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Having being founded in 1762, Barings Bank, previously known as Baring Brothers & Co. was the oldest merchant banking company in England. Known as the Queen’s bank and counting members of the British Royal Family as customers, Barings Bank collapsed due to the activities of one trader, Nick Leeson on February 26, 1995. This was the second time Barings had faced bankruptcy, the first being in 1980 when a significant amount was lost in South America following the Argentinan revolution. However, they were bailed out by the Bank of England and other London banks. Unfortunately, the bank was unable to sustain the massive losses caused by the unauthorized trading of one trader and was forced into receivership. Barings was eventually purchased by the Dutch bank ING after its collapse for the sum of £1.
The collapse of one of the oldest and most respected financial institutions in Britain was unexpected as it was inevitable due to the apparent lack of and enforcement of policies, procedures and systems necessary for prudent management of derivatives trading. Nick Leeson began working for Barings Bank in Jakarta in the back office addressing the problems and making delivery of stock certificates and bearer bonds. He was then appointed general manager of a new operation in futures markets on the Singapore Monetary Exchange (SIMEX) and was soon making millions for Barings. As general manager, he also had the authority to hire traders and back office staff. Nick Leeson was general manager, head trader and in charge of the back office. This obvious conflict of interest did not seem to concern senior management within Barings, although questions should have been raised at the time. Leeson took unauthorized speculative positions in futures linked to the Nikkei 225 as well as Japanese Government Bonds (JGB). He also sold put and call options with a nominal value of $6.68 billion. These unauthorized trades and losses were hid in an account named ‘Error Account 88888.’ By December 1994, losses hidden in account 88888 totaled $512 million. The size of the positions were highlighted by the fact that in January and February 1995, Barings Tokyo and London transferred US$835 million to its Singapore office to enable Leeson to meet SIMEX margin requirements. Increasingly desperate to regain losses, Leeson bet that the Nikkei would not drop below 19,000 points. However, a devastating earthquake hit Kobe and the previously stable Nikkei fell by 7% in a week. Leeson requested further funds in the hope that he would be able to trade out of the debacle. He was counting on the Nikkei recovering after the earthquake and stabilizing at 19,000. However, he had an open position with no bets the other way to protect Barings’ huge exposure. The Nikkei did not rebound and three quarters of the $1.3 billion he lost Barings was as a result of those subsequent trades. The situation was all the more astounding because Barings’ reported capital was estimated to be $615 million. The $1.3 billion of liabilities was more than the entire capital and reserves of the bank. Ultimately, Barings collapsed because it could not meet the enormous trading obligations which Leeson had established in the name of the bank.
