Barings Bank - 1995 Collapse

1995 Collapse

Despite surviving the Great Depression and both World Wars, Barings was brought down in 1995 due to unauthorized trading by its head derivatives trader in Singapore, Nick Leeson.

At the time of the massive trading loss, Leeson was supposed to be arbitraging, seeking to profit from differences in the prices of Nikkei 225 futures contracts listed on the Osaka Securities Exchange in Japan and the Singapore International Monetary Exchange. Such arbitrage involves buying futures contracts on one market and simultaneously selling them on another at a higher price. Since everyone tries to take advantage of a price difference on a publicly traded futures contract, the margins on arbitrage trading are small or even wafer thin. Consequently, the volumes traded by arbitrageurs must be very large to gain any meaningful profit. In arbitrage, one is buying something at one market while selling the same goods in another market at about the same time. Consequently, almost all risks are hedged and the strategy is not very risky. Certainly it would not have bankrupted the bank. For example, one could buy a futures contract on Nikkei worth $100 million on one day and at the same time sell the same product in Singapore for say $100,001,000. Though a person would have bought and sold nearly 200 million, their profit is only $1,000, that is 1,000 dollars for a 100 million dollar investment. However, instead of buying on one market and immediately selling on another market for a small profit, the strategy approved by his superiors, Leeson bought on one market then held on to the contract, gambling on the future direction of the Japanese markets. If one uses the above example, one could buy $100 million worth of Nikkei futures contracts then hope that the contract price goes up in future. In this instance, even a one percent change of the price would create 1 million dollar worth of profit or loss.

According to Eddie George, Governor of the Bank of England, Leeson began doing this at the end of January 1995. Due to a series of internal and external events, his unhedged losses escalated rapidly.