The Collapse of Barings
Finance 443 International Finance
Jay Yoo Alan Yeung Stuart Sutton Jennie Kretchmar
Contents
Background of Barings Nicholas Leeson How Leeson Broke Barings Barings Inadequate Controls
Background of Barings
Founded in 1762. Rapid growth during Napoleonic Wars (1798 1814) Concurred as the sixth great European power at the Congress of Vienna in 1815 During the years of 1830s and 1840s, Barings became the most influential financial house in U.S.
Background of Barings
A Financial Crisis in 1890
Provided loans to Argentina in 1824 Debt crisis in Argentina in 1888 Reported companys liabilities of over 21 million pounds sterling Rescued by the British government and the Bank of England
Background of Barings
Impact of Argentine Debt Crisis
Withdrew all transaction in North American continent Firms management was relegated to consulting small firms and wealthy people, which includes British Royal family
Background of Barings
Repair of Companys Reputation
Success in consulting the royal family asset management Success in giving advice for stock and bonds for small British firms Moved back into American finance scene in 1980s
Background of Barings
Expansion to Asia
Opened a stock brokerage operation in Tokyo during the mid 1980s Expanded its operation by establishing offices in Singapore
Background of Barings
Leeson Crisis in 1995
Nick Leeson, alone manager in the companys Singapore office made speculative trades on future market, which broke the company
ING, Dutch financial service company, bought Barings at the fire sale price of just 1 in June 1995
Nicholas Leeson
The son of a plasterer from the London suburb of Watford
Described as a loner by the people that he worked with
Competent soccer player
Nicholas Leeson
28-year-old trader who never graduated from college
Gained knowledge through numerous investment establishment positions
Nicholas Leeson
An investment officer at Barings L.P.C.
Working at the Singapore International Monetary Exchange
In charge of both making deals and overseeing the paperwork on these deals
Nicholas Leeson
Accused of losing the $1.3 billion
Charged with forgery and cheating on December 1, 1995 Sentenced to six and a half years
How Leeson Broke Barings?
Arrived in Singapore in 1992 Arbitrage opportunities of Nikkei 225 futures between SIMEX and OSE Leesons Singapore office is terribly understaffed errors frequently occurred Error account 88888 created by a new phone clerk: Loss of 20,000
How Leeson Broke Barings?
Unauthorized: Sold options, took positions on SIMEX on both futures and options contracts Fantasy: Leeson is a genius Created 50% of Barings 1994 profits
Reality: Leeson is a loser Loss of $296 million in 1994 alone
How Leeson Broke Barings?
How did he do that? Cross-trade technique with a real account 92000 and the error account 88888
Year 1993 1994 1995 Reported (Million) Actual (Million) + 8.83 + 28.53 + 18.57 - 21 - 185 - 619
In November and December 1994 Sold 34,400 options (straddles)
How Leeson Broke Barings?
Straddles: Profitable (Premium) if Nikkei traded within or near strikes between 18,500 20,000
How Leeson Broke Barings?
Nikkei 225
4Q 1994 - January 1995 Nikkei in a range of 19,000 19,500 Leeson held long futures of 3,000 Nikkei 225 equity contracts
How Leeson Broke Barings?
January 17, 1995 Kobe Earthquake Nikkei dropped sharply as people took cash out
How Leeson Broke Barings?
January 20 February, 1995 Leeson launched aggressive buying program: (3,000) 55,206 March contracts and 5,650 June contracts
How Leeson Broke Barings?
Barings collapsed could not meet huge trading obligations Outstanding futures positions of $27 billion (Barings capital was $615 million)
Barings Inadequate Controls
Lesson controlled both the dealing desk and the back office
Leeson removed account 88888 from daily accounts sent to Barings
Barings ignored internal auditors reports
Barings Inadequate Controls
Problems with Senior management
Showed little interest in the Singapore Branch Had only a vague understanding of derivatives
Did not have a precise breakdown of Leesons profits
Failed to question capital requests by Leeson to fund margin accounts
Barings Inadequate Controls
Problems with Barings Funding Control Measures
No distinction between proprietary and customer trades Ignorance to credit risks
Barings Inadequate Controls
Supervision Problems
Leesons superiors did not accept responsibility over him No one investigated a default in account 88888
Conclusion
Barings collapse could have been prevented through a series of controls to monitor Leeson Why couldnt others duplicate Leesons strategy
Any Questions?
