The Barings Bank, which dates back to 1762, was the oldest banking entity in England. However, in 1995 the bank went bankrupt as a result of the speculative operations of one of its employees, trader Nick Leeson.
A long history of more than two centuries of history had made Barings Bank the oldest bank in England. The entity had played a key role in financing Britain in conflicts such as the Napoleonic Wars.
Nor should we forget that it was a very important bank when it came to financing the two world wars, as it provided the liquidity that the British government needed in those difficult times.
The bank came to enjoy great prestige, having among its most prominent clients the British royal family. Over time, Barings Bank adopted an expansion strategy. Precisely within the framework of this expansion, the actions of its manager in Asia led Barings Bank to collapse in 1995.
Nick Leeson, the man who bankrupted Barings Bank
Born in the English city of Watford in 1965, Nick Leeson worked in financial sector entities such as Coutts and Morgan Stanley. In 1989, Leeson joined the Barings Bank staff.
However, during his time at Morgan Stanley he had already traded futures and options.
Upon joining Barings Bank, he was posted to Asia, until he was appointed CEO of the Singapore Options and Futures office in 1992. In this way, he became head of risk and internal management of the company, becoming at the head of the operations of the Barings Bank in the Asian continent.
The road to collapse
Initially, Nick Leeson worked with futures in a conventional way. But, faced with the possibility of higher profits, he opted to increase his leverage levels.
Leeson had become a highly reputable trader valued by his superiors, which allowed him great freedom of movement. However, one day he suffered losses.
To avoid reporting such losses to his superiors, he opted to create the so-called 88888 account. In this way, he hid the losses, which he referred to as back office errors. In other words, he was accounting for losses as administration and management errors.
But Leeson’s losses weren’t one-offs and began to add up. The negative operations did not stop swelling the account 88888, which in 1994 reached the scandalous figure of 208 million pounds. Each trade that closed in the negative led Leeson to excessively increase leverage. This led Leeson himself to the extreme of buying and trading futures to himself.
Speculating with Japan
In 1995, the Kobe earthquake occurred, a natural disaster in Japan that not only leveled its infrastructure, but also caused a colossal collapse of the Japanese Nikkei index and wreaked havoc on the Japanese economy.
In the midst of that tragedy, Leeson saw an opportunity and went for heavy leverage on Nikkei contracts and currency derivatives. Leeson had made a very risky bet in believing that the Japanese selective would remain stable after the Kobe earthquake.
In Leeson’s eyes, the reconstruction was a lucrative business, since it meant loans to finance it, large construction contracts, etc. All of this had led Leeson to buy about half of the Nikkei futures.
Leeson’s forecasts were not fulfilled and the Bank of Japan chose to pay for the reconstruction of the country with government bonds. This meant that foreign investors like Leeson could not benefit from the reconstruction. All this precipitated the collapse of Barings Bank.
The end of Barings Bank
Finally, the auditors inspected Leeson’s accounts. The result of the audit was a loss valued at 827 million pounds (twice the trading capital of Barings Bank itself).
Despite the fact that the British government tried to rescue Barings Bank, the situation was insurmountable and on February 26, 1995 the bankruptcy of the oldest banking entity in England was announced.
For his part, Leeson fled, although he was eventually arrested in Germany and extradited in November 1995 to Singapore. After pleading guilty to falsifying documentation and concealing information from auditors, he was sentenced to six and a half years in prison. Not long after he was released due to colon cancer which he managed to survive.
Regarding Barings Bank, the entity was acquired by the Dutch bank ING at the price of 1 pound. Precisely, it was the Dutch entity that assumed the debts of Barings Bank.
Later, Nick Leeson published his autobiography under the title Rogue Trader and, in 1999, a feature film of the same title was released in which actor Ewan McGreegor played Leeson.