The Collapse of Barings

...it had financed the Louisiana Purchase, and (so the legend goes) the Duc de Richelieu had named Europe's six great powers: "England, France, Prussia, Austria, Russia—and Baring Brothers...

...In fact it was Leeson who was losing Barings, racking up roughly $1.4 billion dollars of red ink by the end of the affair—"the biggest trading disaster in the history of financial markets...

...Leeson knew the common practice of establishing an "error account" — essentially a waiting area in cyberspace for transactions that, for one reason or another, can't be properly reconciled at the close of a day's business...

...to offset the 88888 losses, Leeson would create a phantom profit in other Barings accounts...

...But there weren't...

...Gung-ho traders used those calculations to move hundreds of millions in assets in the span of a keystroke...

...When the bank was finally bought out after bankruptcy, a deal was struck to pay the Barings staff its expected annual bonus: some £8o million in all, and most of it concentrated in the corridors of decayed upper management...

...Leeson wanted to be like them...

...After the bank had almost collapsed a century before, its motto seemed to have become "nothing ventured, nothing lost...

...Leeson and the Barings brass are equally to blame for the failure of this historic British institution, though Fay believes they are unlikely to remain alone in their ignominy for long...

...That guy is a turbo-arbitrageur...

...Top City directors, meanwhile, were likely as not to be en route to the opera box or the Switzerland chalet by sundown...

...Leeson devised a scheme to "hide" the deals within the vast ocean of electronic data on which modern finance floats...

...within weeks he was moving volumes of shares that would turn the knuckles white on even the most experienced of traders...

...The bogus successes were astonishing, and equally astonishing is that Barings took so long—almost until the very end—to catch on: His colleagues were captivated...

...When the London bankers needed his final assent to the calculations, he was deep in his dreams: "And when the Sultan of Brunei goes to sleep, no one wakes him up...

...Because he was losing so much money, he had to pretend to earn that much more...

...When he heard that Leeson's revenue in one week in January had been $10 million, Mike Killian said to Ron Baker: "You know, if he makes $lo million doing arbitrage in a week, what is that...

...Could these other bankers, gentlemen all, pledge £600 million to set things right...

...For decades a career in the City had been a guarantee of gentility, and a career at Barings an exercise in conservatism and prudence...

...Nick Leeson, the 28-yearold trader who broke the bank by losing $1.4 billion on deals he'd never been authorized to make, doesn't appear to have embezzled any of the cash for perMARC CARNEGIE is managing editor of The American Spectator...

...by day he was a serious young professional with big responsibilities, circulating in that curious culture of upward mobility and "big swinging dicks"—the high-rolling traders who sported "red braces, lace-up shoes, fat cigars...

...On nights and weekends he was the pintswilling hellraiser who was not always reliable about his debts...

...About half a billion dollars a year...

...Fay has no sympathy to spare for the Barings brass...

...Though only a clerk responsible for reconciling accounts, Leeson was competent and efficient...

...The 232-year-old Barings was an institution, in every sense of the word...

...Brilliant Ph.D.'s analyzed infinitesimal price variations in markets around the world with intricate The American Spectator • March 1997 79 computer programs they wrote to perform abstract and strange computations: deltas, vegas, contangos...

...Now that power was on the edge of the abyss, threatening to take the Queen's money (and everyone else's) down with it...

...Effectively he had no supervision...

...His tremendous "profits" made him virtually untouchable within the company hierarchy, which is perhaps one reason why few at Barings headquarters thought it odd that he was continually requesting fresh infusions of capital from London...

...Because the manipulation of technology has become so important in the realm of finance— and traditional personal skills much less so—there remains quite a large gap between, as he puts it, "computer nerds and computer illiterates, for whom the future is a closed book...

...sonal gain...

...On the Friday before Barings went under, Fay notes, "most" important City executives were still at work when the Bank of England made its emergency call at 5 p.m.—the demanding new climate meant they were now "working longer hours...

...Of course it will...

...Not only were they thousands of miles away from the action, they were well out of their element...

...Yet one of the most stunning revelations in Stephen Fay's excellent book is how little greed had to do with the bank's demise...

...Then followed a two-year stint at Morgan Stanley, which led to his being hired at Barings...

...Only terrifically complex deals could fritter away so much money so quickly, and it is one of the author's achievementsthat he makes those deals comprehensible to the reader: the Barings execs should have been so fortunate...

...But the recent explosion in financial products (options, futures, derivatives) had made the banking business too complicated, and too dependent upon the "new" technology of the computer, for the old guard to keep up...

...Nor does Fay accept that Leeson, now serving six-and-a-half years in a Singapore prison, was ultimately a victim of the poor supervision of his superiors, the line of defense that's been offered since his arrest...

...inside, however, he was feeling "schizophrenic," as he later told David Frost...

...Will it happen again...

...Because the buy-out was at a bargain-basement rate-5 pence on the pound—depositors (known as bond-holders) would be stiffed, while those who had overseen the bank's collapse would hardly feel a pinch...

...One of the many intriguing anomalies in this complicated tale is that the account was numbered 88888, eight being as lucky a number for Singaporeans as sevens are for us—and thus just the sort of figure rj one imagines would leap zr, off the page to even the 6. 78 March 1997 • The American Spectator most casual observer: hardly anyone noticed...

...But they were not greedy in any ordinary sense...

...That is pretty good doing arbitrage...

...The executives who fiddled while Barings burned were incompetent, surely, and only too happy not to notice that the source of their lavish annual bonuses was a technically complicated enterprise concerning "derivatives" that no one, least of all they, seemed to understand...

...Leeson started using "double-eight triple-eight" for his own trades instead, trying his hand at fantastically complex arbitrage deals for which he had neither knowledge nor authorization—nor money...

...Had there been any real gentlemen left at Barings," Fay writes, "they would have donated their bonuses to the bond-holders...

...04...

...In the first of the bank's countless mistakes, it allowed Leeson to supervise both the back office (reconciling accounts) and the front (executing the trades...

...It was the absence of the latter two that required some ingenuity...

...Fay thinks him worse than a swindler—"even that term does not do justice to the crimes that Leeson began to commit in July 1992 and continued to commit until February 1995...

...As Fay puts it, "Many English bankers still thought it was in bad taste to talk about making lots of money, [while] the Americans assumed that banking had no other purpose...

...One of the most telling pieces of evidence of the bank's obliviousness is a memo, written just before the collapse and reproduced here, stressing how essential it is that offers from rival firms not cause Barings to lose Leeson...

...Like the rich, the British are different from you and me, not least because of their distinctly un-American reluctance to revere capital as the holiest of the holy...

...The lack of the first deterred him hardly at all...

...N ick Leeson was a regular lad, the son of a plasterer from working-class Watford...

...Norton /310 pages / $275o REVIEWED BY Marc Carnegie 0 n the weekend before Barings Bank collapsed in February 1995, the heads of Britain's other large banks had been gathered by the governor of the Bank of England to discuss a last-minute bailout...

...In fact, between 23 and 27 January, when he claimed to have made some £5 million from arbitrage, Leeson had actually lost £47 million...

...In his self-serving and generally irresponsible memoir Rogue Trader, Leeson claims that he began his deceptions to camouflage a mistake by a female colleague on the trading floor of the Singapore exchange (SIMEX...

...Somewhere, it—or something like it— is happening now...

...Even the Sultan of Brunei — reportedly the richest man in the world and the one person who, it was thought, might have pulled off (and profited from) an eleventh-hour salvage—could not be bothered to stay awake until the Tokyo markets opened and the deal could be finalized...

...There was agreement that the deal could be done, but when discussion began about how profits would come to be shared should Barings survive, one banker became livid, later filing a complaint with the governor about "this undignified display of greed...

...He got his chance in 1992, when he and his wife-to-be were posted to the Barings Singapore office...

...They were Young Turks, gonzo maniacs who monitored developments round-the-clock and worked nearly as long...

...Lacking both the marks and the ambition for university, he took a job in the back office of a prestigious firm in the City—London's Wall Street...

...But Fay, who had access to SIMEX records in researching The Collapse ofBarings, shows that Leeson started playing tricks on his bosses and everyone else almost as soon as the plane had touched down...