February 26, 1995
What was it?
The infamous risk management fiasco when a single trader brought down the Queen’s bank.
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What happened?
Having built up his own mini-fiefdom over three years (simultaneously employed as general manager, chief trader and effective head of the back office), Nick Leeson played fast and loose with company funds. His “creative allocation” of numbers (shifting millions between Tokyo, London and Singapore accounts) earned him star trader status while racking up millions in debt. By the end of 1994, £208 million had been dumped into error account number 88888. But on January 16 he took a punt on markets remaining static for the night (known as a short straddle) on what was to be the eve of one of Japan’s worst natural disasters. With the Kobe earthquake, Asian markets were crushed — Leeson’s investments along with them. On February 23 he fled to Kuala Lumpur, having burnt an £827 million hole in Barings’ balance sheet. With losses now twice its trading capital, the bank got wise — and folded. While its name lives on in Baring Asset Management, the company was sold to the Dutch financiers ING for a nominal £1.
A disaster waiting to happen?
With an ongoing Barings merger and no risk management official in sight, the self-confessed liar had a free hand. Employees had complained that lines of reporting were unclear and Barings’ chairman, Peter Baring, said in 1993: “It is not terribly difficult to make money in security markets.” As a result of the debacle, financial regulation in the City was revamped. Risk controls were overhauled, compliance and legal teams became centres of corporate power and back office and trading functions were kept separate.
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And lessons for Nick?
Released from jail in 1999, he has a new job at Galway United FC, owes about £100 million and has just published Back from the Brink: Coping with Stress.
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KAREN BAYNE