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What could have prevented the Nick Leeson Barings disaster
He is the trader who brought Barings bank to its knees with losses
of more that 1 billion pounds sterling. But how could it have been avoided?
He dealt / settled his own trades
He was the Chief Derivatives trader on the Singapore Derivatives Market
for Barings but in charge of Settlements at the same time. As part of
the settlements duties he arranged the payments to the stock exchange
to cover Barings trading at the end of each day.
Therefore, when he made a loss he was able to transfer it into another
internal hidden account, number 88888 - a lucky Chinese number - then
keep on trading showing no loss, whilst regularly making up excuses
to his superiors about why he required more cash to be wired from London
to cover his trading. He said it was to cover clients trades - which
meant the bank couldn't lose money. This was a lie. It was in fact to
trade with Barings money, not their clients.
Eventually, he had so much money at the mercy of the market, that any
swing downward (for the Nikkei Japanese index) would result in huge
losses for Barings. Unfortunately, for him and all his collegues, there
was an earthquake in Japan and the Market crashed and didn't bounce
as he'd hoped.
Realising no way out, he then left the Singapore and went on the run
to Europe. If he was imprisoned, he hoped to serve his sentence in a
UK Prison. He was caught getting off a plane in Germany and then extradited
to Singapore where he received a sentence of 6 1/2/ years.
Perhaps one reason for the problem is the lack of understanding his
superiors had of market risk and risk management, but it isn't the only
reason Nick Leeson lost so much money. However, Market Risk monitoring
would have shown his managers how risky their trading methods were before
Barings even started to trade derivatives with little Executive management
knowledge or inclination. It would likely reduce the risk of failure.
More seriously, is that he controlled the Settlement of his own trades.
Giving him means to hide losses until it was too late..
More information on Nick Leeson Barings.
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