||The Build Up To 1995
The week before Nick Leeson disappeared he had kept throwing
up at work.
Colleagues did not know why but were soon to find out.
The ego of a 28-year-old trader on the Singapore Monetary Exchange
and the greed and stupidity of a 233-year-old bank had combined to destroy
an investment empire and in the process stunned the world…
Nick Leeson's life started as a classic rags-to-riches tale.
Born on 25th February 1967, he was the working class son of
a plasterer from a Watford council estate, who failed his final
maths exam and left school with a mere handful of qualifications.
Nonetheless, 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.
Before long, 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. His
bosses back in London, who viewed with glee his large profits, trusted
the whizzkid. Leeson and his wife Lisa seemed to have everything: a salary
of £50,000 with bonuses of up to £150,000, weekends in exotic
places, a smart apartment and frequent parties and to top it all they even
seemed to be very much in love.
The job of a derivatives trader is akin to a bookie once removed, taking
bets on people making bets and Leeson started by buying and selling the
simplest kind of derivatives futures pegged to the Nikkei 225, the Japanese
equivalent to the UK's FTSE 100. At the time the trader only had to put
down a small percentage of the amount that was being traded, it was therefore
easily possible for the money on the table to be exceeded many times by
losses. However Leeson seemed to be infallible to Barings Chief Executives,
by the end of 1993, he had made more than £10m - about 10% of total
profit that year.
Barings believed that it wasn't exposed to any losses because Leeson claimed
that he was executing purchase orders on behalf of a client. What the company
did not realise was that is was responsible for error account 88888 where
Leeson 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. In a fatal
mistake, the bank allowed Leeson to remain Chief Trader while being responsible
for settling his trades, a job that is usually split.
By December 1994 the red ink hidden in account 88888 totalled $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% 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 stabilise 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.
< PREVIOUS | 01 | 02 | 03 | NEXT >