Analysis on the Collapse of Baring bank.

1. Barings Bank PLC,
Nick Leeson’s Lesson
Team 3
Ashmita Srivastava
Alexis Druon
Dorra Mahbouli
Majid Salehizadeh
Congjie Li
David Bensimon
S

2. 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.

3. 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

4. How did it happen?

5. Nick Leeson

6. Nick Leeson’s Career

7. 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?

8. How was it ‘Justified’?
Cost
saving by Time gap between
having one buying and selling
person in
front and
back office
Trading
losses by
having one
person in Minimize the risk involved
front and in switching
back office

9. Leeson’s Arbitrage

10. Deception
• Unauthorized trades in Singapore
• Doubling
• Falsifying records
• Margin call stories
• Sold straddles
• Used Error account ‘88888’ to hide his trades

11. 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 = Loss
Nick Leeson applied the same strategy:
Increased his investments to offset his losse

12. Nikkei 225 Overview

13. Nikkei 225 Index
Mid June 1994 to February 27,
1995

14. Long Futures Contracts
Leeson's Long Futures Positions
1,500
1,000
500
Gains/Losses (Yen)
Declining Nikkei 225 Index
0
Losses
18,000 18,500 19,000 19,500 20,000
-500
-1,000
-1,500
Nikkei 225 Index

15. Short Put Short Call
1,500 1,500
1,000 1,000
Gains/Losses (Yen)
Gains/Losses (Yen)
500 500
0 0
17,000 17,500 18,000 18,500 19,000 19,500 20,000 18,000 18,500 19,000 19,500 20,000 20,500 21,000
-500 -500
-1,000 -1,000
-1,500 -1,500
Nikkei 225 Index Nikkei 225 Index
Short Straddle
3,000
2,000
1,000
Gains/Losses (Yen)
0
-1,000
-2,000
-3,000
-4,000
-5,000
-6,000
-7,000
Nikkei 225 Index

16. 1 Short Straddle + 1 Long Future
2,500
2,000
1,500
1,000
Gains/Losses (Yen)
500
0
17,000 17,500 18,000 18,500 19,000 19,500 20,000 20,500 21,000
-500
-1,000
-1,500
-2,000
-2,500
Nikkei 225 Index

17. 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 24,000
Gains/Losses (Yen)
-2,000
-4,000
-6,000
-8,000
-10,000
-12,000
-14,000
Nikkei 225 Index

18. 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

19. 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

20. Reported Earnings v/s Actual
losses
• Reported • £28.8
• £8.8 Million
Earnings
Arbitrage Million
of End of End of
started in
1993
1993 1994 • £185
• £21
• Actual Million
Million
Losses

21. Reality of 88888 Account

22. 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

23. 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

24. Thank You.