Nick Leeson and the Barings Bank Scandal

The bank focused its activities in the investment sector, so its successes in trading determined its future. In February 1995 the bank discovered that a massive fraud scheme, perpetrated by one of its traders in Singapore, had wiped out the bank’s capital and destroyed the 220-year-old institution. By 1989, Barings had established trading operations at most of the world’s exchanges, operating primarily in British Commonwealth countries and former British colonies. In that year, Nick Leeson, a young commodities trader, joined the bank. He had graduated from college and spent two years at Morgan Stanley as a settlements clerk, clearing the huge futures and options deals the traders were making.

When he joined Barings, it was in this same role, clearing settlements and learning the back office operations of the bank. Bored with the limited opportunities for advancement, Leeson quickly applied for a transfer, taking a position in the Bank’s trading operation in Jakarta, Indonesia. He had applied for the position based on the image of an exotic locale and the flashy marketing materials the bank used to promote its Far East experience. But he soon found the reality to be vastly different, with the operations actually just a hotel room with several computers in it. In his autobiographical account of the scheme, Leeson claims to have learned just how lax the bank’s controls were and how much tolerance the bank extended to “superstar” traders. He claims that significant losses were essentially ignored, because they were typically not found until subsequent profits were booked to cover them. With this experience under his belt, Leeson was returned to London, where he spent the next year or so traveling around the Far East, meeting the various people and learning about Barings’ various operations in the region. During that time period, Barings acquired a seat on the Singapore International Monetary Exchange (SIMEX) but had not yet begun utilizing it. In 1992 Leeson was selected to open, run, and manage the new operation in Singapore, managing all aspects of trading on SIMEX. He had been with the bank approximately three years and had a total of five years of experience in banking.

In his early stages, Leeson concentrated on arbitraging currency transactions. This is a fast-paced practice in which speed and timing can enable a slow and steady profit. But for its relatively low risk, it is a stressful and high-energy way to make relatively small profit margins. Leeson soon became disenchanted. With his background in settlements, Leeson was quick to catch any slight errors in the trading slips. Typically small errors would be booked against an errors account in London, with the positives and negatives generally netting out over time. In order to take advantage of the time differential, Leeson asked to be allowed to create a local error account, named the 88888 account. This would later prove vital to his orchestration of the scheme.