The Strange Case Of Barings Bank

Posted by Allison on 4 April 2009, 10:15

If a bank has been around for a couple of hundred years you would expect it to be a pretty safe organisation.  There would be every expectation that it could last at least another two hundred years and develop well into the future. 

You certainly wouldn't expect it to be brought down by one man – without and help from anyone else whatsoever.  But that in fact is exactly what happened to the now non-existent Barings Bank, which started life back in 1762 and met its end some two hundred and thirty three years later, thanks to the actions of the so called 'rogue trader' Nick Leeson.

There can't be a single person in the world who hasn't heard of Nick Leeson.  The actions he took to bring the bank down captured the news headlines around the world; it was a story that really started to make people wonder how safe their money was.  After all, if a bank could be established for that length of time and then go under because of what one person did, how safe was their money anywhere?

It was certainly a big question, and the amount that went astray from Barings Bank was a big one too, £827 MILLION pounds to be exact.

So where did it all go?

The world of currency is a huge one, and when it comes to trading billions of pounds worth of stocks, shares and currencies can change hands every single day.  It's what makes the world go round, but it can also bring down governments, organisations – and two hundred year old banks as well.

So what exactly did Nick Leeson do?  His background working in the City of London at a number of different banks (including Coutts) cleared a path for him to start working at Barings Bank.  He soon started working for them in Singapore, trading on futures contracts. 

At first he made a lot of money for the company but it didn't last.  After a while he started to lose it – and we're not talking about small amounts either.  Trading on this scale means your losses can be as big as the potential profits, and when his luck turned sour Nick Leeson started to take measures to try and claw back the money he had lost.  And so it went on – he tried covering up his losses while at the same time speculating more and more to try and regain them.

Needless to say, given what we know now, it didn't work.  As the bosses at Barings finally found out what was going on, Nick Leeson disappeared.

Eventually he was found and sent to prison in Singapore where he had worked (and lost so many millions), but he was almost incidental to the real story here.

It was undoubtedly Nick Leeson who lost such a phenomenal amount of money, but many people have also turned their attention to the bank itself to try and find answers for how a trader could do so much damage in the first place.

First of all, there is the very real fact of the amount of money he lost – eight hundred and twenty seven million pounds.  That's an incredible amount of money, and it's not something that suddenly disappeared overnight.  Far from it, in fact – it took Nick Leeson three whole years to lose that amount of money.

So why didn't the powers that be at Barings Bank spot that something was wrong sooner?

The truth is that if you only look at the figures and the amount of currency that disappeared, you are only seeing half the story.  Nick Leeson was a star player back in the early Nineties, before ruining Barings Bank.  He was good at what he did (at least to start with) and his bosses were understandably pleased that he had made them a lot of money from his skills in the process.

Dealing in large amounts of various currencies like this is very far removed from being in the real world.  Large figures start to become less nerve wracking for traders to deal with as they gain more experience, and it's easy to think that you are untouchable and every gamble you make is going to work out your way.

If you have ever bet money on a sport of some kind and had a nice winning streak you will know the kind of feeling you get.  Now just imagine that every bet, every gamble, is worth thousands or millions instead of just a few pounds.  That really gives the whole idea of trading a new feel.

It should also be remembered that Nick Leeson did what would probably come naturally to all of us if we lost a lot of money – he tried to cover it up in the hope of making that money back again.  So to begin with at least his bosses wouldn't have had any reason to suppose that there was in fact a significant loss in their books.

The amount of time that he managed to cover it up for is quite impressive though.  Did anyone suspect anything during that time, or did he do a much better job of covering up his mistakes than he did trying to rectify them?

Nick Leeson is now out of prison and has a new life far away from the trading floor, but the whole story of the downfall of Barings Bank gives us real food for thought.  Perhaps more fascinating than the £827 million pounds he lost was the fact that the bank which had two centuries worth of history ended up being sold itself – for the princely sum of £1.

This gives us a whole new insight into currency, what it can buy and what things are really worth.  When Barings Bank was at the height of its success you can bet that they would have laughed at an offer to take it over for £1.  And yet that is exactly what happened, due to the amount of money that was lost by one single trader.

There is no doubt that even the most experienced people who trade with such huge sums of money every day can make mistakes, but none of them ever dream that they would make a mistake as big as the one Nick Leeson made… except that is for a French trader, who lost nearly £4 billion for the bank he worked for just a few months ago.

When we hear about huge amounts of money such as this, we tend to think about the currency itself, stacked up in huge piles ready for spending.  But of course it doesn't always work like that.  Traders essentially place bets on whether a certain thing will happen or not, and if they get it wrong they lose money.  But as we have seen, it doesn't matter whether an amount of money exists as actual or virtual currency – it can still bring down an entire bank if it is large enough and goes undiscovered for long enough.

So the next time you take out a five pound note and think about gambling it on a horse race to try and win more back, think about what might happen if it goes the other way.  And if you multiply that five pound note by some 165 million, you'll get an idea of what Nick Leeson lost.