Barings Leeson example

Nick Leeson
at Barings Bank in Singapore
So famous that he became a
movie:
”Rogue Trader” (1999)
Bo Sjö
VT 2014


Barings Bank
• 1992, Nicholas Leeson, clerk,
moved from London to Barings
Futures Singapore (BFS).
• To head the Singapore
International Monetary Exchange
(SIMEX)
• Trade in options and futures on
NIKKEI-225, mainly 10 year Jap.
Gov. Bond, 3-mths euroyen.
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Leeson’s Job
• In 1992, took SIMEX exam.
• Became a floor trader in Singapore.
• And, the General manager and the Head
trader for BFS.
• But, Trading and Back office are normally
split in two units to keep separate records.
• N.L.’s task was to look for arbitrage
between Osaka and Singapore Exchanges.

NIKKEI-225 and Jap. Gov. futures. No
risk-taking was allowed.
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But, Nick Leeson
• He did speculate, against instructions!
• He placed bets on the direction of
price movements on the Tokyo Stock
Exchange.
• Did well at first, soon looses
mounted…
• 1992: - $2m, 1993: -$21m
• 1994: -$185m 1995: -$619m, early
Jan. and then …
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Wait there is more…
• In 1994 he began selling (equity)
straddles (short), speculating in a
lower stock volatility on
NIKKEI-225.
• In early January 1995, he was
short in 37,000 calls and 33,000
puts.
• Plus long in 1000 futures. Now..
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In January 17 1995 – A
Major Earthquake in Kobe
• Markets explode in volatility and
N.L. looses even more and now het
bets even harder (he has nothing to
lose), so by February 23 he holds:
• 61,000 March futures contracts 49% of open interest.
• + 24% of all June contracts.
• + 88% of all Jap. Gov. Bond futures.
• + Large amounts of euroyen contracts, betting on lower
Japanese interest rates.

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Margin Calls All Over
• In Feb 1995 Leeson has to spend
$740m in Margin calls.
• Barings in London gets suspicious,
they hear rumors about an
extremely big speculator on the
Asian Markets.
7


London Calling
• In the last days of February 1995,
Baring sends an inspector.
• Leeson and his wife decide to leave
Singapore for Germany.

• The total loss was almost 2.10 times
Baring’s Equity value.
• Baring was bought and recapitalized
by ING, The Netherlands.
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Lessons of Leeson?
• Bad management, Leeson was
sitting on two chairs. Trading
and back office.
• Better regulations ? Maybe
• What has changed - not much,
mostly details says Leeson.
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Final Words
 ”They have learned nothing”
according to Nick Leeson
 The scandals have changed from
derivatives to accounting.
 The nature of man? Moral Hazard
is the problem - not derivatives
as such.
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Some sentenced individuals in
trading scandal

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Toshihide Iguchi 1995
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Institution: Daiwa Bank
Activity: US Treasury Bonds
Loss : $1.1bn
Sentence: 4 years
”Star trader” who forged 30,000
trading slipes. Hide the losses of
$1.1b over a decade.


Nick Leeson 1995
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Institution: Barings Bank
Activity: Nikkei Index Futures
Loss: $1.4bn

Sentence: 4 years
Positioned in Singapore, made money at
first, but later losses. His hidden
losses of £827 brought down the bank.


Yasuo Hamanaka 1996
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Institution: Sumito Corporation
Activity: Copper
Loss: $2.6bn
Sentence: 8 years
Controlled a relatively large part of the
market for copper (5%). Tried to
manipulate copper prices. Hide losses
for some time.


John Rusak 2002
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Institution: Allied Irish Banks
Activity: FX options
Loss: $691m
Sentence: 7.5 years
”Solid performer”, spent five
years cover up his losses.


Vince Ficarra, Luke Duffy, David Bullen and
Gianni Gray 2003

• Institution: National Bank of
Australia
• Activity: FX Options, Loss: $268m
• Sentences:
–
–
–
–

Ficarra 44 months
Luke Duffy: 29 months
Bullen 28 months
Gray: 16 months

• Broke trading limits 800 times, and inflated profits minutes
before the end of the year to get bigger bonuses. Bullen and
Ficarra were sentenced first.

Chen Jiulin 2005
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Institution: China Aviation Oil
Activity: Jet Fuel Futures
Loss: $550m
Sentence: 4 years + 3 months


Matthew Taylor 2007
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Institution: Goldman Sachs
Activity: S&P 500 futures
Loss: $118m
Sentence: ? Pending?


Jerome Kerviel 2008

Institution: Société Générale
Activity: European stock index futures
Loss: $7.2bn
Sentence: 5 years of which 2 years are

suspended, to be served starting fall
2014?
• The first court sentenced him to payback, but this was upheld by a higher
court in 2014.
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Kweku Adoboli 2012

Institution: UBS (UK)
Activity: Exchange Traded Funds (ETF)
Loss: $2.3bn
Sentence: 7 years
Used his knowledge about back office
routines to cover his losses from 2008.
Worked 16 hours a day, slep under his desk.
Hunted by the back office he went home and
sent a mail to his boss confessing his losses.
He was close to recup some of the losses but
sold off one day to early.

Also, not fully covered here
• Boris Picano-Nacci, 2008: €751m Equity
derivatives, ongoing investigation?
• Orange County, $1.7b, 1994.
• Metallgesellschaft, $1.3b, 1993
• Substantial amounts of money but how
and why did it get wrong?


Gold Prices go up and Gold Mines go
under? An example

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Gold and Derivatives
 Gold mining companies Ashanti in
Ghana and Cambior in Canada.
 1999 September gold prices went
up, but these firms made big losses
and almost got into default!
 How could that be?
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Miners have long positions!
 Typically, mining companies hedge at least
30-40% of future sales.
 Some mining companies used 15-20 years

derivative contracts.
 15-20 years is a long time!
 Critique: Many investors might are not
prepared to mandate companies that sell
vast proportions of ore reserve at low
prices.
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What happened in 1999?
 In Jan/Feb 1999 gold prices fell.
 Miners thought that prices would stay low for
the rest of the year.
 They saw losses from their positions, that
could be compensated by incomes from selling
out-of-the money call options on Gold.
 Since, they assumed that gold prices would
stay low, it seemed safe and would reduce, or
off-set expected losses.
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