Collapse of Barings



Founded in 1762, Barings was the oldest merchant bank in Britain before its collapse in 1995.1 The 233-year-old bank was brought down single-handedly by its employee, Nicholas William Leeson,2 better known as Nick Leeson, a derivatives trader.3 After landing the bank with a debt of S$1.4 billion – largely through futures trading contracts – Leeson fled for Malaysia.4 By the time of the bank’s collapse on 26 February 1995, it had accumulated losses amounting to S$2.2 billion.5 Leeson was sentenced to six-and-a-half years’ imprisonment in Singapore for two charges of fraud and forgery.6

Background
Baring Futures (Singapore) (BFS) was incorporated in Singapore on 17 September 1986. Leeson joined the settlements department of Baring Securities (London), an investment arm of Baring Group, as a clerk in July 1989. He was transferred to Singapore three years later.7

Leeson arrived in Singapore in April 1992 as a derivatives operations manager of Baring Securities (Singapore) (BSS). He became a trader after passing the Institute of Banking and Finance's Futures Trading Test in June that year. When BFS started trading on the Singapore International Monetary Exchange (SIMEX, which has since merged with the Stock Exchange of Singapore to form the Singapore Exchange) in July 1992, Leeson was of one of two traders at the time.8 On 3 July, Leeson opened an error account, 88888, for BFS. The account was originally opened to report error trades made by inexperienced staff of BFS.9 However, Leeson used the account for his unauthorised trading.10 By the end of September 1992, the losses in the 88888 account had amounted to S$8.8 million.11

Unauthorised trading and losses
Leeson was appointed assistant director and general manager of BFS on 28 June 1993. He took charge of not only the front office, which conducted the trading, but also the back office, which processed the paperwork. This enabled him to hide his losses and unauthorised trading using the 88888 account. In 1994, Leeson started dealing in Japanese government bonds, and also dabbled in Nikkei 225 futures and options.12

An internal audit of BFS was conducted for the period 19 July 1994 to 1 August 1994.13 The audit report, which was circulated to Barings' senior management in London, revealed that BFS was exposed to great risks with Leeson taking charge of both the dealing and settlement operations. However, the bank chose to retain Leeson's position because of his experience and the profits he generated. They did not know at the time that Leeson had already incurred big losses, which were hidden in the 88888 account. By the end of December 1994, the losses had risen to S$373.9 million.14

In January 1995, a senior auditor found a discrepancy in the BFS accounts.15 Leeson managed to convince the auditors by fabricating a story about a trade transaction between Barings and US investment firm Spear, Leeds & Kellogg. He even showed them a doctored payment statement to support his explanation.16

Despite the enormous losses accumulated in the 88888 account, Leeson continued to bet heavily in the Nikkei index in January 1995 hoping that it would not fall below 19,000 points.17 However, the Nikkei plunged after an earthquake hit Kobe, Japan, on 17 January. Leeson started feeling the heat when the Nikkei 225 dropped to 17,785 points on 23 January.18 He continued to raise the stakes, hoping for the market to spring back, but luck was not on his side.19 The market continued to slide further to a low of 17,580 on 23 February.20 Knowing that he could not recover the cumulative losses of S$1.4 billion, Leeson fled to Kuala Lumpur, Malaysia, with his wife on 23 February.21 The total losses amounted to S$2.2 billion at the time of Barings’ collapse on 26 February.22

On 23 February 1995, a senior settlements clerk on secondment from the Barings head office in London spotted a discrepancy in Leeson's account. He tried to get an explanation from Leeson but to no avail.23 Leeson said he had to visit his wife at the hospital, and left the office. Soon, he was on the run to Malaysia with his wife.24 Several attempts made to contact Leeson were futile.25 The London Barings office was apprised of the situation, and the BFS office started to check their accounts for unauthorised transactions. Their initial fear was that Leeson may have embezzled money and disappeared. On 24 February, BFS officials found out about the 88888 account and linked the discrepancy to that account.26

Barings in London did not have sufficient funds to continue trading, and was forced into administration on 26 February 1995. The Bank of England attempted to rescue the bank, but failed and BFS was placed under interim judicial management the next day.27

Leeson and his wife left Kuala Lumpur for Sabah on 24 February 1995. The couple then left Sabah for Brunei to take a flight to Frankfurt on 1 March.28 They were detained at the Frankfurt airport on 2 March.29 Leeson was jailed by the German court while waiting for the decision for Singapore's request for his extradition.30 Dutch finance group Internationale Nederlanden Groep (ING) completed the Barings takeover proceedings on 6 March.31

Leeson was extradited to Singapore on 23 November 1995.32 He pleaded guilty to two charges of fraud and forgery on 1 December, and was sentenced to six-and-a-half years in prison in Singapore. Leeson was released early on 3 July 1999 for good behaviour, after having served only three-and-a-half years of his sentence.33

Impact
To prevent another similar incident from happening, amendments were made to the Futures Trading Act, which enabled the Monetary Authority of Singapore to monitor the activities of traders selling futures contracts more closely.34 The Futures Trading (Amendment) Act commenced on 1 April 1995.35

Timeline
17 Sep 1986:
Baring Futures (Singapore) is incorporated.

Jul 1989: Nick Leeson joins Baring Securities (London).
Apr 1992: Leeson joins Baring Securities (Singapore).
3 Jul 1992: Leeson opens account 88888.
Sep 1992: Losses in account 88888 reach S$8.8 million.
Dec 1994: Losses balloon to S$373.9 million.
Jan 1995: Leeson bets heavily on Nikkei 225 index.
17 Jan 1995: Nikkei 225 plunges due to the Kobe earthquake.
23 Feb 1995: Leeson flees to Malaysia with his wife.
24 Feb1995: Discovery of 88888 account.
26 Feb 1995: Barings London is forced into administration.
27 Feb 1995: BFS is placed under interim judicial management.
2 Mar 1995: Leeson is arrested in Frankfurt.
6 Mar 1995: Barings takeover by Dutch finance group ING Group.
1 Apr 1995: Futures Trading (Amendment) Act 1995 comes into force.
23 Nov 1995: Leeson is extradited to Singapore.
1 Dec 1995: Leeson pleads guilty to two charges and is sentenced to six-and-a-half years’ imprisonment in Singapore.
3 Jul 1999: Leeson is released from prison.



Author

Kong Yoke Mun



References
1. Chan, W.C. (1996, April 8). Investors better protected with changes to futures trading rulesThe Straits Times, p. 36; The fateful, frantic hours that broke a bank. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG.
2. Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank. London: HarperCollins, p. 71. (Call no.: RSING 332.60941 RAW)
3. Beckering, L. (1995, July 30). The fall of the house of BaringsThe Straits Times, p. 4; Chan, S. M. (1995, November 24). Leeson saga, and key role of 88888 account. The Straits Times, p. 49; The fateful, frantic hours that broke a bank. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG.
4. The fateful, frantic hours that broke a bank. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG.
5. Chan, S. M. (1995, November 24). Leeson saga, and key role of 88888 account. The Straits Times, p. 49. Retrieved from NewspaperSG; Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, p. 155. (Call no.: RSING 332.632 LIM)
6. Leeson, N. W., & Whitley, E. (1997). Rogue trader. London: Warner, p. 357. (Call no.: RSING 332.632092 LEE); Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank. London: HarperCollins, p. 190. (Call no.: RSING 332.60941 RAW)
7. Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, p. A ix. (Call no.: RSING 332.632 LIM); Chan, S. M. (1995, November 24). Leeson saga, and key role of 88888 account. The Straits Times, p. 49. Retrieved from NewspaperSG.
8. Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, p. A ix. (Call no.: RSING 332.632 LIM)
9. Chan, S. M. (1995, November 24). Leeson saga, and key role of 88888 account. The Straits Times, p. 49; Raj, C. (1995, December 2). Crimes were acts of desperationThe Business Times, p. 2. Retrieved from NewspaperSG; Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank. London: HarperCollins, pp. 164–165. (Call no.: RSING 332.60941 RAW)
10. Chan, S. M. (1995, November 24). Leeson saga, and key role of 88888 account. The Straits Times, p. 49.; Chan, S. M., Lim, L. H., & Wong, D. (1995, December 2). Audit made Leeson cook up deal to hide activities. The Straits Times, p. 28. Retrieved from NewspaperSG; Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank. London: HarperCollins, pp. 164–165. (Call no.: RSING 332.60941 RAW)
11. Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, p. B ii. (Call no.: RSING 332.632 LIM)
12. Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, pp. A x, B iii, 18. (Call no.: RSING 332.632 LIM); Chan, S. M. (1995, November 24). Leeson saga, and key role of 88888 account. The Straits Times, p. 49. Retrieved from NewspaperSG.
13. Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, p. A x. (Call no.: RSING 332.632 LIM)
14. Lim, M. C. S., Tan, N. N. K., & partners of Price Waterhouse. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, pp. B ii, B vi, 12 (Call no.: RSING 332.632 LIM); 'Leeson had too much power'. (1995, March 5.) The Straits Times, p. 1. Retrieved from NewspaperSG.
15. Chan, S. M., Lim, L. H., & Wong, D. (1995, December 2). Audit made Leeson cook up deal to hide activities. The Straits Times, p. 28. Retrieved from NewspaperSG.
16. Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, pp. B viii, B ix. (Call no.: RSING 332.632 LIM); Chan, S. M. (1995, November 24). Leeson saga, and key role of 88888 account. The Straits Times, p. 49; Chan, S. M., Lim, L. H., & Wong, D. (1995, December 2). Audit made Leeson cook up deal to hide activities. The Straits Times, p. 28. Retrieved from NewspaperSG.
17. Beckering, L. (1995, July 30). The fall of the house of BaringsThe Straits Times, p. 4; Nick and the Nikkei. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG; Leeson, N. W., & Whitley, E. (1997). Rogue trader. London: Warner, pp. 220–221. (Call no.: RSING 332.632092 LEE)
18. Nick and the Nikkei. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG; Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank. London: HarperCollins, p. 169. (Call no.: RSING 332.60941 RAW)
19. Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank. London: HarperCollins, p. 169. (Call no.: RSING 332.60941 RAW)
20. Nick and the Nikkei. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG.
21. Leeson on the run. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG.
22. Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, pp. 15, 155. (Call no.: RSING 332.632 LIM)
23. Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, p. 14. (Call no.: RSING 332.632 LIM); Beckering, L. (1995, July 30). The fall of the house of BaringsThe Straits Times, p. 4. Retrieved from NewspaperSG.
24. Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, pp. A xvii, A xviii. (Call no.: RSING 332.632 LIM); The fateful, frantic hours that broke a bank. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG.
25. Lim, M. C. S., Tan, N. N. K., & partners of Price Waterhouse. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, p. A xviii. (Call no.: RSING 332.632 LIM); Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank. London: HarperCollins, p. 14. (Call no.: RSING 332.60941 RAW)
26. Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank. London: HarperCollins, p. 14. (Call no.: RSING 332.60941 RAW); Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, p. 153. (Call no.: RSING 332.632 LIM)
27. Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, p. A xviii. (Call no.: RSING 332.632 LIM); Beckering, L. (1995, July 30). The fall of the house of BaringsThe Straits Times, p. 4. Retrieved from NewspaperSG; Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank. London: HarperCollins, p. 25. (Call no.: RSING 332.60941 RAW)
28. Beckering, L. (1995, July 30). The fall of the house of BaringsThe Straits Times, p. 4; Leeson on the run. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG.
29. Leeson on the run. (1995, March 4). The Business Times, p. 3; The fateful, frantic hours that broke a bank. (1995, March 4). The Business Times, p. 3. Retrieved from NewspaperSG.
30. Ong, C. (1995, December 2). Trial is over for Leeson as he pleads guilty to 2 chargesThe Business Times, p. 1. Retrieved from NewspaperSG.
31. Dutch giant ING acquires Barings. (1995, March 7). The Straits Times, p. 1; ING gets Barings, will provide £540m fund for creditors. (1995, March 7). The Business Times, p. 1. Retrieved from NewspaperSG.
32. Ong. C. (1995, November 24). ‘Give us a smile,’ and the $2.2b man obliged. The Business Times, p. 2. Retrieved from NewspaperSG.
33. Chong, C. K., Chua, C. H., & Vasoo, S. (1999, July 4). Leeson free after 3 years in jail. The Straits Times, p. 1; Ong, C. (1995, December 2). Trial is over for Leeson as he pleads guilty to 2 chargesThe Business Times, p. 1. Retrieved from NewspaperSG; Rawnsley, J. H. (1995). Going for broke: Nick Leeson and the collapse of Barings Bank. London: HarperCollins, p. 190. (Call no.: RSING 332.60941 RAW)
34. Chan, W. C. (1996, April 8). Investors better protected with changes to futures trading rulesThe Straits Times, p. 36; Leo, P., & Siow, L. S. (1996, March 21). Law tightened to prevent another BaringsThe Business Times, p. 1. Retrieved from NewspaperSG; Lim, M. C. S., & Tan, N. N. K. (1995). Baring Futures (Singapore) Pte Ltd: The report of the inspectors appointed by the Minister for Finance: Investigation pursuant to Section 231 of the Companies Act (Chapter 50). Singapore: Ministry of Finance, p. 117. (Call no.: RSING 332.632 LIM)
35. Republic of Singapore. Government Gazette. Acts Supplement. (1995, March 24). Futures Trading (Amendment) Act 1995 (Act 9 of 1995). Retrieved 2016, August 4, from the Attorney-General’s Chambers website http://statutes.agc.gov.sg/aol/search/display/view.w3p;page=0;query=DocId%3A%22d0f4f055-cdc7-4cbf-ac27-cbb91f08491b%22%20Status%3Apublished%20Depth%3A0%20TransactionTime%3A20160805000000;rec=0



The information in this article is valid as at 2009 and correct as far as we are able to ascertain from our sources. It is not intended to be an exhaustive or complete history of the subject. Please contact the Library for further reading materials on the topic.

 

Subject
Merchant banks--Singapore
Trade and industry
Business, finance and industry>>Finance>>Banking
Commerce and Industry
Bank failures--Singapore
Merchant banks--Great Britain
Bank failures--Great Britain