On the evening of Thursday 23 February 1995, a 27-year-old trader named Nick Leeson slipped out of his Singapore office, leaving a note on his desk that read simply "I'm sorry", and boarded a flight out of the country with his wife. By Sunday night, after a weekend of crisis meetings at the Bank of England had failed to find a rescuer, his employer was finished. Barings — Britain's oldest merchant bank, banker to the Queen, financier of governments since 1762 — had been destroyed by losses run up in secret by one man whose work nobody independently checked.
The pedigree made the fall operatic. Barings had arranged financing for the Louisiana Purchase in 1803, which meant a London bank helped fund America's great westward expansion even as Britain squared up to Napoleon. In 1818 the Duc de Richelieu is famously said to have remarked that there were six great powers in Europe: England, France, Prussia, Austria, Russia — and Baring Brothers. The bank had even nearly died once before, brought down in 1890 by bad Argentine bonds and saved by a rescue fund orchestrated by the Bank of England: the original "Barings crisis". In 1995 the Bank declined to fund a sequel, because this time nobody could say how deep the hole went.
Leeson was an unlikely executioner: a plasterer's son from Watford who skipped university and worked his way up through back-office jobs in London before Barings sent him to Singapore in 1992 to run its futures operation on the SIMEX exchange. The posting itself rested on a small omission: Britain's securities regulator had earlier refused him a licence over an undisclosed county-court debt, a detail that never made it onto his Singapore application. There he was handed the combination of roles that risk textbooks now treat as the cardinal sin: he was head of trading and simultaneously ran the back office that settled and recorded the trades. He booked the deals, and he checked the deals. When an early error by a junior colleague needed hiding, he parked the loss in a dormant error account numbered 88888 — eight being a lucky number in Chinese custom — and that account quietly became the bank's shadow ledger.
Account 88888
Officially, Leeson ran a boring, low-risk arbitrage between Nikkei futures prices in Osaka and Singapore. Unofficially, account 88888 filled with unauthorised and ever-larger positions, including sold options that amounted to a wager that the Nikkei 225 would stay calm. Losses were never declared, only doubled up. London, meanwhile, celebrated its Singapore star, whose reported profits were a serious share of the whole bank's earnings, and wired out tens of millions of pounds in "margin" with remarkably little curiosity. Auditors and visiting executives accepted explanations — including a fabricated £50 million receivable, complete with a crudely forged confirmation — that a determined enquiry would have shredded in an afternoon.
On 17 January 1995 an earthquake devastated the Japanese city of Kobe, and the Nikkei lurched downwards. Leeson responded not by cutting his exposure but by buying Nikkei futures on a huge scale, gambling on a rebound that never came. By late February the concealed losses had reached about £827 million — roughly twice the bank's available capital. Once he fled, the truth surfaced within hours; administrators were appointed on 26 February 1995, and the Dutch group ING soon bought the 233-year-old institution for a symbolic one pound. Staff around the world learned from news bulletins that their employer no longer existed and that the bonuses due within days would never be paid.
After the fall
Leeson was arrested when his flight touched down in Frankfurt, extradited to Singapore, and sentenced to six and a half years in Changi prison, where he was treated for colon cancer before his release in 1999. His memoir, Rogue Trader, became a film with Ewan McGregor in the lead, and its title became the standard label for an entire species of financial scandal; in a stranger coda, Leeson later spent several years as chief executive of Galway United football club in Ireland. The official inquiry by the Bank of England's Board of Banking Supervision spread the blame well beyond Singapore, cataloguing management failures at every level of the bank. The collapse itself became the textbook case of operational risk: there was no exotic mathematics at the heart of it, just the oldest control failure in banking — letting one man keep score of his own game. The house that had outlasted Napoleon, financed empires and given its name to a crisis a century earlier could not survive a single unchecked employee with a terminal and an error account.
Quiz nuggets
- Barings, founded in 1762, arranged financing for the Louisiana Purchase of 1803.
- Nick Leeson hid his losses in error account 88888 — eight is a lucky number in Chinese culture.
- The Kobe earthquake of 17 January 1995 sank the Nikkei and doomed Leeson's doubled-up positions.
- Losses of about £827 million — roughly twice the bank's capital — sank Barings on 26 February 1995; ING bought it for £1.
- Leeson was sentenced to six and a half years in Singapore's Changi prison; Ewan McGregor played him in the film Rogue Trader.