Case Baring Bank

Background

Symptoms

 A rumor was circulating in financial markets in early February 1995, stated that Leeson’s customer “X”, who had bought huge quantities of options, was none other than Barings themselves.

 In February 1995, two of Barings’ financial controllers, Tony Hawes and Tony Railton travelled from London to investigate the SLK incident and the apparent reconciliation problem. From Leeson’s accounts, Railton found an un-reconciled balance of at least £90 million. By this finding, Simon Jones, the local manager in Singapore, insisted that Leeson attend a meeting with himself to explain the reconciliation problem. After a few minutes Leeson left the meeting on a pretext and did not return. Leeson’s disappearance prompted alarm.

 Superiority of Leeson, which control both front and back office in BFS.

 Account 88888 is an error account, which to receive few transaction mistakes, temporary awaiting the write off.

 The “high risk high return” parlance that is not suitable with BFS transaction that is low risk with soar profit.

 Miss analysis by BFS in Nikkei and OSE transaction. this position forced Leeson to retain their position in around 19,000 "fighting the market", while others sell their position, Leeson keep trading.

Key Issues

• What the position?

• How it work?

• How it finance?

Solutions

1. What is the position?

Notional Amount, reported on off-balance sheet not reported to central office (London).

Futures:

Nikkei 225 equity =$ 7 billions

JGB & Euroyen =$ 20 billions

Option =$ 6.68 billions

$ 33.68 billions

Account 88888 for recording errors, the contract value increasingly falling.

2. How it work?

a. Jobs Leeson in Singapore as a trader branches and settlement

b. Leeson Barings in 1992 was assigned to arbitration (long & short). Arbitration is carried out only a small profit.

c. Leeson take long & long (option) with the assumption at that time Japan was growing, the...