Baringscasestudy

Barings Case Study

One of the most infamous tales of financial demise is that of Barings Bank. Trader Nick Leeson was supposed to be exploiting low-risk arbitrage opportunities that would leverage price differences in similar equity derivatives on the Singapore Money Exchange (Simex) and the Osaka exchange. In fact, he was taking much riskier positions by buying and selling different amounts of the contracts on the two exchanges or buying and selling contracts of different types. Thanks to the lax attitude of senior management, Leeson was given control over both the trading and back office functions.As Leeson's losses mounted, he increased his bets. However, after an earthquake in Japan caused the Nikkei Index to drop sharply, the losses increased rapidly, with Leeson's positions going more than $1 billion into the red. This was too much for the bank to sustain; in March of 1995, it was purchased by the Dutch bank ING for just one pound sterling. |

Barings Bank had a long history of success and was much respected as the UK's oldest merchant bank. But in February of 1995, this highly regarded bank, with $900 million in capital, was bankrupted by $1 billion of unauthorised trading losses.In 1993, Nick Leeson was appointed general manager of the bank's Barings Futures subsidiary in Singapore. In this capacity, he was able to conceal his unauthorised trading activities for over a year because he managed both the trading and back office functions. The senior managers at Barings came primarily from a merchant banking background and knew very little about trading. Even in the face of large profits, which should have tipped management off to the fact that substantial risks were being taken, they continued to believe that Leeson held matched positions on the Singapore International Monetary Exchange (Simex) and the Osaka exchange, and hence was making a low-risk profit.In fact, Leeson was trading derivatives contracts on the two exchanges that were, in some cases,...