How Nick Leeson's Actions Led to the Collapse of Barings Bank

Nick Leeson, once a promising derivatives trader, became infamous for causing the collapse of Barings Bank, the United Kingdom’s oldest merchant bank, in 1995. Stationed in Singapore, Leeson operated the Futures and Options office and engaged in unauthorized trading that ultimately wiped out over $1 billion of the bank’s capital while managing operations on the Singapore Exchange (SGX).

Key Insights

• Nick Leeson’s rogue trading led to the bankruptcy of Barings Bank, a historic UK financial institution.
• After relocating to Singapore in 1992 to handle transactions on the Singapore Exchange, Leeson began making unauthorized trades that initially generated substantial profits.
• Instead of managing a cash-neutral portfolio as intended, Leeson leveraged the bank’s funds to cover his mounting losses through risky market bets.
• Leeson’s losses reached £827 million, double Barings’s trading capital, culminating in the bank’s bankruptcy in February 1995 after a failed rescue attempt.

Nick Leeson and the Demise of Barings Bank

Beginning his career at Barings at age 28, Leeson quickly gained recognition for his speculative trading skills, delivering significant profits. Upon moving to Singapore to oversee transactions on the SGX, he began executing unauthorized trades. Initially, these high-risk moves earned the bank up to £10 million, representing 10% of Barings' annual profit in 1992.

Leeson primarily traded futures on the Nikkei 225 Stock Average, Tokyo’s key market index. His role was intended to be cash-neutral, meaning he should have managed client funds without exposing the bank to direct market risk. Instead, Leeson used Barings’s capital to place speculative bets aimed at recovering previous losses, a practice that breached his mandate.

Barings entrusted Leeson with the unusual responsibility of reconciling his own trades, allowing him to conceal losses in a secret account. As losses mounted, Leeson took increasingly risky positions. By late 1993, his hidden losses exceeded £23 million, ballooning to £208 million by the end of 1994.

On January 16, 1995, Leeson placed a short straddle on the Singapore and Tokyo stock exchanges, betting on market stability overnight. However, the Kobe earthquake on January 17 triggered a sharp market decline, devastating Leeson’s position.

In a desperate effort to offset losses, Leeson engaged in more hazardous trades based on the Nikkei’s recovery rate. Ultimately, he fled Singapore on February 23, 1995, with losses totaling £827 million ($1.4 billion), twice the bank’s available trading capital.

Leeson was apprehended in Germany, and after Barings failed to secure a bailout, the bank declared bankruptcy on February 26, 1995. Charged with fraud for misleading his superiors regarding the risks and scale of his losses, Leeson was sentenced to six and a half years in a Singapore prison. During his incarceration, he authored "Rogue Trader," which was later adapted into a 1999 film starring Ewan McGregor and Anna Friel.

Leeson held the record for the largest trading losses due to unauthorized activity until 2008, when Société Générale revealed that rogue trader Jérôme Kerviel incurred losses exceeding seven billion dollars through unauthorized and fictitious trades.

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