88888: “Five Fat Pigs”
By Anuj Jain
Suresh Attal
Diana Cho
Alice Kim
Introduction
 February 26, 1995

Baring Brothers & Co. collapsed, reducing
in value from $500 million to $1.60
 The culprit

28 year-old rogue trader, Nicholas Leeson

By secretly traded futures contracts on both the
Nikkei 225 and on JGB’s (Japanese
Government Bonds)
 The damage

$1.4 billion dollars lost
Leeson’s Responsibilities
 Leeson was authorized to take advantage of
arbitrage opportunities available in Osaka
and Singapore futures markets on the Nikkei
225
 Leeson chose to ignore the strategy which he
was supposed to employ
 The secret 88888 account
 Used to hide the losses
Leeson’s Trading Strategy
 Went long on Nikkei 225 future contracts
 Used the option premiums to offset his needs
for margin requirements from futures
contracts
 Also went short on Japanese Government
Bonds to hedge his exposure partially.
Leeson’s Trading Strategy
 As losses mounted he took on larger
positions – Rogue Trader
 Other traders choose to take advantage of
the big position that Barings had to bet
against the firm
 To stem losses, Leeson would step in to
support the market causing him to continue to
build up more positions
Tally Sheet
 By February 23, 1995, Leeson held:
 49% total open interest in Mar ’95 Nikkei
futures
 24% total open interest in Jun ’95 Nikkei
futures
 88% total open interest in Jun ’95 JGB futures
 5% open interest in June ’95 Euroyen futures
 Adds up to MASSIVE MARGIN CALLS for
Baring’s
Leeson’s Plan
 Leeson placed bets on the direction of price
movements on the Tokyo stock exchange
 Focus: Count on the Nikkei index to rise

Felt that the Nikkei had fallen too much and
expected it to rebound eventually
 If it did rebound he would have made a profit
on:


The increased stock value
An increase in interest rates
Selling Options
b. Sell Put
strike price
c. Sell Straddle
Profit
Profit
Profit
a. Sell Call
strike price
strike price
 Leeson used straddle approach
 Option expires “out-of-the-money”  profit
 However, as price volatility increases, an option
seller’s potential losses are unlimited
The Worst Possible
Scenario…
January 17, 1995
Violent earthquake hit Kobe, Japan
 Nikkei fell 1,500 points
 Leeson’s options lost ₤68 million
 PLAN B - Tried to sustain market by:


Buying massive amounts of Nikkei stock index
futures
Selling Japanese government bond futures,
betting that interest rates would rise
Concealed Trading Losses
800
Millions of $
600
400
200
0
1st Qtr
2nd Qtr
3rd Qtr
1995
4th Qtr
Where Did It Go Wrong?
WEAK BALANCE
 Mostly gambled on direction of markets.
 A major part of Leeson’s trading strategy
involved the purchase of futures on Nikkei225 futures contracts
 His only “hedge” was in holding a short
position on JGB’s.
 He only made a one-sided bet.
The Failure of Internal Controls
 No clearly laid down reporting lines
 Several managers responsible for monitoring
Leeson’s performance did not do their job
 No segregation of front and back office
activities
 No comprehensive review of Leeson’s
funding requirements
The reason for the failures

The management failed to investigate these
warnings
1. March 1992, a senior executive in Singapore
expressed his concern on the lack of clear reporting
lines
2. Summer 1994, an internal audit cited lax internal
controls and made specific recommendations
3. Leeson used an error account to hide his illegal
trades – no liaison between markets and company
Recommended Reforms
 Management teams have a duty to
understand fully the business they manage
 Responsibility for each business activity has
to be clearly established and communicated
 Clear segregation of duties is fundamental to
any effective control system
Reforms Continued
 Relevant internal controls have to be
established for all business activities
 Top Management and the Audit Committee
should resolve significant control issues right
away
 Managers should enforce employee job
description limits
Nick After Life With Barings
 Barings Bank collapses
 Barclays sought to acquire the company but then an
additional $300M in losses was added
 Nick Leeson fled out of London
 Eventually caught by Interpol in Germany
 Sentenced 6 and ½ years of prison in Singapore
 Helped launch PaddyPower.com in summer of 2000,
an online betting service
Other Rogue Traders
 Rusnack lost $690 million for Allied Irish Bank

He created false records to cover losses
 Faces 7 ½ years in prison
 Management shakeup at AIB
 This was five years after Baring’s collapse

Management is still irresponsible
 Victims Vs. Idiots
Moral of the Story
 Something too good to be true probably is
just that

INVESTIGATE!!!
 Baring’s Bank was also bailed once before
 Bad loans in late 19th Century
 Financial institutions began noticing that
operations will need a dramatic change

Top management became targets
Sorry is just not enough sometimes…
Questions?