Before the Y2K scam and the dot-com bubble, before the dawn of the age
of what has since become known as the New Economy,
futures and
options were new creatures in the world of international finance. And though
many banks dealt in futures at the time, only one would go on to be
notorious for the way they had affected it and only one bank would go
on to collapse and be bought for the paltry sum of one dollar. That
bank was Barings. The trader largely responsible for its collapse was
Nick Leeson and this is his story.
In the beginning, Nick was a good student at school who by his own
account managed to be both a lad and a swot, that is, someone who
studied hard and also was known to be one of the boys. Though he was
made a prefect this did not diminish his popularity at school. Though
his first job was with Morgan Stanley as a settlements clerk he dreamed
of becoming a trader. To this end he quit his job and took a position
with Barings, the institution that was innovative in the way it dealt
with futures and one which he would help to make world famous though
for all the wrong reasons.
The son of a plasterer, Nick Leeson was pushed to excel by his mother
who wanted her children to do well and sadly did not live to see them
all grown up or married. Like many brokers, Nick also liked to let his
hair down after being constrained in the suit and tie at the bank all
day and so found himself with groups of friends at clubs where their
behaviour and antics would sometimes get them into trouble. Among other
notables, the British Royal family were counted as clients of Barings
and five Barings members received peerages for their services to
banking.
At the start of his career with Barings, Nick began in Jakarta,
Indonesia and was faced with the unenviable task of sorting out a mess
of one hundred million pounds of share certificates. This he achieved
over time and was also significant as it was here that he met his wife
to be, Lisa Sims. Following his success in Jakarta, he was asked to be
the General Manager of a new team running a futures and options
operation in the SIMEX market in Singapore.
It was in this context, amidst the hustle and bustle of trades that the
now famous 88888 account was drawn up, originally as an errors account
since Barings did not want to be burdened by dealing with fifty errors
a day as a result of hectic trading and massive understaffing. However
following the creation of this account, another account was used to
serve this purpose although the 88888 account (chosen because it was a
lucky number) was still active and would soon be used for another
purpose altogether, namely hiding ever increasing losses, the first one
being to bail out a colleague who had made a mistake and in so doing
cost the bank twenty thousand pounds.
Singapore was also the venue in which Nick cultivated some very
high-roller type clients the first being Phillipe Bonnefoy, a banker
with the Bahamas based European Trust and Banking Company. On an
average day there were 20,000 contracts going through SIMEX and
Phillipe’s first order was for 4,000 June contracts in one day. Suffice
it to say this was a huge amount for Leeson. It was also at this time
that the 88888 account began to be used for larger and larger losses.
How it is that the paltry losses in the beginning grew to become one of
the leading causes of the downfall of Barings Bank is a somewhat
complicated affair. Futures and options trading is a volatile practice
at the best of times, not far removed from the environment at a casino.
The main difference being the sums of money at stake. Furthermore,
Barings must take responsibility and must be held accountable for their
failure to investigate the losses and more importantly the size of the
losses incurred in Singapore at the SIMEX.
Through it all we see the sometimes ludicrous world of stockbrokers and
futures traders and the ridiculous behaviourthey engage in both off
and on the trading room floor. We see also examples of the Singaporean
legal system thanks to a mooning incident and Nick’s friend George’s
attempt to head butt someone on the trading room floor highlight the
emotional state of those who operate on it under stress.
In conclusion though the story is one which needs to be told although
the reasons for writing it are somewhat shady given that the author is
in effect profiting from a crime, given the nature of his
business dealings which, after reading this account, can only be described as
criminal. What leads a man of average means to seek to hide such
enormous losses? This is one question that is not fully explored.
However, at the end of the day, like the later Enron scandal it is
always those least responsible for creating the mess that end up
footing the bill when it becomes public. Such is the nature of an
industry that has virtually no oversight and almost no regulation to
keep it in place and keep it honest. Things may change but I’m
sceptical about futures and options.