The Collapse of Barings Bank

1. What was Nick Leesons strategy to earn trading profits on derivatives?

Leeson original goal from Baring was to obtain small profit from arbitrage which was low risk;
however Leeson decided to do directional bets on the market. First he started by opening a
secret trading account, as he lost he bought in more in hopes to make up for the loss, and he
leverage the company policies and slipped through the cracks of Baring computer system
monitoring.

2. What went wrong that caused his strategy to fail?

He didnt not do well from the start but he had accumulated a great position of the Nikkei
futures and the majority of the Japanese government bond market, unfortunately there was an
earthquake in japan and the accumulation of emotional traded took the investment into a
margin call which bankrupted Baring

3. Why did Nick Leeson establish a bogus error account (88888) when a legitimate account (99002)
already existed?

The account 88888 was used by Leeson to hid losses while he posted profits to the other
accounts. Account 99002 was being reported to Baring while 88888 exploited this miss of the
system.

4. Why did Barings and its auditors not discover that the error account was used by Leeson for
unauthorized trading?

Firstly, there were no statements transmitted from Singapore to London. Leeson oversaw both
trading and back office functions, eliminating the necessary checks and balances usually found
within trading organizations. Also, Barings senior management did not provide any individual
who was directly responsible for monitoring Leesons trading activities.

5. Why was Barings Bank willing to transfer large cash sums to Barings Futures Singapore?

Baring was made believe that the money transferred to Barings Futures Singapore was for loans
to customers as portrayed on the Barings Futures Singapore balance sheet.

6. Why did the attempt by the Bank of England to organize a bailout for Barings fail?

The bailout failed primarily because the unknown risks of additional losses, the Bank of England
ultimatedly decided that Barings was not too big to fail, as Lisa S. Kaess of the New York
investment advisory firm of Geoffrey Bell & Company said.