How Rogue Trader Nick Leeson Brought Down Britain’s Oldest Bank
When it comes to banking scandals, no name is more infamous than that of Nick Leeson. While the likes of UBS trader Kweku Adoboli and former Allfirst banker John Rusnak were responsible for bigger losses, Leeson’s illicit trading in the early 1990s brought down Barings Bank, Britain’s oldest and most respected investment bank. It was an event that sent shock waves throughout the entire banking industry. At the time, no one could believe that just one man could be responsible for such a cataclysmic banking collapse, but Leeson’s actions, and his unfettered access to funds, was seen as a warning shot for the banking industry, with many institutions realizing just how vulnerable they were to rogue trading. Read the story, and watch the documentary at the end of the article.
Traditionally in the UK, those working in financial services tended to come from middle class families with finance degrees earned from the top universities. However, Leeson had no such background. Leeson was part of a new wave of banking professionals who were young, ambitious and working class. This new breed added energy and dynamism to what was a rather stuffy and archaic industry, that was in need of a new approach to help it compete in the world’s investment markets.
Born in 1967, Nick Leeson came from a working class family in Watford, England. After leaving school, and without a degree, he managed to land a job as a clerk for Coutts, a well-respected and traditional bank that counted the Queen of England as one of its customers. He then moved onto Morgan Stanley, where he worked for two years, until moving to Barings in 1989. While only 22 years old, he worked his way up to become a rising star in the far eastern currency markets.
Barings Bank Years
Modern banks offer a wide range of different services, from investment trading and merchant services, to personal banking, loans, mortgages and insurance. However, Barings was a bank very much in the old model. Set up in 1762 by wool traders Francis and John Baring, the bank was one of the most respected financial institutions in the UK. Barings had survived two World Wars and several depressions, and while nowhere near the largest of the UK’s banking institutions, the name Barings was synonymous for probity and trustworthiness, and was trusted with money belonging to many of the British elite.
However, in a growing global economy, Barings, like many of the traditional British investment banks, was having to adapt. The Far East was seen as the place to be, where young, fresh talent like Nick Leeson were making the banks enormous profits. By 1993, Leeson had single-handedly made 10% of Barings annual profits from the banks’ new Singapore office where he was trading in Singapore’s International Monetary Exchange. Leeson’s success, however, was all a front.
Nick Leeson, the Rogue Trader
As early as 1992, Leeson was making unauthorized speculative trades, using customer funds. This practice was both illegal and highly risky. In his book, Rogue Trader, which was turned into a film starring Ewan McGregor, Leeson claimed his unauthorized trading started as a means of recovering a loss mistakenly made by one of his colleagues. He had set up an error account, numbered 88888 (the number 8 considered lucky by many Far Eastern countries), from which he made speculative trades, first to recover losses, and then to generate extra profits for the bank. However, when the far eastern markets plummeted in 1994, his error account had losses of over £208 million ($310 million+, based on the exchange rate in 1994), which Leeson tried to recover with further speculative trading. His main error was trying to support the market to avoid further losses. He added to his already losing position, buying more and more contracts, hoping that his buying would help push the market up. It didn’t, and the mistake obviously ending up costing dearly (a mistake all traders need to avoid…throwing good money after bad).
The Barings Bank Collapse
Eventually, after an internal audit in 1995, Barings’ discovered losses of £827 million ($1.29 billion, based on average exchange rate in 1995) in Leeson’s error account, an amount that nearly equated to the entire assets of the bank. While attempts were made to save the bank, Barings crashed and Dutch banking group ING eventually bought it for the paltry sum of £1 ($1.55, based on the exchange rate at the time).
After being discovered, Leeson fled Singapore, but was arrested in Germany and extradited, serving four years in Singapore’s notorious Changi Prison. On his release in 1999, he released his autobiography, which heavily criticized the banking industry for allowing a single trader to have such unfettered access to funds, and blamed part of the bank’s downfall on the pressure on traders to turn a profit.
For more, watch 25 Million Pounds: The Nick Leeson Story. This documentary won the Best Science and Nature Documentary in the 1998 San Francisco International Film Festival.
By Jenny Short
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