The Singapore Slinger: A Cautionary Taleby
Nick Leeson and the Fall of Barings Bank
By Judith H. Rawnsley
HarperBusiness 206pp $24
Let's get one thing straight. Nick Leeson, the 28-year-old futures trader now serving 6 1/2 years in Singapore's Changi jail, did not bring down Barings PLC. That dubious distinction goes to six top executives and four sleepy outside directors. All chose not to see the dangers lurking in the hell-for-leather atmosphere at Baring Securities Ltd., the trading arm of the much older merchant bank known as Baring Brothers. When willful blindness joined forces with an almost total lack of management controls, all the conditions were in place to produce a Nick Leeson.
This is the crux of Judith H. Rawnsley's Total Risk, which exchange regulators, bank supervisors, and dealing-room managers worldwide should study. Her finding of institutional incompetence is in agreement with the conclusions of both Singapore authorities and the Bank of England--but Rawnsley offers a more stimulating read than either of their dense investigative tomes.
Rawnsley's account of Leeson's last day on the job is riveting. By January, 1995, he was frantic to make up for accumulated losses of $320 million. He began using Barings' funds to gamble--his particular bets were "straddles"--that the Nikkei stock index would trade within a narrow range between 19,000 and 21,000. But he was undone by the Jan. 17 Kobe earthquake that killed 5,000 people and sent the Nikkei plummeting. By Feb. 23, losses of $1.3 billion were taking a toll on his nerves--and his stomach. He had to leave the trading floor to throw up in the bathroom. "For once, everyone in the market had been right, except him," Rawnsley writes. He left the office after lunch, having been confronted by two senior officials about strange goings-on with his accounts, and never came back.
Most of this book isn't about Leeson, however. It's about the ignorance and colossal mistakes of senior executives. When Leeson arrived in Singapore in 1992 to help out with settlement of derivatives trades, no one knew to whom he reported. Soon, he was executing in-house as well as client orders from several other offices, particularly Tokyo, making it impossible for supervisors to check on him. A warning from James Bax, then head of the Asian regional office, that lack of accountability could lead to disaster went unanswered.
When rumors reached London in late 1994 that Leeson held very large Nikkei futures positions, senior officials blithely assumed the trades were on behalf of hedge-fund clients, a misconception that Leeson encouraged. Conflicts of interest abounded: Leeson was allowed both to make trades and settle them. Such an arrangement practically invites the creation of fictitious accounts to cover large trading losses, at least until the situation improves. Although Leeson hasn't tried to explain his actions, Rawnsley believes this is how his deception began. Then, when the market didn't move in his favor, he began doubling his bets in desperation.
But more was at work than a lack of supervision, Rawnsley says. A former Euromoney and Economist Intelligence Unit correspondent, the author had been a colleague of Leeson's from 1989 to 1992, when she was employed in Barings' Tokyo office. This background leads her to conclude that the disaster was the byproduct of a foolish strategy: Leeson and other young traders were expected to produce disproportionately huge profits from a tiny capital base. And Leeson desperately wanted to please his bosses as well as boost his own economic and social standing.
By the end of 1994, Leeson's trades were doing just that: He claimed to have made $30 million, or nearly 20% of the year's total profit of $157 million. In reality, Leeson lost $285 million in that year. Meanwhile, the bank's total capital base--shareholders' funds and debt capital--stood at just $800 million. Leeson's bogus claims went undetected, says Rawnsley, because to question his methods, or check his math, might have slowed down Barings' aggressive global expansion and reduced everybody's annual bonus.
More fundamental, Rawnsley says, was that Barings had two very different corporate cultures. Conservative, tradition-bound corporate financiers held sway at Baring Brothers. But at Baring Securities, which didn't exist until 1984, Far East experts, equity traders, and futures traders ran amok, far from London's reach. And since Baring Securities provided two-thirds of the bank's total profit, cooler heads at Baring Brothers were reluctant to interfere. Finally, in 1994 plans were laid to combine the two entities--but by this time, Leeson's paper-profit factory was in full swing.
Even so, several people at Barings began sounding alarm bells, and some of these resulted in internal and external audits of the Singapore slinger. These audits should have opened doors and led officials to Error Account 88888, into which Leeson dumped all his trading losses. But executives were too distracted by restructuring and intoxicated by visions of expected huge annual bonuses to pin him down.
Today, Leeson is behind bars, but the Barings fiasco isn't over. Asia head Bax and his deputy, Simon Jones, may still face prosecution by Singapore authorities. In London, former board members wait to hear whether they will be forever barred from serving as directors of an investment bank. Such a ruling may be in order. But it's more critical for banks to realize that destructive behavior can be a byproduct of the macho emphasis on maximum returns, and that strict controls are the only safeguard. The alternative is total risk.