Barings Bank Team 3 Final
24
S Nick Leeson’s Lesson Team 3 Ashmita Srivastava Alexis Druon Dorra Mahbouli Majid Salehizadeh Congjie Li David Bensimon
description
Analysis on the Collapse of Baring bank.
Transcript of Barings Bank Team 3 Final
S
Barings Bank PLC,Nick Leeson’s
LessonTeam 3
Ashmita SrivastavaAlexis Druon
Dorra MahbouliMajid Salehizadeh
Congjie LiDavid Bensimon
Barings Bank
Establishment
• Founded in 1762 by Sir Francis Baring
Its Impact
• “There are six great powers in Europe: England, France, Prussia, Austria, Russia and Baring Brothers.
Functions
• Banking, asset management and security brokering
The story of Barings Bank
Global Expansion
• Same reserve for all business lines• Loss of control over operations• Bankrupt in 1995
Nick Leeson
• Banks Trader in Singapore • Lost $1.4 Billion in derivatives• Imprisoned for 6.5 years
After
Effects
• ING, a Dutch bank bought Barings bank for £1 • Formed subsidiary: ING Barings
How did it happen?
How can one person do this?
Who authorized Nick Leeson to do what he
was doing?
Nick Leeson
A Rogue Trader
Nick Leeson’s Career
Morgan Stanley
Back Office at Barings Bank,
London
Back office at Jakarta
Chief Trader,
Singapore
Assistant Director
and General manager
What was ‘Questionable’?
• How can a single person make a giant financial bank a fiasco ?
• Why was he given such an authority?
• What was he supposed to do?
• What was senior management suppose to do?
How was it ‘Justified’?
Cost saving
by having
one person in front and
back office
Trading losses by having
one person in front and
back office
Time gap between
buying and selling
Minimize the risk involved in switching
Leeson’s Arbitrage
Japanese Nikkei 225 Stock index
10 year Japanese Government Bonds
3 month Euroyen deposits
Deception
• Unauthorized trades in Singapore
• Doubling
• Falsifying records
• Margin call stories
• Sold straddles
• Used Error account ‘88888’ to hide his trades
Doubling Strategy
• Bet 10 on black or red = Loss• Bet 20 on black or red = Loss• Bet 40 on black or red = Loss• Bet 80 on black or red = Loss
Nick Leeson applied the same strategy:Increased his investments to offset his losses
Nikkei 225 Overview
Nikkei 225 IndexMid June 1994 to February 27, 1995
Long Futures Contracts
18000 18500 19000 19500 20000
-1,500
-1,000
-500
0
500
1,000
1,500
Leeson's Long Futures Positions
Nikkei 225 Index
Gai
ns/
Los
ses
(Yen
)
Declining Nikkei 225 In-dex
Los
ses
17000 17500 18000 18500 19000 19500 20000
-1,500
-1,000
-500
0
500
1,000
1,500
Short Put
Nikkei 225 Index
Gai
ns/
Los
ses
(Yen
)
18000 18500 19000 19500 20000 20500 21000
-1,500
-1,000
-500
0
500
1,000
1,500
Short Call
Nikkei 225 Index
Gai
ns/
Los
ses
(Yen
)11
000
1200
0
1300
0
1400
0
1500
0
1600
0
1700
0
1800
0
1900
0
2000
0
2100
0
2200
0
2300
0
2400
0
2500
0
2600
0
-7,000
-6,000
-5,000
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
Short Straddle
Nikkei 225 Index
Gai
ns/
Los
ses
(Yen
)
17000 17500 18000 18500 19000 19500 20000 20500 21000
-2,500
-2,000
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2,500
1 Short Straddle + 1 Long Future
Nikkei 225 Index
Gai
ns/L
osse
s (Y
en)
14750 15250 15750 16250 16750 17250 18000 18500 19000 20250 21500 22750 24000
-14,000
-12,000
-10,000
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
Many Short Straddle + 1 Long Fu-ture
Nikkei 225 Index
Gai
ns/
Los
ses
(Yen
)
The Five Eights Account
• Switching from 99905 account to 88888 account July 3rd 1992
• Request to switch back to 99905 account several weeks later.
• Leeson did not follow orders
Use of 88888 account to cover Margin Calls
• Increase of commissions generated by using non-market prices
• Used Barings Financial resources as a cash cow
• Booked fictitious trades and falsified records
• Sold Put and Call options in the form of short straddles
Reported Earnings v/s Actual losses
• Reported Earnings of
• Actual Losses
Arbitrage
started in 1993
• £8.8 Million
• £21 Million
End of 1993
• £28.8 Million
• £185 Million
End of 1994
Reality of 88888 Account
Lessons Learned
Lack of Internal Control
• Ineffective and unable control system
• No analysis on unrealistic facts and figures
• Lack of knowledge among senior managers
Ignoring Signs/Warnings
• Auditors recommendations and warnings
• Signals from SIMEX• Inquiries from Bank
of England and Bank for International Settlement
Lessons Learned (Cont.)
Poor supervision and giving unnecessary
authority
• Obvious violation of restrictions on traders
• Integration of front- and back- office management
• Giving too much autonomy and authority to a trader
Neglecting proper reporting and auditing
• Checking all the accounts rather than ending balance
• Relying on original sources
• Board of directors role in setting up a risk-reporting system
Neglecting following procedures and
protocols
• Skipping routine tasks and reporting to the headquarter
Thank You.
Questions
