In every business there is always risk and if the risk is not well managed by the company, it will lead to the huge losses and eventually will make the company bankrupt. Hence, the tool to manage the risk is introduced called derivatives. There are many types of derivatives and the most commonly use are options, futures and forwards. However, there are many cases of company incurred huge losses because of the derivatives.
One of the popular cases on derivatives debacles is the bankruptcy of the Barings Bank in 1995. This is one of the popular cases since it is involve the oldest bank in London and the fall is cause by the action of only one employee base at the small office in Singapore. Barings Bank had suffered a loss of £827 million ($1.3 billion) plus the collapse cost which is £100 millions. The person who was responsible for the fall of Barings Bank is Nick Leeson.
Barings bank was founded by Francis Barings and his silent partner, John which is his older brother at 1762. Barings bank had financed the 1803 Louisiana Purchase, the Erie Canal and also helped the British government battle against Napoleon in finance aspect. In the battle of British and Napoleon, the bank gave loan and raise money to pay the armies, and buy the equipment for the battle.
In 1992, the Barings have decided to send one of their employees to Asian to do the derivatives trading. Since derivatives are something new at that time, not many people know how to deal with it. So, the Baring chose one of their employees named Nick Lesson who had performed well in his job in Jakarta. Nick Lesson was sent to Singapore in 1993 as the general manager of Barings Futures (Singapore) and his job is to run the bank's Singapore International Monetary Exchange (SIMEX) activities. Besides, he also had to manage the back-office which actually should be managed by different people.
At the beginning of his job as a trader, he had done the arbitraging which is take advantages at the difference of equivalent underlying assets' price between two exchanges- buy at the lower price and sell at the higher price. He took positions in Nikkei 225 and Japanese Government Bonds (JGB) as well as options on Nikkei. One year of his work as a general manager in Singapore, he gave the profit of £10 million to the Barings. This had made the trust of the Barings to become stronger than before.
However, what Nick Leeson showed to the top management of Barings Bank is the profit only and he hid the loss he had incurred in the secret account. The 88888 account have been made by Leeson in order to cover the loss that have incurred. At first, this account is use to hide the £20, 000 loss made by one of his staff. But, this account later is use for him because in the year 1994 he is not lucky. The largest part of his losses is on the Nikkei 225 that he bought. By December 1994, the 88888 account have made a total loss of £200million but, he reported to the British tax authorities that he gain £102 million.
Although, Leeson had stressed because of the loss, he still bets that the Nikkei index would rise and not fall below 19, 000. So, on 16th January, in the Osaka Securities Exchange (OSE) and SIMEX, he had placed a short straddle. However, his expectation that suppose to gift profit had turned to be a nightmare when Kobe, Japan got attack by an earthquake on 17th January 1995. Because of the 7.2 Ritcher scale of earthquake in Kobe, the Nikkei index had fall 7% in a week. Three days after the earthquake, he was not stopped taking positions in the Nikkei index. Unfortunately, the loss that he had incurred was too large and cannot be hidden anymore.
The huge amount of losses had made no exit for the Nick Leeson. There is nothing he can do to cover all the losses. He took an action by left his job and went to Malaysia two days before his 28th birthday. He left a note said, "I'm sorry". The total loss he made was $1.3 billion twice from the amount of capital the Barings had. Approximately 2,000 of Nick Leeson's staff have lost their job. On the 26th February 1995, the Barings have been declared as bankrupt.
After the collapse of Barings Bank, their liabilities had increase up to £827 million. The Barings Bank enables to pay all the liabilities which make them collapse on 26th February 1995. In 1995, the ING, one of the Dutch Bank have purchased the Barings Bank for the nominal sum of £1 along with assumption of all Barings liabilities. In 2001, the ING has sold the United States based operations to ABN Amro for $275 million and folded the rest of ING Barings into it European Banking division.
Then, Barings Bank was split and sold by ING to MassMutual which give the right to use the name Barings Asset Management (BAM) and acquiring BAM investment management activities. Therefore, Barings Bank has no longer a separate corporate existence, although the Barings name still lived on as the MassMutual subsidiary Barings Asset Management. The ING also sold Barings Bank to Northern Trust will acquire BAM's financial services group.
In 1995, Nick Leeson has realized that his operation have incurred losses, so he try to escape with his wife by flying to London from Malaysia. He was arrested in March while on a stop-over in Germany. The reason that he gave where he said had been holiday. Singapore court have sentenced him to six and a half years in prison but nick was released from a Changi prison in Singapore after serving three and a half years of a sentence for fraud. At Changi prison, he was diagnosed a cancer and recover, at the same time was divorced by his wife.
After he has release from Changi prison in 1999, he wrote an autobiography which called Rogue Trader. In this autobiography, it covering the events that have been leading up to the collapse. After that, Film maker James Dearden has dramatized the book in the film Rogue Trader. Last but not least, Nick Leeson has released a new book in Jun 2005 entitled back from the brink: coping with stress. It is about continued the story of rogue trader and including in the depth conversation with psychologist Ivan Tyrrell asserting that the prolonged periods of severe stress that affected Leeson mental and physical health that occur in many other people lives.
Barings bank collapse can be a worth lesson to everyone that seek the message behind the tragedy. There is much lesson that can be learned in this incident especially by superiors of an organization. In Barings bank, we can see that there is a poor supervision of employees especially on Nick Leeson when his activities of trading not have been monitored directly which they (Barings bank headquarter in London) only hears the end report made by Leeson. Thus it causes the bank to lose all its assets to cover the losses made by Leeson. Therefore, we know that in an organization there should be more strict rule to do trading and the superior should monitor directly all trading that been done by their subordinate.
Besides that, the top management of Barings bank has lack of understanding about trading business; this made them to give full trust on Leeson. Thus, the upper line of every organization must have the knowledge and understanding about trading and business they involve with. So they may realize their subordinate (in this case Leeson) is trying to gamble using bank's assets as his bet, instead of helping the bank to hedge bank's assets value.
Other than that, in Barings bank there is also a poor segregation of work. This can be seen where Leeson has been assigned to be incharge in both dealing desks and back office. In the first place, the bank should be more detail with their employees' job specification and should diversify the job to avoid fraud in the work place. One person should be incharge in one job or maybe more, but the jobs must have no correlation that may lead to fraud.
Last but not least, the lesson is the employee himself must be honest in doing their job. The employee shouldn't be selfish and greedy to get easy wealth, they should be more innovative in their field to receive promotion or start their own business to be rich and successful.
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