The Collapse of Barings
Finance 443
International Finance
Jay Yoo
Alan Yeung
Stuart Sutton
Jennie Kretchmar
Contents
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Background of Barings
Nicholas Leeson
How Leeson Broke Barings
Barings Inadequate Controls
Background of Barings
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Founded in 1762.
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Rapid growth during
Napoleonic Wars (1798 – 1814)
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Concurred as the sixth great European
power at the Congress of Vienna in 1815
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During the years of 1830s and 1840s,
Barings became the most influential
financial house in U.S.
Background of Barings

A Financial Crisis in 1890
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Provided loans to Argentina in 1824
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Debt crisis in Argentina in 1888
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Reported company’s liabilities of over
21 million pounds sterling
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Rescued by the British government
and the Bank of England
Background of Barings

Impact of Argentine Debt Crisis
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Withdrew all transaction in
North American continent
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Firm’s management was
relegated to consulting small firms and
wealthy people, which includes British
Royal family
Background of Barings
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Repair of Company’s Reputation
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Success in consulting the royal
family asset management
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Success in giving advice for stock and
bonds for small British firms
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Moved back into American finance
scene in 1980s
Background of Barings
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Expansion to Asia
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Opened a stock brokerage operation in
Tokyo during the mid 1980s
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Expanded its operation
by establishing offices
in Singapore
Background of Barings

Leeson Crisis in 1995
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Nick Leeson, a lone manager in the
company’s Singapore office made
speculative trades on future market,
which broke the company
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ING, Dutch financial service company,
bought Barings at the fire sale price of
just £1 in June 1995
Nicholas Leeson
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The son of a plasterer from
the London suburb of Watford
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Described as a loner by the people that he
worked with
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Competent soccer player
Nicholas Leeson
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28-year-old trader who never graduated
from college
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Gained knowledge through numerous
investment establishment positions
Nicholas Leeson
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An investment officer at
Barings L.P.C.
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Working at the Singapore International
Monetary Exchange
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In charge of both making deals and
overseeing the paperwork on these deals
Nicholas Leeson
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Accused of losing the $1.3
billion
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Charged with forgery and cheating on
December 1, 1995
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Sentenced to six and a half years
How Leeson Broke Barings?
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Arrived in Singapore in 1992
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Arbitrage opportunities of Nikkei 225
futures between SIMEX and OSE
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Leeson’s Singapore office is terribly
understaffed – errors frequently occurred
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Error account “88888” created by a new
phone clerk: Loss of £20,000
How Leeson Broke Barings?
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Unauthorized: Sold options, took positions
on SIMEX on both futures and options
contracts
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Fantasy: Leeson is a genius – Created
50% of Barings’ 1994 profits
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Reality: Leeson is a loser – Loss of $296
million in 1994 alone
How Leeson Broke Barings?
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How did he do that?
 Cross-trade technique with a real
account “92000” and the error account
“88888”
Year
Reported (Million) Actual (Million)
1993
+£ 8.83
-£ 21
1994
+£ 28.53
-£ 185
1995
+£ 18.57
-£ 619
In November and December 1994
 Sold 34,400 options (straddles)
How Leeson Broke Barings?
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Straddles:
 Profitable (Premium) if Nikkei traded
within or near strikes between 18,500 –
20,000
How Leeson Broke Barings?
Nikkei 225
日経平均株価
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4Q 1994 - January 1995
 Nikkei in a range of 19,000 – 19,500
 Leeson held long futures of 3,000 Nikkei
225 equity contracts
How Leeson Broke Barings?
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January 17, 1995
 Kobe Earthquake
 Nikkei dropped sharply
as people took cash out
How Leeson Broke Barings?
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January 20 – February, 1995
 Leeson launched aggressive buying
program: (3,000) 55,206 March contracts
and 5,650 June contracts
How Leeson Broke Barings?
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Barings collapsed – could not meet huge
trading obligations
Outstanding futures positions of $27 billion
(Barings’ capital was $615 million)
Barings Inadequate Controls
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Lesson controlled both the dealing desk
and the back office
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Leeson removed account “88888” from
daily accounts sent to Barings
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Barings ignored internal auditor’s reports
Barings Inadequate Controls
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Problems with Senior management
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Showed little interest in the Singapore
Branch
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Had only a vague understanding of
derivatives
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Did not have a precise breakdown of
Leeson’s profits
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Failed to question capital requests by
Leeson to fund margin accounts
Barings Inadequate Controls
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Problems with Barings Funding
Control Measures
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No distinction between proprietary and
customer trades
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Ignorance to credit risks
Barings Inadequate Controls
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Supervision Problems
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Leeson’s superiors did not accept
responsibility over him
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No one investigated a default in account
“88888”
Conclusion
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Barings collapse could have been prevented
through a series of controls to monitor
Leeson
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Why couldn’t others
duplicate Leeson’s strategy
Any Questions?