recommend the 1996 documentary film made by Adam Curtis, titled 25 Million Pounds. Good Day!

Source:  Nick Leeson – Official Website