Barings Bank PLC,Nick Leeson’s Lesson Team 3 Ashmita Srivastava Alexis Druon Dorra Mahbouli Majid Salehizadeh Congjie Li David Bensimon S
Barings Bank• Founded in • “There are six • Banking, 1762 by Sir great powers asset Francis in Europe: management Baring England, and security France, brokering Prussia, Austria, Russia and Baring Brothers.
The story of Barings Bank • Same reserve for all business lines • Loss of control over operations • Bankrupt in 1995 • Banks Trader in Singapore • Lost $1.4 Billion in derivatives • Imprisoned for 6.5 years • ING, a Dutch bank bought Barings bank for £1 • Formed subsidiary: ING Barings
What was ‘Questionable’?• How can a single person make a giant financial bank a fiasco ?• Why was he given such an authority?• What was he supposed to do?• What was senior management suppose to do?
How was it ‘Justified’? Cost saving by Time gap between having one buying and selling person in front and back office Trading losses byhaving one person in Minimize the risk involved front and in switchingback office
Deception• Unauthorized trades in Singapore• Doubling• Falsifying records• Margin call stories• Sold straddles• Used Error account ‘88888’ to hide his trades
Doubling Strategy • Bet 10 on black or red = Loss • Bet 20 on black or red = Loss • Bet 40 on black or red = Loss • Bet 80 on black or red = LossNick Leeson applied the same strategy:Increased his investments to offset his losse
Many Short Straddle + 1 Long Future 6,000 4,000 2,000 0 14,750 15,250 15,750 16,250 16,750 17,250 18,000 18,500 19,000 20,250 21,500 22,750 24,000Gains/Losses (Yen) -2,000 -4,000 -6,000 -8,000 -10,000 -12,000 -14,000 Nikkei 225 Index
The Five Eights Account• Switching from 99905 account to 88888 account July 3rd 1992• Request to switch back to 99905 account several weeks later.• Leeson did not follow orders
Use of 88888 account to cover Margin Calls • Increase of commissions generated by using non-market prices • Used Barings Financial resources as a cash cow • Booked fictitious trades and falsified records • Sold Put and Call options in the form of short straddles
Reported Earnings v/s Actual losses • Reported • £28.8 • £8.8 Million EarningsArbitrage Million of End of End ofstarted in 1993 1993 1994 • £185 • £21 • Actual Million Million Losses
Lessons Learned• Ineffective and • Auditors unable control recommendations system and warnings• No analysis on • Signals from SIMEX unrealistic facts and • Inquiries from Bank figures of England and Bank• Lack of knowledge for International among senior Settlement managers
Lessons Learned (Cont.)• Obvious violation of • Checking all the • Skipping routine restrictions on accounts rather than tasks and reporting traders ending balance to the headquarter• Integration of front- • Relying on original and back- office sources management • Board of directors• Giving too much role in setting up a autonomy and risk-reporting authority to a trader system