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Robert Cairns

It is 10 years since ?rogue trader? Nick Leeson was arrested for almost single-handedly causing the collapse of the British merchant bank Barings.
The demise of the 223-year-old bank was one of the most dramatic financial scandals of the 1990s. For a time, the 28-year-old Englishman was the world?s most wanted man.
Leeson fled Singapore, where he was working in late February 1995. He was finally apprehended on March 1, by German police at Frankfurt Airport.

Barings had been Britain?s oldest merchant bank. It had financed the Louisiana purchase and Britain?s war against Napoleon. It was the Queen?s bank. It seemed unthinkable that a single trader, based in a small office in Singapore, could bury Barings in ?860 million (HK$11 billion) of debt.
Leeson was jailed later in 1995 for his role. He admitted two charges of fraud to a judge in Singapore.
Judge Richard Magnus said Leeson had ?spun a web of deceit? and created a ?superficial reality designed to beguile? the bank and the Singapore International Monetary Exchange (SIMEX).
?The facts speak of the criminal enterprise of the accused,? Judge Magnus added.
But was Leeson solely responsible? 
Philip Augur writes in The Rise and Fall of Gentlemanly Capitalism that ?Barings was undone by a combination of a rogue trader, a lax regulatory regime and weak management...?
He said there had been plenty of warning signs, including unreconciled balances, suspiciously high profits, apparent funding of clients, letters from SIMEX identifying an error account, and persistent market rumours.
?The failure to act on these can be attributed to lack of management expertise; structural weaknesses, and possibly a fear of disturbing or alienating the source of profits that made the group?s results and funded the bonus pool.?
Augur also argues that Baring?s regulators ?lacked the resources, the resolve and the co-ordination to pick up deficiencies in management?.
?This situation was exploited by Nick Leeson, an individual who had been over-promoted and who found himself swimming well out of his depth.?
Lesson was born into a working class family in Watford, Herefordshire, in 1967. After attending university, he worked briefly for Morgan Stanley before joining Barings.
He impressed his superiors by dealing with a problem the company was having with ?100 million in stock certificates and bearer bonds that were non-deliverable.
The clients had been trying to avoid delivery due to falling stock prices. They had claimed the certificates were not in the right denomination or a physically acceptable form. Leeson worked for months sorting out the certificates and finally made delivery.

His managers were grateful. When Leeson applied for a position with Baring Securities in Singapore, he was accepted. Leeson began working in Singapore in 1992. He had taken an exam allowing him to trade on SIMEX.
The 24-year-old was made a general manager, head trader and was also in charge of settling the trades in the back office. These roles are split in most companies. This ultimately meant Leeson could conceal his speculative and illegal activities.
 His first task in 1992 was to hire young people to be trained as traders.

The Singapore Office of Barings originally dealt mainly with shares, but was now doing more futures trading on SIMEX. The bank did not have a seat on the SIMEX exchange and had to pay commissions on its transactions.
Leeson was earning a salary of ?50,000 a year and enjoying bonuses of up to ?150,000. He and wife Lisa lived in a luxury apartment; and Leeson had a circle of friends with whom he regularly went drinking. 
Despite the growth in its derivative business, Barings had failed to adopt the necessary checks and balances on undisciplined activities by traders.
?A couple of the people who were in core places within Barings that should have been administering a high level of control ... had what I would describe as almost no understanding of the business,? Leeson told David Frost in an interview on September 11, 1995.
Many of the managers also seemed to have little understanding of the potential risks. ?Top management, whether corporate or otherwise, failed to understand the nature of the products being used in their treasuries or trading operations,? concluded Risk Management magazine in a June 1995 issue.

Leeson and his inexperienced team were involved in two types on trading: transacting futures and option orders for clients and other companies; and arbitraging price differences between Nikkei-225 Index futures on SIMEX and Japan?s Osaka exchange.
The cocky Leeson loved the thrill of trading but lacked the maturity to handle so much responsibility.
?When I first stepped out to the trading floor, I could smell and see money,? he wrote in his 1996 autobiographyRogue Trader.
?I?d been working in various back offices for almost six years, pushing paper money around, sorting out other people?s problems. Now, out on the trading floor, I could work with instant money ? it was hanging in the air right in front of me, invisible but highly charged, just waiting to be earthed,? he wrote.
Leeson also enjoyed being regarded as a ?whizz-kid?. ?I do think I am quite a clever guy and I can usually turn my brain to anything,? he later explained.
He has also claimed his actions were not motivated by financial gain. ?There have been no instances found of me stealing money and there never will be because there aren?t any.?
In the 1980s and 1990s, the cosy world of British banking had changed considerably following deregulation of financial markets and the rapid growth of derivative markets.
Traditionally, British banks had hired from the public schools, but by the early 1990s this had changed. Young people from more modest backgrounds were proving themselves in the dealing rooms and on the trading floors. 
However, Barings was an old-fashioned bank with conservative managers. This probably limited their understanding and communication with Leeson.
Leeson was also good at exploiting people?s weaknesses. As he observed in  Rogue Trader: ?People at the London end of Barings were all so know-all that nobody dared ask a stupid question in case they looked silly in front of everyone else.?
In 1993, concerns were raised about Leeson having too much authority. An internal memo that year warned managers in London that Leeson should not be allowed to be a trader and a settlement officer. ?We are in danger of setting up a system that will prove disastrous,? it said. But no action was taken.

 Leeson?s duplicity began when one of his junior staff made a mistake resulting in a loss of ?20,000.

Leeson set up an error amount numbered 88888 to hide the loss until he could recoup it through trading. No one noticed.

Confident he could cover future losses, Leeson?s trading became increasingly risky and speculative.

He was gambling markets would remain bullish and the Nikkei would keep rising. But frequently he was wrong. 
As he made greater trading losses, Leeson simply concealed them in the 88888 error account. By December 1992, losses in the 88888 account totalled ?2 million. By the end of the following year, the losses had grown to ?23 million. But all management saw was higher profits.
In 1993, Leeson reported more than ?10 million in profits for the company. This was more than 10 per cent of Baring?s annual profit.
?We were all driven to make profits, profits and more profits,? he recalled in Rogue Trader.

Barings managers were elated. Indeed, group chairman Peter Baring boasted to the director of the Bank of England that ?it was not actually terribly difficult to make money in the securities industry?.
Management was also preoccupied with a merger between two parts of Barings. In November 1993 Barings Securities merged into Baring Brothers and Company as a prelude to forming Barings Investment Bank.
Leeson also found ways to create more money to hide his losses. Tony Dickel, a former Barings staffer, and now managing director of Management Recruiters International (HK), explained: ?Not many people could have thought of selling options so he could create money, so he could cover his margins. But Nick proved too clever by half. It was robbing Peter to pay Paul.?
Leeson was also committing fraud. During 1994, for instance, he reported ?28 million in false profits. This was an extraordinary sum and guaranteed substantial bonuses for his staff.
By the end of 1994 the losses in the error account had soared to ?208 million.

In early 1995, Leeson was still trying to trade his way out. He was hoping Japan?s Nikkei index would rise. 
 Then disaster struck. On January 23, 1995, an earthquake devastated the Japanese city of Kobe, causing widespread damage. More than 5,200 people subsequently died.

The Japanese share market went into free-fall ? the Nikkei plunged 1,000 points.

Leeson again miscalculated that the Nikkei would recover quickly. Over a period of about three months he purchased more than 20,000 futures contracts worth about US$180,000 (about HK$1.4 million) each. He was, single-handedly, trying to make the market rise.
Recalled Tony Dickel: ?Nick tried to buy a bounce, but the market plummeted. Everyone knew Barings was buying and everyone was selling against them.?

It only made matters worse. As he made more losses, he had to pay more to SIMEX in margin calls. 
Leeson had falsified accounts and documents to ensure he obtained additional funding from different arms of the Barings group, including the London and Japan divisions.

He told staff he needed the funds to meet the margin calls of clients. This was illegal as SIMEX?s rules said brokers could not post their own money as margin for clients.
In February 1995, Barings auditors, Coopers & Lybrand, contacted the firm?s finance director. It was concerned about ?50 million in Barings Futures Singapore balance sheet as at December 31, 1994. This was apparently due from Spark, Leeds, & Kellogg, a New York securities trader.
?The transaction turned out to be a fiction of Leeson?s and not enough action was taken to follow up the auditor?s letter, despite market rumours,? explained Augur.

By now Leeson was under terrible stress. He was tired, constantly on edge ? sometimes vomiting in the toilets. The net was closing in on him. 
On February 3, 1995, Barings Investment Bank?s regional manager for South Asia, James Bax, sent a memorandum to chief operating officer Peter Norris. He warned that the ?current operational weaknesses of our SIMEX businesses are in urgent need for a new approach?.
Later that month, group treasurer Tony Hawes and futures and options senior clerk Tony Railton went to Singapore to investigate.
By February 17 Railton ?knew that only Leeson could help him... but Leeson did not appear for meetings with him and on 20 and 21 February,? wrote Augur.

The two men finally met on February 22 and February 23. ?Leeson agreed there appeared to be a problem but characteristically carried on trading during the first meeting and left the second after 30 minutes.?

The game was up. Leeson ? about to turn 28 ? decided to flee. On Friday February 23, he faxed his resignation to Barings from Malaysia. On a note he hastily scribbled: ?I am Sorry?.

He fled to a resort in Brunei before eventually resurfacing in Frankfurt where he was arrested.

A spot audit found Barings losses now amounted to ?800 million ? virtually the bank?s entire assets.

On February 23, Peter Baring met with the deputy governor of the Bank of England. He told him he ?considered that Barings had been the victim of a massive fraud ... vigorous attempts were made to save Barings, but, owing in part to the uncertain cost of closing the opening positions when the markets re-opened on Monday morning and the related difficulty in establishing the facts about Barings financial state, these efforts were unsuccessful?.
 On Feburary 26, administrators were appointed in London. The following day, when the bank failed to meet its margin calls, judicial mangers in Singapore were called in.
A week later, Barings was purchased by the Dutch Banking and Insurance group ING for the sum of ?1.

Leeson was brought back to Singapore to stand trial. He was convicted of fraud and sentenced to six and a half years jail in Changi prison.
 His prison stint was very tough, Leeson revealed recently. ?I?d steel myself to cope, but it was a hard existence, locked up with two others in a tiny cell 23 hours out of 24. Cellmates belonged to rival gangs, and when fights broke out you inevitably got drawn in,? he said.
?You slept on the rough concrete floor; breakfast was three slices of bread and the other meals, monotonous rice with a bit of chicken or vegetables.? 

Leeson?s health suffered and he contracted colon cancer. In July 1999 he was released early for good behaviour. 
His marriage collapsed and his wife Lisa divorced him. She was outraged by confessions of sexual liaisons with Japanese geisha girls in Leeson?s autobiography. She took a job as an air hostess and has since remarried.
Leeson, after being successfully treated for cancer, completed a degree in psychology at Middlesex University.
He does not consider himself a victim. He told The Guardian in 2001. ?I did what I did knowing what I was doing. I knew it was wrong and was quite happy to take any punishment thereafter.?
 In 1999 Rogue Trader was made into a film starring Ewan Mcgregor. Today, Leeson earns money in Britain on the speaking circuit.

Ten years on, the regulatory frameworks governing derivative markets in London and Singapore have been tightened up considerably. Compliance regulations to prevent fraud and undisciplined behaviour by traders has also been introduced.
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Ten years have passed since arrest of rogue trader Nick Leeson