Collapse of Barings Bank

ITM SMBA 16

PRESENTORS

PRANAV THAKKAR PRATIK SHAH MIT TRIVEDI BRIJESH

Introduction of Barings Bank

Established in London in 1763 by Sir Francis Barings Britain Oldest Merchant Bank

Total Capital of Barings Bank till the Yr 1995 was $ 615 Mn

By 1989 Established Trading Operations and in the Yr 1990 Barings Bank appointed Nick Leeson Nick Leeson in 1995 Lost $ 1.4 Billion speculating Primarily on Futures Contracts

History
Barings Bank was founded in 1762 as the John and Francis Baring Company by Francis Baring, with his older brother John Baring as a mostly silent partner. 1804 to1890 New Partnership and the company name was changed to Baring Brothers & Co Panic Of 1890 In the 1880s, daring efforts in underwriting got the firm into serious trouble through overexposure to Argentine and Uruguayan debt. In 1890, Argentine president Miguel Jurez Celman was forced to resign following the Revolutions del Parque, and the country was close to defaulting on its debt payments.

History
During the Second World War, the British government used Barings to liquidate assets in the United States and elsewhere to help finance the war effort. After the war, Barings was overtaken in size and influence by other banking houses, but remained an important player in the market until 1995

1995 Collapse ING

a Dutch bank, purchased Barings Bank in 1995 for the nominal

sum of

Collapse
Barings was brought to its knees by Nick Leeson in a Singapore office He was employed by Barings to profit from low risk arbitrage opportunities between derivatives contracts on the SIMEX and Japans Osaka Exchange Leeson left a $1.4 billion hole in Barings balance sheet due to his unauthorized derivatives speculation, causing the 233-year-old banks demise.

Nick Leeson

Who was Nick Leeson??

He grew up in Londons Watford suburb. Worked for Morgan Stanley after graduating university. Leeson then joined Barings (Jakarta) to sort through back-office mess involving 100 million of share certificates.

Successfully rectified the situation in 10 months.

Then transferred to Singapore and worked with a lot of power & freedom.

Leesons Activities
Was supposed to be Arbitraging. Instead of Hedging, Gambled on the future direction of the Japanese markets. Had long futures positions on OSE Was not short on SIMEX. Kobe earthquake of January 17,1995 led to the crash of Nikkei and his investments.

Leesons Activities
Used Account no. 88888 for unauthorized speculation to cover losses Ended with huge losses (GBP 827 MM) The activities of Nick Leeson led to the fall of Barings

Leesons Deceptive Strategies

Use of Cross Trade Breaking down the total number of contracts into several different trades Changed the trade prices thereon to cause profits Profits credited to Switching' accounts & Losses to be charged to Account 88888 Details of this account were never transmitted to the treasury or risk control offices in London

Leeson: Then
He was then extradited back to Singapore where he received a 6 and a half year sentence to jail. Barings creditors went legal proceedings. Many executives who were involved in the failure to control Leeson either resigned or were sacked. In July 1999, Nicholas Leeson was released from jail on the ground of good behavior. Ruined, abandoned by his wife and sick with a cancer (detected while in prison), Nicholas Leeson became quite popular as the symbol of the ROGUE TRADER

Managements Failure to Control Leeson

Effectively let Leeson settle his own trades by putting him in charge of both the dealing desk and the back office He had the final say on payments, ingoing and outgoing confirmations and contracts reconciliation statements accounting entries position reports Leeson was considered perfectly placed to relay false information back to London

Specific lessons have been learnt but loopholes appear all the time
Raised the standards of internal controls and compliance. Banks are better capitalized which makes them less likely to collapse in case of future rogue trader strikes.

Front and back office operations are carried out independently from each other. Although lessons have been learnt there are loopholes. The market is always changing in terms of products , complexity, and vulnerability to fraud within and supervision from outside.

Could the regulators have done more?

Most of the banks are of the opinion that regulators should not me blamed for the rouge trader incidents. The regulators cannot stop rogue traders from trying to fool banks internal control. Others suggested of having minimum risk management standards for every branch irrespective of its size and volume None of the regulatory authorities in Singapore, Japan and UK discovered the true use of error account.

Could the regulators have done more?

SIMEX assumed that Barings was hedging and not speculating when it granted an exemption on the number of contracts that Barings could hold. In addition, the speculative position of Barings was hidden due to use of an omnibus account to clear trades. With an omnibus account, the identity of the brokers account is hidden from the exchange and clearing house.

Our Observations
Management wanted to enter a new market but Bank was not prepared for the activity on a derivative market Stronger competition search additional profits gave so much control only to the one person Derivatives in recent years a powerful tool in the hands of traders Strict regulations are needed in order to avoid the next Barings

SOME GOOD THOUGHTS

It is possible that the scrupulously honest man may not grow rich so fast as the unscrupulous and dishonest one; but the success will be of a truer kind, earned without fraud or injustice. And even though a man should for a time be unsuccessful, still he must be honest: better lose all and save character. For character is itself a fortune. Samuel Smiles Fraud and falsehood only dread examination. Truth invites it. Samuel Johnson

There are three things in the world that deserve no mercy, hypocrisy, fraud, and tyranny. Frederick W. Robertson
Ive moved on and, hopefully, so has everyone else. Nick Leeson