The Fall of

Barings
Bank
RAKESH KUMAR YADAV
  On Feb 26, 1995 Barings Bank declared
Bankrupt.
 Net worth $900mn and Suffered loss of more
than $1 bn.

Introduction  Gross Mismanagement of banks derivates

trading operation by Nicholas Leeson
 Leeson job was to make arbitrage profits by
taking advantage of price mismatch
 He made unauthorised trades with unhedged
positions in options
About Barings Bank

 Founded in 1762, by Francis Baring

 Business Grew Rapidly from 1798 to 1814
 Helped Britain to finance war against US and France.
 It provided loans to Argentina and in 1890 it was on the verge of
Bankruptcy when Argentina Defaults on Bond payment.
 It was Bailed out by several banks.
 After that it starts providing consultancy to small firms and wealthy
people including British royal family
During 1980 to 1992

 In 1984 acquired Henderson Crosthwaite, later changed name to

Barings Securities Limited (BSL).
 Purchased a seat on SIMEX futures exchange under a new
subsidiary, Barings Futures Singapore (BFS).
 In April 1992 Nick Leeson appointed as General Manager of BFS.
Events Leading to Fall

 Leeson’s job to leverage on arbitrage opportunities on similar equities

derivates on SIMEX and OSE.
 Risk was minimal as the positions were always matched or hedged.
 Leeson has no authority to trade in options or to make un-hedged
positions.
 He was able to conceal all his trades as he was GM.
 He was responsible for both trading and back office operations.
 Took unauthorised positions in Nikkei 225 and Japanese Government
bonds
 He used 88888 account to conceal trade losses
Cont.

 He instructed staff to break down contracts in several accounts in

such a way that is show profits in accounts- 92000, 98007, 98008.
 While losses are charged to account 88888.
 He brought and sold some contracts to himself also.
 Faced major setback after Kobe earthquake.
 He had adopted short straddle strategy but the market goes down
after earthquake.
 Nikkei 225 was trading at 19350 and within a week it went down to
18950.
After Kobe Earthquake

 Leeson started buy derivates aggressively after earthquake in

anticipation that Nikkei will go up.
 However it further dropped by 1000 points.
 But he did not stopped and single-handedly tried to change market
sentiments.
 Ultimately Barings collapsed.
Reported
vs Actual
Positions
What went wrong

 Full authority of Trading and back office.

 Lack of Supervision and Involvement of Senior Management
 SIMEX has also sent a letter to BFS regarding its margin requirements
but the replies to the SIMEX was also sent by Leeson.
 Huge incentives on Profit to Leeson.
 Huge un-hedge positions
 A lot of people turned a Nelsonic blind eye to what Leeson was
doing because he seemed to be bringing profit.- David Frost
What could be done

 As derivatives was new to Barings Bank they should have hired more
people in Top management who have good knowledge of
Derivative
 Leeson should use good derivative strategies to avoid unlimited
losses.
 All positions should be hedged
 Proper internal controls should be there.
Thank You