Why you should care
Because controlling financial risk is a never-ending battle.
Geoffrey Barker remembers it all too well. As head of research at Baring Securities in Tokyo, he was in New York on a marketing trip in late February 1995. All of his potential clients wanted to know one thing: Who was behind the billion dollar-plus bet that Barings Bank — the storied investment bank founded in 1762 by John and Francis Baring — had taken that the Japanese stock market would go up?
Barker didn’t know, and no one at the company’s Tokyo office could tell him. Walking on Madison Avenue with colleagues after a meeting, he recalls today, “We figured that if it’s Barings’ own position, we were going to be bust, and we laughed.” After all, the scenario hardly seemed possible.
Yet the next day he got the call to cut short his trip and come home, worried all the way about whether he’d ever be repaid the $20,000 he’d run up in expenses. (He was.) He and 1,200 others lost their jobs. That was the end of Barings, which was forced into instant bankruptcy by the rogue trading of a single 28-year-old employee in the Singapore office: Nick Leeson. It wasn’t the first time, nor would it be the last, that unauthorized or unwise trading caused massive losses at a financial institution. Yet in some ways, the sudden collapse of Barings remains the most spectacular.
Barings wasn’t just any bank — it was a British establishment. In 1802, it helped to negotiate the Louisiana Purchase from France, and later it helped finance the U.S. government during the War of 1812. The bank boasted not a logo but a crest. One of Princess Diana’s grandmothers was a Baring, and numerous Barings had been elevated to the peerage. Baring Securities, an offshoot of the bank, grew to prominence in the 1980s as a big, and profitable, player in Asia.
Management didn’t think to ask how Leeson could generate such income when no one else could.
As Barker headed home on Feb. 24, Leeson, the rogue trader, was on the lam, having fled Singapore a day earlier, first to Kuala Lumpur in neighboring Malaysia, and then to Frankfurt, where he was arrested. His was an unlikely journey from the start. Leeson, who declined to be interviewed, grew up in public housing in the London suburb of Watford, the son of a plasterer. After failing his qualifying exam in mathematics, he left school at 18 and sought work in the London financial industry. He made his way to Baring Securities’ Singapore office in 1992 as general manager after earning his stripes by cleaning up a mess at Baring’s office in Jakarta, Indonesia.
In Singapore, Leeson earned credentials to trade on the Singapore futures exchange. As general manager, trader and, effectively, overseer of the back office record-keeping, he was subject to little or no oversight. He began speculating on the Japanese market early and stashing the losses in a hidden account while reporting phony record profits. Meanwhile, Barker says management didn’t think to ask how Leeson could generate such income when no one else could. “They didn’t want to know, because it looked very profitable,” he says.
Leeson was cooked when the Kobe earthquake sent the Japanese stock market into a tailspin on January 17. Still, he kept doubling down on a bad bet for the next month, accumulating $1.3 billion in losses that eventually wiped out Barings, which was sold for one pound sterling to the Dutch Bank ING later in 1995.
The bank’s crash got more people to think about how to manage risk. And the growing sophistication of risk modeling — backed by powerful computers — gave the industry ammunition to oppose government regulation. But, ultimately, “it didn’t have a lot of impact,” says risk management consultant Glyn Holton. Many financial institutions still loaded up with bad mortgage securities in the run-up to the crash of 2008, and in 2012, even JPMorgan Chase lost over $6 billion due to the trading misadventures of an employee dubbed the “London whale.” Regulators have recently sought to keep ordinary savers protected from what seems like inevitable carnage and to have banks hold more capital as a protection against loss. Risk and loss are now just part of the landscape to be navigated.
Leeson, meanwhile, made something of a career out of his misdeeds. He was released from prison in 1999 after surviving a bout with colon cancer and a divorce. His book, Rogue Trader, was turned into a movie of the same name. He remarried in Ireland and became general manager of the Galway United Football Club, until four years ago.
These days, he makes his living as a keynote speaker talking about risk and corporate accountability. In the past year alone, his spokesperson says, Leeson has had speaking engagements in Australia, Dubai, Mexico, Russia, France, Sweden, the Netherlands, Ireland and the U.K. And for the official anniversary of the Barings bankruptcy on Feb. 26? No fewer than two corporate speaking engagements.